This report is extracted from the full Remuneration Report set out in the Directors’ Report and Accounts 2006 (a copy of which is available on request and can be found on our website, bat.com).
The role of the Remuneration Committee and Executive remuneration policy
The Remuneration Committee determines the framework and policy on the terms of engagement (including remuneration) for the Chairman, the Executive Directors and the members of the Management Board. The Remuneration Committee also decides their specific remuneration, including awards under the share incentive schemes and pension schemes.
The overriding objective of the British American Tobacco remuneration policy is to reward the achievement of corporate and individual goals by linking success in those areas to the Group strategy: a balanced approach to achieving growth, improving productivity, managing the business in a responsible manner and developing a winning organisation. The delivery of strategy is measured by the Key Performance Indicators (KPIs) and Business Measures set out and described in the Our strategy section Annual Review. The continued focus by the Executive Directors of British American Tobacco and the members of its Management Board in driving all four elements of the strategy will continue to build a sustainable business. This 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.
In order to strengthen the alignment of executive remuneration to the generation of shareholder value, a balance is maintained between the short and the long term elements of the structure. The application of this policy will continue during 2007, with performance based variable rewards (cash and share-based performance related annual bonus plans; and a Long Term Incentive Plan – the LTIP) comprising about 56 per cent of total remuneration with the balance of core fixed elements covering base salary, pension and other benefits.
Remuneration – key componentsTable 1 Executive Directors’ remuneration policy summaryTable 2 Directors’ remunerationTable 3 Summary of share interests including long term incentives
Review of incentive arrangements and proposed new Long Term Incentive Plan
The Company’s current LTIP (the Current LTIP) will expire in April 2008. The Remuneration Committee undertook a comprehensive review of the current incentive arrangements for the senior executive team with a view to advising the Board on possible replacement incentive arrangements to support the executive remuneration policy and its embedded link with the Group strategy (the Review).
As a result of the Review, shareholder approval is being sought for a new Long Term Incentive Plan (the New LTIP). Details of the New LTIP will be set out in the notice for the 2007 Annual General Meeting and its accompanying letter from the Chairman of the Remuneration Committee.
The proposed new plan, in which all Executive Directors and members of the Management Board would participate, is, in many respects, very similar to the existing arrangements and the key points and differences (including proposed award levels) are noted in Table 1. Awards under the New LTIP would deliver shares subject to stretching performance conditions over three years. These performance conditions for the awards would continue to be based on Total Shareholder Return (TSR) and earnings per share (EPS) measures. Participants would continue to receive the LTIP Dividend Equivalent. In order to provide flexibility and sufficient capacity for future awards over the life of the Plan, the individual limit would be increased to 300 per cent of salary. The Remuneration Committee does not anticipate that awards will be made up to this limit in normal circumstances and there is no current intention to utilise this limit by making awards in excess of the proposed levels referred to in Table 1. The Remuneration Committee will advise shareholders in advance of any change in the current proposed award levels, and any such change will be disclosed in the Remuneration Report.
Long Term Incentive Plan: vesting of 2004 award
As reported last year, 77.1 per cent of the 2003 LTIP award vested on 19 March 2006. The sixth LTIP award was made in 2004, with the performance period being completed at 31 December 2006. The Remuneration Committee has assessed the performance of British American Tobacco against the two performance conditions outlined in Table 1
and has determined that 100 per cent of the award will vest. On the TSR measure, the Company ranked tenth out of the FTSE 100 group of companies, giving a vesting of 25 per cent for performance at the upper quartile. A vesting of 25 per cent was achieved for ranking second out of the peer group of international FMCG companies, this being upper quartile. Earnings per share growth was 8.98 per cent per annum in excess of inflation, resulting in a vesting of 50 per cent.
The members of the FMCG group for the 2004 award vesting in March 2007 were:
| Altadis|| Imperial Tobacco Group|
| Altria Group|| InBev|
| Anheuser-Busch|| Johnson & Johnson|
| Cadbury Schweppes|| Kellogg|
| Campbell Soup|| Kimberly-Clark|
| Carlsberg|| LVMH Moët Hennessy|
| Coca-Cola|| Nestlé|
| Colgate-Palmolive|| Pepsico|
| Danone|| Procter & Gamble|
| Diageo|| Reckitt Benckiser|
| Gallaher Group|| SABMiller|
| Heineken|| Sara Lee|
| HJ Heinz|| Scottish & Newcastle|
| The Hershey Company || Unilever|
Schedule 7A to the Companies Act requires that the Company must provide a graph comparing the TSR performance of a hypothetical holding of shares in the Company with a broad equity market index over a five year period – the performance graph. This illustrates the performance of TSR against the FTSE 100 Index over a five year period commencing on 1 January 2002. In the opinion of the Directors, the FTSE 100 Index is the most appropriate index against which TSR should be measured because it is a widely used and understood index of broadly similar-sized UK companies to the Company. In addition to the performance graph, illustrative graphs show the relative position on the TSR measures for the LTIP award vesting in March 2007.