Share Bonus Plan (SBP)
As stated above, 37.5% of any bonus earned is normally deferred into shares under the SBP, under which conditional shares are awarded and held in a trust for three years. The release of shares is not subject to further performance conditions; however, executives are normally required to remain in employment during the three-year vesting period. As the shares have been earned prior to award, any dividends occurring on these shares are paid to the executives during the vesting period. The value of the shares awarded to directors is reported in the year of performance and shown in the Directors’ Remuneration table.
From 2009, should the performance which led to the payment of a bonus subsequently be found to be misstated, the Committee will now have discretion to withhold some or all of the SBP awards paid to executive directors relating to the relevant year’s performance.
Performance Share Plan (PSP)
Executive directors are entitled to participate in the Group’s PSP. In March 2007 the Committee approved the introduction of a specific long term incentive plan for LGIM senior executives (none of whom are executive directors). The PSP remains the sole long term incentive arrangement for all other senior executives. The PSP was approved by shareholders in 2004.
Under the PSP, awards of shares are made to top managers. The Committee reviews the quantum of awards made each year to ensure that it is in line with the market. The maximum annual award possible in 2009 remains at 200% of salary, and it is generally the Committee’s policy to make awards of this level to executive directors annually. However, when making awards, it will also consider wider factors such as corporate performance in determining whether to grant at this normal policy level. In view of the exceptional current economic and financial situation, the Committee has decided to reduce the size of awards for 2009 to 150% of salary.
The number of shares that vest is dependent on Legal & General’s relative TSR performance over a three-year period. If the TSR is at median against the relevant comparator group, then one-quarter of the shares subject to that measure will vest and be transferred to the executives. They will receive the maximum number of shares if Legal & General is ranked at the 20th percentile position or above at the end of the three-year period, with the amounts reducing on a pro rata basis between 20th percentile position and median. The shares will lapse if Legal & General’s TSR is ranked below median against the relevant comparator group at the end of the period.
Until 2007, the FTSE 100 was used to measure relative TSR performance. For the awards made in 2008 onwards, two distinct performance measures are used: half is measured relative to the FTSE 100 constituents (as at the grant date), with the balance being measured against the Insurance constituents of the Euro Top 300 plus any FTSE 350 Life Insurers not in the Euro Top 300. Performance under the two elements will be assessed independently.
The Committee considers that the measures and targets remain appropriate as it endorses consistency in remuneration policy, it provides a clear alignment of interests with shareholders and it ensures a degree of risk management as TSR (through share price) reflects both underlying financial performance and the market’s assessment of the quality and sustainability of those earnings.
The Committee is conscious that the FSA has recently challenged the use of TSR as a performance measure and will consider this further. However, the initial view of the Committee is that TSR remains the clearest means of providing long term alignment between executives and shareholders, it has to date been preferred by the majority of our investors and it remains the Company’s preferred measure for assessing companies in which it invests. Therefore, the Committee does not wish to abandon an established measure without further consideration and dialogue with the FSA.
The TSR performance conditions are independently reviewed by HNBS.
Additionally, the Committee assesses whether the underlying performance of the Company is reflective of the TSR out-turn. In exceptional circumstances, the Committee may exercise its discretion to scale back the vesting of awards if it was felt that the Company’s financial performance did not justify the level of vesting. The parameters which the Committee uses in making this assessment include market share, partnerships gained and maintained, cost constraint, capital management and shareholder perception.
Dilution Limits
The PSP and the SBP operate with market-purchased shares that are held in an Employee Benefit Trust. The Company’s all-employee plans may be satisfied using either new-issue or market-purchased shares.
The Company’s all-employee plans and the now-closed Executive Share Option Scheme operate within the ABI’s dilution limit of 5% in ten years for executive schemes and all its plans operate within the 10% in ten years limit for all schemes. As at 31 December 2008, the Company had 4.41% share capital available under the 5% in ten years limit, and 8.91% share capital available under the 10% in ten years limit.
29,297,488 shares are currently held by the Employee Benefit Trust to hedge outstanding awards of 25,983,799 for the PSP and SBP. This means that the Trust holds 112% of outstanding awards.