RBS 2005 Annual Report Download - page 125

section
02
Governance
123
Directors’ remuneration report
Annual Report and Accounts 2005
The introduction of the EPS element is designed to ensure that
the plan includes a performance measure which is in the clear
line of sight for the participants and which reflects the
business strategy for the next few years.
For the TSR element, vesting will be based on the level of
outperformance by the Group of the median of the comparator
group TSR over the performance period. The Remuneration
Committee believes this method of measuring relative TSR
performance provides a more approriate measure of
management performance. This change is permitted under the
rules of the plan. Awards made under the plan will not vest if
the company’s TSR is below the median of the comparator
group. Achievement of median TSR performance against
comparator companies will result in vesting of 25% of the
award. Outperformance of median TSR performance by up to
9% will result in vesting on a straight-line basis from 25% to
125%, outperformance by 9% to 18% will result in vesting on a
straight-line basis from 125% to 200%. Vesting at 200% will
occur if the company outperforms the median TSR
performance of the comparator group by at least 18%.
Following the Remuneration Committee’s review of the plan,
the comparator group was amended to comprise UK and
international banking groups, which the Remuneration
Committee considers more appropriate in the context of the
Group’s business and performance. For awards made from
2006, the companies in the comparator group will be ABN
Amro Holdings N.V.; BSCH; Barclays PLC; Citigroup Inc; HBOS
plc; HSBC Holdings plc; Lloyds TSB Group plc and Standard
Chartered PLC.
For the EPS element, the level of EPS growth over the three year
period will be calculated by comparing the adjusted EPS in the
year prior to the year of grant with that in the final year of the
performance period. Each year the vesting schedule for the EPS
growth measure will be agreed by the Remuneration Committee
at the time of grant, having regard to the business plan,
performance relative to comparators and analysts’ forecasts.
Options
The executive share option scheme was approved by
shareholders in January 1999. The operation of the scheme
was reviewed as part of the overall executive remuneration
review and the Remuneration Committee is satisfied that no
changes are required. Each executive director is eligible for an
annual grant of an option, exercisable at the market price at
the time of grant. Options granted to executive directors are
typically over shares worth 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. No payment is made by the executive director on the
grant of an option award.
All executive share option grants are subject to a performance
condition which is reviewed by the Remuneration Committee
annually. The performance target is currently that the options
are exercisable only if, over a three year period from the date of
grant, 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 from 2004, there is no
re-testing of the performance condition.
US based director – Lawrence Fish
Lawrence Fish's total remuneration package was reviewed in
2004 by the Remuneration Committee as a result of the
acquisition of Charter One and his changing RBS
responsibilities in North America. A new cash long-term
incentive plan was approved by shareholders at the 2005
Annual General Meeting. The remuneration policy for Mr Fish
is as follows:
Base salary is set having regard to the levels of base salary in
other US banks and the appropriate balance of fixed and
variable remuneration for US based executives of UK listed
companies operating within the corporate governance
frameworks of the UK.
Benefits Mr Fish accrues pension benefits under a number of
arrangements in the US. Details are provided on page 129.
In addition he is entitled to receive other benefits on a similar
basis to other Citizens employees.
Short term performance rewards take the form of an annual
incentive plan which rewards the achievement of Group,
business unit and individual financial and non-financial targets.
The normal maximum annual bonus potential is two times
salary, although additional amounts to a maximum of a further
two times salary may be awarded, at the discretion of the Board,
for exceptional performance as measured by the achievement
of significant objectives.
Long term incentives consist of the following components:
•The two grants made under the Citizens Phantom 2000 Plan
vested on 1 January 2005 and 1 January 2006, respectively.
The value of units at the time of vesting is performance-
linked and is based on the cumulative economic profit
generated by Citizens, the trend in economic profit and on
the external market trends in the US banking sector, using
price/earnings ratios of comparator US banks. This measure
was chosen to establish a clear link between the potential
incentive and the performance of Citizens. No other grants
will be made under this plan.
•A grant under the RBS medium-term performance plan
within the levels, and on the same terms, available to UK
based executives.
•A grant under the executive share option scheme within the
levels, and on the same terms, available to UK based
executives.
•A grant under the new Citizens Long Term Incentive Plan.
Performance is measured on a combination of Growth in
Profit before Tax and Relative Return on Equity based on
a comparison of Citizens with comparator US banks. The
targets for this plan are set on an annual basis over the three
year term of the grant.