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.)
|Chief Executive||100 (100)||200 (150)|
|Finance Director||90 (100)||180 (150)|
|Chief Operating Officer||90 (100)||180 (150)|
|Management Board||67.5 (67)||135 (100)|