The Group recognised the following charges in the income statement in respect of its equity-settled share-based payment plans:
| All figures in £ millions | 2010 | 2009 |
|---|---|---|
| Pearson plans | 35 | 27 |
Share-based payments included in discontinued operations amounted to £4m (2009: £10m).
The Group operates the following equity-settled employee option and share plans:
Worldwide Save for Shares Plan Since 1994, the Group has operated a Save-As-You-Earn plan for UK employees. In 1998, the Group introduced a Worldwide Save for Shares Plan. Under these plans, employees can save a portion of their monthly salary over periods of three, five or seven years. At the end of this period, the employee has the option to purchase ordinary shares with the accumulated funds at a purchase price equal to 80% of the market price prevailing at the time of the commencement of the employee’s participation in the plan. Options that are not exercised within six months of the end of the savings period lapse unconditionally.
Employee Stock Purchase Plan In 2000, the Group established an Employee Stock Purchase Plan which allows all employees in the US to save a portion of their monthly salary over six month periods. At the end of the period, the employee has the option to purchase ADRs with their accumulated funds at a purchase price equal to 85% of the lower of the market price prevailing at the beginning or end of the period.
Long-Term Incentive Plan This plan was introduced in 2001 and renewed in 2006 and consists of two parts: share options and/or restricted shares.
Options were last granted under this plan in 2001 based on a pre-grant earnings per share growth test and are not subject to further performance conditions on exercise. The options became exercisable in tranches and lapse if they remain unexercised at the tenth anniversary of the date of grant.
The vesting of restricted shares is normally dependent on continuing service over a three to five-year period, and in the case of senior management upon the satisfaction of corporate performance targets over a three-year period. These targets may be based on market and/or non-market performance criteria. Restricted shares awarded to senior management in March 2009 and March 2010 vest dependent on relative total shareholder return, return on invested capital and earnings per share growth. The award was split equally across all three measures. Other restricted shares awarded in 2009 and 2010 vest depending on continuing service over a three-year period.
Annual Bonus Share Matching Plan This plan permits executive directors and senior executives around the Group to invest up to 50% of any after tax annual bonus in Pearson shares. If these shares are held and the Group meets an earnings per share growth target, the company will match them on a gross basis i.e. the maximum number of matching shares is equal to the number of shares that could have been acquired with the amount of the pre-tax annual bonus taken in invested shares.
In addition to the above, share options remain outstanding under Executive Share Option, Reward and Special Share Option Plans. These are legacy plans which were replaced with the introduction of the Long-Term Incentive Plan in 2001.
The number and weighted average exercise prices of share options granted under the Group’s plans are as follows:
| 2010 | 2009 | |||
|---|---|---|---|---|
| Number of share options 000s | Weighted average exercise price £ | Number of share options 000s | Weighted average exercise price £ | |
| Outstanding at beginning of year | 12,487 | 12.78 | 14,379 | 13.14 |
| Granted during the year | 628 | 8.06 | 1,320 | 5.47 |
| Exercised during the year | (1,154) | 7.12 | (656) | 5.91 |
| Forfeited during the year | (457) | 9.08 | (2,488) | 13.02 |
| Expired during the year | (2,626) | 23.47 | (68) | 5.20 |
| Outstanding at end of year | 8,878 | 10.20 | 12,487 | 12.78 |
| Options exercisable at end of year | 5,825 | 12.40 | 9,264 | 15.28 |
Options were exercised regularly throughout the year. The weighted average share price during the year was £9.63 (2009: £7.15). Early exercises arising from redundancy, retirement or death are treated as an acceleration of vesting and the Group therefore recognises in the income statement the amount that otherwise would have been recognised for services received over the remainder of the original vesting period.
The options outstanding at the end of the year have weighted average remaining contractual lives and exercise prices as follows:
| Range of exercise prices £ | 2010 | 2009 | ||
|---|---|---|---|---|
| Number of share options 000s | Weighted average contractual life Years | Number of share options 000s | Weighted average contractual life Years | |
| 0 – 5 | 38 | 0.65 | 172 | 1.07 |
| 5 – 10 | 4,757 | 1.86 | 5,523 | 2.37 |
| 10 – 15 | 4,083 | 0.36 | 4,225 | 1.36 |
| 15 – 20 | – | – | 270 | 0.75 |
| 20 – 25 | – | – | 344 | 0.19 |
| >25 | – | – | 1,953 | 0.19 |
| 8,878 | 1.17 | 12,487 | 1.57 |
In 2010 and 2009 options were granted under the Worldwide Save for Shares Plan. The weighted average estimated fair value for the options granted was calculated using a Black-Scholes option pricing model.
The weighted average estimated fair values and the inputs into the Black-Scholes model are as follows:
| 2010 Weighted average | 2009 Weighted average | |
|---|---|---|
| Fair value | £2.14 | £1.69 |
| Weighted average share price | £9.48 | £7.13 |
| Weighted average exercise price | £8.06 | £5.47 |
| Expected volatility | 28.28% | 27.32% |
| Expected life | 4.0 years | 4.0 years |
| Risk free rate | 2.24% | 2.45% |
| Expected dividend yield | 3.75% | 4.74% |
| Forfeiture rate | 3.5% | 3.5% |
The expected volatility is based on the historic volatility of the company’s share price over the previous three to seven years depending on the vesting term of the options.
The following shares were granted under restricted share arrangements:
| 2010 | 2009 | |||
|---|---|---|---|---|
| Number of shares 000s | Weighted average fair value £ | Number of shares 000s | Weighted average fair value £ | |
| Long-Term Incentive Plan | 4,742 | 9.45 | 4,519 | 5.77 |
| Annual Bonus Share Matching Plan | 266 | 10.25 | 271 | 6.70 |
The fair value of shares granted under the Long-Term Incentive Plan that vest unconditionally is determined using the share price at the date of grant. Participants of the Long-Term Incentive Plan are entitled to dividends during the vesting period. The number of shares to vest has been adjusted, based on historical experience, to account for any potential forfeitures. Restricted shares granted under the Annual Bonus Share Matching Plan are valued using the share price at the date of grant. Shares granted include the entitlement to dividends during the vesting period and therefore the share price is not discounted.
Restricted shares with a market performance condition were valued by an independent actuary using a Monte Carlo model. Restricted shares with a non-market performance condition were fair valued based on the share price at the date of grant. Non-market performance conditions were considered by adjusting the number of shares expected to vest based on the most likely outcome of the relevant performance criteria.