Unilever 2005 Annual Report Download - page 58

Report of the Directors
Unilever Annual Report and Accounts 2005 55
Report of the Remuneration Committee
(continued)
Base salary
The Remuneration Committee reviews base salary levels annually,
taking into account external benchmarks in the context of
company and individual performance.
Annual incentive
The annual incentive arrangement rewards Executive Directors for
the delivery of trading contribution (Unilever’s primary internal
measure of economic value added) and top-line growth targets,
as well as for their individual contribution to Unilever’s business
strategy.
In 2005, shareholders approved changes to the corporate
performance criteria for the annual incentive arrangement, to
ensure continuing alignment with business priorities, and a
maximum opportunity for the Group Chief Executive of 150% of
base salary. The maximum level is only payable in the case of
exceptional performance. The annual incentive opportunity for
other Executive Directors remains between 0 and 100%.
The performance criteria for the annual incentive are now:
• Trading contribution (40%, for Chief Executive maximum 50%
of base salary). This is Unilever’s primary internal measure of
economic value added. Increases reflect the combined impact
of top-line growth, margin improvement and capital efficiency
gains. It is well aligned with our objective of a progressive
improvement in return on invested capital and with shareholder
value creation;
• Underlying sales growth (40%, for Chief Executive maximum
50% of base salary). This focuses on the organic growth of
Unilever’s turnover; and
• Individual business targets (20%, for Chief Executive maximum
50% of base salary). The individual performance targets are
tailored to each individual’s responsibilities to deliver certain
business objectives supporting the strategy. Individual
contributions are subject to robust measures and targets to
ensure objectivity of achievement.
The annual incentive is calculated at the end of each financial
year and payable in the following March. Part of the annual
incentive (25%) is delivered to the Executive Directors in the form
of shares in NV and PLC, which are matched by a conditional
award of ‘matching shares’, as further described under long-term
incentives below.
Long-term incentives
In 2005 shareholders also approved the replacement of the
Executive Option Plan with the Unilever Global Performance Share
Plan (GPSP). The long-term incentives for Executive Directors now
consist of three elements, all of which are delivered in shares:
• Global Performance Share Plan;
• TSR Long-Term Incentive Plan; and
• Share Matching Plan (linked to the annual incentive).
The policy in respect of each of the plans is described below,
details for 2005 are set out on page 57 and in the tables on
pages 61 to 64.
Executive Directors are required to demonstrate a significant
personal shareholding commitment to Unilever. Within five years
of appointment, they are expected to hold shares worth 150% of
their annual base salary. This reinforces the link between the
executives and other shareholders.
Global Performance Share Plan (GPSP)
Under the GPSP conditional rights over shares in NV and PLC are
awarded annually to Executive Directors. For Executive Directors
the value of a grant of conditional shares will not exceed 50% of
base salary. The number of shares actually received at the end of
the performance periods of the three years depends on the
satisfaction of the performance targets.
The performance measures for vesting are underlying sales
growth (for 50% of the award) and ungeared free cash flow (for
50% of the award). These are key performance measures in
Unilever’s external reporting. Underlying sales growth focuses on
the organic growth of Unilever’s turnover. Ungeared free cash
flow expresses the translation of profit into cash and thus longer
term economic value.
In respect of performance targets, there is a minimum and a
maximum performance range for each of the two measures and
associated vesting levels. Each year, the Remuneration Committee
reviews the performance targets by taking account of market
conditions and internal financial planning. The Remuneration
Committee will conduct a review of these targets at the start of
2006 and ensure that those attached to awards to be made in
2006 are appropriate and challenging.
Total Shareholder Return (TSR) Long-Term Incentive Plan
This plan rewards Executive Directors for creating more value for
Unilever’s shareholders when compared with the investment
returns generated by competitors.
Under this plan conditional rights over shares in NV and PLC are
awarded annually to Executive Directors.
The current level of conditional annual awards is as follows:
• Group Chief Executive: Shares in NV and PLC to the combined
value of €800 000; and
• Other Executive Directors: Shares in NV and PLC to the
combined value of €500 000.
Vesting is subject to Unilever’s relative Total Shareholder Return
(TSR) performance. TSR measures the returns received by a
shareholder, capturing both the increase in share price and the
value of dividend income (assuming dividends are re-invested).
Unilever’s TSR performance is compared with a peer group of
competitors over a three-year performance period. The TSR results
are compared on a single reference currency basis.
No shares will vest if Unilever is ranked below position 11 of the
TSR ranking table over the three-year period. Between 25% and
200% of the shares will vest if Unilever is ranked in the top half
of the table as shown below: