BT 2010 Annual Report Download - page 71

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69BT GROUP PLC ANNUAL REPORT & FORM 20-F
ADDITIONAL INFORMATION FINANCIAL STATEMENTS REPORT OF THE DIRECTORS REVIEW OF THE YEAR OVERVIEW
Long-term share-based incentives
Incentive shares
BT operates a long-term Incentive Share Plan (ISP), based on
performance over three years. Shares only vest if the participant is
still employed by BT and challenging performance measures have
been met. In 2007/8 and 2008/9, the vesting of awards was
entirely based on Total Shareholder Return (TSR) relative to a
comparable group of companies; for 2009/10 and 2010/11, 50%
of awards are based on relative TSR with the balance based on a
three-year cumulative free cash flow measure. The use of a free
cash flow measure for the long-term incentive plan as well as the
annual bonus reflects the importance of cash generation.
TSR for these purposes was calculated by J.P.Morgan Cazenove.
TSR links the reward given to directors with the performance of BT
against other major companies. TSR is measured against a
comparator group which contains European telecommunications
companies and companies which are either similar in size or market
capitalisation and/or have a similar business mix and spread to BT.
The TSR comparator group for 2010/11 is the same as last year
(with the substitution of Cable & Wireless Worldwide for Cable &
Wireless and TalkTalk for Carphone Warehouse) and comprises the
following companies:
Accenture France Telecom Telecom Italia
AT & T Hellenic Telecom Telefónica
Belgacom IBM Telekom Austria
BSkyB National Grid Telenor
BT Group Portugal Telecom TeliaSonera
Cable & Wireless Worldwide Royal KPN Verizon
Cap Gemini Swisscom Virgin Media
Centrica TalkTalk Vodafone
Deutsche Telekom
The TSR for a company is calculated by comparing the return index
(RI) at the beginning of the performance period with the RI at the
end of the period. The RI is the TSR value of a company measured
on a daily basis, as tracked by independent analysts, Datastream. It
uses the official closing prices for a company’s shares, adjusted for
all capital actions and dividends paid. The initial RI is determined by
calculating the average RI value taken daily over the three months
prior to the beginning of the performance period; and the end
value is determined by calculating the average RI over the three
months up to the end of the performance period. This mitigates the
effects of share price volatility. A positive change between the
initial and end values indicates growth in TSR.
At 31 March 2010, the TSR for the 2007/08 awards was at
14th position against the comparator group of 15 companies. As a
result, none of the shares will vest and all of the share awards have
lapsed.
TSR vesting schedule for ISP awards granted in 2009/10 and
2010/11
Relative TSR over 3 years % of share award vesting
Below median Nil
Median 12.5%
Between median and upper quartile Between 12.5% and 50% on
straight line basis
Upper quartile 50%
The remaining 50% of the ISP awards are based on a three-year
cumulative free cash flow, set at a level considered by the
Committee, and confirmed by its independent adviser, to be at least
as challenging as the previous measure. For awards granted in
2009/10, performance is assessed against a range of cumulative cash
flow measures. 25% of the relevant part of the award will vest for
performance at the lower end of the range, increasing on a straight
line basis, such that 100% of the relevant part of the award will vest
for performance at the upper end of the range. At 31 March 2010,
the performance for the awards granted in 2009/10 was at the
upper end of the range.
The threshold level for vesting for the free cash flow measure for
awards to be made in 2010/11 has been set above market
expectations prevailing when the performance conditions were set;
the range between threshold and maximum vesting is £1bn.
The details of ISP awards held by Ian Livingston, Tony
Chanmugam, Gavin Patterson and Hanif Lalani at the end of the
2009/10 financial year are contained in the table on page 76.
Clawback
The rules of each of the executive share plans provide for a
clawback of unvested awards in circumstances where it becomes
apparent that there was a misjudgement of the basis on which the
award was made.
In addition to the ISP, the BT Equity Incentive Portfolio includes
the Retention Share Plan (RSP) and the Global Share Option Plan
(GSOP).
Retention shares
RSP awards are used by exception only and principally as a recruitment
or retention tool. As a result, shares currently under award are not
generally linked to a corporate performance target. The length of the
retention period before awards vest is flexible, although this would
normally be three years unless the Committee agrees otherwise. The
shares are transferred at the end of the specified period if the individual
is still employed by BT and any performance conditions are met. No RSP
awards were made to executive directors, but three awards were
granted to other senior executives, in 2009/10.
Share options
No share options were awarded under the GSOP in 2009/10 and
none have been awarded since 2004/05.
Details of options held by directors at the end of 2009/10 are
contained in the table on page 75.
Other share plans
The Chairman and executive directors may participate in BT’s
all-employee share plans, the Employee Sharesave Scheme,
Employee Share Investment Plan and Allshare International, on the
same basis as other employees. Details of these plans are disclosed
in note 30 to the consolidated financial statements.
Openreach
In the Undertakings given to Ofcom on 22 September 2005, BT
agreed that the incentive elements of the remuneration of
executives within Openreach should be linked to Openreach
performance rather than BT targets or share price. These incentives
cannot be provided by way of BT shares.
As a result, separate arrangements were put in place for
Openreach executives in 2005/06. The annual bonus is linked solely
to Openreach targets, and long-term incentives are paid in cash
instead of shares. However, payment of bonuses in Openreach is
subject to overall affordability within BT Group.
Openreach executives participate in the BT all-employee share
plans on the same terms as other BT employees.
None of the executive directors participates in the Openreach
incentive plans.
REPORT OF THE DIRECTORS REPORT ON DIRECTORS’ REMUNERATION