Share options

The Wolseley Share Option Plan 2003 (“2003 Plan") received shareholder approval at the Annual General Meeting held in November 2003. Consequently, no further options will be granted under the Executive Share Option Scheme 1984 (“1984 Scheme") nor under the Executive Share Option Scheme 1989 (“1989 Scheme") which are now closed. No options under any such scheme have or will be granted at a discount to the relevant middle market price at the time of grant and no option under any such scheme can be exercised unless performance conditions have been satisfied.

All employees and Executive Directors of the Company, its subsidiaries and joint ventures, are eligible to participate in the 2003 Plan. Participants are selected by the Committee at its discretion. The Committee considers annually the levels of grant, which are phased over time and they determine the size of each award at the time of grant based on individual performance, the ability of each individual to contribute to the achievement of the performance conditions and market levels of remuneration. Awards may not exceed an amount equal to three times base salary for UK and other European-based executives and five times salary for US-based executives although the Committee may, as it so determines, also use the higher limit in exceptional circumstances. It is the Committee’s intention that for the year ending 31 July 2007, awards will not exceed 225% of base salary (or 300% in the case of the US Executive Directors).

No options may be granted more than 10 years after the date on which the 2003 Plan was approved by the Company’s shareholders and the Committee will formally review the 2003 Plan by no later than November 2008.

The Company monitors the awards made under the various employee and discretionary share plans, which it operates, in relation to their effect on dilution limits. Options are either satisfied by the issue of new shares or shares purchased in the market (including treasury shares). The number of new shares, as recommended by the Association of British Insurers (“ABI"), that may be issued to satisfy options granted under the 2003 Plan or any other employee share scheme is restricted to 10% of the issued ordinary share capital of the Company over any rolling 10 years. Further, as set out in the ABI principles and guidelines, the number of new shares that may be issued to satisfy options granted under the 2003 Plan or any other discretionary share scheme is restricted to 5% of the issued ordinary share capital of the Company over any rolling 10 years. In addition, for US-based participants, the 2003 Plan will be restricted such that the aggregate number of shares for which options may be granted to such participants during the life of the 2003 Plan will not exceed 5% of the issued ordinary share capital of the Company as at the date the 2003 Plan was approved by shareholders.

By 31 July 2006, awards had been granted resulting in shares being issued or capable of being issued during the preceding 10 years under all of the Company’s employee share plans representing some 6.72% of the issued ordinary share capital at that date (3.70% of the issued ordinary share capital under the Company’s discretionary share plans).

The extent to which the options will be capable of exercise depends on the satisfaction of a performance condition. The performance condition is based on the growth above UK inflation of the Company’s earnings per share (“EPS"), before goodwill amortisation and exceptional items measured from the year ended immediately prior to grant.

For all grants made under the 2003 Plan on or after 25 November 2004 there is a single three-year performance period and, in the event that the performance conditions are not fully met on the third anniversary of the date of grant, the options will lapse.

The performance condition for options now granted under the 2003 Plan operates on the following sliding scale:

The performance of the Company is initially measured over three financial years, starting with the financial year in which the option grant takes place. For awards granted in 2003, to the extent that the performance target is not fully met at the end of the initial three-year period, a subsequent retest on the fourth anniversary of grant can be undertaken, but from the same performance-related base prevailing at the time the awards were made and with prorated targets for EPS growth. Should the performance target not be met on this subsequent date, the option will lapse.

Provided the performance condition has been satisfied an option may be exercised at any time until it lapses, 10 years from the date of grant. No amount is payable on the award of an option.

The Committee can set different EPS targets from those described above for future options, provided that the new conditions are no less challenging in the circumstances than the initial ones. Similarly, the Committee can vary the terms of existing options to take account of technical changes, for example, changes in accounting standards. The amended target will be materially no less challenging as a result of any such change. The Committee continues to believe that the EPS condition is appropriate for share options, as it requires substantial improvement in the Company’s underlying financial performance and complements the inherent requirement for share price growth for an option to have value.

Following the introduction of International Financial Reporting Standards (“IFRS"), the Group now reports results on this new basis. EPS calculated under the IFRS basis will be utilised to measure performance in respect of options granted since 2005 but EPS and, to the extent required, return on capital employed, will be calculated on as near a UK GAAP basis as possible in respect of options granted prior to 2005 under which performance is still required to be measured in order to assess whether options have vested.

The table below shows the number of share options held by Directors in office during the year under the executive share option schemes as at 31 July 2006.

Executive share option schemes 2005/06

Notes:

1. The highest mid-market price of the Company’s ordinary shares during the year was 1462 pence and the lowest was 1079 pence. The year-end price was 1140 pence.
2. The performance conditions for options granted under the 1984 and 1989 Schemes between May 1994 and December 1996 are that they may not be exercised unless the growth in earnings per share over a period of three consecutive financial years exceeds the growth in the UK Retail Prices Index over the same period by at least 6%. Options granted in, and subsequent to, December 1997 may not be exercised unless growth in earnings per share over a period of three consecutive financial years exceeds growth in the UK Retail Prices Index over the same period by at least 9%. The number of options exercisable for Executive Directors under the 1984 and 1989 Schemes are, in addition, determined by the return on capital employed achieved over the same rolling three-year period. For options granted in 1997 and 1998, achieving a return on capital employed of 15% per annum will enable 50% of options granted to become exercisable, rising on a sliding scale to 100% for achieving a return on capital employed of 20% or more. With effect from October 1999 the return on capital employed required to permit exercise of 100% of options granted was reduced from 20% to 17.5% and the sliding scale was adjusted accordingly.
3. Performance targets not yet met.

Gains made on executive share options during the year to 31 July 2006

The value realisable from gains made on share options is the difference between the market value on the date of exercise and the original option price before any relevant tax deductions, although in most cases, some or all of the shares have been retained by the relevant director.