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Introduction Although 3i is a constituent of the FTSE 100 Index, its business operates exclusively within the venture capital sector. The majority of the Company’s competitors comprise either partnerships of individuals managing funds for investment on behalf of third parties or unquoted subsidiaries of larger banking or financial services groups. Whilst the environment in financial markets has been tough, the venture capital market has continued to be well funded and, despite falling investment returns, competitor organisations have been able to offer substantial rewards for their staff and competition for quality, trained executives remains aggressive. In addition to cash bonuses, remuneration structures in the venture capital market include share plans as well as carried interest or co-investment schemes, which allow executives to share directly in the future profits on investments subject normally to a variety of conditions relating to the performance of those investments. It is against this challenging background that the Company’s Remuneration Committee (“the Committee”) has had to formulate and implement its remuneration policy to ensure that the Company is able to continue to attract, retain and motivate management of the quality required to ensure the continued vibrancy and success of the business as a whole. The Committee is also conscious of the need to align the interests of staff and shareholders. One of the ways in which this is achieved is by encouraging the holding of the Company’s shares by its staff. The Company’s policy has therefore been to provide long term incentives to its executives through share plans and, where appropriate, carried interest schemes. At 31 March 2003 over 75% of the Company’s UK staff were shareholders. Remuneration Committee Composition and terms of reference The Committee consists only of independent non-executive Directors. Its members throughout the year to 31 March 2003 (“the year”) were Dr J R Forrest (the Committee Chairman), Baroness Hogg, Mr F D Rosenkranz and Mr O H J Stocken. None of the members of the Committee sits with any other Director on the board of any other quoted company. The Committee’s terms of reference take into account the provisions of the Combined Code on corporate governance. Activities during the year The Committee met six times during the year to consider remuneration policy and to determine, on behalf of the Board, the specific remuneration packages for each of the executive Directors. In addition, the Committee considered and made recommendations to the Board on the Company’s framework of executive remuneration and its costs. Assistance to the Committee Persons who materially assisted the Committee with advice on Directors’ remuneration in the year were: Monks Partnership, an external remuneration consultant appointed by the Committee, the Group’s Human Resources Director, Mr R B Gregory and (except in relation to his own remuneration) the Chief Executive, Mr B P Larcombe. Mr Gregory was not appointed by the Committee. Monks Partnership is part of PricewaterhouseCoopers LLP. During the year, PricewaterhouseCoopers LLP provided the Group’s investment business with taxation, payroll and corporate restructuring advice, due diligence services and the services of an employee on secondment. Performance graphs The left hand graph below compares the Company’s total shareholder return for the five financial years of the Company to 31 March 2003 with the total shareholder return of the FTSE All-Share Index. The Directors consider that since the Company invests in a broad range of industrial and commercial sectors the FTSE All-Share Index is the most appropriate index against which to compare the Company’s performance. The right hand graph below compares the diluted net asset value per share at each of the last five financial year ends (with dividends reinvested) against the total shareholder return of the FTSE All-Share Index on those dates. This has been included because changes in net asset value per share relative to the FTSE All-Share Index are an important indicator of the performance of the Company’s assets. |
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| Audit The tables in this report have been audited
by Ernst & Young LLP. Directors’ remuneration policy Non-executive Directors The Board’s policy for the current financial year in relation to non-executive Directors (including the Chairman) continues to be to pay fees which are competitive with the fees paid by other FTSE 100 companies. Non-executive Directors’ fees are determined by the Board as a whole, within the limits set by the Company’s Articles of Association, having taken advice from Monks Partnership. Non-executive Directors’ remuneration was restructured with effect from 1 April 2002 by reducing the annual fees for Committee membership (from £5,000 to £3,500) and increasing the annual fees for Committee Chairmanship (from £4,000 to £7,500) and Board membership (from £25,000 to £30,000). No changes were made with effect from 1 April 2003. Non-executive Directors are not eligible for bonuses, share options, long-term incentives, pensions or performance related remuneration. Details of the non-executive Directors’ remuneration for the year are provided in the table below. The Company does not currently expect its policy on non-executive Directors’ remuneration for subsequent financial years to change significantly. Executive Directors The Board’s policy for the current financial year in relation to executive Directors is to pay salaries and benefits sufficient to attract, retain and motivate Directors of the calibre required. The variable elements of each executive Director’s remuneration (comprising annual cash bonuses and long-term incentives) are intended to form a significant component of the executive Director’s total remuneration package. In particular, the salaries of the executive Directors are intended to represent less than half of the executive Directors’ potential rewards with the remainder of the rewards being related to individual and Company performance. The Committee has due regard to competitive market data in relation to similar jobs in comparable organisations including other FTSE 100 companies and companies in the financial services sector. The Company’s policy is also influenced by remuneration practice in the venture capital sector. The Committee is sensitive to wider issues including pay and employment conditions elsewhere in the Group when setting executive Directors’ pay levels and takes into account the Company’s reward strategy generally, before deciding specific packages for the executive Directors. The executive Directors’ performance related compensation is designed to encourage, where practicable, investment in, and the holding of, shares in the Company so as to align the interests of Directors and shareholders. The Company aims to provide pension benefits which are competitive with other FTSE 100 companies and companies in the financial services sector. The Company does not currently expect its policy on executive Directors’ remuneration for subsequent financial years to change significantly. Executive Directors’ remuneration packages The remuneration packages of the executive Directors consist of the following elements: Salaries Executive Directors’ base salaries are determined by the Committee in accordance with the policy referred to above. Annual cash bonuses All employees, including executive Directors, are eligible for non-pensionable discretionary annual cash bonuses. Executive Directors’ bonuses are determined by the Committee. Bonuses for the year, details of which are set out in the table below, have been determined by the Committee based on achievement against a range of corporate and personal objectives. Corporate objectives for the year ended 31 March 2003 which were considered by the Committee included changes in the Company’s net asset value per share compared to the FTSE All-Share Index, total return and levels of revenue, costs and realisations. Personal objectives included clearly defined management targets relating to individual responsibilities. Long-term incentives The Committee determines the levels of long term incentives granted to executive Directors. The Committee regards the purposes of such awards as being both to align the interests of executives with those of shareholders and also to provide levels of potential reward which make continued employment with the Company attractive in relation to opportunities available elsewhere. The Group’s current long-term incentive arrangements for executive Directors consist of: (a) The 3i Group Discretionary Share Plan (the “Discretionary Share Plan”); and (b) US carried interest plans. The Discretionary Share Plan The Company operates a shareholder approved executive share plan which conforms with the Association of British Insurers’ (“ABI”) guidelines on dilution limits. Awards under this plan are not pensionable. The level of annual awards is reviewed each year taking account of market practice and the specific circumstances facing the Company. The Committee determines awards to executives based on an assessment of performance. All awards are granted subject to a performance target, the achievement of which will normally be a condition precedent to the exercise of the awards. Careful consideration is given each year to appropriately demanding performance targets. US carried interest plans At the Annual General Meeting in July 2002, shareholders approved the participation of the executive Director responsible for the Company’s US business, currently Mr M M Gagen, in the carried interest plans available to investment executives based in the US. These awards are not pensionable. Details of the awards made to Mr Gagen during the year are set out in the table below.
Notes
* Awarded before appointment as a Director. † Of these options half became exercisable on the date shown and half became exercisable three years from that date. Notes
The plans operate on the basis of annual “vintages” of investments and points are used to allocate carried interest between participants. New investments made in a particular financial year belong to the same vintage. Further investments in subsequent years are treated as belonging to the vintage in which the first investment was made. Payments will be made to the executive Director in relation to his points for a particular vintage when proceeds from the realisation of investments are received. If the value of any remaining investments for a vintage (both realised and unrealised) exceeds a specified internal rate of return (10% for the vintage years ended 31 March 2000 and 2001 and 8% for the vintage years ended 31 March 2002 and 2003), a proportion of the realised profits will be paid to the executive Director in accordance with his points. If the specified internal rate of return is not achieved, a lesser amount will be paid to the executive Director. The number of points allocated to the US based Director was determined by the Committee after taking into account market practice in the US. The conditions determining payments under the plans were chosen so as to link participants rewards to realised profits from investments. The points set out in the above table provide Mr M M Gagen with the opportunity (subject as mentioned above) to benefit over time by the amount of profit realised on investments having an aggregate original cost of $4.6 million representing 0.95% of the investments made by the US business during the relevant period. Currently these investments are valued at below cost and the points have no accrued value. The Share Incentive Plan Eligible UK employees, including executive Directors, may participate in an Inland Revenue approved Share Incentive Plan. During the year participants could invest up to £125 per month from their pre-tax salaries in the Company’s shares (referred to as partnership shares). For each share so acquired the Company granted two free additional shares (referred to as matching shares). Dividends are reinvested on behalf of participants in further shares (referred to as dividend shares). Details of shares acquired by the executive Directors under this Plan during the year are set out in the table below.
Pension arrangements The executive Directors are, and until their ceasing to be Directors on 31 December 2002, Dr R D M J Summers and Mr P B G Williams were, members of the 3i Group Pension Plan which is a defined benefit contributory scheme to which, at the most recent valuation date, 98% of UK employees belonged. The Plan provides for a pension, subject to Inland Revenue limits, of two-thirds of basic annual salary (limited to the Earnings Cap where this applies) on retirement (normally at age 60) after 25 years’ service and less for service under 25 years. The Plan also provides life cover of four times salary, pensions payable in the event of ill health and spouses’ pensions on death. Further details of the Plan are set out in note 11 to the accounts. Details of the pension entitlements of Directors who served during the year are provided in the table below. The final column of the table gives the difference between the transfer value of the Director’s pension entitlement at the start of the year and the transfer value at the end of the year, less the contributions paid by the Director. The difference over the year is the result of any extra benefits earned over the year and any change in the value placed on £1 p.a. of pension by the actuaries. The value placed by the actuaries on £1 p.a. of pension reflects financial conditions at the time (eg the level of the stock market or returns available on government bonds) and the method and assumptions they use to calculate transfer values from time to time. Changes in the value placed on £1 p.a. of pension can be positive or negative and can have much greater impact than the actual pension benefits earned.
Notes
Company policy is that in normal circumstances executive Directors’ notice periods should not exceed one year. Each executive Director has an employment contract with 3i plc (or, in the case of Mr M M Gagen, 3i Corporation) with a notice period not exceeding 12 months. Save for these notice periods the contracts have no unexpired terms. The contract of employment of each Director (other than Mr Gagen) dates from when he was first employed by the Group, being 23 September 1974 for Mr B P Larcombe, 1 July 1985 for Mr R W Perry and 22 June 1987 for Mr M J Queen. Mr Gagen’s contract of employment is dated 12 July 2000. These contracts contain no specific provisions for the payment of compensation in the event of early termination. The Committee considers that compensation payments on early termination of employment should depend on individual circumstances. The duty of Directors to mitigate their loss will always be a relevant factor. Under the rules of the Company’s share option and long-term incentive award plans, a Director may be permitted to exercise options and awards within 12 months of leaving the Company for all the Plans, except the Discretionary Share Plan, under which a Director may be permitted to exercise options within six months of the date the options vest, if at all.
Full details of the Directors’ interests in the Company’s shares are shown in note 39. Historic awards This section of the Remuneration report gives details of historic awards held by Directors under the Management Equity Investment Plan. Deferred share bonuses under the Management Equity Investment Plan For years up to 31 March 2001 executives could receive part of their annual bonus in the form of a deferred award of shares. The value of these awards was reported each year as remuneration for the year in respect of which they were awarded. Awards took the form of share options issued by an employee benefit trust to acquire shares at no cost to themselves after three years provided they remained in employment with the Group and, in the case of executive Directors, they had maintained an agreed shareholding during the three year period. There was no performance condition since the award was considered part of the bonus already earned. In 1997 and 1998, instead of granting nil-cost options, executives were granted market value options but also received a deferred cash bonus of the same amount which was payable only for the purpose of funding the exercise price payable when awards were exercised.
Note Dr R D M J Summers and Mr P B G Williams are permitted to exercise their deferred share bonuses within 12 months of their ceasing to be Directors. Long-term incentive awards As well as receiving share bonus awards, from 1997 to 2000 executives could also be offered awards linked to the longer term performance of the Group. Participants were awarded a share option by an employee benefit trust to acquire shares at no cost to themselves after five years provided a performance condition had been satisfied. In 1997 and 1998, instead of granting nil-cost options, executives were granted market value options but also received a deferred cash bonus of the same amount which was payable only for the purpose of funding the exercise price payable when awards were exercised.
Notes In accordance with the rules of the Plan, Dr R D M J Summers and Mr P B G Williams are permitted, within 12 months of their ceasing to be Directors, to exercise the awards granted in 1997, 1998 and 1999 (being those with release dates of 2002, 2003 and 2004 respectively), to the extent that the three year performance condition was satisfied (being 100% for the 1997 and 1998 awards and 64.6% for the 1999 awards). The awards granted in 2000 (being those with original release dates of 2005) lapsed following their ceasing to be Directors. The performance condition provides that no shares vest unless the increase in the Company’s total shareholder return (TSR) over a three year performance period is equal to or exceeds the compounded annual increase in the RPI over the period + 6% per annum. If the Company’s TSR over the period is equal to the compounded annual increase in the RPI over the period + 6% per annum, 35% of the shares vest and all shares vest if TSR is equal to or exceeds RPI + 20% per annum. At performance between these levels, a proportion of shares vest. If the minimum performance condition is not achieved in the three year performance period, the performance period is extended up to a maximum period of seven years but from the same base year. The Committee decided that a performance condition linked to shareholder return was in shareholders’ interests and by linking the condition to RPI inflationary increases were discounted. The minimum TSR target of RPI + 6% per annum, and the maximum TSR target of RPI + 20% per annum, were chosen as being suitably demanding at that time whilst aligning the interests of participants and shareholders. The Group’s Human Resources department calculates whether and the extent to which the performance condition has been satisfied in accordance with the formula and this calculation is audited by the Company’s auditors. By order of the Board Baroness Hogg Chairman 14 May 2003 |
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