Directors' Report: Governance - British American Tobacco

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www.bat.com/annualreport2009 The constituent companies in the Pay Comparator Group as at 31 December 2009 are set out below: Associated British Foods Pearson Astra Zeneca Philip Morris International BP Reckitt Benckiser BT Group Reed Elsevier British Sky Broadcasting Royal Dutch Shell Cadbury SABMiller Diageo Tesco GlaxoSmithKline Unilever Imperial Tobacco Group Vodafone Marks & Spencer WPP Group Salary Purpose – reward individual performance – reflect skills and experience Delivery – monthly – cash Policy – annual review in February (with salary changes effective from April) or ad hoc review on a significant change of responsibilities – benchmarked for appropriate salary levels using a company size and complexity model coupled with (1) the Pay Comparator Group; and, for Executive Directors, (2) published salary data for FTSE 350 companies – base salary is pensionable The summary table above sets out the key policy principles for the salaries for the Executive Directors and the Management Board members. Similar principles are applied to the salaries of senior managers and other levels in the organisation, taking into account local market practices. Base salary from Base salary from 1 April 2010 1 April 2009 £ £ Paul Adams (Chief Executive) 1,290,000 1,225,000 Nicandro Durante (Chief Operating Officer) 670,000 630,000 Ben Stevens (Finance Director) 640,000 590,000 The Management Board members will receive salary increases averaging around 4 per cent which are in line with the salary increases awarded to centre-based UK employees with effect from 1 April 2010. Actual rises have been based on each individual’s contribution and performance and the external market competitiveness. The salary increase of the Chief Executive seeks to maintain the market competitive position and recognises the high level of Company performance currently being delivered. Directors’ report: Governance British American Tobacco Annual Report 2009 The Chief Operating Officer and the Finance Director are relatively new to their roles, both having been appointed in early 2008. The Remuneration Committee identified that these two positions are behind the market at both the level of base salary and on-target total compensation. In order to ensure that the remuneration packages of these two roles are better aligned to the market, the Remuneration Committee agreed to increase their levels of base salary by an average of about 7 per cent. The Remuneration Committee, while being clear that annual salary increases are not inevitable, considers that, in all cases, these revised salaries are appropriate as the Company has performed well over the review period. In addition to basic salary, the Executive Directors receive certain benefits in kind, principally: a car or car allowance; the use of a driver; and private medical and personal accident insurance. Performance-related bonus – International Executive Incentive Scheme (IEIS) Purpose – incentivise the attainment of corporate targets on an annual basis Delivery – annual award – 50 per cent cash – 50 per cent shares (deferred shares) – dividend equivalent payment Policy – six common measures for performance: underlying operating profit, market share, Global Drive Brand volume, net revenue, cash flow and costs – the annual ‘on-target’ bonus opportunity for the Chief Executive is 100 per cent of the base salary with a maximum award of 200 per cent of salary, and for the Chief Operating Officer and Finance Director the ‘on-target’ bonus opportunity is 90 per cent with a maximum award of 180 per cent – for the Management Board the ‘on-target’ bonus opportunity is 67.5 per cent of the base salary with a maximum award of 135 per cent of salary – awards are non-pensionable The IEIS rewards short-term business performance within the context of longer-term sustainability and any resulting award is delivered as 50 per cent cash and 50 per cent deferred shares (through the Deferred Share Bonus Scheme). Appropriately, stretching targets are set by the Remuneration Committee at the beginning of each year and are measured in terms of both business and financial performance. The resulting award for senior managers is delivered in variable proportions according to grade, being usually 55 per cent cash and 45 per cent deferred shares. 81 From the Chairman Performance and strategy Regional review Financial review Governance Group financial statements Parent Company financial statements Shareholder information
For the Executive Directors and Management Board members, the annual bonus opportunity for 2010 (unchanged from 2009) will be as shown in the summary table above. The annual bonus opportunity for senior managers also remains unchanged with the annual ‘on-target’ bonus opportunity being 45 per cent of base salary with a normal maximum award of 90 per cent of salary rising to 135 per cent of base salary in cases of exceptional performance. In 2009, the targets reflected the six common measures referred to above with each having an equal weighting of 16.67 per cent. Relevant performance points are: threshold (which must be exceeded to attract any payment of a bonus for that measure); target; and maximum amount (the level at which the bonus for that measure is capped) are set at the start of the year by reference to the projected performance for each target in the context of the Group’s annual budget. No elements of the bonuses are guaranteed and, as in previous years, the specific targets are commercially sensitive and not made public. While the current proposed bonus targets do not include any measures which directly reflect the Group’s performance on corporate social responsibility (CSR) and governance issues, the Board continues to recognise the importance of this area. Governance is embedded in the organisation as evidenced by the Company’s strong governance structure. In addition, the delivery of the strategic vision encompasses the business measure of Responsibility for which the Dow Jones Sustainability Indices (an external benchmark) have been used as one of the measures to assess the Company’s successful performance to date – see CSR section of the Corporate governance statement. The Committee receives reports from management to allow it to assess the extent to which performance measures have been achieved. Subject to the Committee exercising its judgment in the assessment of the quality of the Company’s overall performance, the payout for each measure is determined by reference to performance relative to that measure’s performance points, on a pro rata basis. In respect of the year ended 31 December 2009, the total payouts under the IEIS were: Chief Executive 135.4 per cent (2008: 169.4 per cent); Finance Director and Chief Operating Officer 121.9 per cent (2008: 153.5 per cent); and Management Board 91.4 per cent (2008: 116.7 per cent), in each case paid 50 per cent in cash and 50 per cent in deferred shares. The actual performancerelated pay values are shown in Table 4 – annual cash bonus and deferred share bonus. For senior managers, the total payouts reflect performance at a global, regional, area or end market level, as applicable to their roles. For senior managers whose bonus was linked to global performance, the total payout under the IEIS in respect of the year ended 31 December 2009 was 60.9 per cent (2008: 81.2 per cent), paid 55 per cent in cash and 45 per cent in deferred shares. Awards made under the Deferred Share Bonus Scheme (the Deferred Scheme) are in the form of free ordinary shares in the Company which are normally held in trust for three years and no further performance REMUNERATION REPORT CONTINUED conditions apply in that period. In certain circumstances, such as resigning before the end of the three year period, participants may forfeit the shares. The Remuneration Committee encourages a culture of ‘ownership’ of these awarded shares and participants receive a cash sum equivalent to the dividend on the after-tax position of all unvested ordinary shares held in the Deferred Scheme at the dividend record date. Long-term incentives Purpose – incentivise growth in earnings per share and total shareholder return (TSR) over a three year period Delivery – discretionary annual award – awards of shares – variable due to performance over three year period – dividend equivalent payment Policy – maximum annual award of 300 per cent of salary – three year performance period – TSR performance (50 per cent of the total award) combines both the share price and dividend performance during the three year performance period as against two comparator groups (25 per cent for each measure): (1) constituents of the FTSE 100 Index; and (2) a peer group of FMCG companies – earnings per share measure (50 per cent of the total award) relates to earnings per share growth (on an adjusted diluted basis) relative to inflation The long-term element of remuneration continues to be delivered through the Company’s LTIP. All the Executive Directors, Management Board members and senior employees participate in the Long-Term Incentive Plan adopted in 2007 (the 2007 LTIP). This plan replaced the LTIP adopted in 1998 (1998 LTIP) under which no further awards have been made and which has now expired. The 2007 LTIP provides for awards of free ordinary shares, provided demanding and appropriately stretching performance conditions are met over a three year period. The first award under the 2007 LTIP was made in May 2007. Award levels The current award levels for Executive Directors and Management Board members (in place since 2008) are set out in the table below and will continue to apply to awards made in 2010. Senior managers receive awards over 75 per cent or 25 per cent of salary dependent on grade. The maximum annual award under the rules of the 2007 LTIP is 300 per cent of base salary. The Committee continues to review the application of this limit in the context of its policy overall. Multiple of base salary LTIP awards % Chief Executive 300 Finance Director 250 Chief Operating Officer 250 Management Board 200 82 British American Tobacco Annual Report 2009 Directors’ report: Governance
Page 1 and 2: GOVERNANCE Board of Directors A sum
Page 3 and 4: 1. Richard Burrows (Irish) Chairman
Page 5 and 6: CONTENTS Chairman’s introduction
Page 7 and 8: meeting to address Jan du Plessis
Page 9 and 10: The Board and its Committees receiv
Page 11 and 12: Accountability and audit Audit Comm
Page 13 and 14: The Audit Committee has an establis
Page 15 and 16: Corporate social responsibility CSR
Page 17 and 18: Appointments to the Board Nominatio
Page 19 and 20: CONTENTS Introduction 78 Remunerati
Page 21: The Remuneration Committee reviewed
Page 25 and 26: in each company’s index over the
Page 27 and 28: The Company also operates the Free
Page 29 and 30: Executive Directors’ external app
Page 31 and 32: Appendices to the Remuneration repo
Page 33 and 34: REMUNERATION REPORT CONTINUED Table
Page 39 and 40: CONTENTS Companies Act 2006 98 Prin
Page 41 and 42: Articles of Association The followi
Page 43 and 44: 2) a Director to accept or continue
Page 45 and 46: The Disclosure and Transparency Rul
Page 47: 106 British American Tobacco Annual

Directors' Report: Governance - British American Tobacco

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