43. Employee share schemes
GSK operates several employee share schemes, including the Share Value Plan, whereby awards are granted to employees to acquire shares or ADS in GlaxoSmithKline plc at no cost after a three year vesting period and the Performance Share Plan, whereby awards are granted to employees to acquire shares or ADS in GlaxoSmithKline plc at no cost, subject to the achievement by the Group of specified performance targets. The granting of these restricted share awards has replaced the granting of options to employees as the cost of the schemes more readily equates to the potential gain to be made by the employee. The Group also operates savings related share option schemes, whereby options are granted to employees to acquire shares in GlaxoSmithKline plc at a discounted price.
Grants of restricted share awards are normally exercisable at the end of the three year vesting or performance period. Awards are normally granted to employees to acquire shares or ADS in GlaxoSmithKline plc but in some circumstances may be settled in cash. Grants under savings-related share option schemes are normally exercisable after three years’ saving. In accordance with UK practice, the majority of options under the savings-related share option schemes are granted at a price 20% below the market price ruling at the date of grant. Options under historical share option schemes were granted at the market price ruling at the date of grant.
The total charge for share-based incentive plans in 2017 was £347 million (2016 – £338 million; 2015 – £349 million). Of this amount, £276 million (2016 – £271 million; 2015 – £307 million) arose from the Share Value Plan. See Note 9, ‘Employee Costs’ for further details.
GlaxoSmithKline share award schemes
Share Value Plan
Under the Share Value Plan, share awards are granted to certain employees at no cost. The awards vest after two and a half to three years and there are no performance criteria attached. The fair value of these awards is determined based on the closing share price on the day of grant, after deducting the expected future dividend yield of 4.8% (2016 – 4.5%; 2015 – 5.7%) over the duration of the award.
| Shares | Weighted | ADS | Weighted | |||||||||||||
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Number of shares and ADS issuable |
Number (000) | fair value | Number (000) | fair value | ||||||||||||
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At 1 January 2015 |
32,912 | 21,227 | ||||||||||||||
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Awards granted |
13,019 | £ | 11.57 | 7,198 | $ | 35.66 | ||||||||||
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Awards exercised |
(11,476 | ) | (8,878 | ) | ||||||||||||
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Awards cancelled |
(1,878 | ) | (2,027 | ) | ||||||||||||
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At 31 December 2015 |
32,577 | 17,520 | ||||||||||||||
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Awards granted |
12,983 | £ | 14.97 | 6,589 | $ | 39.18 | ||||||||||
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Awards exercised |
(11,198 | ) | (6,214 | ) | ||||||||||||
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Awards cancelled |
(1,507 | ) | (812 | ) | ||||||||||||
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At 31 December 2016 |
32,855 | 17,083 | ||||||||||||||
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Awards granted |
13,018 | £ | 13.68 | 6,610 | $ | 35.63 | ||||||||||
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Awards exercised |
(10,596 | ) | (5,674 | ) | ||||||||||||
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Awards cancelled |
(1,352 | ) | (627 | ) | ||||||||||||
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At 31 December 2017 |
33,925 | 17,392 | ||||||||||||||
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Performance Share Plan
Under the Performance Share Plan, share awards are granted to Directors and senior executives at no cost. The percentage of each award that vests is based upon the performance of the Group over a defined measurement period with dividends reinvested during the same period. For awards granted from 2015, the performance conditions are based on three equally weighted measures over a three year performance period. These are adjusted free cash flow, TSR and R&D new product performance.
The fair value of the awards is determined based on the closing share price on the day of grant. For TSR performance elements, this is adjusted by the likelihood of that condition being met, as assessed at the time of grant.
During 2017, awards were made of 3.9 million shares at a weighted fair value of £11.09 and 1.0 million ADS at a weighted fair value of $32.85. At 31 December 2017, there were outstanding awards over 12.9 million shares and 3.2 million ADS.
Share options and savings-related options
For the purposes of valuing savings-related options to arrive at the share based payment charge, a Black-Scholes option pricing model has been used. The assumptions used in the model are as follows:
| 2017 Grant | 2016 Grant | 2015 Grant | ||||||||||
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Risk-free interest rate |
0.54 | % | 0.32 | % | 0.88 | % | ||||||
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Dividend yield |
5.9 | % | 4.9 | % | 6.5 | % | ||||||
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Volatility |
23 | % | 23 | % | 21 | % | ||||||
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Expected life |
3 years | 3 years | 3 years | |||||||||
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Savings-related options grant price (including 20% discount) |
£ | 10.86 | £ | 12.95 | £ | 10.14 | ||||||
| Share option | Share option | Savings-related | ||||||||||||||||||||||||||||||
| Options outstanding | schemes – shares | schemes – ADS | share option schemes | |||||||||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||||||||||
| Number | exercise | Number | exercise | Number | exercise | |||||||||||||||||||||||||||
| 000 | price | 000 | price | 000 | price | |||||||||||||||||||||||||||
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At 31 December 2017 |
3,600 | £ | 11.86 | 3,277 | $ | 39.62 | 6,852 | £ | 10.77 | |||||||||||||||||||||||
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Range of exercise prices on options outstanding at year end |
£ | 11.47 | – | £ | 12.21 | $ | 33.42 | – | $ | 48.66 | £ | 10.13 | – | £ | 12.95 | |||||||||||||||||
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Weighted average market price on exercise during year |
£ | 16.07 | $ | 41.50 | £ | 14.28 | ||||||||||||||||||||||||||
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Weighted average remaining contractual life |
1.4 years | 1.0 years | 2.1 years | |||||||||||||||||||||||||||||
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Options over 2.0 million shares were granted during the year under the savings-related share option scheme at a weighted average fair value of £2.08. At 31 December 2017, 6.7 million of the savings-related share options were not exercisable. All of the other share options and ADS options are currently exercisable and all will expire if not exercised on or before 22 July 2020.
There has been no change in the effective exercise price of any outstanding options during the year.
Employee Share Ownership Plan Trusts
The Group sponsors Employee Share Ownership Plan (ESOP) Trusts to acquire and hold shares in GlaxoSmithKline plc to satisfy awards made under employee incentive plans and options granted under employee share option schemes. The trustees of the ESOP Trusts purchase shares with finance provided by the Group by way of loans or contributions. In 2017, Treasury shares with a carrying value of £610 million were purchased by the US ESOP Trust to satisfy future awards. The costs of running the ESOP Trusts are charged to the income statement. Shares held by the ESOP Trusts are deducted from other reserves and amortised down to the value of proceeds, if any, receivable from employees on exercise by a transfer to retained earnings. The trustees have waived their rights to dividends on the shares held by the ESOP Trusts.
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Shares held for share award schemes |
2017 | 2016 | ||||||
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Number of shares (000) |
66,558 | 42,571 | ||||||
| £m | £m | |||||||
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Nominal value |
17 | 11 | ||||||
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Carrying value |
399 | 285 | ||||||
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Market value |
880 | 665 | ||||||
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Shares held for share option schemes |
2017 | 2016 | ||||||
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Number of shares (000) |
139 | 139 | ||||||
| £m | £m | |||||||
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Nominal value |
— | — | ||||||
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Carrying value |
1 | 1 | ||||||
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Market value |
2 | 2 | ||||||