3) REMUNERATION PACKAGE FOR EXECUTIVE DIRECTORS.


The remuneration of the Group’s executive directors comprises salary, participation in an annual bonus plan (paid partly in cash and partly deferred via the Share Bonus Plan (SBP)) and the Group’s Performance Share Plan (PSP), which is a long-term incentive plan, plus pension and ancillary benefits.

When setting remuneration for the executive directors, the Committee takes into account the market sector, function, job size, and individual and Company performance. In addition, the pay, employment conditions and salary budgets set for other employees in the Company are taken into consideration. Data is obtained from a variety of independent sources (including FIT, Hewitt New Bridge Street, HAY Group and Towers Watson). Where possible, the practice is to use at least two independent sources of information for each individual role.

The chart illustrates that a significant proportion of both target and stretch pay is performance-related and paid in shares. The proportion is the same for each director and will remain the same for 2012.

Relative split of salary, bonus and PSP for executive directors at target and stretch performance (%) in line with current policy and for 2012 [Stretch performance: 24% Salary, 29% Bonus, 47% PSP vesting*]; [Target performance: 45% Salary, 33% Bonus, 22% PSP vesting*] * Share price growth is ignored. (bar chart)

Read a textual description of the chart

2011 strategic objectives

Executive directors’ bonuses were based on a number of targets. For 2011 these were weighted as follows:

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Name

Group KPIs

Other financial targets

Other strategic targets

Tim Breedon

50%

20%

30%

Nigel Wilson

50%

20%

30%

John Pollock

40%

30%

30%

Mark Gregory

40%

30%

30%

These weightings will continue for 2012.

Broad explanation of targets
Group Key Performance Indicators (KPIs)

  • Common to all executive directors, as set out below
  • The [TSR] KPI is addressed through the Performance Share Plan (PSP).

Other financial targets

  • Key divisional metrics
  • Managing capital requirements.

Other strategic targets

  • Building a diversified business
  • Delivering a positive customer experience
  • Building a high expectation culture
  • Risk management
  • Improving products and services.

The results for the 2010 and 2011 Group KPIs are shown below and in more detail on in the Our results section.

Further details on the other specific targets are commercially sensitive. The Committee will continue to monitor best practice disclosures and any changes to disclosure requirements that result from the Department for Business Innovation and Skills’ (BIS) consultation papers.

The headings below set out the key features of executive directors’ remuneration, including each element’s purpose, related policy, explanation of how it operates and decisions made.

KEY FEATURES OF EXECUTIVE DIRECTORS’ REMUNERATION

BASE SALARY

Purpose

  • Help recruit and retain key employees.
  • Reflect the individual’s experience and role within the Group.

Policy

  • To pay at around the mid-market range relative to the FTSE 100, with particular regard to other relevant financial institutions.
  • Regard given to individual skills and experience.
  • In specific circumstances (for example, a new appointment) may set salaries below mid-market range, with a view to reaching mid-market range within two to three years provided the individual progresses into the role.
  • Increases in salary for executive directors broadly follow the salary budgets for the rest of the organisation, unless, for example, salary progression to mid-market range is agreed as referred to above or there is significant movement in the mid-market ranges.

HOW THIS APPLIES TO OTHER EMPLOYEES

  • The same principles apply to all employees.

Summary of how it operates

  • Paid monthly in cash.
  • Normally reviewed by the Committee annually and fixed for the 12 months commencing 1 March.

What did we do?

  • For 2012, increases for the executive directors are within with the budget set for the general management pay review below Board level (2.25%) and our policy of salary progression towards mid-market range for Mark Gregory.
  • The base salaries for the executive directors with effect from 1 March 2012 will be as follows:
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Name

Salary for 2012

% Increase 2012 over 2011

% Increase 2011 over 2010

Tim Breedon

£820,000

1.5%

2.9%

Nigel Wilson

£558,500

1.6%

2.6%

John Pollock

£420,000

2.0%

2.9%

Mark Gregory

£418,000

4.5%

11.1%

Total increases over 2011 equate to 2.16%.

ANNUAL BONUS

Purpose

  • Incentivise executives to achieve specific, predetermined goals during a one-year period.
  • Reward ongoing stewardship and contribution to core values.
  • Deferred proportion of bonus, awarded in shares, provides a retention element.

Policy

  • Maximum bonus potential set by reference to market comparators (currently 125% of base salary).
  • On-target bonus of 75% of base salary (60% of maximum of 125% of base salary) for all executive directors.
  • Percentage of bonus deferred and awarded in shares.
  • For 2012 there is no change to the target or maximum bonus potential.

HOW THIS APPLIES TO OTHER EMPLOYEES

  • The majority of employees have a discretionary bonus scheme based on individual performance against objectives. For the management populations and above, 35% of this bonus is deferred into shares. There are some bespoke bonus schemes, where business appropriate, but the Remuneration Committee has ultimate discretion over all bonus plans.
  • Separate plans operate within LGIM consistent with industry practice.

Summary of how it operates

  • In setting bonus targets, the Committee seeks to link targets to areas of the business in which the executive has particular influence and responsibility, while also seeking to maintain a keen team ethos. All executive directors have objectives related to Group key performance indicators (KPIs), plus individual (where relevant) divisional and strategic targets. The objectives also embrace the importance of customer care, employee engagement and Company culture and values.
  • Bonus result is determined by the Committee after the year end, based on performance against targets.
  • Normally, 62.5% of the bonus is paid in cash and 37.5% is paid in deferred shares, subject to continued employment, under the Share Bonus Plan (SBP) to be held for three years.
  • The deferred element may be subject to forfeiture if the performance which led to a bonus being paid is found to be incorrect or in the event of personal misconduct.
  • 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 in the Remuneration policies section.

What did we do?

  • The breakdown of the executive directors’ targets are shown above.
  • For 2011, bonuses of between 77.1% and 114.6% of base salary were awarded.
  • This reflected superior performance against the common financial targets consistent with the overall assessment of the Company’s performance as shown below.
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Group KPIs

2011

2010

Operating profit before tax

£1,056m

£1,002m

[Return on Equity]

14.5%

18.2%

[IGD surplus]

£3.8bn

£3.7bn

[EEV operating profit]

£1,469m

£1,224m

[Net cash generation]

£846m

£760m

[EEV per share]

147p

132p

The Committee carefully assessed the performance against other financial and strategic targets to determine the associated bonus.

  • The total bonus that resulted from the delivery of these objectives was reviewed by the Committee based on its view of the executive’s overall performance and regulatory compliance. In reviewing results, approach to risk (including environmental, social or governance (‘ESG’) risks) is monitored.
  • For 2012 there is no change to the measures or the weighting between them.

PERFORMANCE SHARE PLAN

Purpose

  • Incentivise executives to achieve superior returns to shareholders.
  • Align interests of executives and shareholders through building a shareholding.
  • Retain key executives over a three-year performance period.

Policy

  • Awards of conditional shares/nil cost options made annually, with vesting dependent on relative total shareholder return (TSR) measured over the three subsequent years.
  • Executive directors receive annual grants of up to 200% of salary.
  • The Committee reviews the quantum of awards made each year to ensure that it is in line with the market.
  • When making awards, the Committee will also consider wider factors such as Company performance in determining whether to grant at this normal policy level.
  • The PSP was approved by shareholders in 2004. 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.

HOW THIS APPLIES TO OTHER EMPLOYEES

  • The PSP is awarded to approximately 30 employees, mainly comprising the Leadership Team.

Summary of how it operates

  • The number of shares that vest is dependent on Legal & General’s relative TSR performance over a three-year period as follows:
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Legal & General’s TSR relative to the comparator group

Percentage of
award which vests

Below median

0%

Median

25%

Between median and 20th percentile

25%-100%

20th percentile or above

100%

  • Vesting condition for half of the award measures the Group’s TSR versus the FTSE 100. Vesting condition for the other half measures TSR versus the insurance constituents in the FTSEurofirst 300 plus any FTSE 350 Life Insurance companies not in the FTSEurofirst 300.
  • The two conditions are measured independently.
  • Performance against [TSR] conditions is independently reviewed by FIT Remuneration Consultants LLP.
  • The Committee reviews the measures prior to each award. It continues to believe that the current measures and targets remain appropriate. They endorse consistency in the remuneration policy and provide a clear alignment of interests with shareholders. In addition they ensure 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 Remuneration Committee will also assess whether the TSR out-turn is reflective of the underlying financial performance of the Company and may scale back vesting. The Committee only has discretion to reduce the level of award and may not increase it. The parameters which the Committee uses in making this assessment include, but are not limited to, market share, partnerships entered into and maintained, cost constraint, capital management, risk and shareholder perception.

What did we do?

  • In the year, the 2008 award vested as to 16.6% of the maximum award. This reflected the TSR outcome against the FTSE100 and bespoke comparator group shown in the Other shareholding information section.
  • During 2011 outstanding (non-vested) awards were restructured to nil cost options to permit exercise of the option at any point between vesting and the fifth anniversary of grant. There has been no amendment to the original performance conditions or performance period as a result of this change. All future awards will be granted as conditional nil cost options.
  • After due consideration of business performance and share price, the Remuneration Committee decided that for 2012 executive directors should be granted awards of performance shares equivalent to 200% of 2012 salaries. The maximum award value is shown below:

    Tim Breedon: £1,640,000
    Nigel Wilson: £1,117,000
    John Pollock: £840,000
    Mark Gregory: £836,000
  • In addition, the Committee approved grants of performance shares to the Leadership Group (approximately 30 employees). These grants ranged from 80% to 160% of salary.

PENSIONS AND BENEFITS

Purpose

  • Reward sustained contribution.

Policy

  • Provide competitive post-retirement benefits.
  • No compensation for public policy or tax changes.
  • Salary is the only element of pensionable remuneration.

HOW THIS APPLIES TO OTHER EMPLOYEES

  • There are no special terms for executive directors and they follow the same policies as for all employees.

Summary of how it operates

  • Participation in a Group pension scheme.
  • Accrue benefits according to length of service up to retirement.
  • From 2009, increases in pensionable salary for the defined benefit pension plan have been limited to a maximum of 2.5% each year.
  • New executive directors receive 15% of base salary into the defined contribution pension plan (they contribute 5%).
  • Cash alternative in line with the defined contribution levels for executive directors opting for enhanced or fixed protection above the lifetime allowance or for benefits in excess of the £50,000 annual limit.
  • Normal benefits available to senior managers including car allowance and medical insurance. Legal & General products can be acquired by executive directors on the terms available to other members of staff.

What did we do?

  • No changes.

SHARE OWNERSHIP GUIDELINES

Purpose

  • To align the interests of executive directors and shareholders.

Policy

  • The Group Chief Executive is required to build and maintain a shareholding of 200% of base salary and, for other executive directors, 100% of base salary.

HOW THIS APPLIES TO OTHER EMPLOYEES

  • Members of the broader Leadership Team are encouraged to hold 50% of their salary as shares.
  • There is an Employee Share Plan and Savings-Related Share Option Scheme both approved by HMRC. Depending on Group performance, Group Performance Shares (Free shares) may be awarded once per year.

Summary of how it operates

  • Executives are expected to build a shareholding through the vesting of shares under the Group’s share incentive plans. Existing shareholdings and shares acquired in the market are also taken into account.
  • Although share ownership guidelines are not contractually binding, the Committee retains the discretion to withhold future grants under the PSP if executives do not comply with the guidelines.

What did we do?

  • As at 31 December 2011, the executive directors’ share ownership against the guidelines were:
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Director

Actual share ownership as a % of salary: vested shares

Actual share ownership as a % of salary:
vested and unvested shares

Guideline on share ownership as a % of salary

Guideline met

Excludes conditional shares.

Tim Breedon

238.0%

317.7%

200%

Yes

Nigel Wilson

190.0%

333.3%

100%

Yes

John Pollock

144.9%

207.5%

100%

Yes

Mark Gregory

122.2%

194.8%

100%

Yes

Share price used at 30 December 2011 of 102.8p.

The Bonus Steering Committee (BSC), the Chief Risk Officer and the Group Director of Regulatory Risk and Compliance play key roles in the process of both setting reward structures and evaluating whether achievement of objectives and any payment from bonus plans have taken into account the overall risk profile of the Company. Their roles are set out in more detail below.

BONUS STEERING COMMITTEE

Reporting to the Remuneration Committee, the BSC has continued to review and ‘challenge’ all bonus schemes on a regular basis to ensure they support business strategy and do not encourage any inappropriate risk taking and it has now become embedded in our governance procedures. Its terms of reference are reviewed and agreed by the Remuneration Committee and its members include the Group HR Director and Group Head of Reward and Executive Remuneration as well as the Group Remuneration Team, Business Heads of HR, the Chief Risk Officer and Group Director of Regulatory Risk and Compliance. Members of the businesses also attend as necessary to provide support or provide context for any remuneration proposals. Bonus schemes must be agreed by the BSC prior to submission to the Remuneration Committee which retains overall discretion and approval.

ROLE OF THE CHIEF RISK OFFICER AND GROUP DIRECTOR OF REGULATORY RISK AND
COMPLIANCE

The Remuneration Committee also works closely with the Chief Risk Officer (CRO) and Group Director of Regulatory Risk and Compliance in relation to remuneration proposals. In particular, the Group Director of Regulatory Risk and Compliance reports to the Committee on an annual basis regarding payment of bonus schemes for the year and provides input into how those schemes operate for the following year. She confirms whether any risks have been taken outside of pre-agreed parameters that may lead the Committee to consider whether it should impact the payment of bonus schemes and confirms that all plans for the following year meet business objectives without encouraging undue risk. The CRO specifically looks at the overall risk profile of the Company and whether executive directors have achieved objectives within the Company’s accepted risk appetite. She also reviews the executive directors’ objectives for the forthcoming year to ensure they are in line with the risk parameters.

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