RBS 2003 Annual Report Download - page 125

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Annual Report and Accounts 2003
Directors’ remuneration report
(150 per cent in the case of the Group Chief Executive),
although for exceptional performance, as measured by the
achievement of significant objectives, bonuses up to 200 per
cent of salary may be awarded.
Long-term incentives
The company provides long-term incentives in the form of
share options and share or share equivalent awards. Their
objective is to encourage the creation of value over the long-
term and to align the rewards of the executive directors with
the returns to shareholders.
Medium-term performance plan
The medium-term performance plan was approved by
shareholders in April 2001. Each executive director is eligible
for an annual award under the plan in the form of share or
share equivalent awards, within the overall limit of one and a
half times earnings. The awards made in 2003 were up to one
and a half times salary.
The plan is highly geared to the company’s relative
performance. All awards under the plan are subject to three-
year performance targets. First, the annual growth in the
company’s earnings per share (‘EPS’) must exceed the
annualised growth of the Retail Prices Index (‘RPI’) plus three
per cent. If this condition is satisfied, the company’s total
shareholder return (‘TSR’) is compared with the TSR of a
comparator group of certain companies in the financial
services sector, referred to below. Awards under the plan will
not vest if the company’s TSR is below the median of the
comparator group. Achievement of the EPS target and median
TSR performance against the comparator companies will result
in the vesting of up to 50 per cent of the award, increasing on
a sliding scale up to 100 per cent at upper quartile
performance and up to 200 per cent at upper decile
performance. This combination of EPS and TSR performance
targets measures the underlying financial performance of the
company and ensures a direct link between the value delivered
to shareholders and the levels of incentive payment.
The companies in the comparator group are Abbey National
plc; Aviva plc; Barclays PLC; Citigroup; HBOS plc; HSBC
Holdings plc; Legal & General Group plc; Lloyds TSB Group
plc; Prudential plc and Standard Chartered PLC. In choosing
the comparator group, it was recognised that while the
company has significant international business, the bulk of its
operations are UK-based. Consequently the comparator group
for the award in 2001 focused on the UK financial services
sector. In respect of grants made in 2002 and subsequent
years, the comparator group was reviewed and, following the
merger of Halifax with Bank of Scotland, Citigroup was added
to the group.
Options
The executive share option scheme was approved by share-
holders in January 1999. Each executive director is eligible for
the annual grant of an option, typically equal to 1.25 times
salary, over shares at the market value at date of grant. No
payment is made by the executive on the grant of an option
award.
All executive share options are subject to a performance
target, which is currently that the options are not exercisable
unless the growth in the company’s EPS over three years has
exceeded the growth in the RPI plus nine per cent. This EPS
performance target, which is consistent with market practice,
measures underlying financial performance and represents a
stretching long-term test of performance. For awards made in
2004 and in future, there will be no re-testing of the
performance condition. The condition is reviewed annually.
No previous awards have been subject to re-testing.