BT 2012 Annual Report Download - page 83

80 Governance
Reports of the Board Committees
Long-term share-based incentives
Incentive shares
BT operates a long-term ISP (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 2009 and 2010, 50% of awards are based on relative TSR, with
the other 50% based on a three-year cumulative adjusted free cash flow
measure. The use of an adjusted free cash flow measure for the ISP as well
as for the annual bonus reflects the importance of cash generation over
both the short and medium-term. For awards granted in June 2011, a
new measure for underlying revenue growth (excluding transit revenue)
was added to the plan, to reflect changing strategic priorities for the
group. The 2011 awards are therefore based 40% on relative TSR, 40%
on cumulative adjusted free cash flow, and 20% on underlying revenue
growth (excluding transit revenue) over a three-year performance period.
The performance measures for the awards to be granted in June 2012
will be the same as for those granted in 2011 (other than the use of a
normalised free cash flow measure to align with our outlook) with targets
calibrated for the three-year performance period from 2012. The ISP
2012 awards will be made at the same level as the 2011 awards.
The Committee believes that the free cash flow and revenue
performance measures are challenging, and the financial performance
necessary to achieve awards towards the upper end of the range for
each target, is stretching. Targets for threshold performance have been
established at above market consensus at the time set.
When we set the performance measures for the ISP 2009 awards, the
prior year reported cash flow was £737m. We established a three-
year cumulative threshold of £4bn – to be achieved before any shares
would vest – with a further £1bn performance range up to £5bn, at
which point all of the shares under the cash flow element of the award
would vest. The upper part of the range was considered to be extremely
stretching. We met the measure in full and achieved upper quartile TSR
performance (4th out of 25 companies) during the three-year period.
As a result the ISP 2009 awards vest in full.
TSR for these purposes was calculated by JPMorgan 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 telecoms 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 awards to be granted in June 2012
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 comparator group is the same for awards granted in June 2011.
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.
TSR vesting schedule for awards of incentive shares
granted in 2011
For awards made in June 2011, 40% is based on relative TSR, 40% on
a three-year cumulative adjusted free cash flow measure, and 20% on
underlying revenue growth (excluding transit revenue) over three years.
The following graph shows the potential vesting of awards granted in
2011 based on the TSR element.
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TSR ranking position
% of share award vesting
0%
10%
20%
30%
40%
0 5 10 15 20 25
Historic vesting for executive share plans
Performance conditions for the incentive shares are challenging as
demonstrated by the table below. Relative TSR has been the measure
for many years. This measure has been retained under the current
remuneration policy, although a free cash flow measure was added
for awards granted in 2009 and 2010, and in 2011 an additional
underlying revenue growth (excluding transit) measure was added.
The following table shows the vesting levels of BT’s incentive share
awards granted to executive directors since 2005.
Historic vesting of ISP
Year of grant Performance period
Incentive shares
percentage vesting
2005 2005-2008 25%
2006 2006-2009 0%
2007 2007-2010 0%
2008 2008-2011 0%
2009 2009-2012 100%
Average annual vesting 25%
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