Notes to the consolidated financial statements
Year ended 31 July 2009

34. Share-based payments

The Group operates seven share option plans: the 1984 Executive Share Option Scheme, the 1989 Executive Share Option Scheme and the Wolseley Share Option Plan 2003 (collectively, the “Executive Option Schemes”); the Wolseley Employees Savings Related Share Option Scheme 1981, the Wolseley Irish Sharesave Scheme 2000 and the Wolseley European Sharesave Plan 2001 (collectively, the “Employees Savings Option Schemes”); and the Wolseley Employee Share Purchase Plan 2001 (the “ESPP”).

Awards granted under the Executive Option Schemes are subject to a condition such that they may not be exercised unless the growth in earnings per share over a period of three consecutive financial years exceeds growth in the UK Retail Price Index over the same period by at least 9 per cent and consequently vest over a period of three years. Awards granted under the Employee Savings Option Schemes vest over periods ranging from three to seven years. Awards granted under the ESPP vest over a one-year period.

The Group also operates a Long Term Incentive Scheme (“LTIS”) and the Wolseley Restricted Share Plan (“RSP”) for senior executives. Under the LTIS, executives are awarded a variable number of shares depending on the level of total shareholder return over the next three years relative to that of a number of comparator companies. The vesting period is three years. The maximum award under the scheme is determined at grant date and then adjusted at vesting date in accordance with the market performance condition. Under the RSP, executives (excluding Directors) are granted free shares. The vesting period is three years and there are no performance measures other than retained employment.

Following the capital reorganisation and share issue which was completed during April 2009, appropriate adjustments were made to reflect the dilutive effect of both transactions on outstanding awards. The calculations were made in accordance with HM Revenue and Customs recommendations (“HMRC”). Such calculations were reviewed by the Company’s auditors, who performed specific procedures to recalculate the adjustments made to outstanding awards, on the basis that the Directors of the Company deemed the adjustments to be fair and reasonable.

After adjustments had been made to outstanding awards to reflect the capital reorganisation, a further adjustment was made using the theoretical ex-rights price calculation (“TERP”) as agreed with HMRC. All outstanding awards made under the Company’s share plans were multiplied by a TERP factor of 2.398177677 and the respective option prices and market prices at allocation were multiplied by a factor of 0.416983283.

These formulae were designed to minimise the effect of the capital reorganisation and the share issue upon outstanding awards and, subject to roundings, ensured that the overall value of outstanding awards was the same after adjustment.

The tables below show the effect of the converted share volume and values following the share capital restructuring and the rights issue. For further details of the capital restructuring and the rights issue refer to note 33.

Share options outstanding during the year

	Year ended 31 July
	2009 Shares 000’s	2009 Weighted average exercise price £	2008 Shares 000’s	2008 Weighted average exercise price £
Executive Option Schemes
Outstanding as at 1 August	23,796	9.51	16,672	10.23
Granted	23,796	3.21	9,154	8.06
Exercised	–	–	(422)	4.84
Surrendered or expired pre rights issue	(4,418)	11.21	(1,608)	9.93
Outstanding as at 30 April	43,174	5.85
Converted following rights issue	10,332	24.41
Surrendered or expired post rights issue	(345)	23.12
Outstanding as at 31 July	9,987	24.46	23,796	9.51
Exercisable as at 31 July	1,220	33.31	5,681	7.95
Weighted average fair value of options granted during the year		5.02		2.30
Employees Savings Option Schemes and ESPP
Outstanding as at 1 August	7,934	4.94	3,833	9.10
Granted	14,678	1.67	6,831	4.15
Exercised	(6)	4.03	(395)	4.75
Surrendered or expired pre rights issue	(5,738)	4.55	(2,335)	9.50
Outstanding as at 30 April	16,868	2.23
Converted following rights issue	4,007	9.23
Exercised following rights issue	(3)	17.97
Surrendered or expired post rights issue	(161)	14.52
Outstanding as at 31 July	3,843	9.01	7,934	4.94
Exercisable as at 31 July	52	34.72	257	7.90
Weighted average fair value of options granted during the year		3.91		0.93

The weighted average share price at the date of exercise for share options exercised during the period was £14.95 (2008: £5.82). The total intrinsic value of options exercised during the period was nil (2008: £1 million). The aggregate intrinsic value of options outstanding and exercisable at 31 July 2009 was £21 million and nil respectively (2008: nil and nil).

Details of shares outstanding and exercisable under the LTIS and RSP

	Year ended 31 July
	2009 Shares 000’s	2009 Weighted average exercise price £	2008 Shares 000’s	2008 Weighted average exercise price £
Outstanding as at 1 August	2,612	10.26	2,189	11.38
Granted	3,315	2.87	1,226	7.86
Vested	(4)	13.49	(6)	13.49
Surrendered or expired pre rights issue	(860)	10.47	(797)	9.60
Outstanding as at 30 April	5,063	5.39
Converted following rights issue	1,213	22.45
Vested post rights issue	(3)	56.25
Surrendered or expired post rights issue	(239)	20.90
Outstanding as at 31 July	971	22.74	2,612	10.26
Exercisable as at 31 July	–	–	–	–
Weighted average fair value of shares awarded		4.96		0.78

Details of options exercisable

Options outstanding and exercisable at 31 July 2009 under the Executive Option Schemes, the Employees Saving Option Schemes and ESPP can be analysed as follows:

	Options outstanding				Options exercisable
Range of exercise prices	Shares 000’s	Weighted average remaining contractual life Years	Weighted average exercise price £		Shares 000’s	Weighted average remaining contractual life Years	Weighted average exercise price £
£0.01 – £5.00	–	–	–		–	–	–
£5.01 – £10.00	3,351	3	7.15		–	–	–
£10.01 – £15.00	5,497	9	13.39		22	1	14.58
£15.01 – £20.00	426	2	17.46		65	2	19.06
£20.01 – £25.00	187	3	22.67		187	3	22.67
£25.01 – £30.00	29	–	27.40		25	–	27.40
£30.01 – £35.00	2,417	8	33.24		322	4	30.98
£35.01 – £40.00	636	5	39.52		624	5	39.57
£40.01 – £45.00	53	2	41.91		–	–	–
£45.01 – £50.00	38	2	48.00		27	2	47.78
£50.01 – £55.00	1,196	7	50.08		–	–	–
	13,830	7	20.21		1,272	4	33.37

The fair value at the date of grant of options awarded during the year has been estimated by the binomial methodology for all schemes except the LTIS, for which a Monte Carlo simulation was used. The fair value of shares granted under the RSP was calculated as the market price of the shares at the date of grant reduced by the present value of dividends expected to be paid over the vesting period.

The principal assumptions required by these methodologies were:

	Executive Share Options			Employee Share Options			Long Term Incentive Schemes
	2009	2008		2009	2008		2009	2008
Risk free interest rate	4.09%	4.93%		2.17%	4.19%		3.66%	4.93%
Expected annual increase in dividends*	n/a	10.00%		n/a	10.00%		n/a	n/a
Expected dividend yield	n/a	n/a		n/a	n/a		1.04%	2.94%
Expected volatility	35.82%	26.15%		47.86%	31.03%		45.00%	25.00%
Expected life	5.8 years	5.7 years		1–7 years	1–7 years		3 years	3 years

* The initial assumption was a dividend yield of zero up to 31 July 2010 (2008: 11.94 pence and 23.71 pence for interim and final dividends respectively).

Expected volatility has been estimated on the basis of historic volatility over the expected term, excluding the effect of extraordinary volatility due to the capital reorganisation and rights issue. Expected life has been estimated on the basis of historical data on the exercise pattern.

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