bat plc annual report 2007 - Remuneration report (1 of 13)

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Annual Report and Accounts 2007

Remuneration strategy and policy: overview

British American Tobacco’s remuneration policy continues to seek to reward the achievement of corporate and individual goals by linking success in those areas to the Group strategy. This includes taking a balanced approach to achieving growth, improving productivity, managing the business in a responsible manner and developing a winning organisation, all of which help to build a sustainable business. The delivery of strategy is measured by the specific Key Performance Indicators (KPIs) and comprehensive business measures set out and described in Measuring our performance.

The Remuneration Committee considers executive reward in the context of these measures of corporate performance and the methodology is supported by a competitively positioned and integrated pay and benefits structure which reflects the nature of the Group’s worldwide operations and the need to attract, motivate and retain high quality executives.

The alignment of executive remuneration to the generation of shareholder value has been a strong and consistent theme for British American Tobacco for some time and its success is illustrated by the sustained performance of the Company. The total shareholder return elements of the Company’s long term incentive plan (LTIP), in particular the total shareholder return measure which compares the Company against a peer group of International FMCG companies, shows that British American Tobacco has achieved a position of third, second and second against that comparator group in respect of LTIP awards which vested (or will vest) in 2006, 2007 and 2008 respectively. This emphasis on performance and the alignment of reward with returns to shareholders will continue to apply during 2008.

Variable and fixed remuneration

The role of the Remuneration Committee is to determine the framework and policy that apply to the terms of engagement (including remuneration) of the Chairman, the Executive Directors and the members of the Management Board. It also determines the specific remuneration of each of them (including awards under share incentive schemes and pension scheme participation) and any compensation payments. In determining and applying the framework and policy, the Committee has a guideline that approximately 50 per cent of the remuneration (assuming ‘on target’ performance) should be performance-related or variable in nature. The remuneration package comprises both performance-based variable rewards (cash and share incentive annual bonus plans; and the LTIP) and core fixed elements (base salary, pension and other benefits).

The composition in the case of the Executive Directors for 2007 is illustrated in the bar chart 'Executive director's percentage of fixed and variable remuneration'.

Remuneration strategy and policy: 2007 in focus

The remuneration package for the senior executive team is built on a simple, straightforward model in which there are only two elements of variable pay, in contrast to a number of FTSE 100 companies which may operate two or, in a few cases, three different long term incentive plans, in addition to an annual incentive plan. The long term element is delivered through the long term incentive plan adopted last year (2007 LTIP) which replaced the LTIP adopted in 1998 (1998 LTIP) which has now expired. The Remuneration Committee believes that the Company’s approach provides a clear message to participants of what is required and is transparent to shareholders.

The Committee continues to take a responsible approach to benchmarking and aims to set the reward opportunity for Executive Directors within the market competitive range, but with a balanced overall positioning.

During 2007, the Committee confirmed the use, for benchmarking purposes, of an established peer group of selected FTSE 100 companies (the Pay Comparator Group). The Pay Comparator Group is reviewed annually and a company is included on the basis of its consumer goods focus, its international spread of operations and if it is considered as a competitor for top management talent. The Pay Comparator Group has been in use for a number of years to ensure that base salaries and executive reward continue to be market competitive. The constituent companies in the Pay Comparator Group as at 31 December 2007 are set out in Table 6.

In December 2007, as part of the preparatory work for the Committee’s annual review of the salaries of the Executive Directors and the members of the Management Board, the Committee agreed that, whilst the principles of the remuneration policy remained unchanged, additional reference points would also be considered in order to provide a robust decision-making framework for pay. On this basis, market data for companies in the FTSE 350 will also be considered when setting base salaries for 2008, taking into account the relative size and complexity of the company, as well as practice in the FTSE 30 for the purposes of evaluating total compensation.


The summary table below sets out the key policy elements for the salaries for the Executive Directors and the members of the Management Board.

Similar principles are applied to the salaries of senior managers. Below this level in the organisation, salary scales are graded with reference to market conditions, whilst individual salary increases are linked to performance.

During 2007, the Committee continued to recognise that the requirements of recruitment or retention may on occasion justify the payment of a salary outside the range regarded as appropriate for a particular position.

In addition to basic salary, the Executive Directors and members of the Management Board receive certain benefits in kind, principally a car or car allowance as well as private medical and personal accident insurance. The Executive Directors also receive the benefit of the use of a driver.

Executive Directors’ performance-related bonus plans

Details of the International Executive Incentive Scheme (IEIS) are shown in the summary table below. The IEIS aims to reward short term performance within the context of longer term sustainability and comprises both a cash and a deferred shares element. The bonus entitlements and awards to the Executive Directors and members of the Management Board under the IEIS depend upon the performance of the business. Demanding targets are set by the Remuneration Committee at the beginning of each year and are measured in terms of both financial and business performance. The targets reflect the five common measures referred to in the summary table below. These are identified as being key to sustained performance and have an equal weighting of 20 per cent. Payouts for each target are determined on a sliding scale with three performance points: threshold (which must be exceeded to attract a bonus); target; and maximum amount (the level at which the bonus is capped). The specific targets are not disclosed as they are considered to be commercially sensitive.

The performance points are calculated at the start of the year by reference to the type of target and projected performance in the context of the Group’s annual budget. The Committee receives reports from internal functions to allow it to determine the extent to which performance measures have been achieved. No elements of the bonuses are guaranteed. Bonuses are equally delivered in cash and shares.

Awards made under the Deferred Share Bonus Scheme (the Deferred Scheme) are in the form of free ordinary shares in the Company which are normally held in trust for three years and no further performance conditions apply in that period. In certain circumstances, participants may forfeit the shares if they resign before the end of the three year period. The Remuneration Committee is keen to encourage a culture of ‘ownership’ of these awarded shares and, since April 2004, participants have received a cash sum equivalent to the dividend on the after-tax position of all unvested ordinary shares held in the Deferred Scheme at the dividend record date.

The Committee, following its usual procedures, reviewed the performance targets for the year ended 31 December 2007 and details of the performance-related bonus payments resulting from that review are included in Table 1, in the year to which they relate.

As part of the year end review, the Committee considered the current annual bonus opportunity for the Executive Directors and Management Board against market practice, taking into account the total compensation opportunity for comparable roles in the Pay Comparator Group and the FTSE 30. As a result of this review, the Committee agreed to increase the maximum bonus opportunity for these roles for 2008 as set out below. (The equivalent percentages for 2007 are shown in the table in brackets.)

RoleOn-target bonus
Maximum bonus
Chief Executive100 (100)200 (150)
Finance Director90 (100)180 (150)
Chief Operating Officer90 (100)180 (150)
Management Board67.5 (67)135 (100)

Summary remuneration policy for Executive Directors and the Management Board

Remuneration constituentsPurposeDeliveryPolicy
Base salary— competitively reward individual performance
— reflect skills and experience
— cash
— monthly
— pensionable
— annual review (or on a significant change of responsibilities) with salary changes effective from April
— benchmarked for appropriate salary levels using a company size and complexity model coupled with: (1) the Pay Comparator Group with a mainly international consumer goods focus chosen from the FTSE 100 Index; and (2) published salary data for FTSE 350 companies
— Management Board members are reviewed on the Pay Comparator Group and salary data for FTSE 30 companies
Performance-related bonus— incentivise the attainment of corporate targets on an annual basis— International Executive Incentive Scheme (IEIS)
— annual, non-pensionable payments and awards
— 50 per cent cash
— 50 per cent shares (Deferred Share Bonus Scheme — DSBS)
— DSBS shares held in trust for three years and participants receive cash sum equivalent to the dividend on the after-tax position of all unvested shares held in the DSBS at the dividend record date
— five common measures: underlying operating profit, market share of key players, Global Drive Brand volume, net revenue and cash flow
— for 2007, the 'on target' bonus opportunity for Executive Directors was 100 per cent of the base salary with a maximum award of 150 per cent of salary
— for the Management Board the 'on target' bonus opportunity was 67 per cent of the base salary with a maximum award of 100 per cent of salary
— following a review of market practice, the structure of the bonus has been adjusted for 2008 as set out above, with an increase to the maximum bonus opportunity for Executive Director and Management Board roles
Long term incentives (2007 LTIP) — incentivise growth in earnings per share and total shareholder return (TSR) over a three year period— awards of shares
— variable due to performance over three year period
— discretionary annual award
— LTIP dividend equivalent
— the proportion of shares awarded under an LTIP award which later lapse upon the vesting of an award do not attract the LTIP dividend equivalent

— maximum annual award of 300 per cent of salary
— during 2007, an award of 250 per cent of salary was made to the Chief Executive and 200 per cent of salary to the Finance Director and the Chief Operating Officer
— members of the Management Board received awards of 150 per cent of salary
— cash LTIP Dividend Equivalent to the dividends that participants would have received as shareholders from the date of the LTIP award to the award's vesting date
— the value of the LTIP Dividend Equivalent is taken into account when considering awards
— three year performance period
— TSR performance (50 per cent of the total award) combines both the share price and dividend performance during the three year performance period as against two comparator groups (25 per cent for each measure): (1) the constituents of the FTSE 100 Index; and (2) a peer group of FMCG companies
— earnings per share measure (50 per cent of the total award) relates to earnings per share growth (on an adjusted diluted basis) relative to inflation

Pension— provision of competitive post-retirement benefits — British American Tobacco UK Pension Fund; defined benefit plan (up to April 2005)
— benefit paid as on-going pension
— pension accrues at 1/40 of annual basic salary
— normal pensionable age of 60
— maximum pension payable will not exceed 2/3 of base salary averaged over the preceding 12 months
— UK Pension Fund retains a scheme-specific cap following the introduction of the new UK pension regime in April 2006
— excess benefits continue to be accrued within an unfunded unapproved retirement benefits scheme

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