British American Tobacco Annual Report 2010 - Remuneration report - Remuneration policy

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Remuneration policy

Group reward strategy

It is important that the remuneration policy for the Executive Directors and the members of the Management Board considered by the Committee is placed in the context of the strategy for rewards and benefits for employees across the Group. As a leading global business, British American Tobacco wants its employees to feel rewarded by the challenge of their roles, their career opportunities and positive team relationships. The reward strategy is positioned to support the goal of attracting and retaining the best people for the organisation.

Regular benchmarking exercises are carried out across the Group in order to provide comparative data to ensure the provision of reward and benefit structures in keeping with local market practice while being clearly linked to aligned individual and organisation performance objectives. Economic factors are considered and salary surveys are conducted in individual markets to compare the Group company remuneration packages against those of comparator companies, while ensuring that these are aligned to a global reward philosophy and approach.

Executive Directors and Management Board:
remuneration policy

The remuneration policy for the Executive Directors and members of the Management Board is also considered by the Remuneration Committee with reference to the Company’s strategic vision and analysis of risk and its associated systems (see risk management and internal control in the Corporate governance statement). The aim is to support the Company’s strategy by linking the relevant performance criteria of the remuneration packages with the key performance indicators (KPIs) and business measures (see Business review).

Financially based KPIs form the basis for the majority of the performance-related bonus incentives with market share being an important additional non-financial indicator. The Executive Directors and the members of the Management Board are also held accountable for their performance in respect of the business measures which comprise a mixture of other financial and non-financial targets.

Taken together, these elements provide a comprehensive set of challenging performance criteria which sit alongside the Company’s positive position on sustainability and governance issues. The remuneration policy reflects the Company’s objectives which are linked to the payouts and grants under the respective incentive schemes. This promotes the Group’s ability to attract, retain and motivate top quality executives, enabling the Group to achieve the levels of corporate performance in alignment with the long-term interests of the Company and its shareholders.

Further, the Remuneration Committee has set a guideline that approximately 50 per cent of the remuneration package should be performance-related. The remuneration package comprises both core fixed elements (base salary, pension and other benefits) and performance-based variable elements (cash and share incentive annual bonus plans, and the LTIP).

The composition in the case of the current Executive Directors for 2010 is illustrated in the bar chart below:

Executive Directors’ percentage of fixed and variable remuneration

Notes:

1. The above illustration of the Executive Directors’ percentage of fixed and variable remuneration for 2010 is based on a number of assumptions: (1) base salary represents annual salary; (2) pension represents the transfer value of net increase in pension to the UK Pension Fund as disclosed in Table 7 (Nicandro Durante’s transfer value is based on constant exchange rates); (3) benefits are core benefits such as car allowance, private medical and personal accident insurance; (4) bonus is the amount received for performance in 2010 delivered in cash and deferred shares; (5) LTIP represents the target annualised expected value of the long-term incentive award granted in 2010 expressed as a percentage of base salary; and (6) the remuneration shown for John Daly for 2010 includes eight months as a member of the Management Board prior to his appointment as an Executive Director on 1 September 2010.

2. Fixed remuneration comprises: salary, pension and benefits. Variable remuneration comprises: bonus (cash and deferred shares) and LTIP.

Pay Comparator Group

The setting of the reward opportunity for Executive Directors remains underpinned by responsible independent benchmarking. The approach is focused on a peer group which includes selected FTSE 100 companies and, since 2009, Philip Morris International (the Pay Comparator Group), which is supplemented by market data of FTSE 350 companies, with the relevant scale and complexity, as well as the practice of the FTSE 30 companies. The Pay Comparator Group is made up of companies which meet the criteria of a consumer goods focus, an international spread of operations and a competitor for top management talent.

In February 2010, Cadbury, a former constituent company of the Pay Comparator Group, was taken over by Kraft Foods. Cadbury is therefore removed from the Pay Comparator Group and, as at 31 December 2010, it is comprised as follows: