BP 2005 Annual Report Download - page 167

The committee continued the engagement of Towers Perrin as its
principal external adviser during 2005. Towers Perrin also provided
limited ad hoc remuneration and benefits advice to parts of the group,
mainly comprising pensions advice in Canada, as well as providing
some market information on pay structures. The committee also
continued the engagement of Kepler Associates to advise on
performance measurement. Kepler Associates also provided
performance data and limited ad hoc advice on performance
measurement to the group.
Freshfields Bruckhaus Deringer provided legal advice on specific
matters to the committee as well as providing some legal advice
to the group.
Ernst & Young reviewed the calculations in respect of financial-
based targets that form the basis of the performance-related pay
for the executive directors. They also provided audit, audit-related
and taxation services to the group.
Lord Browne (group chief executive) was consulted on matters
relating to the other executive directors who report to him and on
matters relating to the performance of the company. He was not
present when matters affecting his own remuneration were considered.
POLICY ON EXECUTIVE DIRECTORS’ REMUNERATION
During 2004, the committee carried out a comprehensive and
independent review of all elements of remuneration policy for executive
directors, culminating in a shareholder resolution at the 2005 AGM
approving the renewal of the Executive Directors’ Incentive Plan (EDIP).
The committee seeks to ensure that, in determining remuneration policy,
there is a clear link between the company’s purpose, the business
plans and executive reward. The following key principles guide its policy:
••• Policy for the remuneration of executive directors will be
determined and regularly reviewed independently of executive
management and will set the tone for the remuneration of other
senior executives.
••• The remuneration structure will support and reflect BP’s stated
purpose to maximize long-term shareholder value.
••• The remuneration structure will reflect a just system of rewards
for the participants.
••• The overall quantum of all potential remuneration components
will be determined by the exercise of informed judgement of
the independent remuneration committee, taking into account
the success of BP and the competitive global market.
••• The majority of the remuneration will be linked to the achievement of
demanding performance targets that are independently set and
reflect the creation of long-term shareholder value.
••• A significant personal shareholding will be developed in order to
align executive and shareholder interests.
••• Assessment of performance will be quantitative and qualitative and
will include exercise of informed judgement by the remuneration
committee within a framework that takes account of sector
characteristics and is approved by shareholders.
••• The committee will be proactive in obtaining an understanding
of shareholder preferences.
••• Remuneration policy and practices will be as transparent as
possible, both for participants and shareholders.
••• The wider scene, including pay and employment conditions
elsewhere in the group, will be taken into account, especially
when determining annual salary increases.
Elements of remuneration The executive directors’ total remuneration
will consist of salary, annual bonus, long-term incentives, pensions
and other benefits. This reward structure will be regularly reviewed
by the committee to ensure that it is achieving its objectives.
In 2006, over three-quarters of executive directors’ potential direct
remuneration will again be performance-related (see illustrative
chart below).
This chart reflects on-target values for annual bonus and share element.
ON-TARGET REMUNERATION ELEMENTS
Base salary
Performance-related annual bonus
Performance-related share element
Salary The committee expects to review salaries in 2006. In doing
so, the committee considers both top Europe-based global companies
and the US oil and gas sector; each of these groups is defined and
analysed by the committee’s independent external remuneration
advisers. The committee then assesses the market information and
advice and applies its judgement in setting the salary levels.
Annual bonus Each executive director is eligible to participate in an
annual performance-based bonus scheme. The committee reviews
and sets bonus targets and levels of eligibility annually.
For 2006, the target level is 120% of base salary (except for
Lord Browne, for whom, as group chief executive, it is considered
appropriate to have a target of 130%). In normal circumstances, the
maximum payment level for substantially exceeding targets will continue
to be 150% (165% for the group chief executive) of base salary. In
exceptional circumstances, outstanding performance may be recognized
by bonus payments moderately above the 150% (and 165%) levels at
the discretion of the remuneration committee. Similarly, bonuses may
be reduced where the committee considers that this is warranted
and, in exceptional circumstances, bonuses can be reduced to zero.
The committee recognizes that it is responsible to shareholders
to use its discretion in a reasonable and informed manner in the best
interests of the company and that it has a corresponding duty to be
accountable and transparent as to the manner in which it exercises
its discretion. The committee will explain any significant exercise of
discretion in the subsequent directors’ remuneration report.
Executive directors’ annual bonus awards for 2006 will be based
on a mix of demanding financial targets, based on the company’s
annual plan and leadership objectives established at the beginning
of the year, in accordance with the following weightings:
••• 50% financial and operational metrics from the annual plan, principally
earnings before interest, tax, depreciation and amortization
(EBITDA) and return on average capital employed (ROACE).
••• 30% annual strategic milestones taken from the five-year group
business plan, including those relating to technology, operational
actions and business development.
••• 20% individual performance against leadership objectives and living
the values of the group, which incorporates BP’s code of conduct.
In assessing the final outcome of the individual bonuses each year,
the committee will also carefully review the underlying performance
of the group in the context of the five-year group business plan, as
well as looking at competitor results, analysts’ reports and the views
from the chairmen of other BP board committees. All the calculations
are reviewed by Ernst & Young.
Long-term incentives Long-term incentives will continue to be
provided under the EDIP. It has three elements within its framework:
BP Annual Report and Accounts 2005 165