Annual report and accounts - Cattles Limited

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34 Cattles plc Annual Report and Financial Statements 2004 Report of the Board on Directors’ Remuneration Further details of the new LTIP are set out in the accompanying circular. In summary the new LTIP will have two elements, a conditional award of ‘Performance Shares’ and an award of ‘Matching Shares’ linked to the investment in Cattles shares of annual bonus of up to 37.5% of salary. The normal maximum award level under the Performance Shares element will be 100% of basic salary per annum. The maximum matching ratio under the Matching Shares element will be two Matching Shares for every invested share (on a gross basis). Awards will vest subject to the satisfaction of stretching EPS growth-based performance conditions over a fixed three year period from grant, with the targets for the first awards made under the LTIP being EPS growth of the Retail Price Index (RPI) + 20% (at which point 30% of an award vests) to RPI + 35% (at which point awards vest in full). However, final levels of vesting can be ‘adjusted’ by reference to the company’s EPS growth compared to the average EPS growth of companies in the FTSE 250 Index (calculated by dividing the Index by the price/earnings ratio of the Index) over the same three year period. The Remuneration Committee considers that these performance conditions are appropriate as they encourage the company’s senior management team to deliver sustained exceptional EPS growth, with EPS being a widely used statistic in gauging the company’s performance and in valuing its shares. The Committee considered the use of a Total Shareholder Return (‘TSR’)-based performance condition, but did not believe that there was a sufficient number of directly comparable companies against which it would be appropriate to compare the company’s TSR performance. The Committee is satisfied that the sliding scale of real EPS growth targets of RPI + 20%-35% is appropriate and sufficiently challenging for the following reasons: ● ● ● While the upper EPS growth hurdle of RPI + 35% is marginally lower, in absolute terms, than the upper EPS target required for full vesting under the current Restricted Share Scheme (as set out on page 35), the Committee is mindful of the need to reflect the fact that, as the company matures, its expected EPS growth will also mature. That said, it should be noted that it is the Committee’s policy to set the upper EPS growth target in excess of market expectations. Only 30% of new LTIP awards will vest for achieving the minimum threshold level of EPS growth of RPI + 20%. Pursuant to the last award made under the Restricted Share Scheme, 50% of that award vests for achieving the minimum threshold level of EPS growth. The EPS growth targets set for the new LTIP are significantly more challenging, in absolute terms, than the vast majority of EPS growth targets applied by other companies. The Remuneration Committee believes that share ownership by executive directors and senior executives strengthens the link between their personal interests and those of shareholders, and provides the opportunity for longer term motivation and retention. The company’s policy is that the executive directors are required to build up and retain a shareholding in the company, primarily from their long-term incentive arrangements, equivalent to their annual salary. Restricted Share Scheme This scheme, established in 1994, was structured to provide longer term incentives for the attainment of improved group performance over an extended period. The participants include the executive directors and some other key senior executives who are best placed to influence such performance. In relation to the awards made contingently under the scheme, each participant was notionally awarded shares up to one times basic annual salary each year. The number of long term incentive shares which a participant ultimately receives will depend upon performance over a period measured by real growth in EPS. EPS is calculated on the same basis as stated in the group’s financial statements, subject to the Committee making such adjustment as it sees fit to take account of any material short term effect arising from an acquisition or any exceptional item of profit or loss in the group’s financial statements in a particular year. Any such adjustment to EPS by the Committee would be made in consultation with the external auditors.
Cattles plc Annual Report and Financial Statements 2004 35 The shares will not vest absolutely in the participants until after the end of three years and then only if they are still in the group’s employment at that time. The rules cover the possibility of shares vesting at an earlier date in the event of death, or employment ceasing because of injury, disability or normal retirement. In the event of a change of control of the company, any shares already awarded as a result of the performance goals having been attained will vest in the participants. Any balance of the notional award for future accounting periods will not vest. The participants have no voting rights or entitlements to dividends in respect of the shares until they vest. EPS must grow by a minimum pre-determined amount, set by the Remuneration Committee at the time of the award, over a three year performance period before participants will become entitled to any shares. Target earnings growth is as follows: Three year Notionally awarded Earliest vesting date target earnings growth January 2002 April 2005 45%(i) January 2003 April 2006 45%(i) January 2004 April 2007 45%(i) (i) In excess of the increase in the RPI to the extent that it exceeds 5%. The provisional award of shares is established by comparing the actual earnings growth achieved by the company against the predetermined target set for the relevant period. The maximum award will be made where the target has been met or exceeded. If the earnings growth achieved by the company is less than the target, then the provisional award will be reduced on a straight line basis, such that where the earnings growth is less than 50% of the target in respect of awards made in 2002, and 66.67% of the target in respect of awards made in 2003 and 2004, no provisional award is made. When the provisional award has been calculated, the earnings growth achieved by the company is then compared with the average earnings growth achieved by the constituent companies included in the FTSE All Share Index and the Speciality and Other Financials Index. If the earnings growth achieved by the company is less than that achieved by the constituent companies of either index, the provisional award is reduced by 1% for every 4% by which the earnings growth of the company falls below that of the constituent companies in either index. The provisional award may be reduced by a maximum of 25% as a result of this comparison. Equally, if the earnings growth achieved by the company exceeds that achieved by the constituent companies of either index, then the provisional award is increased by 1% for every 4% by which the earnings growth of the company exceeds that of either index, subject to the original notional award not being exceeded. The Committee may vary or make such other adjustments to the performance conditions applying to awards which have already been granted to reflect changes in accounting standards provided that the varied conditions are fair and reasonable. The scheme operates in conjunction with an employee benefit trust (as will the new LTIP), the trustee of which is Cattles Trustee Limited, a wholly owned subsidiary of Cattles plc. The directors of the trustee company are the members of the Remuneration Committee, all of whom are independent non-executive directors of the parent company, and none of whom is a beneficiary under the scheme. On the grant of notional awards under the scheme, the Trust purchased sufficient shares in the market to satisfy such awards, hence there was no issue of new shares. On the vesting of awards under the scheme, the Trust transfers the appropriate number of shares to the participants. The Trust will at no time hold more than 5% of the issued share capital of Cattles plc. The scheme was funded by loans from the company to the Trust, which then acquired Cattles plc shares for the purpose of the scheme. It is intended that the same policy will be adopted in relation to the operation of the new LTIP.
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