Tesco 2007 Annual Report Download - page 31

Basic pay
Basic pay is designed to attract and retain talented individuals.
It needs to reflect individual capability, and any changes in
responsibilities as the Company faces new opportunities and
challenges. As the Company continues to diversify into new
product areas and services as well as expanding internationally
it seeks to reflect this in the benchmarks that are used. We
aim to reflect salary levels at the top performing retailers,
the leading FTSE companies and ensure consideration is given
to international competitors in order to attract the best people
and maintain excellent performance. We also take into account
pay conditions throughout the Company in deciding annual
salary increases.
Annual cash bonus and deferred annual bonus
The Company operates an annual bonus scheme which is
delivered part in cash and part in shares. The Remuneration
Committee has typically made awards of up to 100% of salary
paid in cash at the end of the year and up to 100% of salary
paid in shares with compulsory deferral for three years. The
share element is based on achievement of stretching earnings
per share (EPS) targets, an assessment of shareholder returns
(TSR) and specific corporate objectives. The cash element is
earned through achievement of EPS growth targets and
progress on specific corporate objectives. The Committee sets
performance targets annually and confirms achievement of
performance and awards to be made.
We cannot disclose future targets for reasons of commercial
sensitivity. By way of illustration of the approach to target-
setting, the corporate objectives are based on our balanced
scorecard, the Steering Wheel, described in more detail on
page 8. Corporate objectives for the awards made in the
financial year 2006/07 included increasing sales from new
space; specific profit targets for international businesses
and for retailing services; like-for-like sales growth and the
development of the non-food business; focus on developing
trading models internationally and in non-food; enhancing
talent management and capability; and embedding the new
Community Plan and implementing international community-
related strategies.
The Committee considers TSR performance against the FTSE
100 and a comparator group of international retailers that
includes Ahold, Carrefour, J Sainsbury, Metro, Morrisons,
Safeway Inc, Target and Walmart.
Following the Remuneration Committee’s consideration of
the various performance measures in respect of the 2006/07
award, the Executive Directors have been awarded 100% of
the annual cash bonus and 100% of the deferred shares
element of the annual bonus.
As mentioned above, in order to motivate short-term
performance and delivery of success in the start-up phase of
the US business, the Remuneration Committee has agreed to
increase the potential short-term bonus opportunity for the US
CEO, Mr T J R Mason, from 100% to 150% of salary in cash
and by an equal amount in deferred shares. Mr T J R Mason’s
total short-term opportunity will be subject to a combination of
Group and US-specific performance conditions.
In order to reward early stage success against financial and
strategic milestones for new business ventures, the potential
opportunity under the share element of the short-term bonus
will also increase from 100% to 150% of salary for the Group
CEO, Sir Terry Leahy (with his potential cash bonus opportunity
remaining at 100%). The share awards will continue to be
deferred for three years before release. Awards will be subject
to performance conditions which measure the successful
progress of the US business including leadership and delivery
of financial and strategic objectives, and factors such as site
acquisitions, store openings, agreed capital expenditure,
infrastructure, early turnover and financial milestones for
returns from the first two years of store openings.
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 longer-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.
The rules of the PSP allow awards to be made over shares up
to 150% of salary. In the year ended 24 February 2007, awards
were made over Tesco PLC shares equal to 100% of salary.
These awards will vest (together with reinvested dividends)
subject to the achievement of 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. The target in respect of the first
75% of the 2006/07 PSP award is achievement of 13.4%
ROCE (based on profit before interest less tax) at the end
of the three-year performance period in 2008/09.
The remaining 25% of the award will vest for superior Return
on Capital 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 achieved;
• the expected ROCE for additional and existing capital
investment;
• whether capital spend is in line with strategic objectives
and balances short and long-term investment needs;
• sales growth and underlying profit growth; and
• whether this reflects other developments in the marketplace.
If the Committee exercises its judgement to allow some,
or all, of the remaining 25% of these PSP awards to vest,
we will describe in the Directors’ Remuneration Report those
factors taken into account in determining the level of the
award which would vest.
29
THE BOARD AND THEIR
RESPONSIBILITIES