Summary Terms of Reference
The Remuneration Committee is responsible for:
- determining an executive remuneration policy covering salary, performance-based variable rewards and pensions;
- determining, within the terms of the agreed policy, the specific remuneration packages for the Chairman, the Executive Directors and the members of the Management Board both on appointment and on review, having due regard to pay and employment conditions elsewhere in the Group;
- the setting and the review of targets applicable for the Company’s short and long-term performance-based variable reward schemes and determining achievement against targets;
- exercising its discretion in relation to performance-based rewards (where appropriate and as provided by the applicable scheme rules); and
- monitoring and advising the Board on any major changes to the policy on employee benefit structures for the British American Tobacco Group.
Key activities of the Remuneration Committee in 2010
The Remuneration Committee met seven times during 2010. The
Committee followed its regular work programme designed around
its two scheduled meetings in February and October each year at
- benchmarked, reviewed and set the salaries for the Executive Directors and the Management Board members;
- assessed the achievement of the targets for the 2009 IEIS award and set the IEIS targets for 2010;
- assessed the measurement of the performance conditions for the vesting of the Long-Term Incentive Plan (LTIP) 2007 award;
- determined the LTIP award for March 2010 and its associated performance conditions;
- assessed the achievement of the targets for the 2009 Share Reward Scheme award and set the targets for the award made in 2010;
- monitored the application of the Company’s shareholding guidelines for the Executive Directors and the Management Board members;
- maintained oversight of the Group’s salary review processes to ensure consistency of application; and
- reviewed the Remuneration report for the year ended 2009 prior to its approval by the Board and subsequent approval by shareholders at the Annual General Meeting in April 2010.
In addition, the Remuneration Committee dealt with the following:
- a comprehensive review of the Company’s remuneration packages over two Committee meetings, culminating in the proposed changes to the LTIP and IEIS as explained elsewhere in this report;
- the application of the Group’s policies in connection with the retirement arrangements for Paul Adams as Chief Executive;
- terms of appointment for Nicandro Durante as Chief Executive Designate and John Daly as Chief Operating Officer;
- the revised remuneration package for Ben Stevens (Finance Director) to reflect his additional responsibilities as Chief Information Officer;
- terms of appointment and termination in connection with Management Board appointments and departures during the year particularly with regard to the reorganisation of the Group’s regional structure; and
- the impact of forthcoming changes to the tax treatment of pension contributions made by or on behalf of UK employees into a UK pension.
Introduction from the Chairman of the Remuneration Committee
For a number of years, the principal objective of the Company’s remuneration policy has been to align remuneration with the delivery of the Group’s strategy of growth, productivity and the development of a winning organisation that acts responsibly at all times. We continue to see this as the right approach. As a result, relevant business objectives underpin all of the performance measures taking into account both business sustainability and the management of key risks.
The Remuneration Committee is also aware, however, that it needs to be sure that the total remuneration opportunity for the Executive Directors and senior management remains market competitive. To that end, and as indicated in the 2009 Remuneration report, a comprehensive review of all elements of senior level remuneration packages was carried out by the Committee’s remuneration consultants during 2010. This included consideration of the Group’s International Executive Incentive Scheme (IEIS) and the Long-Term Incentive Plan (LTIP).
Incentive Review: Overview
In undertaking this review, the Remuneration Committee was well aware of the general economic environment in which the Group continues to operate and the continuing strong performance and resilience of the Company in a challenging world. Over the long term, this is reflected in the total shareholder return of the Company of 775 per cent compared to 132 per cent for the FTSE 100 over the 10 year period to 31 December 2010. The Company has therefore performed well and the Committee is of the view that the reward structure for the Executive Directors and the members of the Management Board should reflect the quality of that performance within a framework of required motivational targets married to the usual checks and constraints relevant to a leading organisation.
Incentive Review: Outcomes
In this context, our review confirmed that, for the most part, the current remuneration works well. In particular, a single long-term performance scheme – the LTIP – continues to be appropriate in maintaining the Company’s requirement for a simple and transparent, yet effective, incentive scheme. Similarly, the IEIS continues to operate effectively.
However, the Committee believes that these two areas, the LTIP and IEIS, can be improved further. In particular, the Committee is aware of the calls for remuneration to be increasingly focused towards payment for long-term performance so that the interests of shareholders and senior executives remain fully aligned. The Committee proposed changes which will firmly align reward towards long-term performance, while still remaining market competitive. In particular, it proposed to: (1) increase the maximum annual award under the LTIP scheme rules from 300 per cent to 500 per cent of annual base salary; (2) consequently increase the annual award to the Chief Executive under the LTIP to 400 per cent of annual base salary; and (3) reduce the number of common performance measures for the IEIS from six to four for 2011 onwards.
These proposals have been the subject of an extensive consultation process with key shareholders since the autumn of 2010. As a result of that dialogue and directly responding to issues raised, the Committee has agreed that: (1) the original proposal for an increase in the maximum annual award under the LTIP scheme rules from 300 per cent to 500 per cent of annual base salary be revised to 400 per cent, being consistent with the proposed award level for the Chief Executive and with no additional headroom; and (2) there should be an increase in the respective percentage amounts of salary that Executive Directors are required to hold under our shareholding guidelines. In addition, the Remuneration Committee has also proposed to introduce a clause into the LTIP scheme rules giving the Committee the discretion to reduce (or to forfeit entirely) a participant’s unvested LTIP award in circumstances where there has been a material misrepresentation involving the participant in connection with a prior vested award.
The proposal for the LTIP, which I now believe has the support of a significant number of our major shareholders, will be put to all shareholders for approval at the Annual General Meeting on 28 April 2011. Separately, the IEIS proposal will be implemented during 2011. In conclusion, I am pleased with the outcomes of the review and details of the specific proposals and related matters are set out later in this report.