GSK Annual Report 2002

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40 GlaxoSmithKline Remuneration report 2002 Directors’ remuneration report This report is submitted to shareholders by the Board for approval at the Annual General Meeting, as referenced in the Chairman’s letter and notice of Annual General Meeting, which has been sent to all shareholders. This report describes the background to and outlines the Group’s remuneration policy. It also gives required information about the earnings of Directors and senior management in 2002, as well as about Directors’ interests in the shares of GlaxoSmithKline and in contracts. References to GlaxoSmithKline shares and ADSs mean, respectively, Ordinary Shares of GlaxoSmithKline plc of 25p and American Depositary shares of GlaxoSmithKline plc. Each ADS represents two GlaxoSmithKline shares. The Remuneration Committee In reviewing governance arrangements, the Board decided during the year to separate the roles of the former Remuneration and Nominations (R&N) Committee in order to give a separate individual Board focus to both functions. Accordingly a Remuneration Committee, with terms of reference revised to take into account latest governance standards, assumed the remuneration responsibilities of the previous R&N Committee in October 2002. The members of the Remuneration Committee, and previously the R&N Committee, are and have been at all times when the matters relating to the directors’ remuneration for 2002 have been considered: Mr Allaire (Chairman), Dr Barzach, Sir Roger Hurn, Mr McArthur, Mr McHenry and Mr Young until his retirement. Mr Allaire succeeded Mr Young as chairman of the R&N Committee on 20th May 2002. Sir Peter Job was appointed a member of the Committee on 7th February 2003. The Chairman and the Chief Executive Officer (CEO) are invited to attend the Committee’s meetings except when their own remuneration is being considered. The Board will review the current terms of reference of all its committees in the light of the Higgs’ Review of the role and effectiveness of non-executive directors and consequent changes to the Combined Code. Any material changes to the Remuneration Committee’s terms of reference will be reported in next year’s report. Remit of the Remuneration Committee The Remuneration Committee considers and regularly reviews the Group’s policy on Executive remuneration for approval by the Board and determines the individual remuneration packages of the members of the Corporate Executive Team. The policy set by the Remuneration Committee shapes remuneration at other levels within the Group affecting the arrangements for the management population as a whole (approximately 11,000 individuals, representing over 10 per cent of the employee population). Towers Perrin, a leading firm of remuneration and benefits consultants, provides strategic advice to GlaxoSmithKline on general remuneration and benefits planning and also provides market data. Towers Perrin also advises the Remuneration Committee, under a separate mandate, with regard to the remuneration of senior executive management and the Non-Executive Directors. Changes to the remuneration of the Non-Executive Directors are determined by the GlaxoSmithKline Board itself on advice from the Remuneration Committee. In 2003, the Remuneration Committee engaged Deloitte & Touche to conduct an additional independent review of GlaxoSmithKline’s current remuneration policy, including its competitiveness, and to advise the Committee as to the shaping and development of future remuneration policy in the context of GlaxoSmithKline’s corporate base in the UK and the competitive needs of the business from a global point of view. Background GlaxoSmithKline is one of the world’s leading research-based pharmaceutical and healthcare companies. As such, it has to be global in outlook and operations. The Group employs over 100,000 people in over 100 countries. Over 90 per cent of its sales are generated outside the UK. The USA is the largest pharmaceutical market in the world and is fundamental to GlaxoSmithKline’s success and profitability. More than 50 per cent of its pharmaceutical sales are in the USA. The Chief Executive Officer is based there, along with another eight of the thirteen person Corporate Executive Team (CET). The CET has considerable global experience with over half the group having worked outside their home country. The quality and motivation of management matter enormously in a very large and complex company like GlaxoSmithKline. A considerable corporate effort is required to recruit, develop and motivate talented people, and to ensure that managers at each level have the necessary breadth of experience, knowledge and leadership skills. The pharmaceutical industry is international and highly specialised. It is characterised by a handful of global companies which compete as intensely for talent as they do for business. The industry’s top managers and scientists are very much in demand, widely known in the industry and are internationally and corporately mobile. The way all managers and scientists in GlaxoSmithKline are rewarded and developed therefore has to be industry-competitive. It is crucial to their retention and effectiveness. Key market data with regard to remuneration for senior management, science based positions and sales is provided by a survey which covers the following group of global pharmaceutical companies (the ‘competitor panel’): Market Cap Constituents of the 31.12.02 Competitor Panel Location £m Abbott Laboratories USA 38,816 AstraZeneca UK 38,154 Aventis France 26,941 Bristol-Myers Squibb USA 27,854 Eli Lilly USA 44,313 Johnson & Johnson USA 99,105 Merck USA 79,103 Novartis Switzerland 65,390 Pfizer USA 117,011 Pharmacia USA 33,499 Roche Switzerland 30,409 Schering-Plough USA 20,221 Wyeth USA 30,796 At 31st December 2002 the market capitalisation of GlaxoSmithKline was £71,809 million, compared to the average market capitalisation of the group of £51,673 million.
The majority of the competitor panel are US based companies which operate globally. These companies are competing for the same talent and any perceived shortfall in GlaxoSmithKline’s competitive position could lead to a loss of key talent. GlaxoSmithKline’s remuneration policy was set out at the time of the merger, endorsed by shareholders then, and has made a major contribution to the success of the merger. Remuneration policy GlaxoSmithKline’s remuneration policy is to pay at industry competitive levels with a heavy emphasis on pay for performance and ‘at risk’ remuneration. The policy is designed to: • focus on long-term sustained success • focus on shareholder value through a strong emphasis on share plans • set high levels of minimum achievement • ensure integrated performance assessment throughout the management team to deliver concerted action towards success • provide opportunities to earn globally competitive rewards, but only if performance is delivered. The Remuneration Committee believe that both individual and team performance are directly linked to organisational success and are, therefore, critical to GlaxoSmithKline’s future. Global job evaluation for management level employees is monitored centrally to ensure consistency and the interlinking of performance objectives from top to bottom of the management chain and throughout the Group. GlaxoSmithKline’s Executive remuneration consists of four components: • Salary • Performance bonus • Long-term incentives • Benefits The relative importance of the fixed and variable elements of pay for the Executive Directors is illustrated in the table below: Fixed Performance-related Short-term incentives Long-term incentives Base pay Performance bonus Share option Performance Measures plan share plan Operating financial EPS growth of 9 TSR vs FTSE 100 measures percentage points greater than Retail EPS growth of 9 Performance against Prices Index (RPI) percentage points individual objectives over 3 years greater than RPI over 3 years 15-25% 75-85% These components are subject to regular review to make sure that remuneration remains competitive and challenging. The following sections provide greater detail on the performance conditions above. Remuneration report GlaxoSmithKline 41 In relating total remuneration opportunity to that available for comparable roles within the competitor panel, the Committee’s policy is to provide the opportunity to earn total remuneration within a range targeted between the median and 65th percentile of that available among those comparable roles. These opportunities only crystallise where individual, team and corporate performance have met strategic, financial and related business objectives. To provide appropriate incentives for exceptional performance, the Committee’s policy is to provide market referenced opportunities beyond this for truly outstanding performance. However, the Committee is aware that current levels of long term incentives do not deliver this policy. Independent market data demonstrates that GlaxoSmithKline’s top management remuneration is currently uncompetitive with regard to long-term incentives. As a result their total remuneration opportunity for 2002 was well below the industry median. The Remuneration Committee will continue to monitor closely the quantum and trend of the competitor panel’s awards and will consider what should be done in the best interests of the company and its shareholders. Salary Base salaries are established by reference to the median for the relevant market (in most cases this is the competitor panel) and will vary based on an executive’s experience, responsibility and market value. Adjustments to base salaries following appointment to a position are based on performance. Salaries are typically reviewed on an annual basis. Performance bonus This is based on a formal review of annual performance by business teams against demanding financial targets and on detailed assessment of individual accomplishments against objectives. Bonuses are subject to upper limits, derived from practice across the competitor panel. The highest of these limits is 200 per cent of base salary. On target business performance brings total annual cash remuneration into line with the competitor panel. Annual cash remuneration rises if the target performance is exceeded, but falls well below the level of competitors if these targets are not achieved. Executives may invest their bonus in GlaxoSmithKline shares, in which case the bonus is enhanced by ten per cent but the shares must be held for a minimum of three years. Long-term incentives These comprise share options and participation in a Performance Share Plan that links reward to shareholder value over the long and medium term respectively. Performance conditions over the relevant measurement periods for the different plans were designed to provide a competitive remuneration package that, as a whole, focuses Executive Directors on meeting the Group’s business objectives. The design of plans is reviewed to ensure that they evolve to meet the needs of a changing competitive environment, both in terms of maintaining the competitive position in the global market and ensuring a focus on current business issues.
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Page 55 and 56: 2002 Year World economy The world
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13 Earnings per share Notes to the
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19 Equity investments Notes to the
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31 Acquisitions and disposals conti
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32 Financial instruments and relate
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34 Employee share schemes continued
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37 Reconciliation to US accounting
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38 Principal Group companies Notes
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38 Principal Group companies contin
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Financial record GlaxoSmithKline 14
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Investor information GlaxoSmithKlin
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Shareholder information Ordinary sh
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Share capital GlaxoSmithKline 155 A
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Cross reference to Form 20-F GlaxoS
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Index A Access to healthcare 27 Acc
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Contact details INTERNET Informatio
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GSK Annual Report 2002

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