directors report and accounts 2006 - Summary remuneration report
Annual Report
and Accounts 2006
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 components
Table 1 Executive Directors’ remuneration policy summaryTable 2 Directors’ remuneration
Table 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 |
Performance graph
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.
Table 1: Executive Directors' renumeration policy summary
| Remuneration constituents | Rationale | Delivery | Policy summary |
|---|---|---|---|
| Base salary | – competitively reward corporate and individual performance – reflect skills and experience | – cash – monthly | – annual review with changes effective from April – benchmarked against a mid-market level of main board directors from a UK comparator group with a mainly international consumer goods focus chosen from the FTSE 100 Index – additional reference to published salary data with reference to companies in the UK comparator group |
| Benefits in kind | – car or car allowance – private medical and personal accident insurance | – UK management level benefit – Executive Directors receive the benefit of the use of a driver | |
| Performance related bonus | – incentivise the attainment of corporate targets on an annual basis | – International Executive Incentive Scheme (IEIS) – 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 an ‘on target’ performance, the cash and shares elements of the IEIS together carry a value of 100 per cent of the base salary with an overall maximum of 150 per cent |
| Long term incentives (Long Term Incentive Plan or LTIP); new Long Term Incentive Plan or New LTIP proposed for shareholder approval at Annual General Meeting on 26 April 2007 | – alignment of executive remuneration with the generation of shareholder value – incentivise growth in earnings per share and Total Shareholder Return (TSR) over a three year period | – shares – discretionary annual award – LTIP dividend equivalent as cash at time of vesting – the proportion of shares awarded under an LTIP grant which later lapse upon the vesting of an award do not attract the LTIP dividend equivalent | – maximum awards under the New LTIP will be increased from 175 per cent of salary to 250 per cent for the Chief Executive, and from 125 per cent to 200 per cent of salary for the Finance Director and Chief Operating Officer – 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: (1) the constituents of the FTSE 100 Index; and (2) a peer group of FMCG companies (25 per cent for each measure) – 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 – benefit paid as on-going pension | – pension accrues at 1/40 of annual basic salary – UK Pension Fund normal retirement age of 60 – maximum pension payable will not exceed 2/3 of base salary averaged over the preceding 12 months – Paul Adams and Paul Rayner are both members of the UK Pension Fund – 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 (UURBS) – benefits for Antonio Monteiro de Castro are all accrued in the UURBS, offset by his entitlements under the defined benefit plan of Souza Cruz of Brazil |
Executive Directors’ service contracts
The Remuneration Committee continues to operate a policy of one year rolling contracts for Executive Directors; these contracts incorporate a provision for a termination or compensation payment in lieu of notice. This will comprise: (1) 12 months’ salary at his then current base pay; and (2) a cash payment in respect of other benefits under the contract such as medical insurance, or the Company may at its option continue those benefits for a 12 month period. In addition, the Committee also maintains discretion in respect of this policy for those Executive Directors who may be recruited externally or from overseas, when it may be appropriate to offer a contract with an initial period of longer than one year, reducing to a one year rolling contract after the expiry of the initial period.Non-Executive Directors’ terms of appointment and remuneration policy
The Non-Executive Directors do not have service contracts with the Company but instead have letters of appointment. The terms of appointment provide that a new Director is appointed for a specified term, being an initial period to the next Annual General Meeting after appointment and, subject to reappointment at that meeting, for a further period ending at the Annual General Meeting held three years thereafter. Subsequent reappointment is subject to endorsement by the Board and the approval of shareholders. Fees for Non-Executive Directors are determined by the Board with reference to the time commitment and responsibilities associated with the roles. Under the terms of their letters of appointment, on termination (at any time), a Non-Executive Director is entitled to any accrued but unpaid Director’s fees but not to any other compensation.
Table 2: Directors' remuneration
| Salary/fees £ | Performance-related pay: annual cash bonus2 £ | Performance-related pay: deferred share bonus2, 3 £ | Benefits in kind4 £ | 2006 Total £ | 2005 Total £ | |
|---|---|---|---|---|---|---|
| J P du Plessis | 520,000 | – | – | 68,524 | 588,524 | 533,743 |
| K H Clarke | 150,000 | – | – | 593 | 150,593 | 154,237 |
| P N Adams | 984,896 | 710,000 | 745,425 | 132,397 | 2,572,718 | 2,118,457 |
| P A Rayner5 | 608,646 | 436,650 | 460,512 | 232,642 | 1,738,450 | 1,443,800 |
| A Monteiro de Castro6 | 835,956 | 482,800 | 504,779 | 213,176 | 2,036,711 | 1,803,123 |
| P E Beyers | 60,000 | – | – | 9,735 | 69,735 | 60,000 |
| R E Lerwill | 75,000 | – | – | 403 | 75,403 | 79,664 |
| A M Llopis | 60,000 | – | – | – | 60,000 | 60,000 |
| R L Pennant-Rea | 60,000 | – | – | – | 60,000 | 68,750 |
| A Ruys1 | 50,000 | – | – | 831 | 50,831 | – |
| Sir Nicholas Scheele | 60,000 | – | – | 8,739 | 68,739 | 50,860 |
| M H Visser | 60,000 | – | – | 6,584 | 66,584 | 82,588 |
| Former Director K S Wong (deceased)1 | – | – | – | – | – | 10,000 |
| Total remuneration | 3,524,498 | 1,629,450 | 1,710,716 | 673,624 | 7,538,288 | 6,465,222 |
Notes:
1 K S Wong died on 16 February 2005; Anthony Ruys was appointed a Director on 1 March 2006.
2 The Remuneration Committee, following its usual procedures, agreed that the performance targets for the year ended 31 December 2006 have been met (subject to confirmation of a figure yet to be published). The Committee agreed that the performance-related bonus payments shown above could, as a consequence, increase or decrease by approximately 1.5 per cent following the publication of the outstanding information which would enable the relevant calculations to be finalised after 1 March 2007. Such changes, if any, will be reported in the Remuneration Report for the year ending 31 December 2007.
3 The deferred share bonus payments include cash sums equivalent to the dividend on the after tax position on all unvested ordinary shares comprised in the awards held by participants (including Executive Directors) in the Deferred Share Bonus Scheme at each dividend record date. For the year ended 31 December 2006, these payments for Executive Directors were as follows: Paul Adams £35,425 (2005: £29,374); Paul Rayner £23,862 (2005: £19,750); and Antonio Monteiro de Castro £21,979 (2005: £18,376).
4 Benefits in kind include: (a) a car or a car allowance; (b) use of a driver; (c) spouse travel and associated expenses for business-related purposes. For Non-Executive Directors these benefits relate to spouse travel only.
5 Paul Rayner’s benefits in kind included payments in respect of family education (£56,344) which followed his relocation to the UK from Australia.
6 Antonio Monteiro de Castro’s benefits in kind included tax advice of £65,424 in respect of his former contractual arrangements up to 1 January 2004 prior to which date he derived his emoluments in both the UK and Brazil.
7 The Directors’ remuneration shown above does not include the illustrative value (as at 23 February 2007) of the Executive Directors’ Long Term Incentive Plan awards made in March 2004 which will vest on 17 March 2007. Reference should be made to Table 3 below, note 5.
Chairman’s terms of appointment and remuneration
Jan du Plessis’s terms of appointment provide that he will hold the office of Chairman with effect from 1 July 2004 for a period of three years unless terminated earlier by: (1) the Company giving three months’ notice or a discretionary compensation payment in lieu of notice; or (2) by the Chairman giving one month’s written notice with the Company having discretion to make a compensation payment in lieu of such notice. This is limited to any fees which are payable for such part of the relevant notice period as the Board does not require the Chairman to perform his duties. The Chairman is subject to the reappointment of Directors’ provisions contained in the Company’s articles of association; he will therefore not ordinarily serve as a Director for more than two years before seeking reappointment. In common with the Non-Executive Directors, he does not participate in the Company’s share schemes, bonus schemes or incentive plans and is not a member of any Group pension plan.Table 3: Summary of share interests including long term incentives
| Ordinary shares at 1 Jan 2006 or date of appointment | Ordinary shares at 31 Dec 2006 | Ordinary shares (Deferred Scheme) at 1 Jan 2006 | Ordinary shares (Deferred Scheme) at 31 Dec 2006 | Options and awards over ordinary shares at 1 Jan 2006 | Options and awards over ordinary shares at 31 Dec 2006 | Share options exercisable from/to LTIP awards initial vesting date | |
|---|---|---|---|---|---|---|---|
| P N Adams | 143,051 | 143,394 | 125,517 | 118,611 | – | – | – |
| Sharesave Scheme | – | – | – | – | 2,492 | 2,492 | Jan 10-Jun 10 |
| LTIP | – | – | – | – | 341,383 | 362,067 | Mar 07-Mar 09 |
| P A Rayner | 83,228 | 83,558 | 83,155 | 82,821 | – | – | – |
| Share Option and Sharesave Schemes | – | – | – | – | 6,777 | 6,266 | Sep 02-Jun 12 |
| LTIP | – | – | – | – | 200,511 | 177,490 | Mar 07-Mar 09 |
| A Monteiro de Castro | 179,564 | 179,844 | 76,784 | 75,889 | – | – | – |
| Sharesave Scheme | – | – | – | – | 957 | 957 | Jan 09-Jun 09 |
| LTIP | – | – | – | – | 229,480 | 266,273 | Mar 06-Mar 09 |
| J P du Plessis | 50,000 | 50,000 | – | – | – | – | – |
| K H Clarke | 4,459 | 4,611 | – | – | – | – | – |
| P E Beyers | – | – | – | – | – | – | – |
| R E Lerwill | 3,000 | 3,000 | – | – | – | – | – |
| A M Llopis | 2,200 | 2,200 | – | – | – | – | – |
| R L Pennant-Rea | 3,295 | 3,407 | – | – | – | – | – |
| A Ruys1 | – | 3,000 | – | – | – | – | – |
| Sir Nicholas Scheele | – | – | – | – | – | – | – |
| M H Visser | – | – | – | – | – | – | – |
Notes:
1 Anthony Ruys was appointed a Director on 1 March 2006.
2 No Director had a non-beneficial interest in the shares of the Company at the dates stated above.
3 Share options granted under the Share Option Scheme are not normally granted in any year to Executive Directors who receive an award under the LTIP; no options were granted in the year ended 31 December 2006. The aggregate gains on share options exercised by Executive Directors during the year ended 31 December 2006 were £17,562 (2005: £423,516). Options granted under the Share Option Scheme are exercisable subject to a performance condition based on earnings per share growth; the Company’s published adjusted earnings per share growth has to exceed inflation by an average of 3 per cent per annum over any consecutive three year period during the 10 year life of the options.
4 The value of LTIP awards which vested to Executive Directors during the year ended 31 December 2006 was £2,783,533 (2005: £1,300,628).
5 The March 2004 LTIP award will vest on 17 March 2007 at 100 per cent in the manner described in 'Long Term Incentive Plan - vesting of 2004 award' above. For illustrative purposes only, the aggregate value of the vesting awards for the Executive Directors was £3,820,370 based on a share price on 23 February 2007 (being the latest practicable date prior to publication) of 1,584p per ordinary share.