Governance

Executive share options (audited)

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 five times salary for US-based executives and three times salary for UK and other Europebased executives, although the committee may, if it so determines, also use the five times salary limit in exceptional circumstances.

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 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. In accordance with the recommendations of the Association of British Insurers ('ABI'), the number of new shares that may be issued to satisfy options granted under the 2003 Plan and any other employee share scheme is restricted to 10 per cent 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 executive options granted under the 2003 Plan and any other discretionary share scheme is restricted to 5 per cent 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 per cent of the issued ordinary share capital of the Company as at the date the 2003 Plan was approved by shareholders.

At 31 July 2008, 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 7.7 per cent of the issued ordinary share capital at that date and 4.4 per cent 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, based on achieving growth above UK inflation in the Company's EPS (as calculated under UK GAAP before goodwill amortisation and exceptional items), measured from the year ended immediately prior to grant.

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

The performance of the Company is measured over three financial years, starting with the financial year in which the option grant takes place. For all grants made under the 2003 Plan on or after 5 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 unvested options 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 grant 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 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.

In November 2007, a total of 9,154,472 options (2007: 5,432,414) were granted to 1,370 employees (2007: 1,133) across the Group. The first table on page 56 shows the number of share options held by Directors in office during the year under all executive share option schemes as at 31 July 2008.