BT 2007 Annual Report Download - page 58

wave services, generated mainly from networked IT services and
broadband, have been developed to provide revenue growth. To
ensure that key people are both recruited and retained, base
salaries are positioned within a range, consistent with prevailing
market rates, with the potential for total direct compensation
(basic salary, annual bonus – cash and deferred shares – and the
expected value of any long-term incentives) to deliver upper
quartile remuneration for sustained and excellent performance.
A significant proportion of the total executive remuneration
package is variable and is linked to corporate performance.
Remuneration arrangements and performance targets are kept
under regular review to achieve this.
As members of the Board, all Committee members receive
and review an annual corporate social responsibility report
detailing the way in which the company manages social, ethical
and environmental issues. The Committee is satisfied that the
structure for the remuneration of the executive directors and
senior executives does not raise environmental, social and
governance risks by inadvertently motivating irresponsible
behaviour.
(ii) Packages and financial year 2006/07 operation
The remuneration package is made up of some or all of the
following:
Basic salary
Salaries are reviewed annually, but increases are made only
where the Committee believes that adjustments are appropriate
to reflect contribution, increased responsibilities and/or market
pressures. No base pay changes were proposed or made for
executive directors in 2006/07, save that the Committee agreed
increases in annual base salary effective from 1 June 2006 for
Ben Verwaayen and Hanif Lalani to bring their remuneration
more into line with the market.
Performance-related remuneration
Annual bonus
The annual bonus plan is designed to reward the achievement
of results against set objectives.
For the financial year 2006/07, on-target and maximum
(requiring truly exceptional performance) bonus levels for
executive directors, as a percentage of salary, were set at 60%
and 110% respectively. In addition, executive directors are
entitled to a bonus in the form of deferred shares with a value
of 75% of the cash bonus.
The Chief Executive has a target cash bonus of 85% of salary
and a maximum cash bonus, for exceptional performance, of
130% of salary. He is also entitled to an award of deferred
shares, equal to two-times his cash bonus, subject to an overall
cap of three-times salary (cash plus deferred shares) in any one
year.
Under his contract, the Chairman is not entitled to a bonus.
Corporate performance targets, set at the beginning of the
financial year 2006/07, were weighted such that 40% of the
bonus potential was based on EPS (earnings per share), 40% on
free cash flow and 20% on customer satisfaction. Delivery
against these operational targets is a key determinant of success
and supports BT’s strategy for transformation and growth. The
Committee agreed that in calculating earnings per share for
purposes of the annual bonus, volatile items which would be
reported under IFRS should be excluded. The impact of market
movements in foreign exchange and financial instruments plus
the net finance income relating to the group’s pension liabilities
were excluded from the target.
For the executive directors and other relevant senior executives,
(but not Openreach executives, see ‘Openreach’ on page 59) the
importance of meeting these operational targets is recognised by
linking 100% of their potential bonus to BT’s corporate
performance. The Committee retains the flexibility to enhance or
reduce bonus awards in exceptional circumstances.
Payment against corporate targets in the financial year 2006/07
Earnings per
share –
weighting
40% of target
Free cash
flow –
weighting
40% of target
Customer
satisfaction –
weighting
20% of target
Total % of
target
80 80 13 173
(Note – threshold reflects 50% of target; target is 100%; and stretch is 200%)
The deferred share element of the annual bonus is paid under
the DBP (Deferred Bonus Plan). The shares vest and are
transferred to the executive after three years if still employed by
the company. There are no additional performance measures for
the vesting of deferred share awards. The Committee considers
that deferring a part of the annual bonus in this way also acts as
a retention measure and contributes to aligning management
with long-term shareholder interests.
The deferred awards for Ben Verwaayen, Andy Green, Hanif
Lalani, Ian Livingston and Paul Reynolds at the end of the
financial year 2006/07, and for Franc¸ois Barrault on 24 April
2007 when he was appointed as a director, are contained in the
table on page 67. The initial values of the awards to be granted
in respect of the financial year 2006/07 are given in the table
on page 63.
Long-term incentives
The BT Equity Incentive Portfolio (the Portfolio) is designed to
ensure that equity participation is an important part of total
remuneration and that overall directors’ remuneration is aligned
with shareholders’ interests. It comprises three elements: share
options, incentive shares and retention shares. Incentive shares
were used for equity participation in the financial year 2006/07.
Retention shares are used principally as a recruitment or
retention tool. No options were granted in the financial year
2006/07.
Under his service agreement, the Chairman is not entitled to
receive annual grants of incentive awards or options.
Normally, awards vest and options become exercisable only if
a predetermined performance target has been achieved. The
performance measure for outstanding awards and options is
total shareholder return (TSR), calculated on a common currency
basis and compared with a relevant basket of companies. TSR
for these purposes was calculated by the law firm, Allen &
Overy. TSR links the reward given to directors with the
performance of BT against the shares of other major companies.
For grants in the financial years 2002/03 and 2003/04, the
comparator group was the FTSE 100 at 1 April in each year. For
grants in the financial year 2004/05, 2005/06 and 2006/07,
TSR was measured against a group of companies from the
European Telecom Sector. This comparator group was chosen
because the companies face similar market sector challenges to
BT and are within the sector in which BT competes for capital.
BT Group plc Annual Report & Form 20-F 57
Report of the Directors Governance