Tesco 2005 Annual Report Download - page 21

Tesco PLC 19
Performance Share Plan
The Performance Share Plan (PSP) provides the opportunity
to earn greater rewards for superior long-term performance.
By assuring a focus on long-term business success and helping
the Executive Directors to build up a shareholding in Tesco,
the plan further aligns the interests of shareholders and
Executive Directors.
Awards can be made up to 150% of salary. No award in
the year exceeded 75% of salary. Awards will be made
‘over’ shares and will vest, according to the achievement of the
ROCE targets. Awards will vest on a straight-line basis: 25% of
the award will vest for baseline performance with the maximum
award vesting for maximum performance. The vested shares
must then be retained for a further 12 months. The Board set
out objectives for profitable deployment of capital in a Placing
Announcement of 13 January 2004. The 2004/05 award will
vest based on the achievement of 11.5% (derived from profit
before interest less tax) at the end of the three year
performance period. This reflects the five-year objective of
raising post tax ROCE by up to 200 basis points from the base
point of 10.2% achieved in the financial year ended February
2003.
Share options
Share options with a value of up to 200% of salary are granted
to the Executive Directors under the same conditions as for
senior managers. The first 100% is subject to the achievement
of EPS growth of at least RPI plus 9% over three years, with
the balance vesting for achieving RPI plus 15% over three
years. It is practice that the value of options granted to
Executive Directors each year does not exceed 200% of salary
other than in exceptional circumstances. There is no re-testing
of performance.
Share options are an important part of the incentive
framework for hundreds of senior managers within the Group.
The Committee has considered fully the current accounting
changes and concluded that share option plans remain in
the best interests of shareholders.
Share ownership guidelines
Executive Directors are normally expected to build and
maintain a shareholding with a value at least equal to their
base salary. New appointees will typically be allowed around
three years to establish this shareholding. Full participation
in the Performance Share Plan is conditional upon this.
Summary of remuneration elements
All awards made to Executive Directors under the Annual
Bonus, Performance Share Plan and all options granted
under the Executive Share Option Scheme are subject to the
satisfaction of performance conditions, which are explained
above. If performance is unsatisfactory the cash bonus and
long-term incentives will reduce accordingly. The Committee
regularly reviews these performance conditions and considers
that the proposed mix of performance conditions best
supports the Group’s business strategy and provides a set of
comprehensive and robust measures of management’s effort
and success in creating shareholder value. A summary of the
elements of the package is set out in the table below.
Part of remuneration Performance measure Purpose
Base salary Individual contribution to the business success To attract and retain talented people
Annual cash bonus Earnings per share and specified Motivates year on year earnings growth
corporate objectives and delivery of business priorities
Annual deferred share element Total shareholder return, Earnings per share Generates focus on medium-term targets
and specified corporate objectives and by incentivising share price and dividend
growth ensures alignment with shareholder interests
Performance Share Plan Return on capital employed over a three Assures a focus on long-term business success
year period
Share options Earnings per share relative to retail price index Incentivises earnings growth and Executive
with more stretching performance targets for Director shareholding
the balance of awards over 100% of salary