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10. Share-based payments

The Group has granted options over shares to employees for a number of years under different schemes. Where grants were made after 7 November 2002 they have been accounted for as required by IFRS 2 ‘Share-based Payment’. As permitted by the transitional arrangements of that standard, awards made before that date have not been so accounted. All options have been valued at the date of grant by an independent third party using a Monte Carlo model which uses the same principle as a binomial model.

No new awards were made in 2008. Details of awards made since 7 November 2002 are:

(a) Employee Sharesave Scheme

In September 2003 the Company awarded options to UK employees under an approved Sharesave scheme, the terms of which were that the employee entered into regular savings commitment up to a maximum of £250 per month for a three year period. The cumulative savings were then used to acquire options over a number of shares at a 10% discount to market price at the date of grant. There were no performance conditions but, in general, the employee must remain in employment for the three year period. Inputs to the valuation model were: option price 229p, volatility 38%, expected dividend yield 4.3%, risk-free interest rate 4.49% and a term of 3.25 years. There have been no further awards since September 2003.

(b) Executive Share Option Schemes (ESOS)

Awards were made to Directors and certain senior employees in March 2003 under the 2001 scheme and in September 2004, April 2005 and April 2006 under the 2004 scheme. In April 2007 awards were made to Directors under the 2004 scheme. Under both schemes options were granted with a fixed exercise price equal to the market price at the date of grant and subject to meeting performance conditions over a three year period. In the case of the 2001 scheme, the performance condition was based on earnings per share (eps) growth whilst under the 2004 scheme the condition is based on Total Shareholder Return (TSR) compared with that of comparator companies. Under the 2001 scheme only, where the performance condition is not satisfied in full after the first three years, retesting is carried out each year up to six years from the date of grant. Inputs to the valuation model were: option price 163p to 380.3p, volatility 31% to 38%, expected dividend yield 3.3% to 6.2%, riskfree interest rate 4.28% to 5.40% and expected terms of 6.4 years to 6.7 years.

(c) Long Term Incentive Plans (LTIP)

Awards were made to Directors and certain senior employees in March 2003 under the 2001 scheme and in September 2004, April 2006 and April 2007 under the 2004 scheme. In April 2005 awards were made to Directors under the 2004 scheme. Under both schemes, options were granted subject to TSR performance over a three year period compared with a comparator group. There is no retest facility under either scheme. Inputs to the valuation model were: option price nil, volatility 23% to 39%, expected dividend yield 3.3% to 6.2%, risk-free interest rate 4.05% to 5.40% and a term of 3 years to 4 years 9.5 months.

(d) Bonus Co-Investment Plan (BCIP)

Under the Bonus Co-Investment Plan, certain senior employees (excluding Directors) were entitled to use up to 10% of their gross short term annual bonus potential to purchase shares in the Company at market price. Provided they remain in employment for three years and the shares are retained for that period the Company matches those shares. For shares purchased by employees in 2004 the match was on a two for one basis and in 2005 was two and a half for one. In addition, in 2005 there was a further one for one match if certain profit targets are achieved. All shares under the scheme are purchased in the open market. Inputs to the valuation model were: option price nil, volatility, where applicable, 37%, expected dividend yield 4.9% to 5.4%, risk-free interest rate, where applicable, 4.94% and a term of 3 years.

(e) Profit Growth Incentive Plan (PGIP)

Awards were made in April 2007 under the PGIP to certain senior employees (excluding Directors). Any benefit under the PGIP will be deliverable dependent upon the extent to which profit growth targets are satisfied by the Group over a 3 year performance period; the Group’s reported profit for the year prior to the year of award forms the baseline for this performance measure. The PGIP is a cash-based incentive plan, however, for certain very senior employees the benefit is deliverable in shares; the number of shares given below will be released following the performance period if the minimum targeted profit growth is achieved. A maximum of twice the amount of shares listed below will be released on achievement of the maximum profit target, with one and a half times the number being released for interim performance. No shares will be released and the awards will lapse if the minimum profit target is not achieved. Release is also conditional upon the satisfaction of a personal shareholding requirement. Any awards deliverable under the PGIP will be satisfied from GKN ordinary shares already in issue.

The expected volatility is based on historical volatility over a period commensurate with the term of the awards. The risk-free interest rate is the rate obtainable from government securities over the expected life of the equity incentive.

Further details of the ESOS, LTIP, BCIP and PGIP schemes are given in the remuneration report.

Shares granted under each award were:

Scheme Date
of
grant
Number
of
shares
000s
Contractual
life of
options
years
Employee Sharesave 18/09/2003 1,880 3
Executive Options 19/03/2003 7,735 10
  16/09/2004 5,550 10
  05/04/2005 4,203 10
  11/04/2006 2,705 10
  02/04/2007 349 10
Long Term Incentive Plan 16/09/2004 1,133 3
  16/09/2004 2,006 10
  05/04/2005 613 10
  11/04/2006 850 3
  11/04/2006 1,883 10
  02/04/2007 499 10
Bonus Co-Investment Plan 10/08/2004 675 3
  21/04/2005 1,151 3
Profit Growth Incentive Plan 02/04/2007 333 3

A reconciliation of option movements over the year to 31 December 2008 is shown below:

  2008 2007
  Number
000s
Weighted
average
exercise price
pence
Number
000s
Weighted
average
exercise price
pence
Outstanding at 1 January 12,113 251.53 24,378 235.35
Granted 349 380.30
Forfeited (4,252) 265.35 (10,428) 223.78
Exercised (480) 193.37 (2,186) 223.99
Outstanding at 31 December 7,381 247.34 12,113 251.53
Exercisable at 31 December 3,334 189.22 213 231.45

For options outstanding at 31 December the range of exercise prices and weighted average contractual life is shown in the following table:

  2008 2007
Range of exercise price Number
of shares
000s
Contractual
weighted
average
remaining life
years
Number
of shares
000s
Contractual
weighted
average
remaining life
years
130p–180p 3,488 4.208 3,855 5.208
215p–230p 413 0.867 650 1.409
240p–260p 3,140 7.250
261p–280p 7
300p–385p 3,480 6.297 4,461 6.745

The weighted average share price during the period for options exercised over the year was 221.5p (2007 – 356.2p). The total charge for the year relating to share-based payment plans was £2 million (2007 – £6 million), all of which related to equity-settled share-based payment transactions. After deferred tax, the total charge was £2 million (2007 – £6 million).

Liabilities in respect of share-based payments were not material at either 31 December 2008 or 31 December 2007. There were no vested rights to cash or other assets at either 31 December 2008 or 31 December 2007.

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