Unilever 2006 Annual Report Download - page 54

Unilever Annual Report and Accounts 2006 51
Report of the Directors (continued)
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 Group
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 2006, the Group Chief Executive had a maximum opportunity
of 150% of base salary. The maximum level is only payable in the
case of exceptional performance. The opportunity for other
Executive Directors in 2006 was between 0% and 100%.
The performance criteria for the annual incentive are:
• Trading contribution: Unilever’s primary internal measure of
economic value added. It is calculated from Trading Result after
adeduction for tax and a charge for asset use. (Trading result
is the internal management measure of profit that is the most
consistent with operating profit). Increases in trading
contribution 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
returnon invested capital and with shareholder value creation;
• Underlying sales growth: focus on the organic growth of
Unilever’s turnover; and
• Individual business targets: tailored to each individual’s
responsibilities to deliver certain business objectives supporting
the strategy. Individual contribution is assessed against robustly
set measures and targets to ensureboth objectivity and
‘stretch’.
Achievement of targets is measured at the end of the year and
the payment takes place 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 the
section on long-term incentives below.
Long-term incentives
The long-term incentives for Executive Directors in 2006 consist
of three elements, all of which are delivered in shares:
• Global Performance Share Plan;
• TSR Long-Term Incentive Plan; and
• ShareMatching Plan (linked to the annual incentive).
Executive Directors are required to demonstrate a significant
personal shareholding commitment to Unilever. Within five years
of appointment, they areexpected 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.
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 level of conditional annual award in 2006 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 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 reinvested). 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:
Vested award
%of original conditional
TSR peer group ranking award that will vest
12th to 21st 0%
10th or 11th 25%
8th or 9th 50%
5th to 7th 100%
3rd or 4th 150%
1st or 2nd 200%