Tesco 2006 Annual Report Download - page 29

27Tesco plc
For the TSR performance, the Committee considers
performance against the FTSE 100 and a comparator group
that includes Ahold, Carrefour, J Sainsbury, Metro, Morrisons,
Safeway Inc, Target and Walmart.
For 2005/06, the Executive Directors have been awarded 100%
of the annual cash bonus and 97% of the deferred shares
element of the annual bonus. This reflected the high level
of business performance as described in the Operating and
financial review, achievement of corporate objectives, and the
fact that while TSR performance over three and five years
remained very strong, performance over one year had been
slightly less strong.
Performance Share Plan
The Performance Share Plan (PSP) provides the opportunity
to earn rewards for achieving superior long-term performance.
By ensuring a focus on long-term business success and
encouraging the Executive Directors to build up a shareholding
in the Company the plan further aligns the interests of
shareholders and Executive Directors.
Awards under the PSP can be made up to 150% of salary. In
the year ended 25 February 2006 awards were made ‘over’
Tesco PLC shares equal to 100% of salary and will vest (together
with reinvested dividends) according to the achievement of
the ROCE targets. The first 75% of the award will vest on a
straight-line basis at the end of the three-year performance
period, with 25% vesting for baseline performance and the
full 75% vesting for maximum performance against target. Any
vested shares must then be retained for a further 12 months.
The Board set out objectives for profitable deployment of
capital in a Placing Announcement of 13 January 2004. The
2005/06 award, in respect of 75% of base salary, will vest
based on the achievement of 11.7% ROCE (derived from
profit before interest less tax) at the end of the three-year
performance period. This reflects the five year objective of
raising post tax ROCE by up to 200 basis points from the base
of 10.2% in the year ended February 2003.
The remaining 25% of the award will vest for superior ROCE
performance. The Committee agreed that it was appropriate
to exercise judgement on whether vesting should occur to
encourage Executives to make investment decisions in the
long-term interests of the business without being unduly
influenced by the impact on the ROCE target. When determining
whether some, or all, of the remaining 25% of the award will
vest, the Committee will take into account a number of factors
including:
• the level of ROCE;
• the expected ROCE for additional and existing capital
investment;
• whether capital spend is in line with strategic objectives
and balances short-term and long-term investment
needs; and
• whether this reflects other developments in the
market place.
If the Committee exercises its judgement to allow some,
or all, of the remaining 25% of the award to vest then we will
describe in the Directors’ Remuneration Report those factors
taken into account.
Share options
Share options with a value of 200% of salary were granted to
the Executive Directors. Options are granted with an exercise
price equal to the market value at the date of grant and any
gain is therefore dependent on increasing the share price
between the date of grant and exercise. Vesting of the options
is dependent on the achievement of performance conditions,
with the first 100% subject to the achievement of EPS growth
of at least RPI plus 9% over three years and the balance
vesting for achieving RPI plus 15%. There is no
re-testing of performance.
Share options are an important part of the incentive framework
for hundreds of senior managers within the Company. The
Committee acknowledges that some companies are moving
away from share options as a result of accounting changes and
has kept the arrangements under review for this reason. The
Committee concludes that the share option plans remain in the
best interests of shareholders as they provide a clear, simple
incentive arrangement for a large group of senior management,
including Executive Directors, and they reward increases in
absolute shareholder value.
Share ownership guideline
Executive Directors are normally expected to build and
maintain a shareholding with a value at least equal to their
basic salary. New appointees will typically be allowed around
three years to establish this shareholding. Full participation
in the PSP is conditional upon this.
Summary of remuneration elements
All awards made to Executive Directors under the Annual
bonus and PSP and all options granted under the Executive
Share Option Scheme are subject to the satisfaction of
performance conditions. If performance is lower than the
maximum targets set, the short-term bonus and long-term
incentives will reduce accordingly. This year the Committee
has increased the potential level of performance pay in light
of its annual review of the packages payable in benchmark
companies. It has also reviewed and revised the associated
performance conditions and considers that the proposed mix
of performance conditions best supports the Group’s business
strategy – it provides a set of comprehensive and robust
measures of management’s effort and success in creating
shareholder value. A summary of the elements of the package
is set out in the following table.