4.7 Share-based payments

Accounting policies

Employee benefits

Employees (including Directors) of the Group receive remuneration in the form of share-based payments, whereby employees render services in exchange for rights over shares ("equity-settled transactions"). The cost of equity-settled transactions with employees is measured with reference to the fair value at the date on which they are granted. Fair value is measured using the Black-Scholes Option Pricing Model. The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. In valuing equity-settled transactions, no account is taken of any performance conditions.

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the years in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award ("vesting date").

At each reporting date, the cumulative expense recognised for equity-settled transactions reflects the extent to which the vesting period has expired and the number of awards, that in the opinion of the Directors, will ultimately vest. Directors' estimates are based on the best available information at that date.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.

The Group has exposure in respect of cash-settled share-based payment transactions and share-based payment transactions with cash alternatives as defined by IFRS 2 "Share-based Payment" only in respect of bad leaver provisions in the Group's JSOS.

4.7.1 Share options and other equity instruments

The Group currently operates three employee share incentive schemes, namely the executive share ownership scheme (the "ESOS"), the joint share ownership scheme (the "JSOS") and the Sharesave Scheme.

The total expense for the period relating to employee share-based payment plans was £0.6 million (2010: £0.3 million), all of which related to equity-settled share-based payment transactions, except for £0.1 million in the prior period relating to a cash-settled share-based payment.

(a) ESOS

The Group's ESOS is an equity-settled share option scheme approved by HMRC. Options may also be granted under the terms of a schedule, which is not so approved. The ESOS was established by Ocado in 2001.

Under the ESOS, Ocado or the trustees of an employee trust may grant options over shares in the Company to eligible employees. The eligible employees to whom options are granted and the terms of such options will be determined by the Directors of Ocado or the trustees. The employees who are eligible to participate in the ESOS are all Ocado's Executive Directors and employees, including the employees of the Company's subsidiaries. Options are not transferable.

The exercise price of options may not be less than the market value of the Company's shares on the date of grant. If the trustees or the Directors have determined that the exercise of an option will be satisfied by the issue of ordinary shares, the exercise price may also not be less than the nominal value of ordinary shares.

The Directors of Ocado or the trustees may impose a performance target and any further condition determined to be appropriate on the exercise of an option. Any performance target must generally be measured over a period of at least three years. There are currently no options granted which are subject to performance targets that have not yet been met.

The vesting period for the ESOS is three years. If the options remain unexercised after a period of ten years from the date of grant or the employee leaves the Group, the options expire (subject to a limited number of exceptions).

On 9 February 2010 the ordinary shares and convertible preference shares in Ocado Limited were converted into ordinary shares and convertible preference shares in Ocado Group plc on a 1:100 basis with a nominal value of 2 pence per ordinary share. The prior period opening balance and movements during the prior period have been disclosed as if the conversion occurred at the beginning of that period.

At each respective balance sheet date the outstanding options were as follows:

 


Year of
issue
27 November
2011
Exercise
price (£)
28 November
2010
Exercise
price (£)
Exercise period
Approved 2001 260,308 0.80 593,725 0.80 21/08/03 – 29/11/11

2001 17,744 0.90 17,744 0.90 30/11/04 – 29/11/11

2002 59,162 0.90 128,181 0.90 31/05/05 – 29/11/12

2003 97,194 0.90 120,053 0.90 31/05/06 – 29/11/13

2004 123,385 0.90 183,426 0.90 31/05/07 – 29/11/14

2005 255,088 1.00 367,789 1.00 31/05/08 – 29/11/15

2005 66,866 1.15 70,170 1.15 31/05/08 – 30/05/15

2006 86,320 1.40 138,890 1.40 31/05/09 – 30/05/16

2006 86,327 1.50 115,028 1.50 30/11/09 – 29/11/16

2007 414,270 1.50 587,939 1.50 31/05/10 – 29/11/17

2008 166,816 1.35 225,578 1.35 30/11/11 – 29/11/18

2008 393,212 1.20 445,751 1.20 31/05/11 – 30/05/18

2009 225,796 1.20 240,554 1.20 31/05/12 – 30/05/19

2009 1,182,523 1.35 1,354,121 1.35 02/11/12 – 29/11/19

2010 981,348 1.65 1,151,593 1.65 30/06/13 – 29/06/20

2011 325,811 1.89 19/07/14 – 18/07/21
2011 805,243 2.55 14/02/14 – 13/02/21
Total approved options
5,547,413
5,740,542


Year of
issue
27 November
2011
Exercise
price (£)
28 November
2010
Exercise
price (£)
Exercise period
Non-Approved 2001 21,563 0.80 46,563 0.80 21/08/03 – 29/11/11

2001 10,856 0.90 35,856 0.90 30/11/04 – 29/11/11

2002 31,009 0.90 56,787 0.90 31/05/05 – 29/11/12

2002 175,000 1.00 175,000 1.00 07/02/05 – 30/05/12

2002 350,000 1.50 350,000 1.50 07/02/05 – 30/05/12

2003 100,000 0.90 100,000 0.90 30/11/06 – 29/11/13

2005 754 1.00 754 1.00 30/11/08 – 29/11/15

2005 787,436 1.15 808,236 1.15 16/05/08 – 29/11/15

2007 50,833 1.50 50,833 1.50 31/05/10 – 30/05/17

2009 267,500 1.20 267,500 1.20 31/05/12 – 30/05/19

2009 24,074 1.35 24,074 1.35 16/11/12 – 15/11/19

2011 37,038 1.89 19/07/14 – 18/02/21
Total unapproved options 1,856,063
1,915,603

Total
7,403,476
7,656,145

Of the total employee share options above, the following options were subject to performance criteria in relation to the average contribution by basket and EBITDA:

Year of
issue
27 November 201128 November 2010Exercise period
Number of share options Exercise
price (£)
Number
of share options
Exercise
price (£)

2005 170,670 1.15 170,670 1.15 31/05/08 – 30/05/15
2009 254,000 1.20 254,000 1.20 31/05/12 – 30/05/19
Total options subject to performance criteria 424,670
424,670

Details of the movement in the number of share options outstanding during each period are as follows:

27 November 201128 November 2010
Number of
share
options
Weighted
average
exercise
price (£)
Number of
share
options
Weighted
average
exercise
price (£)
Outstanding at the beginning of the period 7,656,145 1.27 10,593,611 1.15
Granted during the period 1,352,275 2.36 1,313,929 1.65
Forfeited during the period (669,807) 1.72 (2,554,974) 1.12
Exercised during the period (935,137) 1.02 (1,696,421) 1.02
Outstanding at the end of the period 7,403,476 1.46 7,656,145 1.27
Exercisable at the end of the period 3,092,598 1.20 3,662,300 1.11

Since the Company's Admission, the market value of the Company's shares at each option grant date was taken to be the closing mid-market price of the shares on the day prior to issuance. Prior to the Admission, the market value of the Company's shares was derived based on the market value of similar companies and by taking into account transactions with shareholders during the relevant period. The Share Valuation Office of HMRC has confirmed in correspondence that in respect of options granted prior to Admission, the exercise price was not less that the market value of the Company's shares at each option grant date.

The ESOS share options were exercised on a regular basis throughout the current and prior periods. For these exercises, the weighted average share price at the date of exercise was £2.17 (2010: £1.53).

In determining the fair value of the share options granted during the period, the Black-Scholes Option Pricing Model was used with the following inputs:


27 November
2011
28 November
2010
Weighted average share price £2.36 £1.65
Weighted average exercise price £2.36 £1.65
Expected volatility 0.25 0.25
Weighted expected life — years 3.00 3.00
Risk-free interest rate 3.5% 3.5%
Expected dividend yield 0.0% 0.0%

Expected volatility was determined by comparing the Company to others of a similar size or which operate in a similar industry. The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. All share awards under the ESOS are equity-settled.

The weighted average remaining contractual lives for outstanding share options under the ESOS are as follows:


27 November 201128 November 2010
Exercise
Price (£)
Number of
share
options
Weighted
average
remaining
contractual
life (years)
Exercise
Price (£)
Number of
share
options
Weighted
average
remaining
contractual
life (years)

0.80 281,871 0.80 640,288 1.0

0.90 439,350 1.9 0.90 642,047 3.0

1.00 430,842 2.5 1.00 543,543 3.8

1.15 854,302 3.5 1.15 878,406 4.5

1.20 886,508 7.4 1.20 953,805 8.4

1.35 1,373,413 7.9 1.35 1,603,773 8.9

1.40 86,320 4.5 1.40 138,890 5.5

1.50 901,430 3.7 1.50 1,103,800 5.1

1.65 981,348 8.6 1.65 1,151,593 9.6

1.89 362,849 9.6

2.55 805,243 9.2
Outstanding at the end of the period
7,403,476 7,656,145

(b) JSOS

The JSOS is an executive incentive scheme which was introduced to incentivise and retain its Executive Directors and select members of senior management of the Group (the "Participants"). It is a share ownership scheme under which the Participants and Appleby Trust (Jersey) Limited, the EBT Trustee, held at balance sheet date separate beneficial interests in 36,305,099 (2010: 32,476,700) ordinary shares which represents 6.5% (2010: 5.9%) of the issued share capital of the Company.

Participants

Awards are granted to the Executive Board and a select group of senior management. In the prior period they acquired interests in 32,476,700 ordinary shares with an issue price of £1.50 per share, in accordance with the Group's first JSOS scheme ("JSOS1"). In the current period, interests in a further 3,990,799 ordinary shares with an issue price of £1.70 were acquired by a select group of senior management (excluding Directors) in accordance with the Group's second JSOS scheme ("JSOS2").

Nature of interests

Interests take the form of a restricted interest in ordinary shares in the Company (the "Interest"). An Interest permits a Participant to benefit from the increase (if any) in the value of a number of ordinary shares in the Company ("Shares") over specified threshold amounts. In order to acquire an Interest, a Participant must enter into a joint share ownership agreement with the EBT Trustee, under which the Participant and the EBT Trustee jointly acquire the Shares and agree that when the Shares are sold the Participant has a right to receive a proportion of the sale proceeds insofar as the value of the Shares exceeds the threshold amount. For the initial Interests acquired by the Participants, there are four tranches, each with their own threshold or hurdle price as follows:

JSOS1JSOS2
TrancheVesting dateHurdle price% of
issue price
TrancheVesting dateHurdle price% of
issue price
1 (2011) 01/01/2011 £1.73 115% 1 (2012) 30/06/2012 £1.96 115%
2 (2012) 01/01/2012 £1.91 127% 2 (2013) 30/06/2013 £2.15 127%
3 (2013) 01/01/2013 £2.08 139% 3 (2014) 30/06/2014 £2.36 139%
4 (2014) 01/01/2014 £2.28 152% 4 (2015) 30/06/2015 £2.59 152%

For JSOS1, Participants were required to purchase their Interest for 2% of the issue price. For JSOS2, the price was in a range of 7.1% to 10.8%. When an Interest vests, the EBT Trustee will transfer Shares to the Participant of equal value to the Participant's Interest or the Shares will be sold and the EBT Trustee will account to the Participant for the balance, i.e. the difference between the sale proceeds (less expenses) and the hurdle price.

Vesting conditions

The vesting of the Interests granted to Participants is subject to a time vesting condition with one quarter of the Interest in the Shares vesting on the first anniversary of their acquisition, one quarter on the second anniversary, one quarter on the third anniversary and the final quarter on the fourth anniversary.

The fair value of the Interests awarded under the JSOS was determined using the Black-Scholes Option Pricing Model. As per IFRS 2 "Share-based Payment", market based vesting conditions and the share price target conditions in the JSOS have been taken into account in establishing the fair value of the equity instruments granted. Other non-market or performance related conditions were not taken into account in establishing the fair value of equity instruments granted; instead, these non-market vesting conditions are taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount so that, ultimately the amount recognised for services received as consideration for the equity instruments granted is based on the number of equity instruments that will eventually vest.

In determining the fair value of the Interests granted, the Black-Scholes Option Pricing Model was used with the following inputs:

JSOS1Tranche 1Tranche 2Tranche 3Tranche 4
Weighted average share price £1.35 £1.35 £1.35 £1.35
Weighted average exercise price £1.73 £1.91 £2.08 £2.28
Expected volatility 0.25 0.25 0.25 0.25
Weighted expected life — years 0.91 1.91 2.91 3.91
Risk-free interest rate 3.5% 3.5% 3.5% 3.5%
Expected dividend yield 0.0% 0.0% 0.0% 0.0%
JSOS2Tranche 1Tranche 2Tranche 3Tranche 4
Weighted average share price £1.70 £1.70 £1.70 £1.70
Weighted average exercise price £1.96 £2.15 £2.36 £2.59
Expected volatility 0.25 0.25 0.25 0.25
Weighted expected life — years 1.0 2.0 3.0 4.0
Risk-free interest rate 3.5% 3.5% 3.5% 3.5%
Expected dividend yield 0.0% 0.0% 0.0% 0.0%

Expected volatility was determined by comparing the Company to a basket of others of a similar size or which operate in a similar industry.

(c) Non-employee share options

Options to subscribe for ordinary shares and convertible preference shares have been granted by Ocado Limited to non-employees. These options are equity-settled, and do not have any vesting criteria. As a result of the Group's restructuring in the prior period, these options are now held over ordinary shares in Ocado Group plc.

At each respective balance sheet date the outstanding options were as follows:

Date of issue27 November 201128 November 2010Exercise period
Number of
share options
Exercise
price (£)
Number of
share options
Exercise
price (£)
Feb-02 7,400 0.90 04/02/04 – 03/02/14
Feb-02 886,700 0.90 886,700 0.90 04/02/02 – 04/02/17
Jan-04 435,300 1.03 435,300 1.03 03/01/04 – 03/01/18
Outstanding at the end of the period 1,322,000 1,329,400

Details of the movement in the number of non-employee share options outstanding during each period are as follows:


27 November 201128 November 2010
Number of
share options
Weighted
average
exercise
price (£)
Number of
share
options
Weighted
exercise
average
price (£)
Outstanding at the beginning of the period 1,329,400 0.95 1,471,400 0.92
Granted during the period
Forfeited during the period
Exercised during the period (7,400) 0.90 (142,000) 0.70
Outstanding at the end of the period 1,322,000 0.95 1,329,400 0.95
Exercisable at the end of the period 1,322,000 0.95 1,329,400 0.95

In the prior period the Company documented an option to Hawkeye Capital Partners Limited to subscribe for 38,700 ordinary shares at a price of £1.03 per share. These options were exercised on IPO at a weighted average price of £1.03.

The weighted average remaining contractual lives for outstanding non-employee share options are as follows:


27 November 201128 November 2010
Exercise
Price (£)
Number of
share
options
Weighted
average
remaining
contractual
life (years)
Exercise
Price (£)
Number of
share
options
Weighted
average
remaining
contractual
life (years)

0.90 886,700 5.2 0.90 894,100 6.2

1.03 435,300 6.1 1.03 435,300 7.9
Outstanding at the end of the period
1,322,000 1,329,400

(d) Sharesave Scheme

In the prior period the Group launched the Ocado Group Sharesave Scheme. This is an HMRC approved scheme and is open to any person that was an employee or officer of the Group at the launch date. Under the scheme, members save a fixed amount each month for three years. At the end of the three year period they are entitled to use these savings to buy shares in the Company at a price equal to 85% of the market value of the shares at the launch date.

At 27 November 2011 employees of the Company's subsidiaries held 681 (2010: 819) contracts in respect of options over 2,314,294 (2010: 2,724,513) shares. Details of the movement in the number of Sharesave options outstanding during each period are as follows:


27 November 201128 November 2010
Number of
share
options
Weighted
average
exercise
price (£)
Number of
share
options
Weighted
average
exercise
price (£)
Outstanding at the beginning of the period 2,724,513 1.162
Granted during the period 2,728,850 1.162
Forfeited during the period (409,617) 1.162 (4,337) 1.162
Exercised during the period (602) 1.162
Outstanding at the end of the period 2,314,294 1.162 2,724,513 1.162
Exercisable at the end of the period

There were no Sharesave options granted during the period. In determining the fair value of the share options granted during the prior period, the Black-Scholes Option Pricing Model was used with the following inputs:

28 November
2010
Weighted average share price £1.37
Weighted average exercise price £1.16
Expected volatility 0.25
Weighted expected life — years 3.00
Risk-free interest rate 3.5%
Expected dividend yield 0.0%

Expected volatility was determined by comparing the Company to others of a similar size or which operate in a similar industry.