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:
- 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.
- 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 Foods||Pearson|
|BT Group||Royal Dutch Shell|
|British Sky Broadcasting||SABMiller|
|Imperial Tobacco Group||WPP 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.