Tesco 2008 Annual Report Download - page 31

Tesco PLC Annual Report and
Financial Statements 2008 29
Share options
Options over shares with a value of 200% of salary are granted to the
Executive Directors on an annual basis. Options are granted with an
exercise price equal to the market value at the date of grant and any gain
is therefore dependent on increasing the share price between the date of
grant and exercise. Vesting of the options is conditional on the achievement
of earnings per share performance conditions, with the first 100% subject
to the achievement of EPS growth of at least RPI plus 9% over three years
and the balance vesting for achieving EPS growth of at least RPI plus 15%.
There is no re-testing of performance.
Following the Remuneration Committee’s consideration of the extent
to which the earnings per share performance conditions for the options
granted to the Executive Directors in 2005/6 have been achieved, these
options will vest in full.
Share options are an important part of the incentive framework for
hundreds of senior managers within Tesco. The Committee recognises
that some companies are moving away from share options and
has again considered the appropriateness of retaining this scheme.
The Committee remains highly confident that the share option plans
remain in the best interests of shareholders as they provide a clear,
simple incentive arrangement for a large group of senior management,
including Executive Directors, and they reward increases in absolute
shareholder value.
Funding of awards
Executive incentive arrangements are funded by a mix of newly issued
shares and shares purchased in the market. Where shares are newly
issued the company complies with ABI dilution guidelines on their issue.
Share ownership guidelines
Executive Directors are normally expected to build and maintain a
shareholding with a value at least equal to their basic salary. New appointees
will typically be allowed around three years to establish this shareholding.
Full participation in the PSP is conditional upon this. All Executive Directors
currently satisfy this requirement.
Summary of remuneration elements
All awards made to Executive Directors under the Annual Bonus, PSP,
US LTIP and Group New Business Incentive Plan, and all options granted
under the Discretionary Share Option Plan are subject to the satisfaction
of performance conditions. If performance is lower than the maximum
targets, the short-term bonus and long-term incentives will reduce accordingly.
The Committee has reviewed the performance conditions for each of the
incentive arrangements against the Group’s business strategy, its growing
global leadership, its position as one of the rising companies at the top of
the FTSE 100 and increasing competition from private equity in the sector
and has concluded that they provide 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 and the applicable performance
measures is set out in the table below.
Element of remuneration Performance measure Purpose
Base salary Individual contribution to the business success To attract and retain talented people
Annual cash bonus For all Executives, earnings per share and specified Motivates year-on-year earnings growth and
(Up to 100% of salary) corporate objectives delivery of strategic business priorities
(Additional potential of up to For the US CEO, objectives relating to early-stage progress Incentivises entrepreneurial spirit and early
50% of salary for US CEO) in establishing the US operations stage progress of US business
Annual deferred share element For all Executives, total shareholder return, EPS and Generates focus on medium-term targets and,
(Up to 100% of salary) specified corporate objectives by incentivising share price and dividend growth,
ensures alignment with shareholder interests.
(Additional potential of up to Objectives relating to early-stage progress in establishing Incentivises entrepreneurial spirit and early
50% of salary for Group CEO new business ventures for the Group CEO, and relating stage progress of US business
and US CEO) to the successful start-up of the US operations for the
US CEO
Performance Share Plan Group performance: Group ROCE Assures a focus on long-term business success
(Up to 150% of salary: International performance: International ROCE and shareholder returns
100% for Group performance; and
50% for International performance*) The Committee will also take account of sales growth and
* US CEO not eligible for the 50% underlying profit growth in determining levels of vesting
relating to International performance
US Long-Term Incentive Plan US performance: US EBIT and ROCE Incentivises establishment of a successful
(One-off award to US CEO US business over the long term
of 2 million shares, pays out in
four tranches 2010 to 2014)
Group New Business Incentive Plan New Business Performance: initially just US EBIT/ROCE, Incentivises establishment of a successful new
(One-off award to Group CEO of but no payout unless Group and International ROCE businesses over the long term, but ensures
2.5 million shares, pays out in targets are also achieved continued focus on the Group as a whole
four tranches 2010 to 2014)
Share options EPS relative to retail price index Incentivises earnings growth and Executive
Director shareholding