BP 2008 Annual Report Download - page 82

BP Annual Report and Accounts 2008
Directors’ remuneration report
Salary
The remuneration committee normally 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 analyzed
by the committee’s independent remuneration advisers. For 2009, the
committee has agreed with the group chief executive’s view that salaries
should be frozen at their current level.
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 2009 is 120% of base salary. In normal
circumstances, the maximum payment for substantially exceeding
performance targets will continue to be 150% of base salary.
The group chief executive’s and group chief financial officer’s
bonus will be determined on group results as follows:
• 70% on group performance compared with key metrics and
milestones from the annual plan including:
• Cash costs and organic capex.
• Underlying replacement cost profit and operating cash flow.
• Production and reserves replacement.
• Refining availability and earnings/barrel.
• Installed wind capacity.
• 15% on safety performance, including satisfactory and improving key
metrics as well as progress on OMS implementation.
• 15% on people, including behaviour, culture and values.
For the chief executive of Exploration and Production, and the chief
executive of Refining and Marketing, 50% of their bonus will be based on
the above group results and 50% on the results of their respective
businesses as measured by key metrics and milestones set out in the
annual plan. For Exploration and Production, these include production
costs and reserves replacement as well as safety and new opportunities.
For Refining and Marketing, they include refining availability, earnings and
cash costs, as well as safety and work simplification.
The remuneration committee will also review carefully the
underlying performance of the group in light of company business
plans 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 to promote the success 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.
Long-term incentives
Each executive director participates in the EDIP. It has three elements:
shares, share options and cash. The remuneration committee does not
intend to use either the share option or cash elements in 2009, nor to
grant any retention awards which are also permitted under the EDIP.
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 for performance share awards
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.
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 2009-2011 EDIP share element
Performance period Retention period
Award Vesting Release
2009 2010 2011 2012 2013 2014 2015
Where shares vest, 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 build a significant personal shareholding, with a target of
shares equivalent in value to five times his or her base salary within
a reasonable timeframe from appointment as an executive director.
This policy is reflected in the terms of the performance shares under the
EDIP, as shares vested will normally only be released at the end of the
three-year retention period, described above, if these minimum
shareholding guidelines are met.
Performance conditions
Performance conditions for the 2009-11 share element will be somewhat
modified from previous years. First, the peer group of oil majors against
which we compare will be increased to include ConocoPhillips as well as
ExxonMobil, Shell, Total and Chevron as previously. This change reflects
ConocoPhillips’ significant growth over the last few years, providing it
with similar scale and global reach to the other oil majors.
Second, vesting of the shares will be based 50% on total
shareholder return (TSR) versus the competitor group and 50% on a
balanced scorecard of underlying performance versus the same
competitors. The underlying performance will be assessed on three
measures reflecting key priorities in BP’s strategy – in Exploration and
Production, hydrocarbon production growth, in Refining and Marketing,
improvement in earnings per barrel, and group increase in underlying
net income. Both Exploration and Production production growth and
Refining and Marketing earnings improvement are key strategic
objectives for the group and this inclusion aligns key measures with
both executive director priorities as well as key drivers of value for
shareholders. Group increase in underlying net income acts as a holistic
measure of success reflecting revenues, costs and complexity as well
as safe and reliable operations.
Directors’ remuneration report
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