british american tobacco p.l.c. annual report 2008 - Remuneration report (1 of 10)

 
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British American Tobacco p.l.c. Annual Report 2008

Overview

The Group’s remuneration policy continues to focus on the achievement of corporate and individual goals aligned to the Group’s strategy. A sustainable business, which is at the heart of the Group’s strategy, is built upon a balanced approach to achieving growth, improving productivity, operating responsibly and developing a winning organisation.

The effectiveness and the market competitiveness of executive remuneration in the context of the Group’s strategy and the need to attract, motivate and retain the high-quality executive talent required to deliver the strategy are the key considerations of the Remuneration Committee. Comprehensive business metrics including established Key Performance Indicators (KPIs) measure the delivery of the Group’s strategy.

The consistent theme for a number of years, which will continue in 2009, is to build a strong link between executive remuneration and shareholder value. 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 the Company has consistently ranked second within that comparator group of companies in respect of LTIP awards which vested (or will vest) in each of 2007, 2008 and 2009.

Variable and fixed remuneration

The role of the Remuneration Committee is to determine the policy and framework 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 remuneration of each of them (including, where appropriate, awards under share incentive schemes and pension scheme participation) and any compensation payments.

The Committee has set a guideline that approximately 50 per cent of the remuneration package should be performance-related. The remuneration package comprises both performance-based variable elements (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 current Executive Directors for 2008 is illustrated in the bar chart below:

Executive Directors percentage of fixed and variable remuneration

Notes:

  1. The above illustration of the current Executive Directors’ percentage of fixed and variable remuneration for 2008 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 4; (3) benefits are core benefits such as car/car allowance, private medical and personal accident insurance; (4) bonus is the amount received for performance in 2008 delivered in cash and deferred shares; and (5) LTIP represents the target annualised expected value of the long-term incentive award granted in 2008 expressed as a percentage of base salary.
     
  2. Fixed remuneration comprises: salary, pension and benefits. Variable remuneration comprises: bonus (cash and deferred shares) and LTIP.

2008 in focus

The Remuneration Committee continues to promote a simple and transparent approach for the remuneration packages of the senior executive team. The value of this focus is clarity for shareholders and no ambiguity for any eligible participants about the required performance levels.

Responsible benchmarking is a key element of setting the reward opportunity for Executive Directors. As in 2007, the Remuneration Committee considered additional external market reference points to further enhance the robustness of the decision-making framework for pay.

As a result, in 2008, the established peer group of selected FTSE 100 companies (the Pay Comparator Group) was supplemented by market data of FTSE 350 companies taking into account the relative scale and complexity of each company as well as the practice of the FTSE 30 companies. The Pay Comparator Group, which is reviewed annually, is made up of companies with a consumer goods focus, an international spread of operations and those which are considered to be 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. During 2008, the constituent companies were reviewed and Associated British Foods was added and Scottish & Newcastle removed for the purposes of the 2009 pay review.

The constituent companies in the Pay Comparator Group as at 31 December 2008 are set out below:

Associated British FoodsPearson
AstraZenecaReckitt Benckiser
BPReed Elsevier
BT GroupRoyal Dutch Shell
British Sky BroadcastingSABMiller
CadburyTesco
DiageoUnilever
GlaxoSmithKlineVodafone
Imperial Tobacco GroupWPP Group
Marks & Spencer 

From 2009, data on the Company’s closest competitor, Philip Morris International, will be taken as an additional reference point for the pay review.

The long-term element of remuneration is delivered through the Company’s LTIP. In February 2008, as part of the annual benchmarking review, the Committee considered whether the total potential remuneration continued to be competitive against the market. The review showed that there was a significant shortfall in the total compensation available at higher levels of performance. On this basis, awards made under the LTIP in 2008 were increased from 250 per cent to 300 per cent of salary for the Chief Executive and from 200 per cent to 250 per cent of salary for the Finance Director and Chief Operating Officer. Awards for the Management Board were increased from 150 per cent to 200 per cent of salary. In order to maintain the positioning of the package at ‘target’ performance, an adjustment was made to the performance schedule for the 2008 award to the Executive Directors and the Management Board such that the same percentage of salary would vest for threshold performance before and after the increase in the award. The maximum award will be achievable only where stretching performance targets are achieved in full.

The Remuneration Committee consulted shareholders prior to making awards in 2008, advising them of the increase in award sizes and offering them the opportunity to comment. The new vesting schedule and award levels will also be applied to the LTIP awards to be made in 2009.

The Company’s key remuneration principles for Executive Directors and the Management Board are summarised in the Remuneration policy summary table below.

Salary

The summary table sets out the key policy principles for the salaries for the Executive Directors and the members of the Management Board. Similar principles are applied to the salaries of senior managers and other levels in the organisation, where, with reference to external market practice, salary increases are linked to individual performance.

The Remuneration Committee continues to accept 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.

The remuneration of the Executive Directors is reviewed in February each year, with salary increases effective from April. With effect from 1 April 2009, the base salary for Paul Adams (Chief Executive) will be £1,225,000 (1 April 2008: £1,180,000), for Nicandro Durante £630,000 (1 January 2008, upon becoming Chief Operating Officer: £600,000) and Ben Stevens £590,000 (30 April 2008, upon becoming Finance Director: £560,000).

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 as a benefit the use of a driver.

Performance-related bonus plans

Details of the International Executive Incentive Scheme (IEIS) are shown in the Remuneration policy summary table.

Remuneration policy summary for Executive Directors and the Management Board
Remuneration constituentsPurposeDeliveryPolicy
Base salary— reward individual performance
— reflect skills and experience
— cash
— monthly
— 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
 — base salary is pensionable
Performance-related bonus— incentivise the attainment of corporate targets on an annual basis— International Executive Incentive Scheme (IEIS)
— annual awards
— 50 per cent cash
— 50 per cent shares (deferred shares)
— deferred shares held in trust for 3 years and participants receive cash sum equivalent to the dividend on the after-tax position of all unvested shares held at the dividend record date
— 6 common measures: underlying operating profit, market share, Global Drive Brand volume, net revenue and cash flow; and (new for 2009) costs
— the 'on target' bonus opportunity for the Chief Executive is 100 per cent of the base salary with a maximum award of 200 per cent of salary, and for the Chief operating Officer and Finance Director the 'on target' bonus opportunity is 90 per cent with a maximum of 180 per cent
— for the Management Board the 'on target' bonus opportunity is 67.5 per cent of the base salary with a maximu award of 135 per cent of salary
— awards are non-pensionable
Long term incentives (2007 LTIP) — incentivise growth in earnings per share and total shareholder return (TSR) over a 3 year period— awards of shares
— variable due to performance over 3 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
— cash LTIP dividend equivalent to the dividends that paticipants would have received as shareholders from the date of the LTIP award to the award's vesting date
— 3 year performance period
— TSR performance (50 per cent of the total award) combines both the share price and dividend performance during the 3 year performance period as against 2 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

As reported in 2007, the maximum bonus opportunity was increased in 2008 for the Executive Directors and the Management Board. The annual bonus opportunity, both on-target and maximum, for the Executive Directors and Management Board in 2008, and which will be the same in 2009, are shown in the table below.

RoleOn target bonus
%
Maximum bonus
%
Chief Executive100200
Finance Director90180
Chief Operating Officer90180
Management Board67.5135

The IEIS rewards short-term business performance within the context of longer-term sustainability and any resulting award is delivered as 50 per cent cash and 50 per cent deferred shares (through the Deferred Share Bonus Scheme). Demanding targets are set by the Remuneration Committee at the beginning of each year and are measured in terms of both business and financial performance.

In 2008, the targets reflected the 5 common measures referred to in the Remuneration policy summary table. These are identified as the key drivers of sustained performance and have an equal weighting of 20 per cent. The performance points (described below) are set at the start of the year by reference to the projected performance for each target in the context of the Group’s annual budget.

Subject to the Committee exercising its judgement in the assessment of the quality of the Company’s overall performance, payouts for each measure are determined on a sliding scale with 3 performance points. These are: threshold (which must be exceeded to attract any payment of a bonus for that measure); target; and maximum amount (the level at which the bonus for that measure is capped).

In respect of the year ended 31 December 2008, the bonus payouts under the IEIS were 169.4 per cent for the Chief Executive; 153.5 per cent for each of the Finance Director and Chief Operating Officer; and 116.7 per cent for the members of the Management Board. The actual performance related pay values are shown in Table 1 – annual cash bonus and deferred share bonus.

The Committee receives reports from management to allow it to determine the extent to which performance measures have been achieved. No elements of the bonuses are guaranteed and, as in previous years, the specific targets are commercially sensitive and not made public.

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 3 years and no further performance conditions apply in that period. In certain circumstances, such as resigning before the end of the 3 year period, participants may forfeit the shares. The Remuneration Committee encourages a culture of ‘ownership’ of these awarded shares and participants receive 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.

For performance during 2009 and payout in 2010, an additional measure, focusing on costs, has been added to the 5 existing measures to reflect the broader perspective of sustained business performance. The 6 measures will be equally weighted, each contributing 16.67 per cent, and will continue to operate under the current IEIS framework.

© British American Tobacco