Notes to the financial statements

32 Share-based payments

The Group recognised £38 million (2006: £23 million) of employee costs (note 6) related to share-based payment transactions made during the financial year.

National insurance contributions are payable in respect of certain share-based payments transactions and are treated as cash-settled transactions.

At 24 March 2007, the carrying amount of national insurance contributions payable was £14 million (2006: £4 million) of which £2 million (2006: £1 million) was in respect of vested grants.

The Group operates various share-based payment schemes as set out below:

(a) Savings Related Share Option Scheme (“SAYE”)

The Group operates a Savings Related Share Option Scheme, which is open to all UK employees with more than three months continuous service.

This is an approved HMRC Scheme and was established in 1980. Under the SAYE scheme, participants remaining in the Group’s employment at the end of the three-year or five-year savings period are entitled to use their savings to purchase shares in the Company at a stated exercise price. Employees leaving for certain reasons are able to use their savings to purchase shares within six months of their leaving.

At 24 March 2007, UK employees held 21,833 five-year savings contracts (2006: 24,033) in respect of options over 20.5 million shares (2006: 21.6 million) and 24,919 three-year savings contracts (2006: 23,265) in respect of options over 14.1 million shares (2006: 13.8 million).

A reconciliation of option movements is shown below:

	2007		2006
	Number of options million	Weighted average exercise price pence	Number of options million	Weighted average exercise price pence
Outstanding at beginning of year	35.4	237	33.2	248
Granted	9.1	328	13.2	231
Forfeited	(4.3)	236	(4.4)	239
Exercised	(4.4)	272	(3.6)	264
Expired	(1.3)	278	(3.0)	288
Outstanding at end of year	34.5	256	35.4	237
Exercisable at end of year	3.4	247	1.7	278

The weighted average share price during the period for options exercised over the year was 510 pence (2006: 317 pence).

Details of options at 24 March 2007 are set out below:

			Options outstanding
Date of grant	Date of expiry	Exercise price pence	2007 million	2006 million
28 November 2000 (5 year period)	31 August 2006	299	—	1.1
20 December 2001 (5 year period)	31 August 2007	302	0.4	2.6
3 January 2003 (3 year period)	31 August 2006	239	—	0.6
3 January 2003 (5 year period)	31 August 2008	239	3.0	3.3
17 December 2003 (3 year period)	31 August 2007	241	0.4	2.6
17 December 2003 (5 year period)	31 August 2009	241	3.0	3.3
15 December 2004 (3 year period)	31 August 2008	217	3.5	4.1
15 December 2004 (5 year period)	31 August 2010	217	4.3	4.8
15 December 2005 (3 year period)	31 August 2009	231	5.3	6.6
15 December 2005 (5 year period)	31 August 2011	231	5.6	6.4
15 December 2006 (3 year period)	31 August 2010	328	4.8	—
15 December 2006 (5 year period)	31 August 2012	328	4.2	—
			34.5	35.4

Options granted during the year were valued using the Black-Scholes option-pricing model. No performance conditions were included in the fair value calculations. The fair value per option granted during the year and the assumptions used in the calculation are as follows:

	2007	2006
Share price at grant date (pence)	409	306
Exercise price (pence)	328	231
Expected volatility – 3 year period (%)	18.0	23.9
– 5 year period (%)	25.5	27.3
Option life – 3 year period (years)	3.2	3.2
– 5 year period (years)	5.2	5.2
Expected dividends (expressed as dividend yield %)	2.3	2.7
Risk-free interest rate – 3 year period (%)	4.2	4.2
– 5 year period (%)	4.2	4.2
Fair value per option – 3 year period (pence)	105	91
– 5 year period (pence)	132	103

The expected volatility is based on the standard deviation of the Group’s share price for the period immediately prior to the date of grant of award, over the period identical to the vesting period of the award, adjusted for management’s view of future volatility of the share price.

(b) Colleague Share Option Plan (“CSOP”)

The Colleague Share Option Plan operates under the rules of the HMRC Approved Discretionary Share Option Scheme. Under the CSOP, participants are granted options to purchase shares of the Company at a stated exercise price. The exercise of options is conditional upon participants remaining in the employment of the Group for a three-year period after date of grant. Colleagues leaving employment for certain reasons have six months from their leaving date to exercise their options.

At 24 March 2007, a total of 17,793 UK employees (2006: 54,817) participated in the plan and held options over 5.7 million shares (2006: 18.6 million). Options have been exercised in respect of 7.9 million (2006: 32,058) ordinary shares during the year. Options are exercisable between three and ten years from the date of the grant of option. It is intended that there will be no further options granted under this plan.

A reconciliation of option movements is shown below:

	2007		2006
	Number of options million	Weighted average exercise price pence	Number of options million	Weighted average exercise price pence
Outstanding at beginning of year	18.6	366	21.9	366
Forfeited	(4.8)	363	(3.3)	365
Exercised	(7.9)	369	—	—
Expired	(0.2)	371	—	—
Outstanding at end of year	5.7	365	18.6	366
Exercisable at end of year	5.7	365	18.6	366

The weighted average share price during the period for options exercised over the year was 500 pence (2006: 310 pence).

Details of options at 24 March 2007 are set out below:

			Options outstanding
Date of grant	Date of expiry	Exercise price pence	2007 million	2006 million
2 August 1999	1 August 2009	378	5.0	16.6
2 June 2000	1 June 2010	272	0.7	2.0
			5.7	18.6

(c) Executive Share Option Plan (“ESOP”)

Under the Executive Share Option Plan, participants were granted options to purchase shares in the Company at a stated exercise price. The maximum annual option award was two times basic salary and the grants were agreed by the Remuneration Committee according to the assessed performance and potential of participants.

The exercise of options is conditional upon a performance target based on the growth in the Company’s underlying earnings per share (“EPS”) relative to inflation over a three-year period. EPS is measured against a fixed starting point over the performance period beginning with the year in which the option was granted. To the extent that the condition is not satisfied in full after three years, it will be retested on a fixed point basis over four and then five financial years. To the extent the condition is not met after five financial years, the option will lapse.

Once the options vest, participants remaining in the Group’s employment or leaving for certain reasons, are entitled to exercise the options between vesting date (normally at the end of the three-year performance period) and the option expiry date, which is ten years from date of grant. It is intended that there will be no further options granted under this plan.

A reconciliation of option movements is shown below:

	2007		2006
	Number of options million	Weighted average exercise price pence	Number of options million	Weighted average exercise price pence
Outstanding at beginning of year	36.8	358	93.9	313
Forfeited	(0.5)	400	(50.2)	278
Exercised	(11.5)	356	(4.9)	265
Expired	(4.4)	343	(2.0)	475
Outstanding at end of year	20.4	362	36.8	358
Exercisable at end of year	12.2	420	26.0	393

The weighted average share price during the period for options exercised over the year was 460 pence (2006: 296 pence).

Details of options at 24 March 2007 are set out below:

			Options outstanding
Date of grant	Date of expiry	Exercise price pence	2007 million	2006 million
20 May 1997	19 May 2007	367	0.7	2.2
11 November 1997	10 November 2007	489	0.1	0.1
10 November 1998	9 November 2008	545	2.4	2.9
2 August 1999	1 August 2009	378	1.8	4.2
24 November 1999	23 November 2009	320	—	0.1
2 June 2000	1 June 2010	272	1.1	5.0
7 June 2001	6 June 2011	427	2.9	5.5
26 July 2001	25 July 2011	407	3.2	6.1
25 July 2002	24 July 2012	287	3.7	5.3
22 May 2003	21 May 2013	257	3.1	4.0
20 May 2004	19 May 2014	275	1.4	1.4
			20.4	36.8

(d) Performance Share Plan (“PSP”)

The Performance Share Plan is a long-term incentive scheme through which shares are awarded to senior managers on a conditional basis. Under the PSP, participants remaining in the Group’s employment or leaving for certain reasons, are entitled to receive a grant of options after a performance period of three years to acquire the shares awarded to them, at any time during the ten years following the date of grant.

The participant’s entitlement to receive the grant depends on the Company’s Total Shareholder Return (“TSR”) – being the increase in the value of a share, including reinvested dividends, compared with a peer group of 12 companies (namely Ahold, Alliance Boots, Carrefour, Casino, DSG International, GUS, Kingfisher, Loblaw, Marks & Spencer, Morrisons, Next and Tesco), over the three-year performance period.

If the median performance of the TSR against the comparator group is not achieved at the end of the three-year performance period, the entitlement to receive the grant of options will lapse. At median level, shares to the value of 30 per cent of salary will be released and the award will be pro rated at every position between the median and first position in the comparator group. The maximum allocation for Directors is a conditional grant of shares equal to 75 per cent of salary. No further allocations will be made under this plan.

A reconciliation of the number of shares conditionally allocated is shown below:

	Number of shares
	2007 million	2006 million
Outstanding at beginning of year	2.2	3.7
Forfeited	(0.2)	(1.5)
Released to participants	(0.6)	—
Lapsed	(0.5)	—
Outstanding at end of year	0.9	2.2

Details of shares conditionally allocated at 24 March 2007 are set out below:

	Shares conditionally allocated
Date of conditional allocation	2007 million	2006 million
22 May 2003	—	1.1
20 May 2004	0.9	1.1
	0.9	2.2

Conditional awards of shares that have fulfilled all conditions at the end of the performance period are represented by options granted to participants to acquire the shares awarded to them. Details of the options outstanding at year-end are set out below:

			2007		2006
Date of grant	Date of expiry	Exercise price pence	Options	Shares in respect of options granted	Options	Shares in respect of options granted
29 May 20021	28 May 2012	100	—	—	1	15,857
17 May 20062	16 May 2016	—	1	13,187	—	—
			1	13,187	1	15,857

Options granted in respect of shares conditionally allocated on 26 July 1999.
Options granted in respect of shares conditionally allocated on 22 May 2003.

(e) All-Employee Share Ownership Plan

In June 2003, under the All-Employee Share Ownership Plan, free shares were awarded to UK employees with more than 12 months’ continuous service. The free shares are being held in a trust on behalf of participants and will be forfeited if participants cease to remain in the Group’s employment for a period of three years. Shares are released to participants within the first three years for certain reasons. After the three-year period, the shares continue to be held by the trust for a further holding period of two years, unless they are released to participants upon cessation of employment with the Group.

A reconciliation of shares held in the trust is shown below:

	Number of shares
	2007 million	2006 million
Outstanding at beginning of year	1.7	1.9
Forfeited	(0.1)	(0.2)
Released to participants	(0.1)	—
Outstanding at end of year	1.5	1.7

(f) J Sainsbury plc Share Plan 2005

Under the J Sainsbury plc Share Plan 2005, shares were awarded to participants on the conditional basis that the performance targets are achieved within the four-year performance period, from the financial year beginning 27 March 2005 until the financial year ending March 2009. The levels of awards are scaled according to seniority and there is an opportunity for Executive Directors and eligible Operating Board members to make a personal investment of up to 50 per cent of salary in the plan.

The awards will vest if stretching sales and earnings per share (“EPS”) targets are achieved, as shown in table 1 below. The relevant performance multiplier, which is on a sliding scale up to a maximum of five times, will be calculated and applied to the core award of shares, as well as the personal investment of shares i.e. shares acquired by Executive Directors and eligible Operating Board members. Further, there is an opportunity for partial vesting of up to half the award, if the accelerated performance targets have been met at the end of year three (i.e. financial year ending March 2008) as shown in table 2. No awards will vest unless threshold levels of growth in both sales and EPS are achieved.

Once performance targets have been achieved, options will be granted to participants remaining in the Group’s employment or leaving for certain reasons to acquire the shares awarded to them, at nil cost. The options will expire within a year after the end of the four-year performance period. Dividends will accrue on the shares that vest in the form of additional shares.

In order to participate in the plan, participants agreed to surrender options granted to them under the Company’s Executive Share Option Plan in 2002, 2003 and 2004.

Table 1 – Maturity vesting (multiplier applied to the shares)

	4 year EPS growth (compound annual)
Sales growth in £ billion	<5%	5%	10%	14%	17%	21%
2.50	0.0	1.0	2.0	3.0	4.5	5.0
2.25	0.0	1.0	1.5	2.5	4.0	5.0
2.00	0.0	0.0	1.5	2.0	3.0	4.5
1.75	0.0	0.0	1.5	2.0	2.5	4.0
1.50	0.0	0.0	1.0	1.5	2.0	3.0
1.25	0.0	0.0	0.0	1.0	1.5	2.5
1.00	0.0	0.0	0.0	0.0	1.0	2.0

Table 2 – Interim vesting (multiplier applied to 50% of the shares)

	3 year EPS growth (compound annual)
Sales growth in £ billion	<5%	5%	10%	15%	20%	25%
2.50	0.0	1.0	2.0	3.0	4.5	5.0
2.25	0.0	1.0	1.5	2.5	4.0	5.0
2.00	0.0	0.0	1.5	2.0	3.0	4.5
1.75	0.0	0.0	1.5	2.0	2.5	4.0
1.50	0.0	0.0	1.0	1.5	2.0	3.0
1.25	0.0	0.0	0.0	1.0	1.5	2.5
1.00	0.0	0.0	0.0	0.0	1.0	2.0

A reconciliation of the number of shares conditionally allocated is shown below:

	Number of shares
	2007 million	2006 million
Outstanding at beginning of year	7.0	—
Conditionally allocated	—	7.0
Forfeited	(0.5)	—
Outstanding at end of year	6.5	7.0

Details of shares conditionally allocated at 24 March 2007 are set out below:

	Shares conditionally allocated
Date of conditional award	2007 million	2006 million
13 July 2005	6.5	7.0

Options to acquire the conditional award of shares were valued using the Black-Scholes option-pricing model. No performance conditions were included in the fair value calculations. The fair value per option granted during the year and the assumptions used in the calculation are as follows:

	2007	2006
Share price at grant date (pence)	—	286
Exercise price (pence)	—	—
Expected volatility (%)	—	29.0
Option life (years)	—	4.1
Expected dividends (expressed as dividend yield %)	—	—
Risk-free interest rate (%)	—	4.3
Fair value per option (pence)	—	286

(g) Long-Term Incentive Plan 2006

Under the Long-Term Incentive Plan 2006, shares were conditionally awarded to the top 1,000 managers in the Company, from the Chief Executive to the supermarket store managers. The core awards are calculated as a percentage of the participants’ salaries and scaled according to grades.

The awards will vest if the threshold levels of two co-dependent performance conditions – Return on Capital Employed (“ROCE”) and growth in cash flow per share, are achieved over the three-year performance period. As set out in table 3 below, the core award can grow by up to four times, dependent on the level of performance. Straight-line vesting will apply if performance falls between two points.

Performance will be measured at the end of the three-year performance period. If the required level of performance has been reached, the awards vest and 50 per cent of the award will be released. Subject to participants remaining in employment for a further year, the balance will be released on the fourth anniversary of the date of award. Options granted to acquire the award of shares will expire two years from vesting date. Dividends will accrue on the shares that vest in the form of additional shares.

Table 3 – Level of awards

	3 year cash flow per share (compound annual)
ROCE	6%	9%	12%	15%	>18%
>=14%	1.5	2.5	3.0	3.5	4.0
13%	1.0	1.5	2.0	3.0	3.5
12%	0.5	1.0	1.5	2.0	3.0
11%	0.0	0.5	1.0	1.5	2.5
10%	0.0	0.0	0.5	1.0	1.5

Details of shares conditionally awarded at 24 March 2007 are set out below:

Date of conditional award	Shares conditionally awarded million
13 July 2006	2.5

Options to acquire the award of shares were valued using the Black-Scholes option-pricing model. No performance conditions were included in the fair value calculations. The fair value per option granted during the year and the assumptions used in the calculation are as follows:

	2007
Share price at grant date (pence)	335
Exercise price (pence)	—
Expected volatility (%)	29.0
Option life (years)	4.1
Expected dividends (expressed as dividend yield %)	—
Risk-free interest rate (%)	4.7
Fair value per option (pence)	335