The full terms of reference of the Remuneration Committee, which conform with the requirements of the Combined Code, can be found on the Company’s website or can be obtained from the Company Secretary.
Carl Symon
Remuneration Committee Chairman
REMUNERATION COMMITTEE REPORT
The Remuneration report is structured as follows:– Remuneration Committee report Page 90
– Non-Executive Directors’ Fees Committee report Page 92
– Remuneration reporting:
– Remuneration strategy, policy and service Pages 93
contracts for executive directors to 103
– Chairman’s appointment, term and fees Page 103
– Non-executive directors’ appointment, term and fees Page 104
– Tabular information on directors’
shareholdings, share-based incentives, Pages 105
emoluments and pensions to 111
Governance
The members of the Committee are independent non-executive directors. Following Sir Nigel Rudd’s decision to retire from the Board at the end of 2009, the Board appointed Carl Symon as Chairman of the Remuneration Committee in August 2009 in Sir Nigel’s stead.
Dick Olver, the Company’s Chairman, also served as a member of the Committee from 23 September 2009 until 17 February 2010. He was deemed to be independent on his appointment as Board Chairman on 1 July 2004. Nick Rose was appointed to the Committee with effect from 17 February 2010.
The Chief Executive and, other than during the period when he served as a committee member, the Company’s Chairman, attend Committee meetings by invitation only. They do not attend where their individual remuneration is discussed and no director is involved in deciding his own remuneration. The Company Secretary acts as secretary to the Committee.
In 2009, the Committee met six times and details of attendance at these meetings are provided in the Corporate Governance report on page 83. The Committee appointed Kepler Associates as its Independent Adviser in 2007 to provide advice to the Committee and its individual members on all aspects of the Committee’s remit. Kepler Associates will not undertake any work for the Company whilst they are retained as the Committee’s Independent Adviser. Representatives from Kepler Associates have attended each of the Committee meetings during 2009 and will be in attendance at all meetings unless specifically requested otherwise by the Committee.
During the year, the Committee also received material assistance and advice on remuneration policy from the Group’s Human Resources Director, Alastair Imrie, and the Human Resources Director, Group Remuneration and Benefits, Graham Middleton. Dick Olver, Chairman, and Ian King, Chief Executive, also provided advice that was of material assistance to the Committee.
Legal advice to the Committee has been provided by Linklaters who are appointed by the Company, and who also provided services to the Company during the year. The Committee is satisfied that the services provided to it by Linklaters are of a technical nature and did not create any conflict of interest. If a conflict of interest were to arise in the future, the Committee would appoint separate legal advisers from those used by the Company. PricewaterhouseCoopers (PwC), who are appointed by the Company and also provided services to the Company during the year, provided detailed information on market trends and the competitive positioning of packages. Hewitt New Bridge Street, who are appointed by the Committee, provided advice on the total shareholder return figures for assessing the performance condition under the Performance Share Plan (PSP).
On an annual basis, the Committee’s effectiveness is reviewed as part of the Board’s externally facilitated evaluation process.
The table below shows the annual timetable of Committee activities: Q1 Directors’ and EC members’ remuneration Shareholder consultation on remuneration review Approve remuneration for EC members
Annual bonus
Review prior year performance against financial and non-financial objectives. Where applicable, award bonuses
Set directors’ and EC members’ performance targets and objectives for current year
Share plans
Approve Group All-Employee Free Shares Plan payments Grant of Spring awards to directors and executives
Miscellaneous
Review Remuneration Committee Terms of Reference and output of the Remuneration Committee performance evaluation Review Remuneration Report for recommendation to the Board
Q3 Q2
Review directors’ actual pay and bonus for previous year against comparator group actuals Set basis for annual remuneration review
Review progress of directors’ and EC members’ performance against targets
Grant of Autumn awards to directors and executives
Review pay review for senior executives below the EC
Q4 Review market position
(including pensions) Set bonus levels and share plan grant levels
Set directors’ salaries
Review share-based reward considering market trends, and review status of performance conditions, dilution levels and usage for following year
Agree grant policy for Spring awards Approve Group All-Employee Free Shares Plan for following year
Review market position of package (including pensions) for senior executives below the EC
Activities
During the period under review, the Committee:
– Assessed the level of achievement against financial and non-financial objectives under the annual incentive plan, and determined the levels of payout as detailed on page 99.
– Considered the outcome of the performance conditions for the March 2007 Share Matching Plan (SMP) awards and share options; the real growth in EPS over the three-year performance period exceeded 5% pa so that the awards of share options and matching SMP shares vest in full.
– Considered the outcome of the performance condition for the March 2007 awards under the PSP; these lapsed as the total shareholder return over the three-year performance period to the end of 2009 of -10.4% was below the median return of the global comparator group of aerospace and defence companies of -5.1%.
– Agreed the package for Linda Hudson on her appointment to the Board as President and Chief Executive Officer, BAE Systems, Inc., and an executive director of BAE Systems plc.
– Agreed the Chief Executive’s recommendation to leave salary and incentive levels for executive directors unchanged for 2010. – Agreed significant changes to US pension arrangements to ensure
they remain affordable and competitive.
– Retained the same performance conditions for 2010 awards under the SMP and the PSP despite the challenging economic environment.
– Increased the proportion of the annual incentive measured against safety and business conduct objectives from approximately 12.6% to 15% to further reinforce key aspects of the Group’s Corporate Responsibility agenda.
– Retained the requirement for one-third of executive directors’ annual incentives (25% for EC members and other senior executives) to be compulsorily deferred into the SMP.
– Retained the requirement for executive directors and EC members to build up a shareholding over time of at least 200% of salary. – Decided to introduce a claw back arrangement on in-year annual
incentives, and future awards under the SMP and PSP prior to vesting. – Consulted with major shareholders on aspects of remuneration
strategy and policy.
The Company’s remuneration strategy, policy and details of executive remuneration are set out on pages 93 to 111 of this Remuneration report.
On behalf of the Remuneration Committee
DIRECTORS’ REPORT: BUSINESS REVIEW GOVERNANCE REMUNERATION REPORT CONTINUED
Governance
The Non-Executive Directors’ Fees Committee has delegated authority from the Board to agree fees payable to non-executive directors on its behalf. Walt Havenstein was a Committee member up to June 2009. Linda Hudson joined the Committee on her appointment to the Board in October 2009.