31. Share based payments

The total charge recognised in 2008 in respect of share based payments was £73 million (2007: £93 million, 2006: £76 million). The total fair value to be recognised over the vesting period of share options and awards granted in 2008 was £104 million (2007: £92 million, 2006: £105 million).
     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 employees and an employee stock purchase plan for employees in the United States. It also has several share plans for executives. All share based payment plans are equity settled and details of these plans and an analysis of the total charge by type of award is set out below.

  2008   2007   2006  
  £m   £m   £m  
Employee Sharesave Plan 29    25    21  
Allshare 2    26    21  
Employee Stock Purchase Plan 1    1    1  
Incentive Share Plan 26    18    9  
Deferred Bonus Plan 12    13    6  
Retention Share Plan 3    3    2  
GSOP and GLOP    7    16  






 
   73    93    76  






 

Share Options
BT Group Employee Sharesave plans
There is an HMRC approved savings related share option plan, under which employees save on a monthly basis, over a three or five-year period, towards the purchase of shares at a fixed price determined when the option is granted. This price is usually set at a 20% discount to the market price for five year plans and 10% for three year plans. The options must be exercised within six months of maturity of the savings contract, otherwise they lapse. Options are granted annually, usually in June. Similar plans operate for BT’s overseas employees.

Employee Stock Purchase Plan
The BT Group Employee Stock Purchase Plan (ESPP), for employees in the US, enables participants to purchase American Depositary Shares (ADSs) quarterly at a price (the Initial Base Option Price) which is 85% of the fair market price of an ADS at the start of the Initial Enrolment Period of, in the case of employees who enrol in the ESPP after the Initial Enrolment Period, 85% of the fair market price of an ADS on the last business day of the calendar quarter immediately following enrolment. From 15 May 2007 to 31 March 2008 1,596,480 shares (159,648 ADSs) have been transferred to participants out of treasury shares under the ESPP (from 15 May 2006 to 15 May 2007 2,070,190 shares (207,019 ADSs); from 15 May 2005 to 15 May 2006 1,750,560 shares (175,056 ADS’s)). The fifth offer was launched in December 2006, with an Initial Base Option Price of US$46.00 and ended on 31 March 2008.

The following are legacy option plans which are no longer operated by the group.

BT Group Global Share Option Plan (GSOP)
The options granted in previous years were exercisable on the third anniversary of the date of grant, subject to continued employment and meeting corporate performance targets. Options must be exercised within seven years of the vesting date.

BT Group Legacy Option Plan (GLOP)
On the demerger of 02, 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 launched on 17 December 2001 following the scheme of arrangement and demerger of 02 in November 2001, and is therefore outside the scope of IFRS 2. The options were exercisable subject to continued employment and meeting corporate performance targets, on the third anniversary of the date of grant. Options must be exercised within seven years of the vesting date.

Share Plans
Incentive Share Plan, Deferred Bonus Plan and Retention Share Plan
Under the BT Group Incentive Share Plan (ISP), participants are 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. The corporate performance measure is BT’s total shareholder return (TSR) measured against a comparator group of companies from the European Telecom Sector at the beginning of the relevant performance period.
     Under the BT Group Retention Share Plan (RSP), the length of retention period before awards vest is flexible. Awards may vest annually in tranches. The shares are transferred at the end of a specified period, only if the employee is still employed by the group.
     Under the BT Group Deferred Bonus Plan (DBP) awards are granted annually to selected employees of the group. Shares in the company are transferred to participants at the end of three years if they continue to be employed by the group throughout that period.
     In accordance with the terms of the ISP, DBP and RSP, dividends or dividend equivalents earned on shares during the conditional periods are reinvested in company shares for the potential benefit of the participants.

Employee Share Investment Plan (ESIP)
The ESIP is an HMRC approved plan that has been in operation since December 2001. It allows BT employees to buy shares with contributions of up to £1,500 per tax year out gross of pay (directshare) and allows BT to provide free shares to UK employees which are held in trust for at least three years (allshare). During 2008, 5.4 million directshare shares (2007: 5.3 million directshare shares), were purchased by the Trustee of the ESIP on behalf of 19,603 (2007: 15,445) employees at a total cost of £15.8 million (2007: £14.2 million). A further 1.4 million shares (2007: 1.0 million shares) were purchased by the Trustee by dividend reinvestment on behalf of 22,136 (2007: 18,789) allshare and directshare employee participants.
     During 2008, allshare was replaced by free BT Total Broadband Option 3 for all BT employees in the UK. Employees outside the UK continue to receive awards of shares where practicable, otherwise they will receive awards equivalent to the value of free shares.

Share option plans
Activity relating to share options during 2008, 2007 and 2006 are shown below.  

   Employee Sharesave    GSOP and GLOP  



 




Movement in the number of share 2008   2007   2006   2008   2007   2006  
options: millions   millions   millions   millions   millions   millions  
Outstanding at the beginning of the year 272    279    262    103    187    206   
Granted 54    49    59            
Forfeited (15 ) (12 ) (20 ) (10 ) (9 ) (16 )
Exercised (28 ) (42 ) (2 ) (14 ) (20 ) (3 )
Expired or lapsed (2 ) (2 ) (20 ) (33 ) (55 )   












 
Outstanding at the end of the year 281    272    279    46    103    187   












 
Exercisable at the end of the year 2    2       46    48    57   












 
Weighted average exercise price:                                    












 
Outstanding at the beginning of the year 165 p 166 p 169 p 227 p 213 p 213 p
Granted 269 p 185 p 179 p         
Forfeited 208 p 176 p 173 p 251 p 222 p 205 p
Exercised 188 p 199 p 215 p 198 p 203 p 199 p
Expired or lapsed 179 p 179 p 216 p 199 p 189 p   












 
Outstanding at the end of the year 180 p 165 p 166 p 257 p 227 p 213 p












 
Exercisable at the end of the year 158 p 210 p    257 p 261 p 280 p












 

Options were exercised regularly throughout the year. The weighted average share price during the year was 293p (2007: 265p, 2006: 205p). The following table summarises information relating to options outstanding and exercisable under all share option plans at 31 March 2008, together with their exercise prices and dates:

   Exercise price   Number of outstanding options    Number of exercisable options  
Normal dates of exercise per share   millions    millions  
BT Group Employee Sharesave Plans             
2008 154p–192 94    1  
2009 146p–202 p 71    1  
2010 171p–294 p 46     
2011 179 p 32     
2012 262 p 38     






 
Total     281    2  






 
BT Group Legacy Option Plan             
2001-2011 318p–602 p 10    10  






 
Total     10    10  






 
BT Group Global Share Option Plan             
2004-2014 176p–199.5 p 27    27  
2005-2015 179p-263 p 9    9  






 
Total     36    36  






 
Total options     327    48  






 

The options outstanding under all share option plans at 31 March 2008, have weighted average remaining contractual lives as follows:

   Employee Sharesave        GSOP and GLOP  
 




     




 
Range of exercise prices Weighted average exercise price   Number of outstanding options millions   Weighted average contractual remaining life   Range of exercise prices   Weighted average exercise price   Number of outstanding options millions   Weighted average contractual remaining life  
100p – 199p 160 p 222   22 months   176 – 263 p 198 p 36   69 months  
200p – 300p 258 p 59   48 months   318 – 602 p 474 p 10   32 months  














 
Total       281                      46        














 

Executive share plans
Movements in non-vested executive share plans during 2008 are shown below:

  Millions of shares   
 






 
  ISP   DBP   RSP   Total  
At 1 April 2007 59.0    11.2    3.2    73.4   
Awards granted 21.0    4.7    1.4    27.1   
Awards vested (7.0 ) (3.7 ) (1.8 ) (12.5 )
Awards lapsed (10.0 ) (0.4 ) (0.3 ) (10.7 )
Dividend shares reinvested 3.4    0.6    0.1    4.1   








 
At 31 March 2008 66.4   12.4   2.6   81.4   








 

At 31 March 2008, 2.1 million shares (2007: 15.6 million) were held in trust and 79.3 million shares (2007: 57.8 million) were held in treasury for executive share plans.

Fair value
The following table summarises the fair values and key assumptions used for grants made under the Employee Sharesave and ISP in 2008, 2007 and 2006.

      2008        2007        2006   



 


 


 
   Employee
Sharesave
  ISP   Employee
Sharesave
  ISP   Employee
Sharesave
  ISP  
Weighted average fair value 71 p 182 p 43 p 127 p 52 p 123 p












 
Weighted average share price 329 p 306 p 229 p 230 p 222 p 222 p
Weighted average exercise price 269 p   185 p    175 p   
Expected dividend yield 5.5 % 5.5 % 5.5 % 5.5 % 5.0 % 4.1 %
Risk free rates 5.8 % 5.8 % 5.0 % 5.0 % 4.0 % 4.0 %
Expected volatility 22.0 % 18.0 % 17.0 % 17.0 % 25.0 % 24.0 %












 

Employee Sharesave grants, which include the BT Group Employee Sharesave and the BT Group International Employee Sharesave option plans, are valued using a binomial option pricing model. Awards under the ISP are valued using Monte Carlo simulations. TSRs were generated for BT and the comparator group at the end of the three year performance period, using each company’s volatility and dividend yield, as well as the cross correlation between pairs of stocks.
     Volatility has been determined by reference to BT’s historical volatility which is expected to reflect the BT share price in the future. An expected life of three months after exercise price is assumed for Employee Sharesave options and for all other awards the expected life is equal to the vesting period. The risk free interest rate is based on the UK gilt curve in effect at the time of the grant, for the expected life of the option or award.
     The fair values for the RSP and DBP were determined using the middle market share price three days prior to the date of grant. The weighted average share price for RSP awards granted in 2008 was 310p (2007: 267p, 2006: 216p). The weighted average share price for DBP awards granted in 2008 was 319p (2007: 232p, 2006: 223p).

Openreach
In the Undertakings given to Ofcom on 22 September 2005, BT agreed that the incentive elements of the remuneration of employees within Openreach should be linked to Openreach performance rather than BT targets or share price. Long-term incentive arrangements are linked to Openreach targets and are paid in cash instead of shares and hence are neither equity settled or cash settled share based payment arrangements.

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