Notes to the financial statements

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8 Share-based payments

Equity-settled share option schemes

Share options

The Group has a number of share option schemes that entitle employees to purchase shares in the Group. Options are exercisable at a price equal to the market value of the Company's shares on the date of grant. Each of the schemes has different vesting periods and conditions and these are summarised below:

The 3i Group 1994 Executive Share Option Plan

Options granted between 1 January 1995 and 31 March 2001 were granted under this Plan and are normally exercisable between the third and tenth anniversaries of the date of grant provided that a performance condition has been met over a rolling three year period. This requires that the adjusted net asset value per share (after adding back dividends paid during the three year performance period) at the end of the three year period is equal to or in excess of the net asset value per share at the beginning of the period compounded annually over the period by the annual increase in the RPI plus 4%.

The 3i Group Discretionary Share Plan

Options granted after 31 March 2001 were granted under the Discretionary Share Plan and are normally exercisable between the third and tenth anniversaries of the date of grant to the extent a performance target has been met over a performance period of three years from the date of grant. For options granted between 1 April 2001 and 31 March 2003 and for options granted to three Directors in June 2003, if the minimum threshold for vesting is not achieved in the first three years from grant, the performance period is extended to four and then five years from the date of grant but from the same base year. For options granted between 1 April 2003 and 31 March 2004 the performance period is extended to four years from the date of grant. For options granted after 31 March 2004, there is no opportunity for the performance condition to be retested after the three year performance period.

Options granted between 1 April 2001 and 31 March 2003 were subject to a performance condition that options would vest if the annual compound growth ("ACG") in net asset value per share with dividends re-invested was RPI plus 5%. If this target was achieved then 50% of the options would vest. If the ACG was in excess of RPI plus 10% then the maximum number of shares would vest. Options would vest pro rata if the ACG was between these two amounts. For options granted after 31 March 2003 the target ACG was RPI plus 3% with maximum vesting at RPI plus 8%, except for options granted to three Directors in June 2003 where the target ACG was RPI plus 5% with maximum vesting at RPI plus 10%. Details of all share options outstanding during the year are as follows:

Included within this balance are options over 13 million (2005: 16 million) shares that have not been recognised in accordance with IFRS 2 as the options were granted on or before 7 November 2002. These options have not been subsequently modified and therefore do not need to be accounted for in accordance with IFRS 2.

The range of exercise prices for options outstanding at the end of the year was:

The weighted average share price at the date of exercise during the year was 850p (2005: 645p). The options outstanding at the end of the year have a weighted average contractual life of 6.35 years (2005: 6.47 years). The cost of share options is spread over the vesting period of three to five years. The weighted average fair value of options granted during the year was 218p (2005: 193p). These fair values were calculated using the Black-Scholes option pricing model.

The inputs to this model were as follows:

The expected life of the option is based on the best estimate of the Directors following a review of the profile of the award holders. Expected volatility was determined using an average of the implied volatility on grant and historic share price volatility of the preceding 8.5 years. No options have been repriced during the year (2005: nil). All share options are equity settled.

Performance share awards

Performance share awards are awards of shares to executive Directors which are transferred to the participant by an employee benefit trust on terms that the shares may, in certain circumstances, be forfeited. While the shares are subject to forfeiture they may not be sold, transferred or used as security. Awards are subject to a performance condition determining whether and to what extent the award will vest. Non-vested shares are forfeited. The performance condition provides for shares to vest based on the Company's "percentage rank" by total shareholder return for the period of three years from grant (averaged over a 60 day period) compared to a comparator group.

The comparator group consists of the FTSE100 Index constituents at the grant date (adjusted for mergers, demergers and delistings during the performance period). A company's percentage rank is its rank in the comparator group divided by the number of companies in the group at the end of the performance period expressed as a percentage. If the Company's percentage rank is less than 50% none of the shares vest. At a percentage rank of 50%, 35% of the shares vest and at 75% all the shares vest. Between these points shares vest pro rata.

The shares outstanding at the end of the year have a weighted average contractual life of 1.64 years (2005: 0.96 years). The cost of these shares is spread over the vesting period of three years.

The weighted average fair value of shares granted during the year was 343p (2005: 270p).

These fair values were calculated using the Monte Carlo option pricing model. The inputs to this model were as follows:

In the current financial year expected volatility was determined using an average of the implied volatility and historic volatility of the Company's share price over the preceding three years, whereas in the prior year it was based on the historic volatility only. The expected volatility of the comparator group is 35% (2005:35%).

Share incentive plan

Eligible UK employees may participate in an Inland Revenue approved Share Incentive Plan intended to encourage employees to invest in the Company's shares and which accordingly is not subject to a performance condition. During the year participants could invest up to £125 per month from their pre-tax salaries in the Company's shares (referred to as partnership shares). For each share so acquired the Company granted two free additional shares (referred to as matching shares) which are normally subject to forfeiture if the employee ceases to be employed (other than by reason of retirement) within three years of grant. Dividends are re-invested on behalf of participants in further shares (referred to as dividend shares).

The Company issues shares to cover the matching shares. The fair value of matching shares is the share price at the date of the award.

The average purchase price of the shares during the year was 798p (2005: 681p).

Deferred bonus share awards

Certain employees receive an element of their bonus as shares. These shares are held in trust for two years. The Company purchases shares to cover the deferred shares awarded and these are held in the 3i Group Employee Trust in a nominee capacity. The fair value of the deferred shares is the share price at the date of the award.

The weighted average fair value of the shares awarded during the year was 698p (2005: nil).

Share trust

The Group has a trust that is used to hold shares in 3i Group plc to meet its obligations under the above share schemes.

Total costs

The total cost recognised in profit or loss for each of the share schemes is shown below. The cost is borne mainly by 3i plc, the main operating company of the Group.