BT 2004 Annual Report Download - page 60

Remuneration policy
This part of the Report on directors’ remuneration
is not subject to audit.
BT’s executive remuneration policy is to reward
employees competitively, taking into account
individual performance, company performance, market
comparisons and the competitive pressures in the
information and communications technology industry.
Base salaries are positioned around the mid-market,
with total direct compensation (basic salary, annual
bonus and the value of any long-term incentives) to be
at the upper quartile only for sustained and excellent
performance. There are no plans to change this policy.
A significant proportion of the total executive
remuneration package is linked to line of business and
corporate performance. Remuneration arrangements
and performance targets are kept under regular review
to achieve this. The Committee has decided to review
during the 2005 financial year the company’s current
arrangements for executive remuneration, including
the structure of the remuneration packages, their
constituent parts and their mix.
Where any significant changes are proposed to
executive remuneration, these will be discussed with
BT’s principal shareholders and the main
representative groups of the institutional shareholders.
(i) Packages
The remuneration package is made up of some or all of
the following:
Basic salary
Salaries are reviewed annually. Salary increases are
made only where the Committee believes that
adjustments are appropriate to reflect contribution,
increased responsibilities and/or market pressures.
Performance-related remuneration
Annual bonus and deferred bonus
The annual bonus plan is designed to reward the
achievement of results against set objectives.
For the 2004 financial year, on-target and
maximum (requiring truly exceptional performance)
bonus levels for executive directors and OC members,
as a percentage of salary, were 50% and 100%
(increased from 75% at the beginning of the 2003
financial year to reward the achievement of
increasingly stretching targets). The on-target and
maximum bonus levels for the Chief Executive were
85% and 130%, respectively, under his service
agreement. Under his contract, the Chairman is not
entitled to a bonus.
Targets set at the beginning of the 2004 financial
year for each objective, to which specific weights were
attached, were based on earnings per share and free
cash flow, each representing 40% of the potential
bonus, and customer satisfaction representing 20% of
the potential bonus. For the three line of business
CEO’s, 75% of the potential bonus was linked to BT’s
corporate performance and 25% to the performance of
their respective line of business. For all other relevant
executives, bonuses are based solely on corporate
performance.
The Committee retains the flexibility to enhance or
reduce bonus awards in exceptional circumstances.
Awards in the form of BT shares, granted under
the Deferred Bonus Plan (DBP), are directly linked to
the value of annual bonuses and hence to
performance. The shares are held in trust and
transferred to the executive if still employed by the
company in three years’ time. There are no additional
performance measures for the vesting of DBP awards.
The DBP rewards performance and acts as a retention
measure.
Awards for the senior management team are
equivalent in value to 50% of gross annual bonus.
The awards under the DBP held by Ben
Verwaayen, Pierre Danon, Andy Green, Ian Livingston
and Paul Reynolds at the end of the 2004 financial
year are contained in the table on page 69. The
amounts are in note e on page 65.
Long-term incentives
The BT Equity Incentive Portfolio (the Portfolio) is
designed to ensure that equity participation is a
significant part of overall remuneration. It comprises
three elements: share options, incentive shares and
retention shares. Share options were the main element
of equity participation in the 2004 financial year.
Retention shares are used as a recruitment and
retention tool.
Under his service agreement, the Chairman is not
entitled to participate in the annual operation of the
Portfolio.
Generally, awards vest and options become
exercisable only if a predetermined performance target
has been achieved. Normally, the performance
measure for outstanding awards and options is TSR
(total shareholder return) compared with the FTSE 100
companies. TSR links the reward given to directors
with the performance of BT against the shares of other
major UK companies.
For 1999, 2000, 2001 and 2003 awards, the base
price at the beginning of the performance period has
been calculated by averaging the BT share price over
the six months to 31 March in the year of award. For
the 2002 awards, the period was from 19 November
2001 (the date of the mmO
2
demerger) to 31 March
2002. The end price is the average of the share price
over the six months to the end of the performance
period. The end price is adjusted for all capital actions
and dividend payments that occur during the
performance periods.
Share options
The price at which shares may be acquired under the
Global Share Option Plan (GSOP) is the market price at
the date of grant. Other than for new recruits, the size
of option grant is based on corporate and individual
performance, and market relativity.
Options granted will be exercisable in three years,
subject to the performance target being met. The
Committee would not normally expect the initial value
of annual grants of options, based on the market price
of a BT share, to exceed three times salary.
BT Annual Report and Form 20-F 200459 Report on directors’ remuneration