34. Employee share schemes

The company has a share ownership scheme used for employee share allocations (profit sharing), an employee share investment plan, savings-related share option schemes for its employees and those of participating subsidiaries, further share option schemes for selected group employees and an employee stock purchase plan for employees in the United States. It also has several share plans for executives.

The major share option scheme, the BT Group Employee Sharesave Scheme, is savings related and the share options are normally exercisable on completion of a three or five year Save As You Earn contract. A similar savings related scheme exists for group employees based outside the UK.

Following the scheme of arrangement and demerger in November 2001, all options under the savings related schemes became exercisable for a period of six months. On expiry of this period, these options lapsed to the extent to which they had not been exercised. Shortly before the scheme of arrangement, 57 million shares were allotted to a special purpose trust to satisfy options which were likely to be exercised during that six month period.

Participants in the BT Share Option Scheme, the BT US Stock Option Plan, the BT Worldwide Share Option Scheme, and the BT Global Share Option Plan (the Executive Option Plans) were given the opportunity to (i) conditionally on the scheme of arrangement being sanctioned by the Court, release their options over British Telecommunications plc shares in consideration for the grant of options in their employer’s new holding company (BT Group plc or mmO₂ plc); or (ii) if their options were already exercisable, exercise their options over ordinary shares irrespective of whether the scheme of arrangement was sanctioned by the Court; or (iii) if their options were not already exercisable, conditionally on the scheme of arrangement being sanctioned by the Court, exercise their options immediately following that time but prior to the reduction of BT Group’s share capital.

To the extent that they had not already been exercised, these options lapsed on 16 November 2001, the effective date of the scheme of arrangement.

On 17 December 2001, replacement unapproved options over BT Group shares were granted under the BT Group Legacy Option Plan 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 mmO₂ 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.

On the demerger, BT’s share option plans ceased to operate and were replaced by similar BT Group Employee Sharesave schemes and the BT Group Global Share Option Plan.

The weighted average fair value of share options granted during the year ended 31 March 2003 has been estimated on the date of grant using the Black-Scholes 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% (2002 – 5%, 2001 – 2%); risk free interest rates of approximately 5% (2002 – 6%, 2001 – 7%); and expected volatility of approximately 40% (2002 – 34%, 2001 – 41%).

The weighted average fair value of the share options granted in the year ended 31 March 2003 was 55p (2002 – 55p, 2001 – 329p) for options exercisable three years after the date of grant and 72p (2002 – 55p, 2001 – 424p) for options exercisable five years after the date of grant. The weighted average fair value of options granted under the BT Group Global Share Option Plan has been estimated as 24p. The total value of share options granted by BT in the year ended 31 March 2003 was £41 million (2002 – £88 million, 2001 – £168 million).

In accordance with UK accounting practices, no compensation expense is recognised for the fair value of options granted where the exercise price equals the market price at date of grant or options granted under approved Sharesave schemes. 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 schemes during the years ended 31 March 2001, 2002 and 2003 and options exercisable at 31 March 2001, 2002 and 2003 were as follows:

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 assesses the company’s overall performance against those top 100 companies listed on the London Stock Exchange, as rated by the Financial Times (the FTSE 100 index), at the beginning of the relevant performance period. 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 2003 financial year, 374,039 (2002 – 162,772) shares vested in 11 (2002 – 12) participants in the RSP.

The BT Executive Share Plan (ESP) was introduced for employees of the group in 1994. Under the ESP, company shares are acquired by an employee share ownership trust and are conditionally awarded to participants. Participants are only entitled to these shares in full at the end of a five-year period under the ESP if, at the end of the period, the company has met the relevant pre-determined corporate performance measure. Awards of shares were granted in each of the years from 1994 to 1999 under the ESP.

In 1994, 1995, 1996 and 1997 ESP participants could invest 50% of their annual bonus in the ESP for the purchase of shares. These invested shares were matched by the company.

The corporate performance measure assesses the company’s overall performance against those top 100 companies listed on the London Stock Exchange, as rated by the FTSE 100 index, at the beginning of the relevant performance period.

The fourth five-year performance cycle of the ESP ended on 31 July 2002 and on the basis of the corporate performance measure, the company’s Total Shareholder Return (TSR) target relative to the other companies in the FTSE 100, 32.5% (2002 – 85%) of the shares vested on 1 August 2002 in 65 participants (1 August 2001: 62 participants) and 1.0 million shares (1 August 2001 – 1.2 million shares) were transferred to those participants.

The BT Deferred Bonus Plan (DBP) was established in 1998 and awards were granted to employees of the group in July 1998, 1999, 2000, 2001 and June 2002. 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 1 August 2002, 657,592 shares (1 August 2001 – 303,326) were transferred to 223 participants (1 August 2001 – 154) at the end of the three-year deferred period.

At 31 March 2003, 31.7 million shares (2002 – 24.6 million shares) in the company were held in trust for employee share schemes, of which 15.5 million shares (2002 – 16.5 million shares) were held for the ISP, 2.9 million shares (2002 – 1.1 million shares) were held for the RSP, 2.3 million shares (2002 – 4.4 million shares) were held for the ESP and 4.2 million shares (2002 – 2.7 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:

	ISP		RSP		ESP		DBP		Total
Year ended 31 March 2003	£m		£m		£m		£m		£m
Value of range of possible future transfers: nil to	24.3		4.6		3.6		6.7		39.2
Provision for the costs of the plans charged (credited) to the profit  and loss account in year
	–		(0.2	)	(0.2	)	5.8		5.4
Nominal value of shares held in trust	0.8		0.1		0.1		0.2		1.2
Market value of shares held in trust	24.3		4.6		3.6		6.7		39.2
	ISP		RSP		ESP		DBP		Total
Year ended 31 March 2002	£m		£m		£m		£m		£m
Value of range of possible future transfers: nil to	46.0		3.0		12.3		7.5		68.8
Provision for the costs of the plans charged (credited) to the profit   and loss account in year
	–		5.4		(9.2	)	2.1		(1.7	)
Nominal value of shares held in trust	0.8		0.1		0.2		0.1		1.2
Market value of shares held in trust	46.0		3.0		12.3		7.5		68.8

Of the total BT Group plc shares held, 6.8 million shares were held at 31 March 2003 in trust for future awards under employee share schemes. These shares had a nominal value of £0.3 million and a market value of £10.7 million at 31 March 2003.

The values of possible future transfers of shares under the plans were based on the BT Group plc share price at 31 March 2003 of 157p (2002 – 280p). The provisions for the costs of the ISP, RSP and ESP 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.

From December 2001 the BT Group Employee Share Investment Plan (ESIP) was in operation. The ESIP, which has been approved by the Inland Revenue, gives UK employees an opportunity to purchase shares (partnership shares) monthly out of pre-tax salary up to a maximum value of £125 per month. During the 2003 financial year, 5.3 million shares (2002 – 0.7 million shares) were purchased by the Trustee of the ESIP on behalf of 12,092 employees at a total cost of £10.6 million (2002 – £1.8 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 2003, 2% of pre-tax profits, amounting to £36 million, was set aside for the ESIP and the phantom plan for employees outside the UK (2002 – £25 million). The allocation of this sum was subject to two performance targets, one of increasing earnings per share by 25% and the other of reducing customer dissatisfaction by 25%, both of which were achieved. The ESIP replaced the BT Employee Share Ownership Scheme which operated for employee profit sharing until 2001.

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 (and in the case of employees who have joined the ESPP after the start of the offer, 85% of the market price on the date of joining, whichever is higher). At 15 May 2003, 69,164 shares have been issued under the BT Group ESPP. As the ADS price has been less than the Base Option Price since the date of the quarterly purchase in July 2002 the ESPP has been suspended until the ADS price rises above the Base Option Price.

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