Subject to shareholder approval at the AGM in 2006, it is proposed that the PSP will replace the existing Deferred Bonus Scheme.
Under the PSP, the maximum value of share awards made to Executive Directors and other Senior Executives each year is 100% of base salary. Awards will vest after three years to the extent that performance conditions are met. One-half of the award is subject to a TSR target relative to other FTSE 100 companies. For full vesting, the company’s TSR must be at or above the 75th percentile over the three-year performance period. 30% of this element of the award will vest if the company’s TSR is at the median. Awards will vest on a straight-line pro rata basis between median and 75th percentile. Awards based on TSR will only vest if the Committee is also satisfied with the underlying financial performance of the company over the performance period. The remaining one-half of the award will be subject to an adjusted earnings per share (EPS) growth target. For the three-year cycle commencing in 2006/07, full vesting will occur if the annual growth in adjusted EPS is equivalent to 8% above RPI per annum. 30% vesting will occur if the annual growth in adjusted EPS is equivalent to 3% above RPI per annum, with vesting on a straight- line basis between 3% and 8% above RPI. There will be no vesting of the relevant portion of award if the TSR minimum target of median is not achieved, or if the minimum real annual growth of EPS is not achieved.
The Committee considers the use of two measures, in these proportions, to be appropriate. The TSR performance measure is dependent on the company’s relative long- term share price performance, and therefore brings a market perspective to the PSP. Furthermore vesting of this element requires the Committee to be satisfied with the underlying financial performance of the company. The TSR measure is balanced by a key internal measure, adjusted EPS growth, which is critical to the company’s long-term success and ties in with its strategic goals. The Committee considers that the
achievement of annual adjusted EPS growth of 8% above RPI per annum is a suitably demanding target for maximum vesting in light of the regulatory regime in which the company operates and on the basis of independent advice. The target range has been set in the light of consensus expectations and the company’s own forecasts. The Committee believes that for 2006/07 this target range strikes the right balance between being stretching at the top end, and being achievable and motivational at the lower end. The Committee may set different vesting levels in future years for the EPS or TSR elements in order to ensure that the target remains sufficiently stretching. There will be no retesting of either the TSR or EPS performance measures. Further information is contained in the explanatory
notes accompanying the Notice of AGM which includes details on the consequences of leaving employment, and change of control arrangements.
All-Employee Share Schemes
Executive Directors are eligible to participate in the company’s all-employee share schemes on the same terms as other employees. These schemes comprise:
(a) the Sharesave Scheme, a savings- related share option scheme available to all employees. This scheme operates within specific tax legislation (including a requirement to finance exercise of the option using the proceeds of a monthly savings contract of up to £250 per month), and, in common with all such schemes, exercise of the option is not subject to satisfaction of a performance target. The option price is set at a discount of 10% to market value; and
(b) the Share Incentive Plan (the SIP), also available to all employees, under which employees allocate part of their pre-tax salary to purchase shares up to a maximum of £125 per month. The SIP operates within specific tax legislation. During the year, the company matched the first five shares purchased by the participating employees each month and intends to continue to do so. The company also offered 50 free shares to all eligible employees during the year, with no performance conditions attached, in recognition of the contribution of all staff to the performance of the Group.
In the past, the company operated a Discretionary Share Option Scheme, under which Senior Executives and staff were awarded options over shares. This scheme has now been terminated. No options have been granted under this scheme since 1998, and all options granted to Executive
Directors have been exercised or have lapsed.
Service Contracts
It is the company’s policy that Executive Directors should have service contracts with the company which are terminable on 12 months’ notice given by either party. The key aspects of each contract are as follows:
The Executive Directors are employed under service contracts with the company each dated 11 March 2005. They are eligible under the contracts to participate in the company’s Executive Directors’ bonus scheme, the company’s Sharesave or other employee share schemes and profit sharing schemes (if any). They are each entitled to a company car (or a cash allowance), membership of the company’s pension scheme including life assurance cover equal to four times salary,
and private health insurance which also covers dependants.
The contracts are each for an indefinite term ending automatically on retirement date (expressed to be age 60), but may be terminated by 12 months’ notice given by the company or by 12 months’ notice given by the Director. The company may at its discretion elect to terminate any Executive Director’s contract by making a payment in lieu of notice equal to the basic salary which would have been received during the notice period (excluding any bonus and any other emolument referable to the employment). Payments in lieu of notice will be made in staged payments, and such payments will either reduce or cease completely in circumstances where the departing Executive Director gains new employment. There is also a specific provision obliging the departing Executive to mitigate his/her loss in these circumstances. There are no special provisions applying in the event of change of control.
Remuneration and Pensions
The remuneration of Directors who served during the year was as shown below. All the Executive Directors participate in either the Southern Electric Pension Scheme or the Scottish Hydro-Electric Pension Scheme, which are funded final salary pension schemes. The Directors’ service contracts provide for a possible maximum pension of two-thirds final salary at age 60. In relation to Executive Directors who are subject to the earnings cap imposed by the Finance Act 1989 (broadly, those becoming employed by a Group company since 1989), the company provides top-up (unfunded) arrangements which are designed to provide an equivalent pension on retirement at age 60 to that which they would have earned if they had not been subject to the earnings cap.
During the year, the Committee considered the potential impact of legislative changes on pensions’ policy. From April 2006, current HM Revenue & Customs limits will cease to apply to benefits provided by the pension schemes. If a member’s accrued fund exceeds the new lifetime allowance (‘LTA’), the benefits payable by the scheme from that excess will be subject to a higher rate of income tax. The company intends to maximise the use of the new allowance thereby providing Executive Directors with more of their existing benefits via registered schemes. In the case of Colin Hood, who was not subject to the previous earnings cap but is now limited by the LTA, further accrual will be via an unfunded top-up arrangement. There will be no arrangements to compensate members for any change in their personal tax liability. The Committee takes the view that the overall approach meets its objective of fulfilling existing contractual obligations in a cost effective way.
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Non-Executive Directors
The remuneration of non-Executive Directors, apart from the company
Chairman, is determined by the Board, with the non-Executive Directors concerned not participating in this process. The non- Executive Directors do not have service contracts but instead have letters of appointment. They are appointed for fixed terms of three years, subject to retirement by rotation and re-election at AGMs in terms of the company’s Articles of Association. They do not participate in the Annual Bonus Scheme, Deferred Bonus Scheme, any of the share option schemes, or contribute to any Group pension scheme. The Chairman of the Audit Committee receives an additional fee of £10,000, and the non-Executive Directors who are members of the Audit Committee
receive an additional annual fee of £5,000 in respect of their responsibilities as members of that Committee. The non-Executive Director who is a member of the Health, Safety and Environmental Advisory Committee receives a fee of £5,000.
Performance Graph
The following graph charts the cumulative Total Shareholder Return of the company since 1 April 2001 compared to the FTSE 100 Index over the same period. The company is a member of the FTSE 100 index, and this was considered to be the most relevant index for comparative purposes.
The auditors are required to report on the information contained in tables A, B and D.
Table A – Directors’ Emoluments
The emoluments of each of the Directors were as follows:
Total Total
Salary/fee Bonuses Benefits 2006 2005
£000 £000 £000 £000 £000
Executive Directors
Ian Marchant 615 409 16 1,040 803
Gregor Alexander 311 207 13 531 403
Colin Hood (i) 461 297 14 772 600
Alistair Phillips-Davies 311 207 13 531 404
Non-Executive Directors
Henry Casley (ii) 6 – – 6 38
René Médori 44 – – 44 43
David Payne 64 – – 64 44
Susan Rice 39 – – 39 38
Kevin Smith (iii) 36 – – 36 26
Sir Robert Smith(Chairman) (iv) 218 – – 218 99
Former Directors
David Sigsworth (v) 0 – – 0 449
Bruce Farmer (vi) 0 – – – 177
Sir Graeme Odgers (vii) 0 – – 0 7
2,105 1,120 56 3,281 3,131
(i) During the year Colin Hood was paid £67,431 in respect of relocation expenses. (ii) Retired from the Board 17 May 2005.
(iii) From date of appointment to the Board on 24 June 2004.
(iv) 2005 figure reflects appointment as Chairman from 1 January 2005.
(v) Following his retirement from the Board on 31 March 2005, David Sigsworth has provided consultancy services to the company in the Energy Services business and represents the company in general industry forums. He received £105,000 for the provision of these services during the year. These consultancy services have been extended with a reduced time commitment until September 2006. (vi) Retired from the Board on 31 December 2004.
(vii) Retired from the Board on 18 May 2004.
Total Shareholder Return 250 240 230 220 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 SSE FTSE 100