RBS 2004 Annual Report Download - page 127

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Annual Report and Accounts 2004
Directors’ remuneration report
Governance
Short-term annual incentives
These typically focus from year to year on the delivery of a
combination of appropriate Group and individual financial and
operational targets approved by the Remuneration Committee.
Individual UK-based executive directors normally have a
maximum annual bonus potential of one times salary (one
and a half times in the case of the Group Chief Executive),
although for exceptional performance, as measured by the
achievement of significant objectives, bonuses of up to two
times 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. Directors are encouraged to hold shares in the
company and a culture of voluntary shareholding has been
fostered, which has resulted in a number of executive directors
building up substantial shareholdings over time.
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. Whilst the rules of the plan allow
grants of awards of up to one and a half times earnings, the
Remuneration Committee has adopted a policy of granting
awards based on a multiple of salary. Normally awards are
made at one times salary with one and a half times salary
being granted in the case of the Group Chief Executive. No
changes will be made to this policy without prior consultation
with shareholders.
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 vesting of 25 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. Vesting at 200
per cent can only occur if the company achieves a TSR
ranking at 1st position in the comparator group and exceeds
the TSR of the 2nd placed comparator company by at least
34%.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.
For awards made since 2002, 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. Following the takeover of Abbey National plc
by Banco Santander Central Hispano SA (‘BSCH’) in November
2004, Abbey National plc has been replaced by BSCH in the
comparator group for awards made from 2003 onwards.
Options
The executive share option scheme was approved by
shareholders in January 1999. Each executive director is
eligible for the annual grant of an option, typically of one and a
quarter times salary with an upper maximum in appropriate
circumstances of two and a half times salary, over shares at
the market value at date of grant. Under the terms of his
appointment, the Chairman is also eligible to participate in the
executive share option scheme. No payment is made by the
executive director on the grant of an option award.
All executive share options are subject to a performance
target, which is currently that the options are exercisable only
if, over a three year period, the growth in the company’s EPS
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 long-term test of performance. For awards made
in 2004 onwards, there is no re-testing of the performance
condition. The condition is reviewed annually. All previous
awards have vested without re-testing.