Tesco plc Annual Report and Financial Statements 2008

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Directors’ remuneration report continued A percentage of the EBIT of the US business for the relevant years may be allocated to an EBIT pool (the ‘profit pool’). The profit pool will be capped at 10% in any one year and is expected to be approximately 5% of cumulative EBIT over the four measurement years (2010/11 to 2013/14). The portion of an award which may vest will be determined by reference to the value of the EBIT pool as well as performance against the ROCE hurdles for the relevant year, as outlined in the table headed ‘Summary of US business performance conditions’ below. To the extent that the ROCE hurdles for any one year are met (either in full or in part), but there is insufficient value in the profit pool to fund the vesting of awards, then the actual vesting in that year will be scaled back so that the profit pool is not exceeded. That portion of the award that has not paid out in that year due to the profit pool being restricted may vest in future years, provided that the profit pool in any later year permits this. The targets for the US LTIP have been based on the business plan in respect of the initial phase of the US business. The Remuneration Committee has the responsibility to review these targets in light of the scale and scope of the US business in order to ensure that they remain appropriate and challenging. In particular, the Remuneration Committee will seek the input of the Audit Committee and the new Governance Oversight Committee (described below) in order to ensure that financial performance against the targets is indicative of strong and robust business performance. Any material adjustments made in respect of the targets will be reviewed and approved by the Audit Committee and will be disclosed in the Company’s Remuneration Report. Group New Business Incentive Plan 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. It is important to incentivise executives to encourage entrepreneurialism where this is in the best long term interests of shareholders, and 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 Committee in the future where this is appropriate to do so in order to support the Group’s new business ventures. The maximum number of shares which may be awarded under the rules of the Group Plan is 2.5 million shares to the Group CEO and 2 million shares to any other participant. An award of 2.5 million shares was made to the Group CEO in November 2007. Awards may be adjusted to take account of any dividends paid or that are payable in respect of the number of shares earned. The vesting of the award made to the Group CEO under this Plan will be conditional upon achievement against Group and International performance conditions. The performance conditions under this award will be aligned with the targets set for awards made under the PSP in each of the years 2007 to 2009, which will become capable of vesting between 2010 and 2012. The targets set for awards made under the PSP are referred to in the section above headed ‘Performance Share Plan’. Summary of US business performance conditions 28 Tesco PLC Annual Report and Financial Statements 2008 If less than threshold performance is achieved for each of these PSP awards then no portion of the Group Plan award will become capable of vesting. If maximum Group and International performance is achieved for each of these PSP awards (i.e. the 2007 – 2009 PSP awards vest in full in 2010 – 2012), then the whole of the Group Plan award will become eligible for vesting, subject to achievement of the appropriate new business performance targets referred to below. If Group and International performance for any of these PSP awards is between threshold and maximum levels then the Group award will become eligible for vesting on a pro rata basis, subject always to the achievement of the appropriate new business targets referred to below. Once performance against the Group and International targets has been determined, the extent to which the award made to the Group CEO under this Plan is capable of vesting will be conditional on the financial performance of the specified new business ventures, as determined by the Committee. 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 will initially be focused on the performance of the US venture, based on the performance targets set out in the section headed ‘US Long-Term Plan’ above, although the Committee will have the flexibility to consider and include other new business development opportunities within the proposed award. In addition, the Committee will consider the findings of the Governance Oversight Committee (described below) and opinions of the Audit Committee as to whether the level of ROCE 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. Awards made to other participants will vest based on the financial performance of new business ventures, as determined by the Committee at the time of any award. Governance Oversight Committee In light of the introduction of, and the potential future payouts under, the new long term incentive arrangements, it has been decided to establish a Governance Oversight Committee (the GOC) to review and report at the end of each financial year on the allocation of capital and other Group resources. The GOC will comprise the Senior Independent Director of the Company (who will chair the GOC), the Chairman of the Audit Committee of the Company and the Chairman of the Remuneration Committee of the Company. The Company Chairman will attend the GOC and the Company Secretary will serve as its secretary. The GOC will report its findings to the Remuneration Committee each year. The Remuneration Committee will take these into account along with the view of the Audit Committee to ensure that financial performance against targets is indicative of strong and robust business performance. If appropriate, vesting under the plans may be adjusted by the Remuneration Committee (in respect of Executive Directors) or the Board (in respect of all other employees who are participants). In accordance with the Combined Code, any such adjustments to vesting for Executive Directors will be reported to shareholders in the Remuneration Report at the relevant time. ROCE hurdle1 2010/11 2011/12 2012/13 2013/14 Maximum performance 6% ROCE 9% ROCE 11% ROCE 12% ROCE Target performance Vesting percentage (% of maximum award) 4% ROCE 6% ROCE 8% ROCE 10% ROCE Vesting levels at maximum performance Up to 25% Up to 50% Up to 75% Up to 100% Vesting level at target performance Up to 6.25% Up to 10% Up to 12.5% Up to 18.75% 1 ROCE targets have been calculated on the basis of an assumed tax rate of 30%. www.tesco.com/annualreport08
Share options Options over shares with a value of 200% of salary are granted to the Executive Directors on an annual basis. Options are granted 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 the options is conditional on the achievement of earnings per share performance conditions, with the first 100% subject to the achievement of EPS growth of at least RPI plus 9% over three years and the balance vesting for achieving EPS growth of at least RPI plus 15%. There is no re-testing of performance. Following the Remuneration Committee’s consideration of the extent to which the earnings per share performance conditions for the options granted to the Executive Directors in 2005/6 have been achieved, these options will vest in full. Share options are an important part of the incentive framework for hundreds of senior managers within Tesco. The Committee recognises that some companies are moving away from share options and has again considered the appropriateness of retaining this scheme. The Committee remains highly confident that the share option plans remain in the best interests of shareholders as they provide a clear, simple incentive arrangement for a large group of senior management, including Executive Directors, and they reward increases in absolute shareholder value. Element of remuneration Performance measure Purpose Funding of awards Executive incentive arrangements are funded by a mix of newly issued shares and shares purchased in the market. Where shares are newly issued the company complies with ABI dilution guidelines on their issue. Share ownership guidelines Executive Directors are normally expected to build and maintain a shareholding with a value at least equal to their basic salary. New appointees will typically be allowed around three years to establish this shareholding. Full participation in the PSP is conditional upon this. All Executive Directors currently satisfy this requirement. Summary of remuneration elements All awards made to Executive Directors under the Annual Bonus, PSP, US LTIP and Group New Business Incentive Plan, and all options granted under the Discretionary Share Option Plan are subject to the satisfaction of performance conditions. If performance is lower than the maximum targets, the short-term bonus and long-term incentives will reduce accordingly. The Committee has reviewed the performance conditions for each of the incentive arrangements against the Group’s business strategy, its growing global leadership, its position as one of the rising companies at the top of the FTSE 100 and increasing competition from private equity in the sector and has concluded that they provide a set of comprehensive and robust measures of management’s effort and success in creating shareholder value. A summary of the elements of the package and the applicable performance measures is set out in the table below. Base salary Individual contribution to the business success To attract and retain talented people Annual cash bonus For all Executives, earnings per share and specified Motivates year-on-year earnings growth and (Up to 100% of salary) corporate objectives delivery of strategic business priorities (Additional potential of up to For the US CEO, objectives relating to early-stage progress Incentivises entrepreneurial spirit and early 50% of salary for US CEO) in establishing the US operations stage progress of US business Annual deferred share element For all Executives, total shareholder return, EPS and Generates focus on medium-term targets and, (Up to 100% of salary) specified corporate objectives by incentivising share price and dividend growth, ensures alignment with shareholder interests. (Additional potential of up to Objectives relating to early-stage progress in establishing Incentivises entrepreneurial spirit and early 50% of salary for Group CEO new business ventures for the Group CEO, and relating stage progress of US business and US CEO) to the successful start-up of the US operations for the US CEO Performance Share Plan Group performance: Group ROCE Assures a focus on long-term business success (Up to 150% of salary: International performance: International ROCE and shareholder returns 100% for Group performance; and 50% for International performance*) The Committee will also take account of sales growth and * US CEO not eligible for the 50% underlying profit growth in determining levels of vesting relating to International performance US Long-Term Incentive Plan US performance: US EBIT and ROCE Incentivises establishment of a successful (One-off award to US CEO US business over the long term of 2 million shares, pays out in four tranches 2010 to 2014) Group New Business Incentive Plan New Business Performance: initially just US EBIT/ROCE, Incentivises establishment of a successful new (One-off award to Group CEO of but no payout unless Group and International ROCE businesses over the long term, but ensures 2.5 million shares, pays out in targets are also achieved continued focus on the Group as a whole four tranches 2010 to 2014) Share options EPS relative to retail price index Incentivises earnings growth and Executive Director shareholding Tesco PLC Annual Report and Financial Statements 2008 29
Page 1 and 2: Tesco PLC Annual Report and Financi
Page 3 and 4: Financial highlights Growth on 2007
Page 5 and 6: Report of the Directors The Directo
Page 7 and 8: International contributed £701m to
Page 9 and 10: Current trading We have seen a stro
Page 11 and 12: 2008 2007 Total shareholder return
Page 13 and 14: Our business in Poland had a good y
Page 15 and 16: Tesco Personal Finance (TPF) TPF is
Page 17 and 18: and put the community at the heart
Page 19 and 20: Joint venture governance and partne
Page 21 and 22: Political and charitable donations
Page 23 and 24: Members’ attendance during the ye
Page 25 and 26: Internal controls Accountability fo
Page 27 and 28: Directors’ remuneration report ye
Page 29: The Committee considers TSR perform
Page 33 and 34: Non-executive Directors Non-executi
Page 35 and 36: Table 4 Share options held by Direc
Page 37 and 38: Table 6 Long-Term Performance Share
Page 39 and 40: Table 10 Directors’ interests in
Page 41 and 42: Go online! Every year, more and mor
Page 43 and 44: Independent auditors’ report to t
Page 45 and 46: Group statement of recognised incom
Page 47 and 48: Group cash flow statement year ende
Page 49 and 50: Note 1 Accounting policies continue
Page 55 and 56: Note 2 Segmental reporting The Boar
Page 57 and 58: Note 2 Segmental reporting continue
Page 59 and 60: Note 5 Finance income and costs 200
Page 61 and 62: Note 6 Taxation continued Deferred
Page 63 and 64: Note 7 Discontinued operation and a
Page 65 and 66: Note 10 Goodwill and other intangib
Page 67 and 68: Note 11 Property, plant and equipme
Page 69 and 70: Note 11 Property, plant and equipme
Page 71 and 72: Note 13 Group entities continued (a
Page 73 and 74: Note 14 Other investments continued
Page 75 and 76: Note 19 Borrowings Current Maturity
Page 77 and 78: Note 20 Financial instruments conti
Page 79 and 80: Note 21 Financial risk factors cont
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Note 21 Financial risk factors cont
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Note 23 Share-based payments contin
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Note 24 Post-employment benefits Pe
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Note 24 Post-employment benefits co
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Note 25 Called up share capital 200
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Note 26 Statement of changes in equ
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Note 27 Business combinations conti
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Note 30 Analysis of changes in net
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Note 32 Leasing commitments continu
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UK GAAP IFRS 2004 2005 2005 20061 5
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Notes to the Parent Company financi
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Note 2 Auditor remuneration 2008 20
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Note 9 Borrowings Maturity 2008 200
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Note 11 Share-based payments contin
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Note 14 Reserves Restated* 2008 200
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Cover: Kana and son Tesco Express,
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Tesco plc Annual Report and Financial Statements 2008

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