Notes to the Financial Statements
For the year ended 30 June 2005
Share Capital - Employee Plans
Details of the Directors’ and Specified Executives’ remuneration, interests in long term incentive plans, shares, options and loans are included in the Remuneration section of the Directors’ Report.
Employee Share Plans
The Bank has in place the following employee share plans:
- Commonwealth Bank Employee Share Acquisition Plan (‘ESAP’);
- Commonwealth Bank Equity Participation Plan (‘EPP’);
- Commonwealth Bank Equity Reward Plan (‘ERP’); and
- Commonwealth Bank Non-Executive Directors Share Plan (‘NEDSP’).
The ESAP and ERP were each approved by Shareholders at the Annual General Meeting (‘AGM’) on 26 October 2000. Shareholders’ consent was not required for either the EPP or NEDSP but details were included in the Explanatory Memorandum to the meeting to ensure Shareholders were fully informed.
Employee Share Acquisition Plan
The ESAP was introduced in 1996 and provides employees with up to $1,000 worth of free shares per annum subject to a performance target being met. The performance target is growth in annual profit of the greater of 5% or the consumer price index (CPI change) plus 2%. Whenever annual profit growth exceeds CPI change, the Board may use its discretion in determining whether any grant of shares will be made.
Under ESAP, shares granted are restricted for sale for three years or until such time as the participating employee ceases employment with the Group, whichever is earlier. Shares granted under the ESAP receive full dividend entitlements, voting rights and there are no forfeiture or vesting conditions attached to the shares granted.
Effective from 1 July 2002, shares granted under ESAP offers have been expensed through the profit and loss. In the current year, 699,918 shares were granted to eligible employees in respect of the 2004 grant.
The Bank has determined to allocate each eligible employee shares up to a value of $1,000 in respect of the 2005 grant. As a result, an amount of $27 million has been accrued in respect of the year ended 30 June 2005. The shares will be purchased on-market at the then market price.
From 1 July 2000 to 30 June 2002, details of issues under ESAP were:
|Issue Date||Bonus Ordinary
|13 October 2000||872,620||24,932||35||$27.78|
|20 December 2000||805||23||35||$27.78|
|31 October 2001||893,554||26,281||34||$28.95|
|3 December 2001||3,876||114||34||$28.95|
|31 January 2002||1,938||57||34||$28.95|
From 1 July 2002, details of shares purchased under ESAP were:
|Purchase Date|| Ordinary
|31 October 2002||830,874||25,178||33||$29.71|
|22 January 2003||1,584||48||33||$29.71|
|31 October 2003||683,617||23,573||29||$27.53|
|29 October 2004||699,918||22,578||31||$31.52|
1 For Offers in 2000 and 2001 both new and existing Shareholders were granted Bonus Ordinary Shares issued from the Share Capital Account.
2 The Issue Price x Shares issued to each Participant effectively represents about $1,000 of free shares.
3 The Allocation Price for the offer is equal to the market value which is determined by calculating the weighted average of the prices at which the shares were traded on the ASX during the five trading day period up to and including the grant date. The Allocation Price x Shares issued to each participant effectively represents about $1,000 of free shares for the 2002 and 2004 Offers and $800 of free shares for the 2003 Offer.
Equity Participation Plan
The EPP facilitates the voluntary sacrifice of both fixed remuneration and annual short term incentives (STI) to be applied in the acquisition of shares. The plan previously also facilitated the mandatory sacrifice of 50% of STI payments for some employees. However the mandatory component of EPP ceased for the year ending 30 June 2005 and was replaced with a separate cash STI deferral arrangement for eligible employees. Shares previously granted under the mandatory component of the EPP remain subject to their vesting conditions.
All shares acquired by employees under this plan are purchased on-market at the current market price. A total number of 7,952,277 shares have been acquired under the EPP since the plan commenced in 2001.
Details of purchases under the EPP from 1 July 2004 to 30 June 2005 were as follows:
|Allotment Date||Participants||Shares Purchased||Average
|24 September 2004||1,449||1,858,984||$29.85|
|30 September 2004||756||259,890||$30.05|
|30 December 2004||80||12,274||$32.11|
|22 April 2005||57||8,704||$35.97|
Under the voluntary component of the EPP, shares purchased are restricted for sale for two years or when a participating employee ceases employment with the Bank, whichever is earlier. Shares purchased under the voluntary component of the EPP carry full dividend entitlements, voting rights and there are no forfeiture or vesting conditions attached to the shares.
Under the mandatory component of the EPP, fully paid ordinary shares were purchased and held in trust until such time as the vesting conditions were met. The vesting condition attached to the shares specifies that participants must remain employees of the Bank until the vesting date (generally a period of one and two years after the STI award period).
Each participant of the mandatory component of the EPP for whom shares are held by the Trustee on their behalf has a right to receive dividends. Once the shares vest, dividends which have accrued during the vesting period are paid to participants. The participant may also direct the Trustee on how the voting rights attached to the shares are to be exercised during the vesting period.
Where participating employees do not satisfy the vesting conditions, shares and dividend rights are forfeited.
The movement in shares purchased under the mandatory component of the EPP has been as follows:
|Details of Movements||July 2004 - June 2005||July 2003 - June 2004|
|Shares held under the Plan at the beginning of the year||2,790,353||2,497,184|
|Shares allocated during year||2,067,281||2,121,075|
|Shares vested during year||(2,016,790)||(1,715,807)|
|Shares forfeited during year||(224,073)||(112,099)|
|Shares held under the Plan at end of the year||2,616,771||2,790,353|
Shares acquired under both the voluntary and mandatory components of the EPP have been expensed through the profit and loss. In the current year, $2.5 million was expensed through the profit and loss to reflect the cost of allocations under the plan. The expense through the profit and loss for the current year is lower than previous years due to the discontinuation of the mandatory component of the EPP.
Equity Reward Plan
The Board has envisaged that up to a maximum of 500 employees would participate each year in the ERP.
Previous grants under the ERP were in two parts, comprising grants of options and grants of shares. Since 2001/2002, no options have been issued under the ERP. From 2002/2003, Reward Shares only have been issued under this plan.
The exercise of previously granted options and the vesting of employee legal title to the shares is conditional on the Bank achieving a prescribed performance hurdle. The ERP performance hurdle is based on relative Total Shareholder Return (‘TSR’) with the Bank’s TSR performance being measured against a comparator group of companies.
The prescribed performance hurdle for options and Reward Shares issued prior to 2002/2003 which has now been met was:
- The Bank’s TSR (broadly, growth in share price plus dividends reinvested) over a minimum three year period, must equal or exceed the index of TSR achieved by the comparator group of companies. The comparator group (previously companies represented in the ASX ‘Banks and Finance Accumulation Index’ excluding the Bank) was widened in 2001/2002 to better reflect the Bank’s business mix; and
- If the performance hurdle is not reached within that three years the options may nevertheless be exercisable or the shares vest, only where the hurdle is subsequently reached within five years from the grant date.
For Reward Shares granted from 2002/2003 onwards, a tiered vesting scale was introduced so that 50% of the allocated shares vest if the Bank’s TSR is equal to the 50th percentile return, 75% vest at the 67th percentile and 100% when the Bank’s return is in the top quartile.
Where the rating is at least at the 50th percentile on the third anniversary of the grant, the shares will vest at a time nominated by the executive, within half yearly windows, over the next two years. The vesting percentage will be the higher of the rating determined at the third year anniversary of the grant and the rating determined at the half yearly measurement point at which the executive nominates that the shares will vest.
Where the rating is below the 50th percentile on the third anniversary of grant, the shares can still vest if the rating reaches the 50th percentile at one of the half yearly measurements points prior to the fifth anniversary, but the maximum vesting will be 50%.
Reward Shares acquired under the share component of the ERP are purchased on-market at the current market price. The cost of shares acquired is expensed through the profit and loss over a three year period, reflecting the minimum vesting period. In the current year, $12 million has been expensed through the profit and loss.
Executive options issued up to September 2001 have not been recorded as an expense by the Group.
Details of options issued and shares acquired under ERP as well as movements in the options and shares are as follows:
|2000||13 September 2000||7 February 01||577,500||247,500||16||$26.972||14 September 2003
13 September 20103
|13 September 2000||31 October 01||12,500||—||1||$26.972||14 September 2003
13 September 20103
|2001||3 September 2001||31 October 01||2,882,000||1,689,100||61||$30.122||4 September 2004
3 September 20114
|3 September 2001||31 January 02||12,500||12,500||1||$30.122||4 September 2004
3 September 20114
|3 September 2001||15 April 02||100,000||100,000||1||$30.122||4 September 2004
3 September 20114
1 Options outstanding as at the date of the report.
2 The premium adjustment (based on the actual difference between the dividend and bond yields at the date of vesting) was nil.
3 Performance hurdle was satisfied on 31 March 2004 and options may be exercised up to 13 September 2010.
4 Performance hurdle was satisfied on 3 October 2004
and options may be exercised up to 3 September 2011.
Options – Details of Movements
|July 2003 - June 2004||July 2004 - June 2005|
|Year of Grant||2000||2001||2000||2001|
|Held by participants at the start of year||427,500||2,336,400||402,500||2,235,200|
|Granted during year||—||—||—||—|
|Exercised during year||—||—||155,000||403,900|
|Lapsed during year||—||101,200||—||29,700|
|Outstanding at the end of year||427,500||2,235,200||247,500||1,801,600|
|Granted from 30 June to date of report||—||—||—||—|
|Exercised from 30 June to date of report||25,000||—||—||50,000|
|Lapsed from 30 June to date of report||—||—||—||—|
|Outstanding as at the date of report||402,500||2,235,200||247,500||1,751,600|
|2000||20 Feb 2001||361,100||361,100||61||14 Sept 2003 to 13 Sept 20055||$29.72|
|31 Oct 2001||2,000||2,000||1||14 Sept 2003 to 13 Sept 20055||$29.25|
|2001||31 Oct 2001||652,100||661,5001||241||4 Sept 2004 to 3 Sept 20066||$29.25|
|2002||22 Nov 2002||357,500||545,5002||195||3 Sept 2005 to 2 Sept 20077||$28.26|
|2003||12 Nov 2003||285,531||595,6003||255||2 Sept 2006 to 1 Sept 20087||$28.33|
|2004||11 Nov 2004||225,934||522,2904||259||23 Aug 2007 to 23 Aug 20097||$29.87|
1 In October 2001, 11,400 Reward Shares were re-allocated to participants receiving the 2001 grant as a result of reward shares forfeited from previous ERP grant.
2 In November 2002, 188,000 shares were re-allocated to participants receiving the 2002 grant as a result of shares forfeited from previous grants. The total number of Reward Shares allocated in 2002 represents 50% of the maximum entitlement that participants may receive. It is intended that Reward Shares required to meet obligations under ERP will be acquired by the trust on-market during the term of the grant and (if required) shortly after the time of vesting.
3 In November 2003, 310,069 shares were re-allocated to participants receiving the 2003 grant as a result of shares forfeited from previous grants. The total number of Reward Shares allocated in 2003 represents 50% of the maximum entitlement that participants may receive – refer to footnote 2 above for further information.
4 In November 2004, 296,356 shares were re-allocated to participants receiving the 2004 grant as a result of shares forfeited from previous grants. The total number of Reward Shares allocated in 2004 represents 50% of the maximum entitlement that participants may receive – refer to footnote 2 above for further information.
5 Performance hurdle was satisfied on 31 March 2004 and as a result 195,700 shares vested to participants of the 2000 grant.
6 Performance hurdle was satisfied on 3 October 2004 and as a result 423,500 shares vested to participants of the 2001 grant.
7 Performance hurdle must be satisfied within the vesting
period, otherwise shares will be forfeited.
Reward Shares — Details of Movements
|July 2003 - June 2004||July 2004 - June 2005|
|Year of Grant||2000||2001||2002||2003||2001||2002||2003||2004|
|Total reward shares:|
|Held by participants at the start of year||217,100||518,500||515,300||—||437,000||445,825||557,500||—|
|Granted during year||—||—||—||597,100||—||—||—||597,975|
|Vested during year||195,700||—||—||—||423,500||—||—||—|
|Lapsed during year||21,400||59,000||43,225||10,725||13,500||68,975||94,650||53,075|
|Outstanding at the end of year||—||459,500||472,075||586,375||—||376,850||462,850||544,900|
|Granted from 30 June to date of report||—||—||—||—||—||—||—||—|
|Vested from 30 June to date of report||—||—||—||—||—||—||—||—|
|Lapsed from 30 June to date of report||—||22,500||26,250||28,875||—||11,400||8,950||8,750|
|Outstanding as at the date of report||—||437,000||445,825||557,500||—||365,450||453,900||536,150|
During the vesting period, Reward Shares are held in trust. Each participant on behalf of whom Reward Shares are held by the Trustee has a right to receive dividends. Once the shares vest dividends are paid in relation to those accrued during the vesting period. The participant may also direct the Trustee on how the voting rights attached to the shares are to be exercised during the vesting period.
For a limited number of executives including overseas based staff and those approved by the Chief Executive Officer and ratified by the Board, a cash based ‘share replicator’ ERP scheme is operated by way of grants of performance units. The performance unit grants are subject to the same vesting conditions as the Reward Share component of the ERP. On meeting the vesting condition, a cash payment is made to executives whereby the value is determined based on the current share price on vesting plus an accrued dividend value. An amount of $3.1 million has been expensed through the profit and loss in respect of the year ended 30 June 2005 to reflect future payments which may be required under the ‘share replicator’ plan.
Executive Option Plan
As previously notified to Shareholders, this plan was discontinued in 2000/2001.
Under the EOP, the Bank granted options to purchase ordinary shares to those key executives who, being able by virtue of their responsibility, experience and skill to influence the generation of Shareholder wealth, were declared by the Board of Directors to be eligible to participate in the plan. Non-Executive Directors were not eligible to participate in the plan.
Options cannot be exercised before each respective exercise period and the ability to exercise is conditional on the Bank achieving a prescribed performance hurdle. The option plan did not grant rights to the optionholders to participate in a share issue of any other body corporate.
The performance hurdle is the same TSR comparator hurdle as outlined above for the ERP grants prior to 2002/2003.
The last grant under EOP was made in September 2000. The performance hurdles for the August 1999 grant and the September 2000 grant were met in 2004.
Details of issues made under EOP as well as movements for 2003/2004 and 2004/2005 are as follows:
|3 Nov 1997||11 Dec 1997||2,875,000||—||27||$15.532||4 Nov 00 to 3 Nov 02|
|25 Aug 1998||30 Sep 1998||3,275,000||—||32||$19.582||26 Aug 01 to 25 Aug 03|
|24 Aug 1999||24 Sep 1999||3,855,000||450,000||38||$23.842||25 Aug 02 to 24 Aug 093|
|13 Sep 2000||13 Oct 2000||2,002,500||637,300||50||$26.972||14 Sep 03 to 13 Sep 104|
1 Market value at the commencement date. Market value is defined as the weighted average of the prices at which shares were traded on the ASX during the one week period before the commencement date.
2 Premium adjustment (based on the actual difference between the dividend and bond yields at the date of vesting) was nil.
3 Performance hurdle for the 1999 grant was satisfied on 28 February 2004 and options may be exercised up to 24 August 2009.
4 Performance hurdle for the 2000 grant was satisfied on 31 March 2004 and options may be exercised up to 13 September 2010.
Details of Movements
1 July 2003 to
30 June 20041
1 July 2004 to
30 June 20051
|Year of Grant||1998||1999||2000||1999||2000|
|Held by participants at the start of year||312,500||3,221,000||1,336,200||1,875,000||1,144,600|
|Exercised during year||312,500||1,271,000||129,100||1,425,000||507,300|
|Lapsed during year||—||25,000||12,500||—||—|
|Outstanding at the end of year||—||1,925,000||1,194,600||450,000||637,300|
|Exercised from 30 June to date of report||—||50,000||50,000||—||75,400|
|Lapsed from 30 June to date of report||—||—||—||—||—|
|Outstanding as at the date of report||—||1,875,000||1,144,600||450,000||561,900|
1 The EOP was discontinued in 2000/01 and no options have been granted under the plan during the last two reporting periods.
Summary of shares issued during the period 1 July 2004 to the date of the report as a result of options being exercised are:
|Option Issue Date||Shares
|24 Sept 1999||1,475,000||$23.84||$35,164,000|
|13 Oct 2000||632,700||$26.97||$17,063,919|
|7 Feb 2001||180,000||$26.97||$4,854,600|
|3 Sept 2001||453,900||$30.12||$13,671,468|
No amount is unpaid in respect of the shares issued upon exercise of the options during the above period.
Under the Bank’s EOP and ERP an optionholder generally has no right to participate in any new issue of securities of the Bank or of a related body corporate as a result of holding the option except that if there is a pro rata issue of shares to the Bank’s Shareholders by way of bonus issue involving capitalisation (other than in place of dividends or by way of dividend reinvestment) an optionholder is entitled to receive additional shares upon exercise of the options being the number of bonus shares that the optionholder would have received if the options had been exercised and shares issued prior to the bonus issue.
Non-Executive Directors Share Plan
The NEDSP provides for the acquisition of shares by Non-Executive Directors through the mandatory sacrifice of 20% of their annual fees. Shares purchased are restricted for sale for 10 years or when the Director leaves the Board, whichever is earlier. In addition, Non-Executive Directors can voluntarily elect to sacrifice up to a further 50% of their annual fees for the acquisition of shares.
Shares acquired under the Plan receive full dividend entitlements and voting rights. There are no forfeiture or vesting conditions attached to shares granted under the NEDSP.
Shares are purchased on-market at the current market price and a total of 41,943 shares have been purchased under the NEDSP since the plan commenced in 2001. Since March 2005, shares are now acquired under the plan on a six monthly basis.
Details of grants under the NEDSP from 1 July 2004 to 30 June 2005 were as follows:
|Period Ending||Total Fees
|30 September 2004||$74,406||11||2,475||$30.05|
|31 December 2004||$76,218||9||2,373||$32.11|
|31 March 2005||$110,958||9||3,086||$35.97|
The trading restrictions on shares were lifted for two Non-Executive Directors as they ceased to be Non-Executive Directors during the period 1 July 2004 to the date of this report.
For the current year, $262,000 was expensed through the profit and
loss reflecting shares purchased and allocated under the NEDSP.