16 SHARE-BASED PAYMENTS.


The fair value at the date of grant of the equity instrument is recognised as an expense, spread over the vesting period of the instrument. The total amount to be expensed is determined by reference to the fair value of the awards, excluding the impact of any non-market vesting conditions. At each balance sheet date, the Group revises its estimate of the number of equity instruments which are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment is made to equity. On vesting or exercise, the difference between the expense charged to the income statement and the actual cost to the Group is transferred to retained earnings. Where new shares are issued, the proceeds received are credited to share capital and share premium.

(i) Description of schemes

The Group provides a number of equity settled share-based long term incentive plans for directors and eligible employees. Options are normally forfeited if the employee leaves the Group.

The Savings related share option scheme (SAYE) allows employees to enter into a regular savings contract over either three, five or seven years, coupled with a corresponding option over shares of the Group. The grant price is equal to 80% of the quoted market price of the Group shares on the invitation date. Fair value is calculated using the Black-Scholes model.

Conditional shares can be granted to top managers under the Performance share plan (PSP), based upon individual and Company performance. Under the PSP, the number of performance shares transferred to the individual at the end of the three year vesting period is dependent on the Group’s relative [Total Shareholder Return (TSR)].

The Company share option scheme (CSOP), approved by HMRC, and unapproved Executive share option scheme (ESOS) are designed to provide a long term incentive to directors and managers of the Group. The number of options granted is based on the manager’s grade, salary and performance. In order for the options to be exercisable, Legal & General’s TSR must exceed the median TSR of the FTSE 100 for a period of at least three years commencing on the date of the grant. Fair value is calculated using a binomial model, reflecting the historic exercise patterns.

The Share bonus plan (SBP) awards restricted shares and nil-paid options. Recipients of restricted shares are entitled to both vote and receive dividends. Fair value is calculated as the market value on the grant date, adjusted to reflect the eligibility for dividend payments.

Under the Employee share plan (ESP), approved by HMRC, permanent UK employees may elect to purchase Group shares from the market at the prevailing market price on a monthly basis. The Group supplements the number of shares purchased by matching the first £20 of the employees’ contributions. From time to time, the Group may make a grant of free shares. Both the free and matching shares must be held in trust for three years before they may vest to the employee. The fair value of granted shares is equal to the market value at grant date.

The fair values of the share grants made during the year have been calculated using the following assumptions:

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SAYE

SAYE

PSP

PSP

Award date

15-Apr-11

1-Sep-11

13-Jan-11

27-Apr-11

Weighted average share price

120p

105p

110p

119p

Weighted average exercise price

88p

79p

n/a

n/a

Expected volatility

45%

45%

n/a

n/a

Expected life

3 – 7 years

3 – 7 years

3 years

3 years

Risk free investment rate

1.8% – 3.2%

0.9% – 2.1%

n/a

n/a

Dividend yield

4.1%

4.5%

n/a

n/a

(ii) Total recognised expense

The total recognised expense relating to share-based payments in 2011 was £22m (2010: £20m) before tax, all of which related to equity settled share schemes. This is broken down between the Group’s plans as detailed below.

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2011
£m

2010
£m

Share bonus plan (SBP)

9

8

Performance share plan (PSP)

5

4

Employee share plan (ESP)

4

4

Savings related share option scheme (SAYE)

4

4

Total share-based payment expense

22

20

(iii) Outstanding share options

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SAYE
Options
2011
 

Weighted
average
exercise
price
2011
p

CSOP/
ESOS
Options
2011
 

Weighted
average
exercise
price
2011
p

SBP
Options
2011
 

Weighted
average
exercise
price
2011
p

Outstanding at 1 January

79,030,152

39

23,678,393

115

325,787

Granted during the year

5,116,868

83

3,937,136

116

79,907

Forfeited during the year

(1,704,792)

56

(643,719)

114

Exercised during the year

(3,760,680)

44

(2,006,892)

83

(16,109)

Expired during the year

(4,905,894)

43

(6,809,432)

143

(13,371)

Outstanding at 31 December

73,775,654

41

18,155,486

107

376,214

Exercisable at 31 December

96,201

89

8,139,062

119

Weighted average remaining contractual life (years)

2

 

2

 

9

 

Exercised during the year includes 270,002 of options, which are predominantly CSOP options linked to SBP which have been settled using employee scheme shares.

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SAYE
Options
2010
 

Weighted
average
exercise
price
2010
p

CSOP/
ESOS
Options
2010
 

Weighted
average
exercise
price
2010
p

SBP
Options
2010
 

Weighted
average
exercise
price
2010
p

Outstanding at 1 January

90,241,779

39

25,531,039

134

Granted during the year

3,761,470

70

6,967,792

85

330,625

Forfeited during the year

(8,434,683)

40

(3,545,279)

136

(4,838)

Exercised during the year

(4,157,478)

49

(304,628)

78

Expired during the year

(2,380,936)

64

(4,970,531)

157

Outstanding at 31 December

79,030,152

39

23,678,393

115

325,787

Exercisable at 31 December

195,033

104

16,911,286

126

Weighted average remaining contractual life (years)

3

 

2

 

10

 

Exercised during the year includes 9,563 of CSOP options linked to SBP which have been settled using employee scheme shares.

(iv) Total options

Options over 92,307,354 shares (2010: 103,034,332 shares) are outstanding under CSOP, ESOS, SAYE and SBP as at 31 December 2011. These options have a range of exercise prices between 0p and 150p (2010: 0p and 150p) and maximum remaining contractual life up to 2021 (2010: 2020).

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