Notes to the consolidated accounts
29 Share-based compensation plans
As at 31 December 2007, the Group had share-based compensation plans in the form of Share Option Plans, Performance Share Plans, and Other Plans.
The numbers in this note include those for Executive Directors shown in the report of the Remuneration Committee and those for key management personnel shown in note 31. No awards were made to Executive Directors in 2005, 2006 and 2007 under the North America Performance Share Programme, the Restricted Share Plan or the cash-settled share-based retention plan. Non-Executive Directors do not participate in any of the share-based compensation plans.
The economic fair value of the awards is calculated using option pricing models and the resulting cost is recognised as remuneration cost amortised over the vesting period of the grant.
Disclosures, including a description of the method and significant assumptions used to estimate the fair values of options and the weighted average information, are given below for each type of plan, for NV, PLC and New York shares on a combined basis.
Unilever will not grant share options in total in respect of Executive Option Plans for more than 5% of its issued ordinary capital, and for all Plans together, for more than 10% of its issued ordinary capital. The Board does not apportion these limits to each plan separately.
The actual remuneration cost charged in each period is shown below, and relates almost wholly to equity settled plans:
| € million | € million | € million | |
|---|---|---|---|
| Income statement charge | 2007 | 2006 | 2005 |
| Share option plans | (16) | (41) | (76) |
| Performance share plans | (103) | (48) | (78) |
| Other plans(a) | (33) | (31) | (38) |
| (152) | (120) | (192) | |
(a) The Group also provides a Share Matching Plan, a Restricted Share Plan, TSR-LTIP (no awards after 2006) and a cash-settled share-based retention plan.
(i) Share Option Plans
Unilever has All-Employee Share Option Plans in 15 countries: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Portugal, Spain, Sweden and Switzerland, and with a share save element in South Africa and the United Kingdom. Generally the vesting periods range between three and five years and the maximum term is five years.
Under the Executive Option Plans options are granted to key employees of the Group on a discretionary basis. The exercise price is the market price at the date of grant. The options become exercisable after a three-year period from the date of grant and have a maximum term of ten years. In view of the introduction of the Global Performance Share Plan in 2005, no further grants were made under the Executive Option Plans after 2005. The plans consist of the NV, the PLC Plans and the North America Programme which is covered by the Unilever North America 2002 Omnibus Equity Compensation Plan.
The fair value per option is estimated using the Black-Scholes option pricing method. The expected option terms are based on historic data. Figures for expected volatility are set with regard to historic volatility over the last six years. The expected dividend yield is based on the dividend yield in the year of grant. Forfeiture rates are set annually with regard to historic forfeiture rates.
Managers working in India can participate in an Executive Option Plan relating to Hindustan Unilever Limited's shares. As these are neither NV nor PLC shares, no figures for this plan are disclosed in this note, but the fair value costs for 2007 were €1 million (2006: €1 million; 2005: €2 million) and are included in the costs of share option plans in the table above.
A summary of the status of the All-Employee and Executive Option Plans as at 31 December 2007, 2006 and 2005 and changes during the years ended on these dates is presented below:
| Number of options |
2007 Weighted average exercise price |
Number of options |
2006 Weighted average exercise price |
Number of options |
2005 Weighted average exercise price |
|
|---|---|---|---|---|---|---|
| Outstanding at 1 January | 96 296 565 | €17.58 | 114 772 471 | €18.33 | 128 972 689 | €18.28 |
| Granted | 2 626 506 | €22.10 | 4 356 278 | €17.65 | 5 878 792 | €17.53 |
| Exercised | (33 535 234) | €17.53 | (14 380 347) | €16.87 | (9 464 155) | €15.42 |
| Forfeited | (3 877 793) | €18.75 | (5 171 316) | €19.57 | (9 045 452) | €19.13 |
| Expired | (2 815 087) | €22.01 | (3 280 521) | €21.22 | (1 569 403) | €17.93 |
| Outstanding at 31 December | 58 694 957 | €17.53 | 96 296 565 | €18.35 | 114 772 471 | €18.42 |
| Exercisable at 31 December | 47 975 809 | €17.35 | 71 189 331 | €18.57 | 66 586 233 | €18.65 |
The weighted average market price of the shares at the time of exercise was €23.02 (2006: €19.68; 2005: €18.66).
| 2007 | 2006 | 2005 | |
| Option value information | |||
| Fair value per option | €4.33 | €3.10 | €3.12 |
| Valuation assumptions: | |||
| Expected option term | 3.5 years | 3.5 years | 3.9 years |
| Expected volatility | 27.5% | 27.5% | 27.5% |
| Expected dividend yield | 3.2% | 3.8% | 3.6% |
| Risk-free interest rate | 4.6% | 3.8% | 3.1% |
The exercise prices and remaining life of the All-Employee and Executive Option Plans as at 31 December 2007 are as follows:
| Options outstanding | Options exercisable | ||||
|---|---|---|---|---|---|
| Range of exercise prices |
Number outstanding at 31 December 2007 |
Weighted average remaining contractual life |
Weighted average exercise price |
Number exercisable at 31 December 2007 |
Weighted average exercise price |
| €8.41 – €11.70 | 1 681 642 | 3 years | €10.98 | 1 681 642 | €10.98 |
| €12.40 – €16.97 | 18 327 615 | 4 years | €14.87 | 15 633 936 | €14.65 |
| €17.00 – €24.66 | 38 685 700 | 4 years | €19.07 | 30 660 231 | €19.07 |
(ii) Performance Share Plans
The Global Performance Share Plan (GPSP) was introduced in 2005. Under this plan, managers can be awarded conditional shares which will vest three years later at a level between 0% and 150% (for middle management) or 200% (for higher executives) depending on Unilever's achievement of set targets for Underlying Sales Growth and Ungeared Free Cash Flow over the three-year performance period. The amount to be paid by participants to obtain the shares at vesting is zero.
In 2007 we introduced the Leadership Performance Share Plan (LPSP) under the Global Share Incentive Plan (GSIP) rules. The structure of this Plan is comparable to the GPSP but the Plan has an additional third performance condition which is based on TSR ranking over the three year period.
North American managers participate in the North American Performance Share Programme, introduced in 2001, that awards Unilever shares if North American company performance targets are met over a three-year period. The amount to be paid to the company by participants to obtain the shares at vesting is zero.
A summary of the status of the Performance Share Plans as at 31 December 2007, 2006 and 2005 and changes during the years ended on these dates is presented below:
| 2007 | 2006 | 2005 | |
|---|---|---|---|
| Number of | Number of | Number of | |
| shares | shares | shares | |
| Outstanding at 1 January | 15 270 180 | 13 286 992 | 10 749 007 |
| Awarded | 6 209 781 | 6 162 489 | 6 514 252 |
| Vested | (3 465 990) | (3 057 630) | (3 510 939) |
| Forfeited | (1 170 202) | (1 121 671) | (465 328) |
| Outstanding at 31 December | 16 843 769 | 15 270 180 | 13 286 992 |
| Exercisable at 31 December | – | – | – |
| 2007 | 2006 | 2005 | |
| Share award value information | |||
| Fair value per share award | €19.06 | €17.22 | €17.26 |
Additional information
As a result of the share-based compensation plans for employees, we are exposed to movements in our own share price. We take a flexible approach to the buying of shares to meet these obligations, not automatically buying shares at grant. In 2001, we entered into a contract with a bank for the forward purchase of Unilever shares. This contract was terminated in March 2006.
At 31 December 2007, there were options outstanding to purchase 61 579 485 (2006: 88 937 770) ordinary shares in NV or PLC in respect of share-based compensation plans of NV and its subsidiaries and the North American plans, and 18 296 234 (2006: 29 315 519) ordinary shares in NV or PLC in respect of share-based compensation plans of PLC and its subsidiaries.
To satisfy the options granted, certain NV group companies hold 68 011 392 (2006: 91 935 752) ordinary shares of NV or PLC, and trusts in Jersey and the United Kingdom hold 10 920 385 (2006: 16 678 871) PLC shares. The trustees of these trusts have agreed, until further notice, to waive dividends on these shares, save for the nominal sum of 0.01p per 31⁄9p ordinary share. Shares acquired during 2007 represent 0.2% of the Group's called up capital. The balance at 31 December 2007 was 2.6% (2006: 3.6%).
The book value of €1 305 million (2006: €1 836 million) of all shares held in respect of share-based compensation plans for both NV and PLC is eliminated on consolidation by deduction from other reserves (see note 23). Their market value at 31 December 2007 was €2 008 million (2006: €2 279 million).
At 31 December 2007 the exercise price of nil (2006: 14 989 001) NV and PLC options were above the market price of the shares.
Shares held to satisfy options are accounted for in accordance with IAS 32 and SIC 12. All differences between the purchase price of the shares held to satisfy options granted and the proceeds received for the shares, whether on exercise or lapse, are charged to reserves. In 2007 this includes €nil million (2006: €7 million) for shares held to meet options expiring in the short term which are priced above market value. The basis of the charge to operating profit for the economic value of options granted is discussed previously within this note.
Obligations over the following number of shares were granted, exercised, forfeited or expired between 31 December 2007 and 1 March 2008.
| Number of shares | ||
|---|---|---|
| Granted | Exercised, forfeited or expired |
|
| Share Option Plans | – | 2 104 963 |
| Performance Share Plans | – | 118 881 |
