BP 2006 Annual Report Download - page 72

70
Remuneration policy
Our remuneration policy for executive directors aims to ensure there
is a clear link between the company’s purpose, the business plans and
executive reward, with pay varying with performance. In order to achieve
this, the policy is based on these key principles:
– The remuneration structure will support BP’s aim to maximize long-term
shareholder value.
– The structure will reflect a fair system of reward for all the participants.
– The remuneration committee will determine the overall amount of each
component of remuneration, taking into account the success of BP and
the competitive environment.
– The majority of executive remuneration will be linked to the
achievement of demanding performance targets, independently
set to support the creation of long-term shareholder value.
– There will be a quantitative and qualitative assessment of performance,
with the remuneration committee making an informed judgement
within a framework approved by shareholders.
– Pay and employment conditions elsewhere in the group will be taken
into account, especially in setting annual salary increases.
– Executives will develop a significant personal shareholding in order to
align their interests with those of shareholders.
– The remuneration policy for executive directors will be reviewed
regularly, independently of executive management, and will set the
tone for the remuneration of other senior executives.
– The remuneration committee will actively seek to understand
shareholder preferences.
– Remuneration policy and practice will be as transparent as possible.
Executive directors’ total remuneration consists of salary, annual bonus,
long-term incentives, pensions and other benefits. The remuneration
committee reviews this structure regularly to ensure it is achieving its
aims. In 2006, well over three-quarters of executive directors’ total
potential remuneration was performance-related, in line with the target.
The same will be true for potential remuneration in 2007.
Salary
The remuneration committee reviews salaries annually, taking into
account other large Europe-based global companies and companies in the
US oil and gas sector. These groups are each defined and analysed by the
committee’s independent remuneration advisers. The committee makes a
judgement on salary levels based on its assessment of market conditions
and the external advice.
Annual bonus
All executive directors are eligible to take part in an annual performance-
based bonus scheme. The remuneration committee sets bonus targets
and levels of eligibility each year.
The target level for 2007 is 120% of base salary. In normal
circumstances, the maximum payment for substantially exceeding
performance targets will continue to be 150% of base salary.
Annual bonus awards for 2007 will be based on a mix of demanding
financial targets, based on the annual plan and the leadership objectives
set at the beginning of the year. The weightings on annual bonus
targets are:
– 50% Financial metrics from the annual plan, principally EBITDA,
cash costs and capital expenditure.
– 30% Non-financial measures focusing on health, safety and the
environment; growth; and reputation.
– 20% Individual performance against leadership objectives and against
living the values of the group (incorporating BP’s code of conduct).
The remuneration committee will also review carefully the underlying
performance of the group in the light of the five-year business plan and
will look at competitors’ results, analysts’ reports and the views of the
chairmen of other BP board committees when assessing results.
In exceptional circumstances, the remuneration committee can decide
to award bonuses moderately above the maximum level. The committee
can also decide to reduce bonuses where this is warranted, and in
exceptional circumstances bonuses could be reduced to zero. We
have a duty to shareholders to use our discretion in a reasonable
and informed manner, acting in the best interests of the company,
and also to be accountable and transparent in our decisions. Any
significant exercise of discretion will be explained in the subsequent
directors’ remuneration report.
Group chief executive
As for previous years, the target level for 2007 for Lord Browne is 130%
of base salary, with a maximum payment for substantially exceeding
performance targets of 165% of base salary. Lord Browne will retire on
31 July 2007. His annual bonus award for 2007 will be pro-rated to reflect
his service during the financial year up to his retirement in July.
Long-term incentives
Each executive director participates in the EDIP. It has three elements:
shares, share options and cash. The remuneration committee did not use
either share option or cash elements in 2006 and would only do so in
2007 in exceptional circumstances. This section describes the share
element. We intend that executive directors will continue to receive
performance shares under the EDIP, barring unforeseen circumstances,
until it expires or is renewed in 2010.
Policy
The remuneration committee can award shares to executive directors that
will only vest to the extent that demanding performance conditions are
satisfied at the end of a three-year period. The maximum number of these
performance shares that can be awarded to an executive director in any
year is at the discretion of the remuneration committee, but will not
normally exceed 5.5 times base salary (7.5 times base salary in the case
of the group chief executive).
In exceptional circumstances, the committee also has an overriding
discretion to reduce the number of shares that vest or to decide that no
shares vest.
The compulsory retention period will also be decided by the committee
and will not normally be less than three years. Together with the
performance period, this gives executive directors a six-year incentive
structure, as shown in the timeline below, which is designed to ensure
their interests are aligned with those of shareholders.
--------------------------------------------------------------------------------------------------------------------------------------------------
TIMELINE FOR 2007-2009 EDIP SHARE ELEMENT
--------------------------------------------------------------------------------------------------------------------------------------
2007 2008 2009 2010 2011 2012 2013
Performance period Retention period
ReleaseVestingAward
--------------------------------------------------------------------------------------------------------------------------------------------------
Where shares vest under awards made in 2007 and future years, the
executive director will receive additional shares representing the value
of the reinvested dividends.
The committee’s policy continues to be that each executive director
should hold shares equivalent in value to five times his or her base salary
within five years of appointment as an executive director. This policy is
reflected in the terms of the EDIP, as shares awarded will only be
released at the end of the three-year retention period, described below,
if these minimum shareholding guidelines are met.
Performance conditions
For performance share awards in 2007, the performance conditions will
continue to relate to BP’s total shareholder return (TSR) compared with
other oil majors – ExxonMobil, Shell, Total and Chevron – over a three-
year period. We have the discretion to alter this comparison group if
circumstances change, for example, if there are significant consolidations
in the industry.
We consider this relative TSR to be the most appropriate measure
of performance for the purpose of long-term incentives for executive
directors. It best reflects the creation of shareholder value while
minimizing the impact of sector-specific effects such as the oil price.
TSR is calculated as share price performance over the relevant period,
assuming dividends are reinvested. All share prices are averaged over the