Tesco 2010 Annual Report Download - page 58

Directors’ remuneration report continued
ROCE achieved, the expected ROCE for additional and existing capital
investment, whether capital spend was in line with strategic objectives
and balanced short-term and long-term investment needs, the level
of sales and underlying profit growth and whether this reflected other
developments in the marketplace. Having considered these factors
in detail the Committee concluded that all of the remaining 25% of the
award should vest. A total of 100% of the 2007/8 PSP award measured
on group performance will therefore vest.
For the 50% of salary award which related to International ROCE
performance, the Committee considered the level of performance against
the target for the first 75% of the International PSP award of achieving
post-tax International ROCE of 8.1% by the end of 2009/10. Post-tax
International ROCE (calculated on a like-for-like basis with the target
originally set) at the end of 2009/10 was 6.9% so 23.1 of the first 75% of
the award will vest. The Committee also exercised its judgement as to the
extent to which the remaining 25% of the PSP award should vest as a
result of superior ROCE performance, taking into account the factors
outlined above, the Committee concluded that all of the remaining 25%
of the International PSP award should vest. A total of 48.1% of the 2007/8
PSP award measured on international performance will therefore vest.
Future performance measures
The Committee has determined that no change is required for the coming
year in the form of incentive arrangements, nor in the relative balance
between them. The maximum opportunity under incentive arrangements
will remain the same for the 2010/11 year (as set out on pages 53 and 54).
The same principles as described earlier were also adopted in the
determination of performance targets.
Short-term performance targets
We do not disclose specific future targets for reasons of commercial
sensitivity. However it is intended that performance will continue to be
measured against stretching EPS, TSR and Corporate Objective targets
aligned with the delivery of our strategy. The continuing difficult market
conditions in the US have led to the start-up phase of the US business
lasting longer than originally envisaged and so the Group CEO and
US CEO will continue to have the opportunity to receive an annual bonus
relating to the achievement of financial, strategic and operational targets
which measure the early-stage development of the US business. Success
against these measures will contribute to building a strong platform for
long-term sustainable growth of the US business.
Long-term performance
Earnings per share
Options were granted in 2009/10 to Executive Directors over shares
with a value of 200% of salary, 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 these options is conditional on the achievement of earnings per share
performance conditions, with the first 100% subject to the achievement
of underlying diluted EPS growth of at least RPI plus 9% over three years
and the balance vesting for achieving growth of at least RPI plus 15%.
Performance against this target will be measured at the end of 2011/12
to determine the level of vesting.
Return on capital employed – Group and international
The rules of the Performance Share Plan allow awards to be made over
shares up to 150% of salary. In the year ended 27 February 2010 awards
were made to all the Executive Directors except Tim Mason over Tesco PLC
shares equal to a total of 150% of salary. An award was made to Tim Mason
over Tesco PLC shares equal to a total of 100% of salary. For all the
Executive Directors, awards over up to 100% of salary will vest (together
with reinvested dividends) subject to the achievement of Group ROCE
targets. The awards over the equivalent of a further 50% of salary made
to the Executive Directors other than Tim Mason will vest (together with
reinvested dividends) subject to the achievement of targets based on
International ROCE in order to incentivise and reward delivery of higher
returns from invested capital outside the UK (but excluding the US).
The first 75% of the awards 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 2009/10 PSP award is
achievement of 13.3% Group ROCE and 7.0% International ROCE at the
end of the three-year performance period in 2011/12. The remaining 25%
of the awards will vest for superior ROCE performance as judged by the
Remuneration Committee taking into account the factors outlined above.
If the Remuneration Committee exercises its judgement to allow some,
or all, of the remaining 25% of the PSP awards to vest, we will describe
in the Directors’ Remuneration Report in the relevant year those factors
taken into account in determining the level of the award which would vest.
There is no re-testing of performance in respect of any targets.
Return on capital employed – US
The Group is seeking to build a substantial presence in the US, which
in time has the potential to become a significant source of value for
our shareholders.
The Tesco PLC US Long Term Incentive Plan 2007 (the US LTIP) has been
designed to deliver reward only if the US business realises this potential.
The US CEO was made an award of two million shares under the US LTIP
in 2007. Awards were also made to other senior members of the US
management team. No other Executive Directors will participate in the
Plan. Awards under the plan vest based on the ROCE and EBIT performance
of the US business as set out on page 63.
A key part of the Group’s long-term strategy is to consider new business
ventures which have the potential for significant long-term value creation
for our shareholders. The Group New Business Incentive Plan (Group Plan)
supports this initiative. Initially only the Group CEO will participate in the
Group Plan. However, awards may be made to other employees at the
discretion of the Remuneration Committee in the future where this is
appropriate to do so in order to support the Group’s new business ventures.
As the Company’s US venture is currently the most developed new
business initiative, the award made to the Group CEO under the Group
Plan is focused on the performance of the US venture, although the
Remuneration Committee has the flexibility to consider and include other
new business development opportunities within the proposed award. An
award of 2.5 million shares was made to the Group CEO in November 2007.
This award will vest based on the ROCE and EBIT performance of the
US business as set out on page 63, however the plan also requires Group
and International ROCE targets to be met and any payouts under this plan
will be scaled back on a pro rata basis to the extent they are not met. In
addition, the Remuneration Committee will consider the findings of the
Governance Oversight Committee (described below) and opinions of the
Audit Committee as to whether the level of reported results achieved reflects
the underlying financial performance of the Company when considering if,
and the extent to which, the award made to the Group CEO will vest.
Service agreements
The Executive Directors all have rolling service agreements with no fixed
expiry date. These contracts are terminated on notice of 12 months by
the Company and six months’ notice by the Executive. If an Executive
Director’s employment is terminated (other than pursuant to the notice
provisions in the service agreement or by reason of resignation or
unacceptable performance or conduct) the Company will pay a sum
calculated on the basis of basic salary and the average annual bonus paid
for the last two years. No account will be taken of pension. Termination
payments will be subject to mitigation. This means that amounts will
be paid in instalments to permit mitigation. If the termination occurs
within one year of retirement, the termination payment will be reduced
accordingly. To reflect his length of service with Tesco and the early age
of his appointment as CEO, Sir Terry Leahy’s service agreement provides
for his full pension entitlement to become available on retirement on or
after his 57th birthday.
The Remuneration Committee has agreed that new appointments
of Executive Directors will normally be on a notice period of 12 months.
The Committee reserves the right to vary this period to 24 months for the
initial period of appointment and for the notice period to then revert to
12months. The service agreements are available to shareholders to view
on request from the Company Secretary.
56 Tesco PLC Annual Report and Financial Statements 2010