directors report and accounts 2006 - Notes 27-29

 
 

 Notes 27-29

 27 Share-based payments

During the period ended 31 December 2006, the following material share-based payment arrangements existed, which are described below:

Type of arrangementLong Term
Incentive Plan
Deferred Share
Bonus Scheme
Sharesave
Scheme
Share Option
Scheme
Share Reward
Scheme
Timing of grantAnnually in March
(2005 - May)
Annually
in March
Annually
in November
See note (a)Annually
in April
Number of options/shares granted in 20062,712,8411,835,2233 year - 126,844
5 year - 154, 664
n/a334,738
Number of options/shares granted in 20053,472,1112,275,5583 year - 224,885
5 year - 190,160
n/a305,888
Fair value per share for 2006 grant£10.10£13.003 year - £3.65
5 year - £3.91
n/a£13.85
Fair value per share for 2005 grant£7.29£8.123 year - £3.12
5 year - £3.33
n/a£9.31
Method of settlementBoth equity and
cash-settled grants
Both equity and
cash-settled grants
EquityBoth equity and
cash-settled grants
Equity
Contractual life10 years3 years3.5 or 5.5 years10 years3 years
Vesting conditionsSee note (b)See note ( c)See note (d)See note (e)See note (f)

Notes:

  1. The granting of options under this scheme ceased with the last grant made in March 2004. Eligible individuals are entitled to participate in the Long Term Incentive Plan and Deferred Share Bonus Scheme.
  2. Nil-cost options exercisable three years from date of grant, with payout subject to performance conditions based on earnings per share relative to inflation (50 per cent of grant) and total shareholder return, combining the share price and dividend performance of the Company by reference to two comparator groups (50 per cent of grant). Participants are not entitled to dividends prior to the exercise of the options. For grants made in 2005 and thereafter, a cash equivalent dividend will accrue through the vesting period and will be paid on vesting.
  3. Free shares released three years from date of grant and may be subject to forfeit if participant leaves employment before the end of the three year holding period. Participants receive a separate payment equivalent to a proportion of the dividend during the holding period.
  4. Options granted by invitation at a 20 per cent discount to the market price. Options are exercisable at the end of a three year or five year savings contract. Participants are not entitled to dividends prior to the exercise of the options.
  5. Options exercisable three years from date of grant and subject to earnings per share performance condition relative to inflation. Participants are not entitled to receive dividends in the period prior to the exercise of the options.
  6. Free shares granted (maximum £3,000 in any year) subject to a three year holding period and may be subject to forfeit if the employee leaves within this period. Participants are entitled to receive dividends during the holding period which are reinvested to buy further shares.

During the period, the Company operated a Partnership Share Scheme, which was open to all eligible employees, where employees can allocate part of their pre-tax salary to purchase shares in British American Tobacco p.l.c. The maximum amount that can be allocated in this way to any individual is £1,500 in any tax year. The shares purchased are held in a UK-based trust and are normally capable of transfer to participants tax free after a five year holding period.

Further details on the operation of share-based payment arrangements can be found in the Remuneration Report.

Share option schemes

Details of the movements for equity-settled share option schemes during the years ended 31 December 2006 and31 December 2005 covering the Share Option and Sharesave Schemes were as follows. The last of the former B.A.T Industries Employee Share 'E' Option Scheme options were exercised in 2005.

 20062005
 Number
of options
Weighted
average exercise
price per share
£
Number
of options
Weighted
average exercise
price per share
£
Outstanding at start of year12,648,695 6.3917,352,182 5.97
Granted during the period281,508 11.52415,045 9.77
Exercised during the period(4,234,650)5.75(4,864,295)5.20
Forfeited during the period(245,872)7.01(254,237)5.89
Outstanding at end of year8,449,681 6.8612,648,695 6.39
Exercisable at end of year3,626,882 5.553,267,697 5.19

In addition to the above options, the movement in nil-cost equity-settled options from the Long Term Incentive Plan was as follows:

 2006
Number
of options
2005
Number
of options
Outstanding at start of year9,403,252 9,851,735
Granted during the period2,224,313 3,099,082
Exercised during the period(2,478,316)(2,078,722)
Forfeited during the period(1,040,994)(1,468,843)
Outstanding at end of year8,108,255 9,403,252
Exercisable at end of year922,014 744,082

The weighted average British American Tobacco p.l.c. share price at the date of exercise for share options exercised during the period was £13.94 (2005: £10.05). A detailed breakdown of the range of exercise prices for options outstanding for the years ended 31 December 2006 and 31 December 2005 is shown in the table below:

 20062005
Range of exercise pricesNumber
outstanding
at end of year
Weighted
average remaining
contractual life
in years
Weighted
average exercise
price per share
£
Number
outstanding
at end of year
Weighted
average remaining
contractual life
in years
Weighted
average exercise
price per share
£
Nil-cost8,108,2557.8n/a9,403,2528.0n/a
£2.53 to £4.99389,8052.03.19966,6891.83.46
£5.00 - £6.993,908,8804.15.747,330,4695.55.81
£7.00 to £8.993,488,6226.47.833,936,4927.47.83
£9.00 to £12.50662,3743.910.51415,0454.49.77
 16,557,9366.43.5022,051,9476.73.66

The weighted average fair value of equity-settled Share Option Schemes' shares granted during 2006 was £9.39 (2005: £6.81).

Assumptions used in the Black-Scholes models to determine the fair value of share options at grant date were as follows:

 20062005
 Long Term
Incentive Plan
Sharesave
Schemes*
Long Term
Incentive Plan
Sharesave
Schemes*
Share price at date of grant (£)14.3414.4010.3712.21
Exercise price (£)nil-cost11.52nil-cost9.77
Volatility (%)23212724
Average expected term to exercise (years)3.53.2/5.23.53.2/5.2
Risk free rate (%)4.44.9/4.84.34.2/4.2
Expected dividend yield (%)3.33.44.03.5

*Where two figures have been quoted for the Sharesave Schemes, the first number represents the assumptions for the three year savings contract and the second number for the five year savings contract.

Market condition features were incorporated into the Monte-Carlo models for the total shareholder return elements of the Long Term Incentive Plan, in determining fair value at grant date. Assumptions used in these models were as follows:

 2006
%
2005
%
Average share price volatility FTSE 100 comparator group3134
Average share price volatility FMCG comparator group2326
Average correlation FTSE 100 comparator group2624
Average correlation FMCG comparator group1816

The expected British American Tobacco p.l.c. share price volatility was determined taking account of the daily share price movements over a five year period. The respective FMCG and FTSE 100 share price volatility and correlations were also determined over the same periods. The average expected term to exercise used in the models has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural conditions, forfeiture and historical experience.

The risk free rate has been determined from market yield curves for government gilts with outstanding terms equal to the average expected term to exercise for each relevant grant. The expected dividend yield was determined by calculating the yield from the last two declared dividends divided by the grant share price.

For grants containing earnings per share performance conditions, the payout calculation is based on the average of expectations published in analysts' forecasts.

Other equity share-based payment arrangements (other than share options)

Details of the movements of other equity share-based payment arrangements during the years ended 31 December 2006 and 31 December 2005, covering the Deferred Share Bonus and Share Reward Schemes, were as follows:

 2006
Number of shares
2005
Number of shares
Outstanding at start of year7,001,271 7,284,592
Granted during the period1,959,868 2,310,273
Exercised during the period(3,037,981)(2,461,386)
Forfeited during the period(89,287)(132,208)
Outstanding at end of year5,833,871 7,001,271
Exercisable at end of year383,294 643,825

The shares outstanding for the year ended 31 December 2006 had a weighted average contractual life of 1.1 years (2005: 1.1 years).

The fair value for other equity share-based payment arrangements granted during the period was determined using the Black-Scholes model with the following input assumptions at their grant date:

 20062005
 Deferred Share
Bonus Scheme
Share Reward
Scheme
Deferred Share
Bonus Scheme
Share Reward
Scheme
Grant price (£)14.3413.859.299.31
Expected volatility (%)23233030
Average expected term to exercise (years)3.05.03.05.0
Risk free rate (%)4.44.54.84.7
Expected dividend yield (%)3.33.44.54.5

The weighted average fair value of other equity share-based payment arrangements granted during 2006 was £13.14 (2005: £8.27).

Cash-settled share-based payment arrangements

The Group issues to certain employees cash-settled share-based payments that require the Group to pay the intrinsic value of these share-based payments to the employee at the date of exercise. The Group has recorded liabilities at the end of 2006 of £14,294,315 (2005: £13,359,675) of which £3,456,071 (2005: £2,698,902) was in respect of vested grants. Fair value was determined from the Black-Scholes and Monte-Carlo models, using assumptions revised at the balance sheet date for cash-settled share-based payment arrangements. The Group recorded total expenses of £9,306,250 in 2006 (2005: £11,581,489).

Details of movements for cash-settled arrangements in respect of the Share Option Scheme during the years ended 31 December 2006 and 31 December 2005, were as follows:

 20062005
 Number
of options
Weighted
average exercise
price per share
£
Number
of options
Weighted
average exercise
price per share
£
Outstanding at start of year1,057,496 6.401,859,995 6.35
Granted during the periodn/an/an/an/a
Exercised during the period(605,634)6.19(774,940)6.28
Forfeited during the period(20,582)6.69(27,559)6.21
Outstanding at end of year431,280 6.691,057,496 6.40
Exercisable at end of year313,101 6.17375,833 6.38

In addition to the above, the movement in other nil-cost cash-settled arrangements during the years ended 31 December 2006 and 31 December 2005, covering the Long Term Incentive Plan and Deferred Share Bonus Scheme, were as follows:

 2006
Number
of shares
2005
Number
of shares
Outstanding at start of year1,215,8611,030,400
Granted during the period698,621644,202
Exercised during the period(239,513)(408,380)
Forfeited during the period(60,263)(50,361)
Outstanding at end of year1,614,7061,215,861
Exercisable at end of year63,93416,190

Assumptions used to determine the fair value of cash-settled share-based payment arrangements at date of grant, can be found in the sections relating to share option schemes and other equity share-based payment arrangements.

The weighted average British American Tobacco p.l.c. share price at the date of exercise for cash-settled share-based arrangements exercised during the period was £14.05 (2005: £10.05). A detailed breakdown of the range of exercise prices for cash-settled share-based payment arrangements outstanding for the years ended 31 December 2006 and31 December 2005 are shown in the table below:

 20062005
Range of exercise pricesNumber
outstanding
at end of year
Weighted
average remaining
contractual life
in years
Weighted
average exercise
price per share
£
Number
outstanding
at end of year
Weighted
average remaining
contractual life
in years
Weighted
average exercise
price per share
£
Nil-cost1,614,7066.1n/a1,215,8615.6n/a
£5.60 - £5.98163,4816.15.97546,9297.15.98
£6.39 - £8.09267,7996.07.14510,5676.76.86
 2,045,9866.11.412,273,3576.22.98

Share-based payment expense

The amounts recognised in the Income Statement in respect of share-based payments were as follows:

 2006
£m
2005
£m
Equity-settled share-based payments4142
Cash-settled share-based payments912
Total amount recognised in the Income Statement (note 3a)5054

 28 Group employees

The average number of persons employed by the Group and its associates during the year, including Directors, was 97,431 (2005: 96,952).

 2006
Number
2005
Number
Europe18,95319,479
Asia-Pacific10,12810,407
Latin America14,94113,969
Africa and Middle East8,9939,247
America-Pacific2,1302,262
Subsidiary undertakings55,14555,364
Associates42,28641,588
 97,43196,952

Details of Directors' remuneration, share options and retirement benefits are given in the Remuneration Report.

Included within the employee numbers for Europe are certain employees in the UK in respect of central functions. Some of the costs of these employees are allocated or charged to the various regions and markets in the Group.

 29 Related party disclosures

The Group has a number of transactions and relationships with related parties, as defined in IAS24 on related party disclosures, all of which are undertaken in the normal course of trading. Details of these are set out below.

Transactions and balances with associates relate mainly to the sale and purchase of cigarettes and tobacco leaf. Amounts receivable from associates in respect of dividends included in the table below were £48 million (2005: £45 million). The Group's share of dividends from associates included in other net income in the table below, was £267 million (2005: £202 million). Legal fees recovered from Reynolds American Inc. included in other net income amounted to £2 million (2005: £10 million).

 2006
£m
2005
£m
Transactions  
- revenue35 43
- purchases(292)(304)
- other net income272 184
Amounts receivable at 31 December58 64
Amounts payable at 31 December (24)(33)

As described in note 26, between 7 January 2005 and 20 December 2005 the Group had an interest in BARH Ltd., a joint venture between British American Tobacco and Honda Motor Co. Ltd. As part of this relationship, the Group had a funding obligation to BARH through to the end of 2006. Payments of US$67.5 million relating to Lucky Strike sponsorship for 2005 and 2006, were made during 2005 and these are included in the table above under other net income.

The key management personnel of British American Tobacco consist of the members of the Board of Directors of British American Tobacco p.l.c. and the members of the Management Board. No such person had any material interest during the year in a contract of significance (other than a service contract) with the Company or any subsidiary company. The term key management personnel in this context includes the respective members of their households.

 2006
£m
2005
£m
The total compensation for key management personnel, including Directors, was  
- salaries and other short term employee benefits14 11
- post-employment benefits3 2
- share-based payments6 5
 23 18

There were no termination benefits paid or other long term benefits applicable in respect of key personnel.

Other than in their capacity as shareholders, there have been no material transactions with Compagnie Financière Richemont SA and Remgro Limited, who together indirectly own 29.2 per cent (2005: 28.6 per cent) of the fully diluted ordinary share capital of British American Tobacco p.l.c. at 31 December 2006.