Remuneration report
Remuneration strategy and policy for executive directors
This section of the report explains the Company’s remuneration strategy and policy, the individual components of executive directors’ remuneration and details of their service contracts as required by legislation.
Remuneration strategy and 2007 review
The Company’s remuneration strategy, policy and package for executive directors is:
In the second half of 2007, the Committee undertook a full review of the remuneration arrangements for executive directors to ensure they remained appropriate and supported the Group strategy given the growth of the Group internationally and the increased focus on excellence in Programme Management and through-life support.
As a result of the review, the Committee has made a number of changes to the arrangements for executive directors for 2008 as detailed below. These changes will flow down to the 250 most senior executives within the Group globally to create a consistent global approach to reward.
Following the announcement in October 2007 that the Chief Executive, Mike Turner, would retire from the Company at the end of August 2008 after 42 years with the Company, the Committee has agreed a separate arrangement for him detailed on the Remuneration package page.
The Committee’s executive remuneration policy continues to be to set base salaries at median competitive levels, taking into account performance and experience in role, whilst seeking to reward upper quartile performance with potential upper quartile remuneration through the focused use of bonus schemes and share-based incentives. The Committee believes that the above changes and improvements to the incentive packages will:
- bring the remuneration packages into line with market competitive levels;
- simplify the arrangements to improve line-of-sight between performance and reward;
- shift the focus towards long-term sustainable growth in EPS;
- reinforce the key aspects of the Group’s corporate responsibility agenda;
- directly align short-term and long-term reward through compulsory deferral of part of the bonus into the Share Matching Plan for all executive directors; and
- increase the gearing to drive for high performance as most of the improvement in package is only delivered for achieving more stretching targets.
The Committee intends to continue with the executive remuneration policy as detailed in this report in 2008 and subsequent years, and will continue to consult on material changes with principal shareholders. The principles of the remuneration strategy are applied consistently across the Group, taking account of seniority and local market practice.
The following sections describe the changes made in more detail and the specific arrangements for executive directors.
Approach to the review
The review not only considered the Company’s executive remuneration packages against the market but also the Company’s performance to date, its strategy for the next five years and the views of the Committee members and senior executives.
Information on the market for comparable management positions was provided by PwC so that the Committee could form a view as to where to position the various elements of the package relative to comparable companies.
The methodology used was to construct appropriate comparator groups for the individual positions, taking account of company size, scale of operations and breadth of role. The comparator group for the UK executive directors comprised 25 of the FTSE 50 companies (excluding financials and retail) with market capitalisation nearest to that of BAE Systems (12 larger and 13 smaller). The Committee believes that the change from a comparator group based on turnover (as used last year) to one based on market capitalisation creates better alignment between the value placed on the Company and the value placed on the executives who manage it.
For the US Chief Operating Officer, regression analysis was used on US aerospace, defence and general industry sector data to produce appropriate market figures consistent with the size and scale of the US business, adjusting where necessary to reflect the extra responsibility for his plc board role.
The base salary, total cash reward (base salary plus annual bonus), total direct reward (total cash reward plus long-term incentives) and total reward (total direct reward plus pension) were analysed at the median and upper quartile for the relevant posts in the comparator group companies. This gives the Committee a view on the competitiveness of the individual elements of the package as well as the package as a whole.
The Committee also reviewed the trends in the elements of remuneration to ensure that the structure of the package stays in line with market practice, and also takes account of the performance of the individual, the Company as a whole and the pay and conditions of Group employees.
