2007 Financial statements
Note 48 - Share based payments
Rio Tinto plc and Rio Tinto Limited ('the Companies') have a number of share based payment plans, which are described in detail in the Remuneration report. These plans have been accounted for in accordance with the fair value recognition provisions of 'IFRS 2 Share-based Payment', which means that IFRS 2 has been applied to all grants of employee share based payments that had not vested as at 1 January 2004.
The compensation cost that has been recognised in income for Rio Tinto's
share based compensation plans, and related liability (for cash-settled plans),
are set out in the table below.
| Expense recognised for the year |
Liability at the end of the year |
||||
|---|---|---|---|---|---|
| 2007 US$m |
2006 US$m |
2007 US$m |
2006 US$m |
||
| Equity-settled plans | 39 | 25 | - | - | |
| Cash-settled plans | 181 | 7 | 219 | 43 | |
| Total | 220 | 32 | 219 | 43 | |
Lattice-based option valuation model
The fair value of share options is estimated as at the date of grant using a lattice-based option valuation model. The significant assumptions used in the valuation model are disclosed below. Expected volatilities are based on the historical volatility of Rio Tinto's share returns under the UK and Australian listings. Historical data was used to estimate employee forfeiture and cancellation rates within the valuation model. Under the Share Option Plans, it is assumed that after options have vested, 20 per cent per annum of participants will exercise their options when the market price is at least 20 per cent above the exercise price of the option. Participants in the Share Savings Plans are assumed to exercise their options immediately after vesting. The implied lifetime of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate used in the valuation model is equal to the yield available on UK and Australian zero-coupon government bonds (for plc and Limited options respectively) at the date of grant with a term equal to the expected term of the options.
Summary of options outstanding
A summary of the status of the Companies' fixed share option plans at 31 December
2007, and changes during the year ended 31 December 2007, is presented below.
Options outstanding at 31 December 2007 |
Number | Weighted average exercise price per option £/ A$ |
Weighted average remaining contractual life Years |
Aggregate intrinsic value 2007 US$m |
|---|---|---|---|---|
| Rio Tinto plc Share Savings Plan (£9 - £36) | 1,419,715 | 18.39 | 2.1 | 99 |
| Rio Tinto plc Share Option Plan (£8 - £35) | 4,960,203 | 18.75 | 6.7 | 341 |
| Rio Tinto Limited Share Savings Plan (A$26 - A$79) | 2,634,607 | 46.36 | 2.3 | 202 |
| Rio Tinto Limited Share Option Plan (A$33 - A$94) | 3,351,754 | 50.84 | 6.9 | 244 |
| 12,366,279 | 886 |
As at 31 December 2006 there were 12,971,924 options outstanding with an aggregate
intrinsic value of US$316 million.
Options exercisable at 31 December 2007 |
Number | Weighted average exercise price per option £/ A$ |
Weighted average remaining contractual life Years |
Aggregate intrinsic value 2007 US$m |
|---|---|---|---|---|
| Rio Tinto plc Share Option Plan (£8 - £15) | 2,387,532 | 13.16 | 5.2 | 191 |
| Rio Tinto Limited Share Option Plan (A$33 - A$40) | 1,529,378 | 35.21 | 5.4 | 133 |
| 3,916,910 | 324 |
As at 31 December 2007, no options were exercisable under both the Rio Tinto
plc and the Rio Tinto Limited Share Savings Plans.
Share Savings Plans
Awards under these plans are settled in equity and accounted for accordingly. The fair value of each award on the day of grant was estimated using a lattice-based option valuation model, including allowance for the exercise price being at a discount to market price. The key assumptions used in the valuation are noted in the following table.
| Risk-free interest rate % |
Expected volatility % |
Dividend yield % |
Forfeiture rates % |
Cancellation rates % |
Implied lifetime Years |
|
|---|---|---|---|---|---|---|
| Awards made in 2007 | ||||||
| - Rio Tinto plc | 5.0 | 35.0 | 1.5 | 5.0 | 5.0 | 2.2-5.2 |
| - Rio Tinto Limited | 6.5 | 28.0 | 1.4 | 5.0 | 5.0 | 3.2-5.2 |
Rio Tinto plc - Share Savings Plan
| 2007 Number |
Weighted average exercise price per 2007 £ |
2006 Number |
Weighted average exercise price per 2006 £ |
|
|---|---|---|---|---|
| Options outstanding at 1 January | 1,497,463 | 14.26 | 1,624,492 | 11.84 |
| Granted | 324,170 | 30.47 | 323,256 | 20.72 |
| Forfeited | (32,518) | 14.30 | (35,953) | 14.06 |
| Exercised | (311,458) | 11.12 | (376,802) | 9.59 |
| Cancellations | (36,075) | 20.13 | (25,097) | 12.38 |
| Expired | (21,867) | 10.36 | (12,433) | 11.72 |
| Options outstanding at 31 December | 1,419,715 | 18.39 | 1,497,463 | 14.26 |
| Weighted average fair value, at date of grant, of options granted during the year (£) | 13.16 | 7.93 | ||
| Share price, at date of grant, of options granted during the year (£) | 41.31 | 24.63 | ||
| Weighted average share price at the time the options were exercised during the year (£) | 28.55 | 27.86 |
Rio Tinto Limited - Share Savings Plan
| 2007 Number |
Weighted average exercise price per 2007 A$ |
2006 Number |
Weighted average exercise price per 2006 A$ |
|
|---|---|---|---|---|
| Options outstanding at 1 January | 2,748,026 | 36.00 | 2,786,301 | 30.56 |
| Granted | 548,549 | 79.27 | 494,141 | 56.80 |
| Forfeited | (121,590) | 37.05 | (81,201) | 30.85 |
| Exercised | (480,955) | 27.75 | (414,201) | 25.65 |
| Cancellations | (39,126) | 41.75 | (36,936) | 30.94 |
| Expired | (20,297) | 27.71 | (78) | 25.57 |
| Options outstanding at 31 December | 2,634,607 | 46.36 | 2,748,026 | 36.00 |
| Weighted average fair value, at date of grant, of options granted during the year (A$) | 34.13 | 23.56 | ||
| Share price, at date of grant, of options granted during the year (A$) | 106.28 | 69.25 | ||
| Weighted average share price at the time the options were exercised during the year (A$) | 81.13 | 74.16 |
Share Option Plans
The Group has a policy of settling these awards in equity, although the directors at their discretion can offer a cash alternative. The awards are accounted for in accordance with the requirements applying to equity-settled, share based payment transactions. The performance conditions in relation to Total Shareholder Return ('TSR') have been incorporated in the measurement of fair value for these awards by modelling the correlation between Rio Tinto's TSR and that of the index. The relationship between Rio Tinto's TSR and the index was simulated many thousands of times to derive a distribution which, in conjunction with the lattice-based option valuation model, was used to determine the fair value of the options.
The key assumptions are noted in the following table.
| Risk-free interest rate % |
Expected volatility % |
Dividend yield % |
Turnover rates % |
Implied lifetime Years |
|
|---|---|---|---|---|---|
| Awards made in 2007 | |||||
| - Rio Tinto plc | 5.0 | 34.0 | 2.4 | 3.0 | 5.2 |
| - Rio Tinto Limited | 5.8 | 27.0 | 2.2 | 3.0 | 5.9 |
A summary of the status of the Companies' performance-based share option plans
at 31 December 2007, and changes during the year ended 31 December 2007, is
presented below.
Rio Tinto plc - Share Option Plan
| 2007 Number |
Weighted average exercise price per 2007 £ |
2006 Number |
Weighted average exercise price per 2006 £ |
|
|---|---|---|---|---|
| Options outstanding at 1 January | 5,185,847 | 16.33 | 6,290,155 | 13.45 |
| Granted | 786,002 | 27.29 | 931,418 | 27.11 |
| Forfeited | (42,211) | 24.73 | (63,713) | 25.16 |
| Exercised | (969,435) | 12.50 | (1,972,013) | 11.95 |
| Options outstanding at 31 December | 4,960,203 | 18.75 | 5,185,847 | 16.33 |
| Weighted average fair value, at date of grant, of options granted during the year (£) | 6.25 | 7.40 | ||
| Weighted average share price, at date of grant, of options granted during the year (£) | 27.48 | 26.89 | ||
| Weighted average share price at the time the options were exercised during the year (£) | 39.25 | 29.01 |
In addition to the equity-settled options shown above, there were 121,131 cash-settled
options outstanding at 31 December 2007. The total liability for these awards
at 31 December 2007 was US$7 million (2006: US$1 million).
Rio Tinto Limited - Share Option Plan
| 2007 Number |
Weighted average exercise price per 2007 £ |
2006 Number |
Weighted average exercise price per 2006 £ |
|
|---|---|---|---|---|
| Options outstanding at 1 January | 3,540,588 | 43.53 | 3,959,472 | 36.17 |
| Granted | 568,638 | 75.12 | 716,318 | 71.06 |
| Forfeited | (20,504) | 71.57 | (89,041) | 53.64 |
| Exercised | (736,968) | 31.88 | (1,043,766) | 33.65 |
| Expired | - | - | (2,395) | 39.87 |
| Options outstanding at 31 December | 3,351,754 | 50.84 | 3,540,588 | 43.53 |
| Weighted average fair value, at date of grant, of options granted during the year (A$) | 14.37 | 17.09 | ||
| Weighted average share price, at date of grant, for options granted during the year (A$) | 75.57 | 70.85 | ||
| Weighted average share price at the time the options were exercised during the year (A$) | 102.04 | 76.64 |
In addition to the equity-settled options shown above, there were 53,369 cash-settled
options outstanding at 31 December 2007. The total liability for these awards
at 31 December 2007 was US$3 million (2006: US$2 million).
Share Ownership Plan
The fair values of awards of Matching and Free Shares made by Rio Tinto are taken to be the market value of the shares on the date of purchase. These awards are settled in equity. The total fair value of shares awarded during the year was £1,145,000 (2006: £988,000).
Mining Companies Comparative Plan
Awards under this plan are accounted for in accordance with the requirements applying to cash-settled, share based payment transactions. If any awards are ultimately settled in shares, the liability is transferred direct to equity as the consideration for the equity instruments issued. The grant date fair value of the awards is taken to be the market value of the shares at the date of award, reduced by 50 per cent for anticipated relative TSR performance. In addition, for the valuations after 2005, the market value is reduced for non receipt of dividends between measurement date and date of vesting (excluding post 2003 awards for executive directors and product group CEOs). Forfeitures are assumed prior to vesting at three per cent per annum of outstanding awards. In accordance with the method of accounting for cash-settled awards, fair values are subsequently remeasured each year to reflect the number of awards expected to vest based on the current and anticipated TSR performance.
A summary of the status of the Companies' performance-based share plans at 31 December 2007, and changes during the year, is presented below.
Rio Tinto plc - Mining Companies Comparative Plan
| 2007 Number |
Weighted average fair value at grant date 2007 £ |
2006 Number |
Weighted average fair value at grant date 2006 £ |
|
|---|---|---|---|---|
| Non vested shares at 1 January | 2,777,374 | 7.36 | 2,276,511 | 6.62 |
| Awarded | 719,898 | 12.61 | 850,126 | 9.02 |
| Forfeited | (45,370) | 10.39 | (60,826) | 8.18 |
| Failed performance conditions | (221,656) | 6.26 | (233,843) | 6.20 |
| Vested | (52,173) | 6.26 | (54,594) | 6.22 |
| Non vested awards at 31 December | 3,178,073 | 8.60 | 2,777,374 | 7.36 |
| Weighted-average share price at date of vesting (£) | 27.99 | 28.67 |
| £'000 | £'000 | |
|---|---|---|
| Total fair value of shares issued in settlement of shares vested during the year | 457 | 529 |
| Total cash payments made in settlement of shares vested during the year | 1,003 | 1,035 |
| Total cash payments made in settlement of shares vested during previous years | - | 1,374 |
Rio Tinto Limited - Mining Companies Comparative Plan
| 2007 Number |
Weighted average fair value at grant date 2007 A$ |
2006 Number |
Weighted average fair value at grant date 2006 A$ |
|
|---|---|---|---|---|
| Non vested shares at 1 January | 1,897,008 | 19.35 | 1,510,846 | 17.27 |
| Awarded | 533,225 | 34.91 | 646,637 | 23.59 |
| Forfeited | (39,790) | 31.36 | (83,092) | 19.90 |
| Failed performance conditions | (149,044) | 17.50 | (146,738) | 16.84 |
| Vested | (31,711) | 17.58 | (30,645) | 16.84 |
| Non vested shares at 31 December | 2,209,688 | 23.04 | 1,897,008 | 19.35 |
| Weighted-average share price at date of vesting (A$) | 77.95 | 71.65 |
| A$'000 | A$'000 | |
|---|---|---|
| Total fair value of shares issued in settlement of shares vested during the year | 879 | 1,136 |
| Total cash payments made in settlement of shares vested during the year | 1,604 | 1,060 |
Management Share Plan
The Management Share Plan was introduced during 2007 and is described in the Remuneration report. The awards will be settled in equity including the dividends accumulated from date of award to vesting. The awards are accounted for in accordance with the requirements applying to equity-settled, share based payment transactions. The fair value of each award on the day of grant is set equal to share price on the day of grant.
Forfeitures are assumed prior to vesting at three per cent per annum of outstanding awards.
A summary of the status of the Companies' fixed share plans at 31 December 2007, and changes during the year, is presented below.
Rio Tinto plc - Management Share Plan
| 2007 Number |
Weighted average fair value at grant date 2007 £ |
2006 Number |
Weighted average fair value at grant date 2006 £ |
|
|---|---|---|---|---|
| Non vested awards at 1 January | - | - | - | - |
| Awarded | 365,670 | 30.09 | - | - |
| Forfeited | (19,382) | 28.33 | - | - |
| Vested | (2,072) | 27.15 | - | - |
| Non vested awards at 31 December | 344,216 | 30.20 | - | - |
| Estimated weighted average share price of awards vested during the year (£) | 43.75 | - |
In addition to the equity-settled awards shown above, there were 6,225 cash-settled
awards outstanding at 31 December 2007. The total liability for these awards
at 31 December 2007 was less than US$1 million (2006: nil).
Rio Tinto Limited - Management Share Plan
| 2007 Number |
Weighted average fair value at grant date 2007 A$ |
2006 Number |
Weighted average fair value at grant date 2006 A$ |
|
|---|---|---|---|---|
| Non vested awards at 1 January | - | - | - | - |
| Awarded | 282,565 | 81.65 | - | - |
| Forfeited | (9,973) | 76.02 | - | - |
| Vested | (1,392) | 74.84 | - | - |
| Non vested awards at 31 December | 271,200 | 81.89 | - | - |
| Estimated weighted average share price of awards vested during the year (A$) | 98.69 | - |
In addition to the equity-settled awards shown above, there were 6,850 cash-settled
awards outstanding at 31 December 2007. The total liability for these awards
at 31 December 2007 was less than US$1 million (2006: nil).