BT 2006 Annual Report Download - page 53

market, with total direct compensation (basic salary, annual
bonus – cash and deferred shares – and the expected value of any
long-term incentives) to be at the upper quartile only for sustained
and excellent performance. There are no plans to change this
policy. A significant and increasing proportion of the total
executive remuneration package is linked to line of business and/
or corporate performance. Remuneration arrangements and
performance targets are kept under regular review to achieve this.
(ii) Packages and financial year 2005/06 operation
The remuneration package is made up of some or all of the
following:
Basic salary
Salaries are reviewed annually, but increases are made only
where the Committee believes that adjustments are appropriate
to reflect contribution, increased responsibilities and/or market
pressures. No base pay changes were proposed or made for
executive directors in 2005/06, save that the Committee
agreed an increase in annual base salary effective from 1 August
2005 for Paul Reynolds to reflect his responsibility for delivering
the 21st Century Network and a number of key productivity and
process improvements.
Performance-related remuneration
Annual bonus
The annual bonus plan is designed to reward the achievement
of results against set objectives.
For the financial year 2005/06, on-target and maximum
(requiring truly exceptional performance) bonus levels for
executive directors and OC members, as a percentage of salary,
were set at 87.5% and 175% respectively, with approximately
43% of any bonus payable in the form of deferred shares.
The Committee last year increased the deferred share
element of the Chief Executive’s annual bonus but not the cash
element for the financial year 2005/06 and subsequent financial
years, in order to make his total package more retentive and
competitive with those of the leaders of the 30 largest
companies in the FTSE 100. Both the cash and shares elements
are determined by performance against corporate targets. Up
to two-thirds of his bonus is paid in deferred shares which vest
after three years. This had the effect of increasing his on-target
bonus to 255% of salary, of which 85% would be paid in cash
as previously and 170% of salary would be paid in deferred
shares. His total bonus – cash and deferred shares – is subject
to an overall cap of 300% of base salary in any one year.
Under his contract, the Chairman is not entitled to a bonus.
Corporate performance targets, set at the beginning of the
financial year 2005/06 were weighted such that 40% of the
bonus potential was based on earnings per share, 40% on free
cash flow and 20% on customer satisfaction. Delivery against
these operational targets is a key determinant of success and
supports BT’s strategy for transformation and growth. The
Committee agreed that in calculating earnings per share for
purposes of the annual bonus, volatile items which would be
reported under IFRS should be excluded. The impact of market
movements in foreign exchange and financial instruments plus
the net finance income relating to the group’s pension liabilities
were excluded from the target.
For the three line of business Chief Executives and other
relevant executives, the importance of meeting these
operational targets was recognised by linking 100% of their
potential bonus to BT’s corporate performance. The Committee
retains the flexibility to enhance or reduce bonus awards in
exceptional circumstances.
Achievement against corporate targets in the financial year 2005/06:
Earnings per
share –
weighting
40% of target
Free cash
flow –
weighting
40% of target
Customer
satisfaction –
weighting
20% of target
Total % of
target
80 80 0 160
(Note – threshold reflects 50% of target; target is 100%; and stretch is 200%)
The deferred share element of the annual bonus is paid under
the Deferred Bonus Plan (DBP). The shares vest and are
transferred to the executive after three years if still employed by
the company. There are no additional performance measures
for the vesting of deferred share awards. The Committee
considers that deferring a part of the annual bonus in this way
also acts as a retention measure and contributes to aligning
management with long-term shareholder interests.
The deferred awards for Ben Verwaayen, Andy Green, Hanif
Lalani, Ian Livingston and Paul Reynolds at the end of the
financial year 2005/06 are contained in the table on page 61.
The initial values of the awards to be granted in respect of the
financial year 2005/06 are given in the table on page 57.
As a retention measure and given competitive market
conditions, the Committee decided last year to introduce an
additional special bonus arrangement for Andy Green, Chief
Executive BT Global Services, linked to performance targets for
that line of business. This bonus arrangement, payable in
retention shares (see Retention shares) which will vest three
years after grant, was applied to performance for the financial
year 2005/06, and will be applied for 2006/07 and 2007/08.
Awards will be linked to a sliding scale of BT Global Services’
performance, weighted equally around revenue growth, EBIT
and cash generation. The target award is equivalent to 100% of
salary, with a maximum of 150% of salary. The first award of
retention shares with a value of £750,000 will be granted in
June 2006 and will vest in June 2009 subject to continued
employment.
Long-term incentives
The BT Equity Incentive Portfolio (the Portfolio) is designed to
ensure that equity participation is an important part of overall
remuneration. It comprises three elements: share options,
incentive shares and retention shares. Incentive shares were
used for equity participation in the financial year 2005/06.
Retention shares are used only as a recruitment or retention
tool. No options were granted in the financial year 2005/06.
Under his service agreement, the Chairman is not entitled to
receive annual grants of incentive awards or options.
Normally, awards vest and options become exercisable only
if a predetermined performance target has been achieved. The
performance measure for outstanding awards and options is
TSR (total shareholder return) compared with a relevant basket
of companies. TSR for these purposes was calculated by New
Bridge Street Consultants. TSR links the reward given to
directors with the performance of BT against the shares of other
major companies. For grants in the financial years 2001/02,
2002/03 and 2003/04, the comparator group was the FTSE
100 at 1 April in each year. For grants in the financial year
2004/05 and in 2005/06, TSR was measured against a group of
companies from the European Telecom Sector.
Report on directors’ remuneration BT Group plc Annual Report and Form 20-F 2006 51