Annual Report and Accounts 2006
Share plans
Bonus Share Retention Plan (BSRP)
The BSRP is an essential element of our total reward programme and has been a key factor in helping and encouraging executives to meet the share ownership guidelines that we apply. The BSRP is available to a group of approximately 170 senior executives including the executive Directors and aims to encourage participants to reinvest a cash award into the Company's shares.
The BSRP enables participants to invest all or part of their AIP award in, or take their AIP award as an award over, our shares ("Deferred Shares") together with a Company match of additional shares after three years. During the three year period, the shares are held in trust. If a participant leaves the Group during the three-year period, they forfeit some of the additional shares and in certain cases it is possible that all of the Deferred Shares and the additional shares may be forfeited. Each year the executive Directors have chosen to invest all their AIP awards into the BSRP.
The number of matching shares that will be provided for grants from 2006 is as follows:
| Absolute compound annual growth in aggregate UEP over the three year deferral period equivalent to: |
Percentage of matching shares awarded at the end of the period: |
|---|---|
| below 4% | 40% (threshold) |
| 4% | 40% |
| 8% | 70% |
| 12% or more | 100% (maximum) |
There is a straight line sliding scale between those percentages. UEP is measured on an aggregate absolute growth basis, the levels of growth required to achieve the highest levels of share match being demanding. For awards made before 2006, UEP performance was measured on a real basis, with a stepped vesting scale between the threshold and maximum. Awards under the BSRP will vest in full following a change in control but only to the extent that performance targets have been met at the time of the change in control unless the Committee decides that the awards would have vested to a greater or lesser extent had the performance targets been measured over the normal period. The 2005-2007 and 2006-2008 cycles are currently expected to result in around two-thirds of the matching shares available being awarded. Actual vesting will depend upon performance over the full vesting period. View the AIP awards received by the executive Directors in respect of the 2006 financial year and reinvested into the BSRP.
Long Term Incentive Plan (LTIP)
Around 85 senior executives (including the executive Directors) are granted a conditional award of shares under the LTIP. This award recognises the significant contribution they make to shareowner value and is designed to incentivise them to strive for sustainable long-term performance.
In 2006, awards for the 2006-2008 performance cycles were made to senior executives, including the executive Directors. View details of the Directors' LTIP interests.
One half of the conditional shares that vest are transferred immediately. The transfer of the remaining half is deferred for two years and is contingent on the participant's employment with us not being terminated for cause during that period. Participants accumulate dividend equivalent payments both on the conditional share awards (which will only be paid to the extent that the performance targets are achieved) and during the deferral period. This part of the award is calculated as follows: number of shares vested multiplied by aggregate of dividends paid in the performance period divided by the share price on the vesting date.
The current LTIP has been in place since 1997. In 2004, the Committee made a number of changes to the LTIP, and the table below sets its key features. As explained above, from 2006, performance ranges for the growth in Underlying earnings per share (UEPS) are expressed in absolute rather than post-inflation terms.
The TSR measure is a widely accepted and understood benchmark of a company's performance. It is measured according to the return index calculated by Datastream on the basis that a company's dividends are invested in the shares of that company. The return is the percentage increase in each company's index over the performance period. UEPS is a key indicator of corporate performance. It is measured on an absolute basis (real prior to 2006 after allowing for inflation). Sustained performance is therefore required over the performance cycle as each year counts in the calculation.
How the LTIP operates
| Awards madeprior to 2004 | Awards made for 2004 onwards | |
|---|---|---|
| Face value of conditional share award made to executive Directors |
80% of base salary | 120% of base salary (2004 and 2005) 160% of base salary (2006 onwards) |
| Performance conditions |
Award is based on TSR relative to the Comparator Group with a UEPS hurdle | Half of the award is based on growth in UEPS over the three year performance period. The other half of the award is based on TSR relative to the Comparator Group |
| UEPS vesting requirement* |
For the award to vest at all UEPS must have grown by at least the rate of inflation as measured by the Retail Price Index plus 2% per annum (over three years) | The extent to which some, all or none of the award vests depends upon annual compound growth in aggregate UEPS over the performance period:
|
| TSR vesting requirement* |
The extent to which some, all or none of the award vests depends on our TSR relative to the Comparator Group:
|
The extent to which some, all or none of the award vests depends upon our TSR relative to the Comparator Group:
|
| Re-tests | If the TSR performance criteria is not satisfied in the initial three year performance period, the award will be deferred on an annual basis for up to three years until the performance is achieved over the extended period (i.e. either four, five or six years). If the award does not vest after six years, then it will lapse | There are no re-tests and the award will lapse if the minimum requirements are not met in the initial three year performance period |
| Comparator Group | A weighting of 75% is applied to the UK companies in the Comparator Group, and 25% to the non-UK based companies | The Comparator Group has been simplified and amended to include companies more relevant to the Company, and there will be no weighting as between UK and non-UK companies |
* For cycles beginning in 2004 and 2005, threshold vesting was 40% of the award, and performance ranges for the growth in Underlying earnings per share (UEPS) was expressed in post-inflation terms.
The following companies were selected as comparator companies (the "Comparator Group") to reflect the global nature of our business:
| UK based companies | Non-UK based companies | Head office location |
|---|---|---|
| Allied Domecq# | Campbell Soup | US |
| Associated British Foods | Coca-Cola | US |
| Diageo | Coca-Cola Enterprises+ | US |
| Northern Foods | Colgate-Palmolive | US |
| Reckitt Benckiser | Conagra+ | US |
| Scottish & Newcastle+ | CSM+ | Netherlands |
| Six Continents* | Danone | France |
| Tate & Lyle | General Mills | US |
| Unilever | Heinz | US |
| Uniq* | Hershey Foods | US |
| Whitbread* | Kellogg | US |
| Kraft Foods+ | US | |
| Lindt & Sprungli+ | Switzerland | |
| Nestlé | Switzerland | |
| Pepsi Bottling Group+ | US | |
| PepsiCo | US | |
| Pernod Ricard | France | |
| Procter & Gamble | US | |
| Sara Lee Corp | US | |
| Suedzucker* | Germany | |
| Wrigley+ | US |
| * | indicates a company dropped from the Comparator Group in 2004 |
|---|---|
| + | indicates a company added to the Comparator Group for 2004 onwards |
| # | indicates a company dropped from the Comparator Group in 2005 due to it no longer being a publicly quoted company |
Awards under the LTIP (both before and after 2004) will vest in full following a change in control, but only to the extent that performance targets have been met at the time of the change in control unless the Committee decides that the awards would have vested to a greater or lesser extent had the performance targets been measured over the normal period. The status as at 1 January 2007 of each LTIP cycle in respect of which awards could have vested at the date of this report is shown to the right, showing our performance against the measures explained above. The 2004-6 LTIP UEPS result reflects an appropriate adjustment to earnings arising from discontinued operations.
| Cycle | Performance against UEPS target |
TSR percentile ranking as at 1 January 2007 |
Current status (% of maximum award) |
|---|---|---|---|
| 2001-2003 | hurdle met | 27 | lapsed |
| 2002-2004 | hurdle met | 35 | extended |
| 2003-2005 | hurdle met | 41 | extended |
| 2004-2006 | threshold exceeded | 74 | paid 69.1% |
The 2005-2007 and 2006-2008 cycles are currently expected to pay around half of the maximum award available. Actual vesting will depend upon performance over the full vesting period.
Discretionary Share Option Plans
No option grants were made to executive Directors in 2006 as discretionary share options were removed as part of our remuneration programme. No rights to subscribe for shares or debentures of any Group company were granted to or exercised by any member of any of the Director's immediate families during 2006. All our existing discretionary share option plans which apply to executive Directors use the following criteria:
| Annual grants made prior to 2004 AGM | Annual grants made after 2004 AGM |
|
|---|---|---|
| Market value of option grant made to executive Directors | Customary grant was 300% of base salary and the maximum was 400% of base salary | Maximum of 200% of base salary. From 2006 onwards, no such grants are made other than in exceptional circumstances |
| Performance condition | Exercise is subject to UEPS growth of at least the rate of inflation plus 2% per annum over three years | Exercise is subject to real compound annual growth in UEPS of 4% for half the award to vest and 6% real growth for the entire award to vest over three years, measured by comparison to the UEPS in the year immediately preceding grant |
| Re-tests | If required, re-testing has been on an annual basis on a rolling three-year base for the life of the option | If the performance condition is not met within the first three years, the option will be re-tested in year five with actual UEPS growth in year five measured in relation to the original base year |
The growth in UEPS for these purposes is calculated on a 'point to point' basis, using a formula which incorporates the UEPS for the year prior to the start of the first performance period and for the last year of the performance period based on a weighted average inflation index. The UEPS is measured on a real basis after allowing for inflation. Options granted in 2004 and 2005 are expected to meet their performance targets and vest in full. The actual vesting of awards will be based on performance over the full vesting period. All options granted prior to 2004 achieved their UEPS targets and vested in full.
Other share option plans
Each executive Director also has the opportunity to participate in the savings-related share option scheme operated in the country in which his contract of employment is based. Further details on these share plans are provided in Note 26 to the financial statements.