The Group has four share award plans, all of which are equity-settled schemes:
1. Halfords company share option scheme
The CSOS was introduced in June 2004 and the Company has made annual grants since. Options are granted with a fixed exercise price equal to the market price of the shares under option at the date of grant. The contractual life of an option is 10 years.
Options granted will become exercisable on the third anniversary of the date of grant, subject to the achievement of a three year performance condition. For grants up to 150% of basic salary the options can only be exercised if the increase in earnings per share ("EPS") over the period is not less than the increase in the Retail Price Index ("RPI") plus 3.5% per year. In the case of grants in excess of 150% of basic salary, the excess can only be exercised in full if the increase is not less than RPI plus 10% per year. Exercise of an option is subject to continued employment.
The expected volatility is based on historical volatility of a peer group of companies since the IPO in June 2004. The expected life is the average expected period to exercise. The risk free rate of return is the yield on zero-coupon UK government bonds.
Options were valued using the Black–Scholes option-pricing models. No performance conditions were included in the fair value calculations.
2. Halfords sharesave scheme
The SAYE is open to all employees with eligible employment service. Options may be exercised under the scheme if the option holder completes his saving contract for a period of three years and then not more than six months thereafter. Special provisions allow early exercise in the case of death, injury, disability, redundancy, retirement or because the company or business which employs the option holder is transferred out of the Group, or in the event of a change in control, reconstruction or winding up of the Company.
Options were valued using the Black–Scholes option-pricing models.
3. Performance share plan
The introduction of a Performance Share Plan ("PSP") was approved at the Annual General Meeting in August 2005 awarding the Executive Directors and certain senior management conditional rights to receive shares. Annual schemes have been approved for each year from 2005.
The extent to which such rights vest will depend upon the Company's performance over the three-year period following the award date. The vesting of 50% of the awards will be determined by the Company's relative total shareholder return ("TSR") performance and the vesting of the other 50% by the Company's absolute EPS performance against RPI. The Company's TSR performance will be measured against the FTSE 350 general retailers as a comparator group. No retesting will be permitted.
The TSR element of the options granted under the schemes has been valued using a model developed by Deloitte. The Deloitte model uses the Group's share price volatility, the correlation between comparator companies and the vesting schedule attaching to the PSP tranche rather than generating a large number of simulations of share price and TSR performance to determine the fair value of the award using a Monte Carlo model.
For 2009 awards onwards, the Committee has recommended the reinvestment of dividends earned on award shares, such shares to invest in proportion to the vesting of the original award shares. This is in line with best practice as contained in the ABI guidelines on executive remuneration. Following this recommendation the shares awarded in 2010, 2011 and 2012 under the Performance Share Plan earned final dividends of 9.1p per share and were reinvested in shares at a cost of £3.71 per share. Shares awarded in 2011, 2012 and 2013 under the PSP earned interim dividends of 5.2p per share and were reinvested in shares at a cost of £4.70 per share.
Changes to the performance criteria of the PSP in relation to the awards granted during the 28 March 2014 year have been made by the Remuneration Committee. These changes have been made in order to create better alignment with the Company's three-year strategic priorities following the Getting Into Gear programme. The awards are weighted 25% towards Group revenue growth targets and 75% towards Group EBITDA growth targets. The core award remains at 150% of base salary with a multiplier being introduced of 1.5x the core award if exceptional levels of performance are achieved. The shares vesting as part of this multiplier calculation will attract a retention period of two years. In order to focus management the awards will be underpinned by a minimum Group EBITDA, and a net debt to EBITDA ratio no greater than 1.5x throughout the three-year performance period.
4. Co-investment share plan
In 2012 the Company adopted the Halfords Group plc 2012 Co-Investment Plan. This plan was adopted for the sole purpose of making a one-off award to the Group's new CEO. No further awards either to the Group's CEO or other executives will be made under this plan.
On 4 October 2012 the new CEO purchased 164,056 Halfords Group plc shares at a price of 302.22 pence per share and will be entitled to receive Matching Shares equivalent to a maximum of 3.5 times this investment. Subject to continued employment these shares may vest up to a third in November 2015, up to two-thirds in November 2016 and in full in November 2017, depending on the following Threshold (30% vesting) and Maximum (100% vesting) share price performance by Halfords:
| November | Threshold | Maximum |
| 2015 | 350p | 400p |
| 2016 | 385p | 440p |
| 2017 | 425p | 485p |
Matching Shares have been granted in the form of nil cost options, with the participant having until the tenth anniversary of the date of grant to exercise the options, and will lapse on a pro rata basis if the required number of Investment Shares is not retained to the final vesting date.
At each relevant vesting date the participant may decide to exercise any portion of the award that has vested based on the performance at that time (in which case any unvested shares in that tranche in respect of which the share price target has not been met will lapse) or roll forward that tranche in full subject to performance testing at the next vesting date. In the latter case the participant will forfeit the right to exercise any awards that had become capable of vesting at the earlier vesting date.
The Participant will be entitled to receive an amount equivalent to the dividends that would have been paid either in cash or on a reinvested basis in shares during the period from grant to exercise in respect of the number of Matching Shares that vest.
The Barrier Black–Scholes Model is an adapted Black–Scholes Model and is used to calculate the estimated fair values of the Co-Investment Plan Options to include the impact of the share price based performance conditions. Using this method the fair value of the options at the time of grant was estimated to be £1.35 per share.
The Group Income Statement charge recognised in respect of share-based payments for the current period is £1.0m (2013: £0.1m).
The following tables reconcile the number of share options outstanding and the weighted average exercise price (WAEP) for all share award plans except for the Co-Investment Plan, details of which are covered above.
For the period ended 28 March 2014
| CSOS | SAYE | PSP |
|---|
| Number
('000) | WAEP (£) | Number
('000) | WAEP (£) | Number
('000) | WAEP (£) |
|---|
| Outstanding at start of year | 5,191 | 3.10 | 2,351 | 1.76 | 1,216 | 0.00 |
| Granted | 1,780 | 3.71 | 543 | 2.54 | 748 | 0.00 |
| Shares representing dividends reinvested | — | — | — | — | 58 | 0.00 |
| Forfeited | — | — | (65) | 2.27 | (144) | 0.00 |
| Exercised | (614) | 3.22 | (35) | 2.37 | — | 0.00 |
| Lapsed | (1,592) | 4.35 | (315) | 1.90 | — | 0.00 |
| Outstanding at end of year | 4,765 | 2.96 | 2,479 | 1.88 | 1,878 | 0.00 |
| Exercisable at end of year | 485 | 3.25 | 62 | 4.15 | — | 0.00 |
| | | | | | |
| Exercise price range (£) | | 2.20 to 5.03 | | 1.56 to 4.15 | | 0.00 |
| Weighted average remaining contractual life (years) | | 8.0 | | 1.4 | | 1.5 |
For the period ended 29 march 2013
| CSOS | SAYE | PSP |
|---|
| Number
('000) | WAEP (£) | Number
('000) | WAEP (£) | Number
('000) | WAEP (£) |
|---|
| Outstanding at start of year | 3,858 | 3.68 | 908 | 3.05 | 1,615 | 0.00 |
| Granted | 2,176 | 2.20 | 2,166 | 1.56 | 631 | 0.00 |
| Shares representing dividends reinvested | — | — | — | — | 133 | 0.00 |
| Forfeited | — | — | (69) | 2.27 | — | 0.00 |
| Exercised | (209) | 3.07 | (73) | 2.60 | — | 0.00 |
| Lapsed | (634) | 3.42 | (581) | 2.83 | (1,163) | 0.00 |
| Outstanding at end of year | 5,191 | 3.10 | 2,351 | 1.76 | 1,216 | 0.00 |
| Exercisable at end of year | 1,127 | 3.25 | 67 | 2.60 | — | 0.00 |
| | | | | | |
| Exercise price range (£) | | 2.20 to 5.03 | | 1.56 to 4.15 | | 0.00 |
| Weighted average remaining contractual life (years) | | 7.8 | | 2.1 | | 1.8 |
The following table gives the assumptions applied to the options granted in the respective periods shown:
| 52 weeks to 28 March 2014 | 52 weeks to 29 March 2013 |
|---|
| Grant date | CSOS | SAYE | PSP | CSOS | SAYE | PSP |
|---|
| Share price at grant date | 3.66 | 3.70 | 3.66 | £2.25 | £2.20 | £2.25 |
| Exercise price | 3.71 | 2.54 | 0.00 | £2.20 | £1.56 | £0.00 |
| Expected volatility | 36% | 35% | 36% | 35% | 31% | 31% |
| Option life (years) | 10 | 3 | 3 | 10 | 3 | 3 |
| Expected life (years) | 4.85 | 3.5 | 3 | 4.85 | 3.5 | 3 |
| Risk free rate | 1.34% | 0.81% | — | 0.66% | 0.31% | — |
| Expected dividend yield | 4.67% | 4.63% | — | 9.80% | 9.88% | 9.80% |
| Probability of forfeiture | 33% | 44% | 30% | 33% | 44% | 30% |
| Weighted average fair value of options granted | £0.72 | £1.11 | £3.66 | £0.24 | £0.36 | £1.64 |
As the PSP awards have a nil exercise price the risk free rate of return does not have any effect on the estimated fair value and therefore is excluded from the above table.