BAE-annual-report-2014

Governance
Description of share plans and summary of performance conditions
PSP
Shares under award vest after satisfaction of the three-year performance condition. Shares under award attract
dividends prior to vesting. Awards that vest are exercisable in three tranches between the third and seventh
anniversary of vesting (being capable of exercise on a phased basis from the third, fourth and fifth anniversary of
grant). For US participants, the awards are automatically delivered at the end of years three, four and five, subject
to the performance condition being achieved. In 2015, shares will be awarded under the Long-Term Incentive Plan
(a single umbrella plan) that was approved at the 2014 AGM as detailed on pages 83 and 85.
Awards made to the UK executive directors since 2008 have been weighted 50% on the PSP EPS performance
condition and 50% on the PSP TSR performance condition. Awards made to the US executive director were weighted
in the same way until 2011 and in 2014. In 2012 and 2013, the weighting for the US executive director was 50%
on the PSP EPS performance condition and 50% on the PSP OCF performance condition. The TSR comparator groups
are shown below.
Plan
Performance condition
PSP EPS For awards made in 2015, rate of average annual EPS growth over the three-year performance period, with 25%
vesting at 3% average growth per annum, 50% vesting at 5% average growth per annum and 100% vesting at 7%
average growth per annum, with vesting on a straight-line basis between these parameters. Awards will not vest
unless the Board is satisfied that there has been a sustained improvement in the underlying financial performance
of the Company (taking account of items such as cash, order book, risk and project performance).
PSP TSR
Pre-2015, rate of average annual EPS growth over the three-year performance period, with nil vesting at 5%
average growth per annum and 100% vesting at 11% average growth per annum, with vesting on a straight-line
basis between these two parameters.
The proportion of the award capable of exercise is determined by:
PSP OCF
(i) the Company’s TSR (share price growth plus dividends) ranking relative to a comparator group of 12 other
international defence companies over a three-year performance period. No shares vest if the Company’s TSR
is outside the top 50% of TSRs achieved by the sectoral comparator group, with 25% vesting at median, 100%
vesting if it is in the top quintile and vesting on a straight-line basis between these two parameters; and
(ii) whether there has been a sustained improvement in the Company’s underlying financial performance. In taking
such a view, the Committee may consider (but not exclusively) the following financial metrics: net cash/debt;
EBITA 1 ; order book; turnover; risk; and underlying project performance.
Long-term operating cash performance at the level of the US businesses over a three-year performance period.
The Committee is of the view that cash performance figures are commercially sensitive and that it would be
detrimental to the interests of the Company to disclose them in advance.
1. Earnings before amortisation and impairment of intangible assets, finance costs and taxation expense.
The TSR comparator group referred to above comprises:
Cobham
Finmeccanica
General Dynamics
ITT Exelis
L-3 Communications
Lockheed Martin
Meggitt
Northrop Grumman
The comparator group for PSP TSR awards from 2008 to 2011 comprises:
Boeing
Cobham
Dassault Aviation
EADS
Embraer PN
Finmeccanica
2. Goodrich is now part of United Technologies.
General Dynamics
GKN
Goodrich 2
Honeywell International
Lockheed Martin
Northrop Grumman
Raytheon
SAIC
Thales
United Technologies
Raytheon
Rockwell Collins
Rolls-Royce
Smiths Group
Thales
United Technologies
STRATEGIC REPORT GOVERNANCE
FINANCIAL STATEMENTS
BAE Systems
Annual Report 2014
77