BP 2006 Annual Report Download - page 73

BP Annual Report and Accounts 2006 71
three months before the beginning and end of the performance period.
They are measured in US dollars. At the end of the performance period,
the companies’ TSRs will be ranked. Executive directors’ performance
shares will vest at 100%, 70% and 35% if BP is ranked first, second
or third respectively; none will vest if BP is in fourth or fifth place.
As the comparator group is small and as the oil majors’ underlying
businesses are broadly similar, a simple ranking could sometimes distort
BP’s underlying business performance relative to the comparators.
The committee is therefore able to exercise discretion in a reasonable
and informed manner to adjust the vesting level upwards or downwards
to reflect better the underlying health of BP’s business. This would be
judged by reference to a range of measures including ROACE, growth
in EPS, reserves replacement and cash flow. The need to exercise
discretion is most likely to arise when the TSR of some companies is
clustered, so that a relatively small difference in TSR performance would
produce a major difference in vesting levels.
The remuneration committee will explain any adjustments in the
next directors’ remuneration report following the vesting, in line with its
commitment to transparency.
Group chief executive
As noted above, as group chief executive, Lord Browne is eligible for
performance share awards of up to 7.5 times his base salary. While the
largest part of this is related to TSR, the committee has decided that
up to two times base salary should be based on long-term leadership
measures. These focus on sustaining BP’s financial, strategic and
organizational health. They include, among other measures, maintenance
of BP’s performance culture and the continued development of BP’s
business strategy, executive talent and internal organization. As with
the TSR element, this element will be assessed over a three-year
performance period.
The remuneration committee has agreed that Lord Browne will be
granted a share award under the 2007-2009 plan on the above basis.
The performance targets for this award (and those granted to him on
the same basis in 2005 and 2006) will be assessed by the remuneration
committee at the end of the three-year performance period that applies
to each award. The actual number of shares received will depend on the
extent to which relevant performance conditions are satisfied.
Pensions
Executive directors are eligible to participate in the appropriate pension
schemes applying in their home countries. Additional details are given
on page 74.
UK directors
UK directors are members of the regular BP Pension Scheme. The core
benefits under this scheme are non-contributory. They include a pension
accrual of 1/60th of basic salary for each year of service, up to a
maximum of two-thirds of final basic salary and a dependant’s benefit of
two-thirds of the member’s pension. The scheme pension is not
integrated with state pension benefits.
The rules of the BP Pension Scheme have recently been amended
such that the normal retirement age is 65. Scheme members can retire
on or after age 60 without reduction. Special early retirement terms apply
to pre-1 December 2006 service for members with long service as at
1 December 2006.
In April 2006, the UK government made important changes to the
operation and taxation of pensions. The remuneration committee decided
to deliver pension benefits in excess of the new lifetime allowance of
£1.5 million set by the legislation via an unapproved, unfunded pension
arrangement paid by the company direct.
US directors
Dr Grote participates in the US BP Retirement Accumulation Plan (US
plan), which features a cash balance formula. The US plan took its current
form on 1 July 2000. Pension benefits are provided through a combination
of tax-qualified and non-qualified benefit restoration plans, consistent with
US tax regulations as applicable.
The Supplemental Executive Retirement Benefit (supplemental plan) is
a non-qualified top-up arrangement that became effective on 1 January
2002 for US employees above a specified salary level. The benefit formula
is 1.3% of final average earnings, which comprise base salary and bonus
in accordance with standard US practice (and as specified under the
qualified arrangement), multiplied by years of service. There is an
offset for benefits payable under all other BP qualified and non-qualified
pension arrangements. This benefit is unfunded and therefore paid from
corporate assets.
Dr Grote is eligible to participate under the supplemental plan. His
pension accrual for 2006, shown in the table on page 74, includes the
total amount that could become payable under all plans.
Other benefits
Executive directors are eligible to participate in regular employee benefit
plans and in all-employee share saving schemes and savings plans
applying in their home countries. Benefits in kind are not pensionable.
Expatriates may receive a resettlement allowance for a limited period.
Service contracts
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DirectoraContract date Salary as at 31 Dec 2006
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Lord Browne 11 Nov 1993 £1,575,000
Dr A B Hayward 29 Jan 2003 £485,000
Dr D C Allen 29 Jan 2003 £485,000
I C Conn 22 Jul 2004 £485,000
Dr B E Grote 7 Aug 2000 $1,000,000
J A Manzoni 29 Jan 2003 £485,000
aSubsequent to 31 December 2006, Dr Hayward’s salary was increased to £750,000
and Mr Inglis’ salary, on appointment to the board, to £425,000.
When Lord Browne retires on 31 July 2007, he will become entitled to a
payment equal to the aggregate of 12 months’ base salary at that date, his
target annual bonus level (130% of base salary) and £90,000 in respect of
fringe benefits. In accordance with the committee’s policy, the payment will
be made in four quarterly instalments (the first payable in November 2007)
and each instalment will be reduced by an amount equal to any of Lord
Browne’s replacement earnings for the quarter in question, to the extent
that such earnings exceed one-third of the relevant quarterly instalment.
Service contracts are expressed to expire at a normal retirement age
of 60 (subject to age discrimination). The contracts have a notice period
of one year.
The service contracts of Dr Allen, Mr Conn, Dr Hayward and
Mr Manzoni may be terminated by the company at any time with
immediate effect, on payment in lieu of notice equivalent to one year’s
salary, or the amount of salary that would have been paid if the contract
had terminated on the expiry of the remainder of the notice period.
Dr Grote’s contract is with BP Exploration (Alaska) Inc. He is seconded
to BP p.l.c. under a secondment agreement of 7 August 2000, which had
an unexpired term of one year on 31 December 2006. The secondment
can be terminated by one month’s notice by either party and terminates
automatically on the termination of Dr Grote’s service contract.
There are no other provisions for compensation payable on early
termination of the above contracts. In the event of the early termination
of any of the contracts by the company, other than for cause (or under a
specific termination payment provision), the relevant director’s then-current
salary and benefits would be taken into account in calculating any liability of
the company.
Since January 2003, new service contracts have included a provision
to allow for severance payments to be phased, when appropriate. The
committee will also consider mitigation to reduce compensation to a
departing director, when appropriate to do so.