To simplify the LTIPs and increase the line of sight between the executive’s reward and performance, no further awards of share options will be made (except in exceptional circumstances, eg to secure a new hire in a competitive situation). Instead, the awards of performance shares will be increased and half the award will be based on an EPS performance condition with the other half based on TSR.
At present, the LTIP arrangements that use EPS growth (ie share options and the Share Matching Plan for executive directors) use real growth in EPS in excess of UK inflation and have stepped vesting with one-third vesting at real annual growth of 3%, jumping to two-thirds vesting at 4% pa and full vesting at 5% pa. From 2008, where EPS is used as a measure in LTIPs, actual (ie nominal) rather than ‘real’ EPS growth will be used, with a straight line vesting scale to avoid stepped vesting.
– Share Matching Plan (SMP)
The SMP is seen as a key part of the long-term incentive package, directly linking short-term reward with long-term reward. A more detailed explanation of the SMP is contained on the Information on share plans page. For awards in 2008 in respect of the 2007 annual bonus, none of the matching shares will vest unless the annual EPS growth over the three-year performance period exceeds 5% pa, increasing uniformly from no match to a 1:1 match for 8% pa growth.
For 2009 awards in respect of the 2008 annual bonus, the matching scale will be extended on a uniform basis to provide a 2:1 match for annual EPS growth of 11% pa. However, executive directors will only be able to invest a maximum of half their net annual bonus into the SMP.
The increase in match from 1:1 to 2:1 for increased performance, to be applied in 2009, will require formal shareholder approval which will be sought at the May 2008 AGM.
If performance is between the base and stretch targets, the bonus is pro-rated on a straight line basis
– Share options
Details of the current Executive Share Option Plan are set out on the Directors' share options page. No further grants of share options will be made, except in exceptional circumstances.
– Performance Share Plan (PSP)
A detailed explanation of the PSP is contained on the Information on share plans page. The Committee believes that the PSP offers better value for money than share options as executives generally place a higher value on such plans than share options, and they require fewer shares to deliver the same value, thus reducing the dilutive effect of executive share-based reward. Following the decision not to award further grants of share options, the Committee has made a number of changes to the PSP.
In line with current corporate governance guidelines, shares awarded under the PSP will attract dividends prior to vesting. The additional value of these dividends has been taken into account in assessing the overall value of awards to be granted.
To further increase the proportion of the package driven off long-term EPS growth, half the PSP awards will be based on the current TSR performance condition and vesting scale, with the other half based on EPS growth.
The EPS performance condition will be based on annual EPS growth, with no vesting at 5% pa growth, increasing on a straight line basis to full vesting at 11% pa growth.
To remain competitive and to replace the value of previous share option grants, the award levels for 2008 will be:
- 200% of base salary for the UK executive directors (split 100% of salary on PSPTSR and 100% of salary on PSPEPS); and
- 250% of base salary for the US executive director (split 125% of salary on PSPTSR and 125% of salary on PSPEPS).
The PSP was approved by shareholders in May 2006. At that time it was agreed that the Committee should have the flexibility for executives below Board level to base up to half of any award on appropriately stretching internal measures, with the rest based on TSR as at present. In addition, the maximum award under the PSP was limited to two times base salary. Shareholder approval will be sought at the May 2008 AGM to base half the PSP award for executive directors on appropriately stretching internal measures, which will be EPS for awards in 2008, and to increase the maximum award level under the PSP to four times base salary. Whilst it is not envisaged that awards at this level will be necessary, it does allow the Committee the flexibility in future should special circumstances arise. Naturally shareholders will be consulted on any significant changes to the normal award levels.
It is proposed that executive directors will receive the 2008 award of PSPTSR in the normal cycle, ie shortly after the Company’s annual results. The 2008 award of PSPEPS will be made shortly after the May 2008 AGM, but with a slightly reduced vesting period (eg two years and ten months rather than the normal three years) so that both awards vest at the same time.
