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RBS Group • Annual Report and Accounts 2006
Governance
The RBS Fund is a non-contributory defined benefit fund.
Details of pension arrangements of directors are shown
on page 124.
From April 2006, new tax legislation applies to UK pensions.
The Remuneration Committee reviewed the pension provision
for all executives and determined that the cost of any additional
tax that individuals may incur as a result of their benefits
exceeding the new lifetime allowances and annual allowances
would not be met by the Group. The Committee believes that
pension is an effective element in the retention of directors and
decided that no changes should be made to existing
arrangements other than to allow directors to opt out of future
tax-registered pension provision. For those directors who have
opted out of the pension provision, the cash allowances are
shown on page 119.
Executive directors are eligible to receive a choice of various
employee benefits or a cash equivalent, on a similar basis to
other employees. In addition, as employees, executive
directors are eligible also to participate in Sharesave, Buy As
You Earn and the Profit Sharing scheme, which currently pays
up to 10 per cent of salaries, depending on the Group’s
performance. These schemes are not subject to performance
conditions since they are operated on an all-employee basis.
Executive directors also receive death-in-service benefits.
Short-term annual incentives
UK-based executive directors normally have a maximum
annual incentive potential of between 160% and 200% of
salary. For exceptional performance, as measured by the
achievement of significant objectives, executive directors may
be awarded incentive payments of up to 200% of salary, or
250% of salary, in the case of the Group Chief Executive and
the Chief Executive, Corporate Markets. Awards will normally
be based on the delivery of a combination of appropriate
Group and individual financial and operational targets
approved each year by the Remuneration Committee.
For the Group Chief Executive, the annual incentive is primarily
based on specific Group financial performance measures such
as operating profit, earnings per share growth and return on equity.
The remainder of the Group Chief Executive’s annual incentive
is based on a range of non-financial measures which may
include measures relating to shareholders, customers and staff.
For the other executive directors a proportion of the annual
incentive is based on Group financial performance and a
proportion on division financial performance. The remainder of
each individual’s annual incentive opportunity is dependent on
achievement of a range of non-financial measures, specific
objectives and key result areas. Divisional performance includes
measures such as operating income, costs, loan impairments
or operating profit. Non-financial measures include customer
measures (e.g. customer numbers, customer satisfaction), staff
measures (e.g. employee engagement) and efficiency and
change objectives.
In respect of 2006, the Remuneration Committee reviewed the
annual incentive payments for all executive directors taking into
account performance against the various targets set at the
beginning of the year and covering overall Group financial
metrics, divisional performance and each director’s other
operational targets.
Group operating profit and other Group financial metrics were
fully met or exceeded, while most divisional and individual
performance objectives were also met or exceeded. As a
result, the Remuneration Committee proposed and the Board
(excluding executive directors) agreed annual incentive
payments ranging from 75% to 125% of normal maximum
level. The payments made to Mr Cameron (125% of normal
maximum) and Sir Fred Goodwin (110% of normal maximum)
reflected the outstanding performance achieved by Corporate
Markets and the Group overall respectively and were within the
exceptional maximum level.
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 (“MPP”) 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
awards over shares worth 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 to executive directors, 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. All awards under the plan are
subject to three-year performance targets.
Awards made from 2006 are subject to two performance
measures; 50% of the award vests on a relative Total
Shareholder Return (“TSR”) measure and 50% vests on growth
in adjusted earnings per share (“EPS”) over the three year
performance period.
For the TSR element, vesting is based on the level of
outperformance by the Group of the median of the comparator
group TSR over the performance period. 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%. For awards made in 2006, the companies in the comparator
group are ABN Amro Holdings N.V.; Banco Santander Central
Hispano, S.A.; Barclays PLC; Citigroup Inc; HBOS plc; HSBC
Holdings plc; Lloyds TSB Group plc and Standard Chartered
PLC. The Remuneration Committee considers this group to be
appropriate in the context of the Group’s business.