Tesco 2005 Annual Report Download - page 20

18 Tesco PLC
In our last Annual Report and Financial Statements, we
explained that the Remuneration Committee had conducted
a review of executive remuneration arrangements. Following
extensive consultation with shareholders and their
representative organisations we introduced a number of
important changes. The revised remuneration strategy for
Executive Directors and other key executives is clearly tailored
to emphasise the delivery of strong year-on-year earnings
growth as well as sustained performance in the longer term
including an element of compulsory deferred shares. This
ensures continued emphasis on strong annual performance
combined with long-term executive share ownership, with a
better link between the incentives received and shareholder value
delivered. We remain committed to the focus on driving strong
financial performance and will actively monitor the level of
reward and performance emphasis to retain the close links to
the business strategy and the appropriate market positioning.
Tesco operates in a highly competitive retail environment.
Business success depends on the talents of the key team,
but outstanding business performance comes from teamwork.
Building and retaining that team at senior levels within Tesco
is vital to success, particularly with a world-class executive
team and high churn in executives in our marketplace. The
Committee also ensures that the remuneration relationship
between the Executive Directors and senior executives of the
company below this level is appropriate. In particular, any
exceptional remuneration arrangements for senior executives
are advised to the Committee.
Total remuneration
The total remuneration levels of Executive Directors are
reviewed annually by the Committee. The Committee considers
external independent remuneration surveys to ensure it has
proper regard to competitive market practice. We are conscious
of the risks involved in paying unjustified amounts and
therefore monitor carefully the basic salary and total
remuneration that each Director receives.
The Board has reduced the number of Executive Directors
whilst increasing the existing Executive Directors’ levels
of responsibility.
The Executive Directors’ total remuneration package comprises
the following elements:
• base salary determined by the responsibilities, skills
and experience of the individual against a benchmark
determined by reference to other large retailers, major
FTSE 100 companies and certain major consumer
companies operating internationally;
• annual bonus paid part in cash and part in shares with
a compulsory deferral of the share element for three years;
• long-term performance share plan based on a stretching
three-year Return On Capital Employed (ROCE) target.
Shares must be held for a further 12 months after vesting;
• performance-related share option awards via the
Share Option Scheme open to all senior managers;
• benefits (which comprise car benefits, disability and
health insurance and staff discount);
• pension, and
• Executive Directors are also eligible to participate in the
company’s all-employee savings related share option
scheme (SAYE), Shares in Success and Buy As You Earn
scheme on the same terms as all other UK employees.
This year the Executive Directors received the maximum level
of bonus reflecting the high level of business performance as
described in the Operating and Financial Review.
Basic Pay
Basic pay must be appropriate to attract and retain talented
individuals. It must reflect individual capability and any changes
in responsibilities as the Group faces new opportunities and
challenges both in the UK and internationally. The Committee
takes into account pay conditions throughout the Group
in deciding annual salary increases. The Committee seeks
to set a level of pay that reflects changes in individual
responsibility and market conditions. We seek to reflect salary
levels at the top performing retailers and the leading FTSE
companies in order to attract the best people and maintain
excellent performance.
Annual Bonus and Deferred Annual Bonus
Tesco operates an annual bonus scheme simplified and
updated last year and the targets and amount which can be
earned are set each year in line with market practice. It is based
on achievement of stretching earnings per share (EPS) targets,
assessment of total shareholder returns (TSR) and specific
corporate objectives. The Committee sets performance targets
annually and confirms achievement of performance and
awards to be made. Policy has been for Executive Directors to
earn a bonus equivalent to up to 100% of salary paid in cash
at the end of the year and a maximum of 75% of salary paid
in shares with compulsory deferral for three years. The cash
element is earned through achievement of previously agreed
EPS growth targets and progress on specific corporate
objectives. The share element has an additional measure,
based on an assessment of comparative shareholder returns.
Total shareholder return has been chosen as it is a clear
indicator of the value created for shareholders. The Committee
considers a comparator group comprising large international
food retailers as the most appropriate basis for assessing relative
performance. This comparator group includes Ahold, Carrefour,
Metro, Morrisons, Safeway Inc. (US), Target (US) and Walmart.
Directors’ remuneration report continued