Tesco 2009 Annual Report Download - page 56

54 DIRECTORS’ REMUNERATION REPORT
Tesco PLC Annual Report and Financial Statements 2009
Directors’ remuneration report continued
If the Remuneration Committee exercises its judgement to allow some,
or all, of the remaining 25% of the PSP awards to vest, we will describe
in the Directors’ Remuneration Report in the relevant year those factors
taken into account in determining the level of the award which would vest.
There is no re-testing of performance in respect of any targets.
Return on capital employed – US
The Group is seeking to build a substantial presence in the US which in time
has the potential to become a significant source of value for our shareholders.
The Tesco PLC US Long Term Incentive Plan 2007 (the US LTIP) has been
designed to deliver reward only if the US business realises this potential.
The US CEO was made an award of two million shares under the US LTIP
in 2007. Awards were also made to other senior members of the
US management team. No other Executive Directors will participate
in the Plan. Awards under the plan vest based on the ROCE and EBIT
performance of the US business as set out on page 61.
A key part of the Group’s long-term strategy is to consider new business
ventures which have the potential for significant long-term value creation
for our shareholders. The Group New Business Incentive Plan (Group Plan)
supports this initiative. Initially only the Group CEO will participate in the
Group Plan. However, awards may be made to other employees at the
discretion of the Remuneration Committee in the future where this is
appropriate to do so in order to support the Group’s new business ventures.
An award of 2.5 million shares was made to the Group CEO in November
2007. This award will vest based on the ROCE and EBIT performance of the
US business as set out on page 61, however the plan also requires Group
and International ROCE targets to be met and any payouts under this plan
will be scaled back on a pro rata basis to the extent they are not met.
As the Company’s US venture is currently the most developed new business
initiative, the award made to the Group CEO under the Group Plan is
focused on the performance of the US venture, although the Remuneration
Committee has the flexibility to consider and include other new business
development opportunities within the proposed award. In addition, the
Remuneration Committee will consider the findings of the Governance
Oversight Committee (described below) and opinions of the Audit
Committee as to whether the level of reported results achieved reflects
the underlying financial performance of the Company when considering
if, and the extent to which, the award made to the Group CEO will vest.
Service agreements
The Executive Directors all have rolling service agreements with no fixed
expiry date. These contracts are terminated on notice of 12 months by
the Company and six months’ notice by the Executive. If an Executive
Director’s employment is terminated (other than pursuant to the notice
provisions in the service agreement or by reason of resignation or
unacceptable performance or conduct) the Company will pay a sum
calculated on the basis of basic salary and the average annual bonus paid
for the last two years. No account will be taken of pension. Termination
payments will be subject to mitigation. This means that amounts will be
paid in instalments to permit mitigation. If the termination occurs within one
year of retirement, the termination payment will be reduced accordingly. To
reflect his length of service with Tesco and the early age of his appointment
as CEO, Sir Terry Leahy’s service agreement provides for his full pension
entitlement to become available on retirement on or after his 57th birthday.
The Remuneration Committee has agreed that new appointments of
Executive Directors will normally be on a notice period of 12 months.
The Committee reserves the right to vary this period to 24 months for the
initial period of appointment and for the notice period to then revert to
12 months. The service agreements are available to shareholders to view
on request from the Company Secretary.
Outside appointments
Tesco recognises that its Executive Directors may be invited to become
Non-executive Directors of other companies. Such non-executive
duties can broaden experience and knowledge which can benefit Tesco.
Subject to approval by the Board, Executive Directors are allowed to
accept non-executive appointments and retain the fees received, provided
that these appointments are not likely to lead to conflicts of interest.
Executive Directors’ biographies can be found on page 43 of this Report.
Fees retained for any non-executive directorships are set out below.
Company in which Fee retained
non-executive in 2008/9
directorship held (£000)
Philip Clarke Whitbread PLC 55
Andrew Higginson BskyB PLC 60
Lucy Neville-Rolfe The Carbon Trust 19
Non-executive Directors
Non-executive Directors have letters of appointment setting out their
duties and the time commitment expected. The letters are available
to shareholders to view from the Company Secretary upon request.
The Chairman meets with each Non-executive Director separately to
review individual performance. All Non-executive Directors are subject
to re-election by shareholders every three years at the Annual General
Meeting and their appointment can be terminated by either party without
notice. Charles Allen and Harald Einsmann, each having served over ten
years, will submit themselves for re-election every year subject to the
Chairman having reviewed their performance and concluded that they
remain independent and continue to add value.
The remuneration of the Non-executive Directors is determined by the
Chairman and the Executive Committee after considering external market
research and individual contribution. Non-executive Directors’ fees were
reviewed during the year and the basic fee was increased to £65,000 per
annum. The Chairs of the Audit and Remuneration Committees receive
£30,000 (in addition to their basic non-executive fee) and Non-executive
Directors who are members of these Committees receive an additional
£12,000 for each Committee. The Senior Independent Non-executive
Director, Rodney Chase, who is also the Deputy Chairman, receives a total
fee of £135,000 per annum. The Remuneration Committee determines
the Chairman’s remuneration, having regard to time commitment and
packages awarded to Chairmen of other companies of a similar size and
complexity. David Reid, Non-executive Chairman, receives an annual fee
of £610,000 this year and has the benefit of a company car and chauffeur.
The Remuneration Committee
The Remuneration Committee (the Committee) is governed by formal
Terms of Reference. They are reviewed annually and this year they were
updated to reflect an increased level of oversight of senior management
packages. The Terms of Reference are available from the Company
Secretary upon request or can be viewed at www.tesco.com/boardprocess.
Composition of the Committee
The Committee consists entirely of independent Non-executive Directors.
The members of the Committee during the year were Charles Allen
(Chairman of the Committee), Patrick Cescau, Rodney Chase, Karen Cook,
E Mervyn Davies and Harald Einsmann. Patrick Cescau was appointed a
member of the Remuneration Committee effective from 1 February 2009.
E Mervyn Davies resigned from the Company during the year due to a
conflict of interest. Ken Hanna joined the Committee on 1 April 2009.
The directors’ biographies can be found on page 43 of this Report.
No member of the Committee has any personal financial interest in the
matters being decided, other than as a shareholder, nor any day-to-day
involvement in running the business of Tesco. Jonathan Lloyd, the
Company Secretary, is Secretary to the Committee. David Reid, Non-
executive Chairman, and Sir Terry Leahy, Chief Executive of the Group,
both attend meetings at the invitation of the Committee. They are not
present when their own remuneration is being discussed.
The Committee is supported by the Group Personnel and Finance
functions and has continued to use the services of Deloitte LLP whom it
appointed as an external, independent advisor. Deloitte LLP also provided
advisory services in respect of corporate tax planning, share schemes,
international taxation, corporate finance and treasury to the Group during
the year. Members’ attendance at Committee meetings is listed in the
Corporate Governance section on page 45 of this Report.