Financial statements
Note 48 - SHARE BASED PAYMENTS
Share based payments (PDF 84KB)
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 charge/(credit) that has been recognised in the income statement for Rio Tinto's share based compensation plans, and the related liability (for cash-settled plans), is set out in the table below.
| Charge/(credit) recognised for the year |
Liability at the end of the year |
||||
|---|---|---|---|---|---|
| 2008 US$m |
2007 US$m |
2008 US$m |
2007 US$m |
||
| Equity-settled plans | 61 | 39 | - | - | |
| Cash-settled plans | (83) | 181 | 43 | 219 | |
| Total | (22) | 220 | 43 | 219 | |
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' share option plans at 31 December 2008, and changes during the year ended 31 December 2008, is presented below.
| Number | Weighted average exercise price per option |
Weighted average remaining contractual life |
Aggregate intrinsic value 2008 |
|
|---|---|---|---|---|
| Options outstanding at 31 December 2008 | £/A$ | Years | US$m | |
| Rio Tinto plc Share Savings Plan (£8 - £36) | 1,372,165 | 22.85 | 2.1 | 1 |
| Rio Tinto Limited Share Savings Plan (A$25 - A$83) | 1,901,417 | 59.51 | 2.4 | 1 |
| Rio Tinto plc Share Option Plan (£8 - £58) | 4,665,835 | 20.88 | 5.9 | 6 |
| Rio Tinto Limited Share Option Plan (A$33 - A$135) | 2,711,678 | 54.92 | 6.3 | 2 |
| 10,651,095 | 10 |
As at 31 December 2007 there were 12,366,279 options outstanding with an aggregate intrinsic value of US$886 million.
| Number | Weighted average exercise price per option |
Weighted average remaining contractual life |
Aggregate intrinsic value 2008 |
|
|---|---|---|---|---|
| Options exercisable at 31 December 2008 | £/A$ | Years | US$m | |
| Rio Tinto plc Share Option Plan (£8 - £19) | 1,892,539 | 14.88 | 4.4 | 3 |
| Rio Tinto Limited Share Option Plan (A$33 - A$48) | 809,737 | 42.04 | 5.1 | 1 |
| 2,702,276 | 4 |
As at 31 December 2008, there were no options exercisable under either the Rio Tinto plc or the Rio Tinto Limited Share Savings Plans.
Share Savings Plans
Awards under these plans are settled in equity and accounted for accordingly. The fair value of each award on the day of grant was estimated using a lattice-based option valuation model, including allowance for the exercise price being at a discount to market price. The key assumptions used in the valuation are noted in the following table.
| Risk-free interest rate % |
Expected volatility % |
Dividend yield % |
Forfeiture rates % |
Cancellation rates (a) % |
Implied lifetime Years |
|
|---|---|---|---|---|---|---|
| Awards made in 2008 | ||||||
| - Rio Tinto plc | 3.9-4.4 | 39.0 | 3.9 | 5.0 | 5.0 | 2.2-5.2 |
| - Rio Tinto Limited | 4.6-5.0 | 31.0 | 3.1 | 5.0 | 5.0 | 3.2-5.2 |
| Notes | Expand |
|
|
Rio Tinto plc - Share Savings Plan
2008 Number |
Weighted average exercise price 2008 £ |
2007 Number |
Weighted average exercise price 2007 £ |
|
|---|---|---|---|---|
| Options outstanding at 1 January | 1,419,715 | 18.39 | 1,497,463 | 14.26 |
| Granted | 439,837 | 27.81 | 324,170 | 30.47 |
| Forfeited | (37,749) | 19.53 | (32,518) | 14.30 |
| Exercised | (384,451) | 12.05 | (311,458) | 11.12 |
| Cancellations | (55,016) | 26.75 | (36,075) | 20.13 |
| Expired | (10,171) | 15.50 | (21,867) | 10.36 |
| Options outstanding at 31 December | 1,372,165 | 22.85 | 1,419,715 | 18.39 |
| Weighted average fair value, at date of grant, of options granted during the year (£) | 1.87 |
13.16 |
||
| Share price, at date of grant, of options granted during the year (£) | 20.50 | 41.31 | ||
| Weighted average share price at the time the options were exercised during the year (£) | 47.75 |
28.55 |
Rio Tinto Limited - Share Savings Plan
2008 Number |
Weighted average exercise price 2008 A$ |
2007 Number |
Weighted average exercise price 2007 A$ |
|
|---|---|---|---|---|
| Options outstanding at 1 January | 2,634,607 | 46.36 | 2,748,026 | 36.00 |
| Granted | 413,271 | 82.19 | 548,549 | 79.27 |
| Forfeited | (285,641) | 59.42 | (121,590) | 37.05 |
| Exercised | (797,744) | 27.36 | (480,955) | 27.75 |
| Cancellations | (46,602) | 80.16 | (39,126) | 41.75 |
| Expired | (16,474) | 25.57 | (20,297) | 27.71 |
| Options outstanding at 31 December | 1,901,417 | 59.51 | 2,634,607 | 46.36 |
| Weighted average fair value, at date of grant, of options granted during the year (A$) | 5.15 |
34.13 |
||
| Share price, at date of grant, of options granted during the year (A$) | 66.01 | 106.28 | ||
| Weighted average share price at the time the options were exercised during the year (A$) | 128.19 |
81.13 |
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 2008 | |||||
| - Rio Tinto plc | 4.1 | 37.0 | 1.5 | nil | 6.1 |
| - Rio Tinto Limited | 6.1 | 28.0 | 1.4 | nil | 7.3 |
A summary of the status of the Companies' performance-based share option plans at 31 December 2008, and changes during the year ended 31 December 2008, is presented below.
Rio Tinto plc - Share Option Plan
2008 Number |
Weighted average exercise price 2008 £ |
2007 Number |
Weighted average exercise price 2007 £ |
|
|---|---|---|---|---|
| Options outstanding at 1 January | 4,960,203 | 18.75 | 5,185,847 | 16.33 |
| Granted | 274,696 | 57.23 | 786,002 | 27.29 |
| Forfeited | (126,287) | 32.18 | (42,211) | 24.73 |
| Exercised | (442,777) | 16.31 | (969,435) | 12.50 |
| Options outstanding at 31 December | 4,665,835 | 20.88 | 4,960,203 | 18.75 |
| Weighted average fair value, at date of grant, of options granted during the year (£) | 20.63 |
6.25 |
||
| Weighted average share price, at date of grant, of options granted during the year (£) | 55.94 |
27.48 |
||
| Weighted average share price at the time the options were exercised during the year (£) | 51.16 |
39.25 |
In addition to the equity-settled options shown above, there were 118,317 cash-settled options outstanding at 31 December 2008. The total liability for these awards at 31 December 2008 was less than US$1 million (2007: US$7 million).
Rio Tinto Limited - Share Option Plan
2008 Number |
Weighted average exercise price 2008 A$ |
2007 Number |
Weighted average exercise price 2007 A$ |
|
|---|---|---|---|---|
| Options outstanding at 1 January | 3,351,754 | 50.84 | 3,540,588 | 43.53 |
| Granted | 63,633 | 134.18 | 568,638 | 75.12 |
| Forfeited | (45,231) | 96.23 | (20,504) | 71.57 |
| Exercised | (658,478) | 38.94 | (736,968) | 31.88 |
| Options outstanding at 31 December | 2,711,678 | 54.92 | 3,351,754 | 50.84 |
| Weighted average fair value, at date of grant, of options granted during the year (A$) | 44.04 |
14.37 |
||
| Weighted average share price, at date of grant, for options granted during the year (A$) | 131.20 |
75.57 |
||
| Weighted average share price at the time the options were exercised during the year (A$) | 138.10 |
102.04 |
In addition to the equity-settled options shown above there were 50,471 cash-settled options outstanding at 31 December 2008. The total liability for these awards at 31 December 2008 was less than US$1 million (2007: US$3 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 US$2 million (2007: US$2 million).
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 made prior to 2008 are taken to be the market value of the shares at the date of award reduced by 50 per cent for anticipated relative TSR performance. The grant date fair value of the awards made in 2008 were calculated using a Monte Carlo simulation model. 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 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 market price of shares at the measurement date and the number of awards expected to vest based on the current and anticipated TSR performance. This remeasurement at 31 December 2008 was calculated using a Monte Carlo simulation model.
A summary of the status of the Companies' performance-based share plans at 31 December 2008, and changes during the year, is presented below.
Rio Tinto plc - Mining Companies Comparative Plan
2008 Number |
Weighted average fair value at grant date 2008 £ |
2007 Number |
Weighted average fair value at grant date 2007 £ |
|
|---|---|---|---|---|
| Non-vested shares at 1 January | 3,178,073 | 8.60 | 2,777,374 | 7.36 |
| Awarded | 389,760 | 48.07 | 719,898 | 12.61 |
| Forfeited | (143,445) | 16.25 | (45,370) | 10.39 |
| Failed performance conditions | (441,868) | 6.45 | (221,656) | 6.26 |
| Vested | (381,406) | 6.45 | (52,173) | 6.26 |
| Non-vested shares at 31 December | 2,601,114 | 14.78 | 3,178,073 | 8.60 |
| Weighted-average share price at date of vesting (£) | 54.93 | 27.99 | ||
| £'000 | £'000 | |||
| Total fair value of shares issued in settlement of shares vested during the year | 116,601 | 6,486 | 16,335 | 457 |
| Total cash payments made in settlement of shares vested during the year | 14,628 | 1,003 |
Rio Tinto Limited - Mining Companies Comparative Plan
2008 Number |
Weighted average fair value at grant date 2008 A$ |
2007 Number |
Weighted average fair value at grant date 2007 A$ |
|
|---|---|---|---|---|
| Non-vested shares at 1 January | 2,209,688 | 23.04 | 1,897,008 | 19.35 |
| Awarded | 173,086 | 107.04 | 533,225 | 34.91 |
| Forfeited | (33,711) | 54.85 | (39,790) | 31.36 |
| Failed performance conditions | (318,032) | 16.44 | (149,044) | 17.50 |
| Vested | (244,276) | 16.44 | (31,711) | 17.58 |
| Non-vested shares at 31 December | 1,786,755 | 32.65 | 2,209,688 | 23.04 |
| Weighted-average share price at date of vesting (A$) | 137.10 | 77.95 | ||
| A$'000 | A$'000 | |||
| Total fair value of shares issued in settlement of shares vested during the year | 107,266 | 14,706 | 11,275 | 879 |
| Total cash payments made in settlement of shares vested during the year | 19,217 | 1,604 | ||
| Total cash payments made in settlement of shares vested during previous years | 141 | - |
Management Share Plan
The Management Share Plan was introduced during 2007 and provides conditional awards to management. The vesting of these awards is dependent on service and/or performance based conditions being met. 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' plans at 31 December 2008, and changes during the year, is presented below.
Rio Tinto plc - Management Share Plan
2008 Number |
Weighted average fair value at grant date 2008 £ |
2007 Number |
Weighted average fair value at grant date 2007 £ |
|
|---|---|---|---|---|
| Non-vested awards at 1 January | 344,216 | 30.20 | - | - |
| Awarded | 440,784 | 55.15 | 365,670 | 30.09 |
| Forfeited | (47,586) | 40.32 | (19,382) | 28.33 |
| Vested | (24,609) | 38.92 | (2,072) | 27.15 |
| Non-vested awards at 31 December | 712,805 | 44.65 | 344,216 | 30.20 |
| Estimated weighted average share price of awards vested during the year (£) | 3,804 | 48.65 | - | 43.75 |
In addition to the equity-settled awards shown above, there were 217,125 cash-settled awards outstanding at 31 December 2008.
The total liability for these awards at 31 December 2008 was US$3 million (2007: less than US$1 million).
Rio Tinto Limited - Management Share Plan
2008 Number |
Weighted average fair value at grant date 2008 A$ |
2007 Number |
Weighted average fair value at grant date 2007 A$ |
|
|---|---|---|---|---|
| Non-vested awards at 1 January | 271,200 | 81.89 | - | - |
| Awarded | 183,843 | 129.37 | 282,565 | 81.65 |
| Forfeited | (29,015) | 93.42 | (9,973) | 76.02 |
| Vested | (3,357) | 81.72 | (1,392) | 74.84 |
| Non-vested awards at 31 December | 422,671 | 101.75 | 271,200 | 81.89 |
| Estimated weighted average share price of awards vested during the year (A$) | 2,894 | 120.79 | 1,392 | 98.69 |
In addition to the equity-settled awards shown above there were 6,850 cash-settled awards outstanding at 31 December 2008.
The total liability for these awards at 31 December 2008 was less than US$1 million (2007: less than US$1 million).
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