BTPLC Annual Report 2005 - Consolidated Fianancial Statements

31.

Employee share plans

The company has an employee share investment plan, and savings-related share option plans for its employees and those of participating subsidiaries, further share option plans for selected group employees and an employee stock purchase plan for employees in the United States. It also has several share plans for executives.

Share option schemes

On the demerger of O2, BT’s share option plans ceased to operate and were replaced by similar BT Group Employee Sharesave plans and the BT Group Global Share Option Plan.
     The BT Group Legacy Option Plan was operated on 17 December 2001 following the scheme of arrangement and demerger in November 2001. Replacement unapproved options over BT Group shares were granted to all participants in the executive option plans who had released their options over British Telecommunications plc shares. The value of the replacement options was determined by averaging the combined prices of BT Group plc and O2 plc shares over the 20 dealing days following the demerger on 19 November 2001. This resulted in a factor of 1.3198 being applied to the former option over British Telecommunications plc shares in order to give the number of BT Group shares under the new option. The option prices of the original options were also adjusted to take account of the different number of shares under option.
     In the year ended 31 March 2005, options over 31 million shares were granted under the BT Group Global Share Option Plan. The options will be exercisable subject to continued employment and meeting corporate performance targets, on the third anniversary of the date of grant.
     Options outstanding under these share option plans at 31 March 2005 and 2004, together with their exercise prices and dates, were as follows:

Normal dates of exercise	2005 Option price per share	2005 millions	2004 Option price per share	2004 millions

BT Group Employee Sharesave plans
2005	218p–255p	20	218p–255p	26
2006	154p–173p	22	154p–173p	30
2007	146p–227p	57	218p–227p	54
2008	154p	92	154p	123
2009	146p	71	–	–

Total		262		233

BT Group Legacy Option Plan^a
2001-2011	318p–602p	15	318p–602p	16

Total		15		16

BT Group Global Share Option Plan
2004-2014	176p–199.5p	59	176p–199.5p	63
2005-2012	163p–263p	51	163p–263p	61
2006-2014	176p–199.5p	51	176p–199.5p	54
2007-2015	179p–215p	30	–	–

Total		191		178

Total outstanding options		468		427

^a	The option prices of shares under the BT Group Legacy Option Plan were adjusted at the time of the demerger as detailed above.

The weighted average fair value of share options granted during the year ended 31 March 2005 has been estimated on the date of grant using a binomial option pricing model. The following weighted average assumptions were used in that model: an expected life extending one month later than the first exercise date; estimated annualised dividend yield of approximately 5% (2004 – 5%, 2003 – 5%); risk free interest rates of approximately 5% (2004 – 4%, 2003 – 5%); and expected volatility of approximately 25% (2004 – 25%, 2003 – 40%).
     The weighted average fair value of the share options granted in the year ended 31 March 2005 was 41p (2004 – 42p, 2003 – 55p) for Sharesave options exercisable three years after the date of grant and 52p (2004 – 51p, 2003 – 72p) for Sharesave options exercisable five years after the date of grant. The BT Group Global Share Option Plan and the BT Group Incentive Share Plan (an executive share plan) were valued using Monte Carlo simulations. The weighted average fair value of options granted under the BT Group Global Share Option Plan has been estimated as 36p. The weighted average fair value of awards of shares granted under the Incentive Share Plan has been estimated as 98p. The total value of share options granted by BT in the year ended 31 March 2005 was £77 million (2004 – £136 million, 2003 – £41 million).
     In accordance with UK accounting practices, no compensation expense is recognised for options granted where the exercise price equals the market price at date of grant, or options granted under approved Sharesave plans. See United States Generally Accepted Accounting Principles – IV Accounting for share options for the treatment under US GAAP.
     Options granted, exercised and lapsed under these share option plans during the years ended 31 March 2003, 2004 and 2005 and options exercisable at 31 March 2003, 2004 and 2005 were as follows:

	Savings related schemes millions		Executive option plans millions		Total millions		Exercise price range	Weighted average exercise price


Outstanding, 31 March 2003	164		85		249		163p–727p	231p
Granted	165		119		284		154p–199.5p	175p
Lapsed	(96	)	(10	)	(106	)	154p–716p	220p

Outstanding, 31 March 2004	233		194		427		154p–727p	196p
Granted	91		31		122		146p–215p	160p
Lapsed	(62	)	(19	)	(81	)	146p–602p	189p

Outstanding, 31 March 2005	262		206		468		146p–602p	188p

Exercisable, 31 March 2003	–		11		11		255p–727p	491p
Exercisable, 31 March 2004	–		13		13		255p–727p	476p
Exercisable, 31 March 2005	16		34		50		199.5p–602p	288p

Incentive Share Plan and Retention Share Plan

The BT Incentive Share Plan (ISP) and the BT Retention Share Plan (RSP) were introduced for employees of the group in 2000. Under the plans, company shares are acquired by an employee share ownership trust and are conditionally awarded to participants. Under the ISP participants are normally only entitled to these shares in full at the end of a three-year period if the company has met the relevant pre-determined corporate performance measure and if the participants are still employed by the group. If the company has exceeded the pre-determined corporate performance measure the participants may be awarded up to double the shares conditionally awarded. The corporate performance measure is BT’s total shareholder return (TSR) measured against a group of companies from the European Telecom Sector at the beginning of the relevant performance period. The ISP was operated in the 2005 financial year with 1,406 participants receiving awards over 12,654,013 shares. The ISP was not operated in the 2004 financial year. Under the RSP the length of retention period before awards vest is flexible. Awards may vest in annual tranches. The shares are transferred at the end of a specified period, only if the individual is still employed by the group. During the 2005 financial year 1,340,256 (2004 – 720,472) shares vested in 11 (2004 – 7) participants in the RSP.

Deferred Bonus Plan

The BT Deferred Bonus Plan (DBP) was established in 1998 and awards are granted annually to employees of the group. Under this plan, shares in the company are acquired by an employee share ownership trust and transferred to participants at the end of three years if he or she has continued to be employed by the group throughout that period. On 2 August 2004, 1,280,934 shares (1 August 2003 – 653,899) were transferred to 219 participants (1 August 2003 – 225) at the end of the three-year deferred period.
At 31 March 2005, 27.8 million shares (2004 – 30.5 million shares) in the company were held in trust for employee share plans, of which 12.7 million shares (2004 – no shares) were held for the ISP, 2.8 million shares (2004 – 3.0 million shares) were held for the RSP and 7.9 million shares (2004 – 6.5 million shares) were held for the DBP. Dividends or dividend equivalents earned on the shares during the conditional periods are reinvested in company shares for the potential benefit of the participants.
Additional information relating to the plans is as follows:

Year ended 31 March 2005	ISP £m	RSP £m	DBP £m	Total £m

Value of range of possible future transfers: nil to	26.1	5.7	16.1	47.9
Provision for the costs of the plans charged to the profit and loss account in year	3.2	2.1	5.3	10.6
Nominal value of shares held in trust	0.6	0.1	0.4	1.1
Market value of shares held in trust	26.1	5.7	16.1	47.9

Year ended 31 March 2004	ISP £m	RSP £m	DBP £m	Total £m

Value of range of possible future transfers: nil to	–	5.3	11.4	16.7
Provision for the costs of the plans charged to the profit and loss account in year	–	9.3	8.2	17.5
Nominal value of shares held in trust	–	0.2	0.3	0.5
Market value of shares held in trust	–	5.3	11.4	16.7

Of the total BT Group plc shares held, 4.5 million shares were held at 31 March 2005 in trust for future awards under employee share plans. These shares had a nominal value of £0.2 million and a market value of £9.3 million at 31 March 2005.
The values of possible future transfers of shares under the plans were based on the BT Group plc share price at 31 March 2005 of 205.5p (2004 – 177p). The provisions for the costs of the ISP and RSP were based on best estimates of the company’s performance over the plans’ conditional periods, relating to those portions of the plan conditional periods from commencement up to the financial year end.

Employee Share Investment Plan

From December 2001 the BT Group Employee Share Investment Plan (ESIP) has been in operation. The ESIP, which has been approved by HM Revenue & Customs, gives UK employees an opportunity to purchase shares (partnership shares) monthly out of pre-tax salary up to a maximum value of £1,500 per year. During the 2005 financial year, 6.1 million shares (2004 – 6.0 million shares), including 0.2 million shares purchased by dividend reinvestment, were purchased by the Trustee of the ESIP on behalf of 13,017 (2004 – 13,974) employees at a total cost of £11.7 million (2004 – £11.1 million). The free shares element of the ESIP allows BT to provide free shares to UK employees which are held in trust for at least three years. A phantom plan, which delivers cash awards equivalent to the value of the free shares, operates for employees outside the UK. In 2005, 0.5% of pre-tax profits, amounting to £11 million, was allocated to the ESIP and the phantom plan for employees outside the UK (2004 – £20 million). Up to 2% of pre tax profits would have been available subject to meeting two corporate performance targets; one of increasing earnings per share before goodwill amortisation and exceptional items by 8% and the other of reducing customer dissatisfaction by 25% on a compound annual basis over the past three years. Although these targets were not met, a discretionary payment was made. The ESIP replaced the BT Employee Share Ownership Scheme which operated for employee profit sharing until 2001.

Employee Stock Purchase Plan

The BT Group Employee Stock Purchase Plan (ESPP) for employees in the US enables participants to purchase ADSs quarterly at a price (the Base Option Price) which is 85% of the market price of an ADS at the start of the offer (or, in the case of employees who join the ESPP after the start of the offer, 85% of the market price on their eligibility date, whichever is higher). Up to 15 May 2005, 934,782 shares (93,478 ADSs) have been transferred to participants out of treasury under the ESPP (up to 15 May 2004, 69,164 new shares were issued and 226,218 shares were transferred out of treasury). The second offer, with a Base Option Price of US$25.61 ended in December 2004. A third offer was launched in December 2004 with a Base Option Price of US$31.52 and will run until December 2005.

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