BT 2011 Annual Report Download - page 75

72
REPORT OF THE DIRECTORS REPORT ON DIRECTORS’ REMUNERATION
Incentive shares
The Chief Executive received an award of incentive shares with a value
equivalent to 2.5x salary (2010: 3x salary). Other executive directors
received awards with a value of 2x salary (2010: 2.5x salary).
The details of all the awards of incentive shares held by Ian
Livingston, Tony Chanmugam and Gavin Patterson at the end of the
2011 financial year are contained in the table on page 80. Awards
of incentive shares granted in 2011 are given in the table on
page 70.
Remuneration in 2012
During 2011 the Remuneration Committee reviewed the senior
executive remuneration package, taking into account the challenges
to the business, our strategic priorities, the need to ensure alignment
with shareholders’ interests and the other general principles on which
we base executive pay. In particular, as BT moves towards achieving
profitable growth, alongside a continuing focus on customer service
and cost transformation, the Committee decided to strengthen
incentives for long-term performance. As part of the review, we
conducted an extensive and helpful consultation with institutional
shareholders and representative bodies.
The Committee decided to implement the following changes in
2012:
•At present, incentive shares are based equally on relative total
shareholder return (TSR) and three-year free cash flow. We will
retain both measures, which are critical to delivering shareholder
value. In order to increase the alignment of pay with our focus on
long-term profitable growth, we will also introduce a further
measure, worth 20%, based on long-term revenue growth. The
remaining 80% will be split equally between TSR and free cash
flow.
•The new revenue growth measure is based on underlying
revenue excluding transit revenue as transit traffic is low-margin
and is significantly affected by reductions in regulatory mobile
termination rates which have no impact on the group’s
profitability.
•Our policy is to set measures for the incentive shares for free cash
flow and long-term revenue growth so that they are
appropriately stretching. The threshold performance level, which
must be achieved before shares vest, is established above market
expectations when targets are set and the maximum award is
only available for outstanding performance. The Committee has
decided that the revenue element of the award will begin to vest
only if revenue in 2014 is higher than the baseline of 2011. In
the face of a tough regulatory environment and intense
competition, the Committee believes that the targets they have
set for remuneration purposes are very challenging.
•In order to allow greater differentiation between individuals’
contribution to the company’s strategic priorities, we will
increase the weighting in the annual bonus on personal and role-
specific objectives aligned with our strategy. For the Chief
Executive and Group Finance Director, corporate performance
(EPS, free cash flow and customer service) will represent 75% of
the scorecard; personal and role-specific objectives aligned with
our strategy 15%, and ESG performance 10%. For the other
executive director, 60% will be linked to corporate objectives,
15% to business unit objectives, 15% to personal objectives and
10% to ESG performance.
• In order to strengthen the alignment with shareholders’ interests,
the customer service element of the annual bonus will only be
paid if the minimum EPS threshold is also achieved.
The Committee believes that the group performance targets for
2012 are very challenging.
The Committee has considered carefully the relationship of risk to
remuneration. The Committee is satisfied that this spread of
measurement criteria does not drive inappropriate and risky
behaviour and that they are aligned to shareholders’ interests.
Base salaries have also been reviewed and, where appropriate,
increased to bring them more closely towards, but still typically
below or around, mid-market levels in comparable companies. In
making these decisions, the Committee took account of the
position of all BT’s employees who will benefit from pay increases
and annual bonuses based on the company’s performance in 2011.
The structure of the annual bonus (cash and deferred shares) is
unchanged for 2012. The value of awards of incentive shares is also
unchanged for 2012.
No retention awards or share options will be granted.
Proportion of fixed and variable remuneration
The composition of each executive director’s performance-related
remuneration, excluding pension, is as follows:
aTarget remuneration comprises current base salary, on-target annual bonus and the expected value
of awards under the deferred bonus and incentive share plans.
bActual remuneration comprises base salary, actual cash bonus and the value received from deferred
shares and incentive shares (awards granted in 2007 and vested in 2010) during the financial year.
Long-term share-based incentives
Incentive shares
BT operates a long-term Incentive Share Plan (incentive shares),
based on performance over three years. Shares only vest if the
participant is still employed by BT and challenging performance
measures have been met. For awards granted in 2008*, the vesting
of awards was based entirely on TSR relative to a comparable group
of companies; in 2009 and 2010, 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-
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Ian Livingston
2012 target
composition
2011 actual
composition
21.1 26.3 52.6
35.5 56.4 8.1
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Tony Chanmugam
2012 target
composition
2011 actual
composition
26.7 26.7 46.6
43.3 52.0 4.7
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Gavin Patterson
2012 target
composition
2011 actual
composition
26.7 26.7 46.6
41.7 51.6 6.7
Fixed Variable cash Variable shares
a
a
a
b
b
b
* For the grant of share awards and options, references to 2008, 2009, etc., are to the calendar year
and not the financial year.
OVERVIEWBUSINESS REVIEWFINANCIAL REVIEWREPORT OF THE DIRECTORSFINANCIAL STATEMENTSADDITIONAL INFORMATION