Aviva 2002 Annual Report Download - page 50

*For the purposes of this diagram, the following assumptions have been made:
At “Target” performance – the annual bonus is 35% of basic pay and the
executive director chooses to defer the whole of his bonus, which is matched.
The ROCE performance condition on the long-term incentive plan is met in full
and the Company’s TSR position is median, resulting in the vesting of 50%
of the shares awarded. The share price growth during the three-year
performance/deferral period averages 5% per year.
At “Stretch” performance – the annual bonus is 50% of basic salary and the
executive director chooses to defer the whole of his bonus, which is matched.
The ROCE performance condition on the long-term incentive plan is met in full
and that the Company’s TSR position is upper decile, resulting in the vesting of
100% of the shares awarded. The share price growth during the three-year
performance/deferral period averages 10% per year.
Basic salaries
In determining the level of basic salaries, the Committee gathers
data from a number of independent sources concerning the level of
salaries paid to senior executives performing comparable functions
within the largest 50 listed companies in the United Kingdom, with
an additional focus on leading United Kingdom and European
financial services companies. Salaries are reviewed annually.
When reviewing basic salaries, the Committee takes into
account market data and the senior executive’s performance. The
Company’s policy is to set basic salaries for competent performance
at the median level. Salaries are targeted towards the upper quartile
for those executives who display sustained superior performance.
Cash bonuses
Senior executives participate in a discretionary annual cash bonus
plan that provides for the payment of cash bonuses. For executive
directors, the bonus for “Target” performance is 35% of basic
salary and for achieving “Stretch” performance a payment of up to
50% can be made. 70% of the potential payment under the
plan is dependent upon financial targets. The remaining 30%
of the bonus is based upon the director’s attainment of personal
objectives.
For the executive directors, shared Group-wide objectives are based
on financial measures relevant to the business, including new
business contribution, combined operating ratio and operating
profit. For the Group Chief Executive and the Group Finance
Director, Group-wide targets are the relevant performance
measures for annual bonus purposes. For the other executive
directors, Group-wide targets represent about 40% of their overall
financial target, with the remainder represented by targets
pertaining to the business unit(s) for which they are responsible.
The Committee considers it important that senior executives hold
shares in the Company and a fundamental part of the annual
bonus plan is the requirement that a stated proportion of any cash
bonus awarded under the plan be taken in the form of shares
through the Deferred Bonus Plan. Executive directors are required
to defer 50%, and may elect to defer up to 100%, of their cash
bonus. In respect of bonuses deferred, participants are granted an
award of shares of equal value to the amount of cash bonus
deferred and this is matched on a “one for one” basis with a
further award of shares.
If a participant leaves service during the vesting period for reasons
of ill-health, retirement or redundancy, the matching shares are
released in full at the end of the vesting period. In all other cases,
the matching shares lapse. The shares granted under the plan are
held in trust and vest automatically after three years.
The Committee has considered carefully the suggestion of certain
institutional investors that the vesting of the matching awards
should be subject to the attainment of performance conditions.
The award of matching shares can only be made in relation to
bonuses actually earned, (i.e. the performance conditions attaching
to the annual bonus plan must have been met). The plan makes it
compulsory for participants to defer 50% of their bonus into
shares and encourages participants to invest the whole of their
bonus into shares, thereby strengthening further the alignment of
their interests with those of shareholders. It is felt that the
imposition of additional performance conditions would be
detrimental to achieving this. As a result of benchmarking the
Company’s remuneration package, the Committee is aware that
the maximum amount which a participant can earn under the
Company’s annual bonus plan, and hence defer (being 50% of
basic salary), is at the lower end of the market range. The
Committee believes that the deferred bonus plan is not excessive.
Long-term incentives
The Aviva Long Term Incentive Plan is a discretionary share plan
and it is the Committee’s policy to make an annual award of
shares to executive directors with a value of 100% of their basic
salary at the time the award is granted. All awards are made
subject to the achievement of stretching performance conditions –
70% of the award relating to Total Shareholder Return (TSR)
performance against a comparator group and 30% of the award
relating to Return on Capital Employed (ROCE) performance.
The awards vest after three years, but only to the extent that
the performance conditions are satisfied.
The performance conditions compare the TSR produced by the
Company over the performance period against the TSR of
companies in a chosen comparator group, and on the ROCE within
the Company. The Committee believes that this combination is the
most appropriate way of incentivising executives since it takes into
account both the total returns to shareholders and the Company’s
underlying performance. Achievement of median TSR performance
within this group triggers the vesting of 20% of the shares, which
rises to 70% if the Company’s performance is in the upper decile
of the comparator group. Recognising the Company’s position as
the largest provider of life and pension products to Europe, the
comparator group for the TSR part of the plan comprises 19
European financial services companies, namely – Abbey National,
AEGON, Allianz, AXA, Barclays, CNP Assurances, Ergo, Fortis,
HBOS, HSBC, ING, Legal & General, Lloyds TSB, Prudential, Royal
Bank of Scotland, Royal & Sun Alliance, Skandia, Swiss Life and
Zurich. The Committee believes that this is the group of
competitors against which Aviva’s relative performance is most
appropriately measured.
The other 30% of the award vests if the Company achieves a
given return, in excess of inflation, on ROCE over the three year
performance period. Awards under this performance condition will
begin to vest if the cumulative ROCE over the performance period
is 24% in excess of the rate of inflation, with the full 30% vesting
if the ROCE is 30%, or higher.
If the performance targets have not been met at all at the end of
the performance period, they will be retested at the end of five
years, the ROCE performance condition being adjusted accordingly,
(i.e. the cumulative ROCE would need to be at least 40% in excess
of the rate of inflation over the extended performance period for
any awards under that part of the plan to vest). The Committee is
aware that certain institutions are not in favour of performance
Directors’ remuneration report continued
36 Aviva plc
Annual report + accounts 2002
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50
100
150
200
250
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The relative value of the elements of executive
directors’ remuneration* (£’000)
Tar get Stretch
LTIP
Cash/deferred bonus
Basic pay