Dear shareholder
I am pleased to present the Remuneration Committee’s report on directors’ remuneration for 2009, the forthcoming financial year and, subject to ongoing review, subsequent years.
The Committee has reviewed all of the Company’s key remuneration policies in the light of the draft code of practice issued by the [FSA], the Walker Review and other publications and guidance from the [ABI], [NAPF] and RiskMetrics. The review confirmed that current arrangements for the overall structure of remuneration for the executive directors remains largely appropriate. However, during 2010, we will continue to review the shape of the directors’ remuneration to ensure it remains competitive and continues to be fit for purpose with a view to any appropriate changes being made for 2011.
Last year the Committee decided to freeze the salaries for the executive directors and senior management except to reflect promotions, awarding no bonuses to the executive directors and reducing Performance Share Plan (PSP) awards for the executive directors from the normal policy level of 200% of salary to 150%.
The Committee continues to take a cautious position and does not feel it appropriate to change the basic shape of the remuneration framework in current economic conditions. Accordingly, the Committee envisages continuing within this basic framework in 2010 but with a return to pre-2009 incentive potential, reflecting the greater stability in the market.
Salaries have been reviewed and adjusted in line with the budget agreed for senior management below Board level (around 2%) or in line with our policy of progression towards mid-market where appropriate. Under the annual bonus plan, bonuses of between 40% and 80% of the maximum potential (125%) were awarded to the executive directors. [PSP] awards at the normal level of 200% of salary were also agreed for 2010.
The Committee takes seriously the issue of balancing risk and reward, an area that has received much scrutiny by regulatory authorities. During 2009, the Committee commissioned a detailed internal review of all bonus plans operating below Board level to ensure that the schemes did not expose the Company to any excessive risk and were appropriately managed. The review determined that the schemes were broadly appropriate in terms of their application. To ensure sound future governance, a Bonus Steering Committee (BSC) has been established to review any proposed new schemes and any changes to existing schemes below Board level to ensure they support business strategy and do not encourage any inappropriate risk taking. Scheme metrics, the quantum of potential award and eligibility to participate (in relation to participants below Board level) will also be reviewed to ensure they continue to be appropriate. The BSC will report to the Remuneration Committee. The Remuneration Committee retains ultimate approval for all bonus plans across the Company and has final discretion as to how they are applied.
The Committee also reviewed its current remuneration structure in relation to tax changes outlined in the April 2009 Budget. The Committee aims to ensure that its remuneration policies are appropriate in light of market conditions, legislation and are perceived as valuable to employees. The Committee agreed to consider the use of approved and unapproved nil cost options as an alternative to deferred shares.
A resolution to vote for this Directors’ Remuneration Report will be put to the Annual General Meeting (AGM). I hope that you will support this resolution.
Sir David Walker
Chairman of the Remuneration Committee
