BP Annual Report and Form 20-F 2011 - Company Reporting

Directors’ remuneration reportRemuneration policy for 2012 in more depthThis section contains a more detailed explanation of the components oftotal remuneration for executive directors and how they will beimplemented in 2012.SalaryThe committee normally reviews salaries annually, taking into accountother large Europe-based global companies, other oil majors, and relevantUS companies. It also considers salary treatment throughout the companywhen determining appropriate increases for executive directors.Annual bonusThe group strategy provides the context for the company’s annual plan,from which measures and targets are derived at the start of the year forsenior managers including executive directors. Measures typically includea range of financial and operating metrics as well as those relating tosafety and environment, and people.At the end of each year, performance is assessed relative to themeasures and targets established at the start of the year, adjusted for anymaterial changes in the market environment (predominantly oil prices).Assessment includes both quantitative and qualitative views as well asinput from the other committees on relevant aspects. The committeeconsiders that this informed judgement is important to establishing a fairoverall assessment.The chart below shows the average annual bonus result (beforeany deferral) and relative to an on-target level for executive directors forthe current year and previous five.History of annual bonus results% of target200150100502006 20072008 2009 20102011on-targetaverage actual resultFor 2012, all executive directors will again be eligible for a total bonus(including deferral) of 150% of salary at target and 225% at maximum.Mr Dudley’s bonus will be based entirely on group measures. Mr Conn,Dr Gilvary and Dr Grote will have 70% of their bonus based on groupresults and 30% on their respective segment or function.The measures used to determine bonus results flow directly fromthe group’s annual plan which reflects the strategic priorities of reinforcingsafety and risk management, rebuilding trust, and reinforcing valuecreation.At group level, safety and risk management measures includerecordable injury frequency, loss of primary containment and processrelated major incident announcements and high potential incidents.Rebuilding trust will be measured via surveys to assess both externalreputation and internal staff alignment and morale. Restoring value willprovide the dominant set of measures and include operating cash flow,underlying replacement cost profit, total cash costs, gearing, divestments,upstream production efficiency, major project delivery and Refining andMarketing profitability.The Refining and Marketing segment will include specific safetymetrics for the segment. Value metrics will include availability, efficiency,and profitability metrics, as well as divestments and major projectdelivery. Finance function measures will include divestments, gearingand major project delivery. The corporate business function will includeprofitability and compliance measures for IST and Alternative Energy.In all cases, targets for each measure are set so that achieving planlevels of performance equates to an on-target bonus. As in past years,in addition to the specific bonus metrics, the committee will also reviewthe underlying performance of the group in light of competitors’ results,analysts’ reports and the views of the chairmen of the other committees.Based on this broader view, the committee can decide to adjust bonuseswhere it is warranted and, in exceptional circumstances, to pay nobonuses.Deferred bonusThe structure of deferred bonus, paid in shares, places increased focuson long-term alignment with shareholders, and reinforces the criticalimportance of maintaining high safety and environmental standards. Iteffectively translates the outcome of a portion of the annual performancebonus into a long-term plan with additional performance hurdles. Asshown below, the results of 2012 will form the basis for determining thedeferred bonus in 2013.Timeline for 2012 deferred bonusResult ofannualperformancePerformance periodDeferralVesting2012 2013 20142015 2016For 2012, as last year, one-third of the annual bonus will be deferredinto shares for three years and matched by the company on a one-foronebasis. Under the rules of the plan, the average share price overthe three days following announcement of full-year results is used todetermine the number of shares. Both deferred and matched shareswill vest in February 2016 contingent on an assessment of safety andenvironmental sustainability over the three-year deferral period. If thecommittee assesses that there has been a material deterioration in safetyand environmental metrics, or there have been major incidents revealingunderlying weaknesses in safety and environmental management, then itmay conclude that shares should vest in part, or not at all. In reaching itsconclusion, the committee will obtain advice from the safety, ethics andenvironment assurance committee (SEEAC).Executive directors may voluntarily defer a further one-third of theirannual bonus into shares, which will be capable of vesting, and will qualifyfor matching, on the same basis as set out above. Where shares vest,the executive director will also receive additional shares representing thevalue of the re-invested dividends.Performance sharesThe performance share element reflects the committee’s policy that alarge proportion of total remuneration is tied to long-term performance.Performance shares are awarded at the start of each year and vesting,after three years, is based on performance relative to measures andtargets derived from the company’s strategic priorities. Those sharesthat vest are then held for a further three-year retention period beforebeing released to the executive after payment of tax on vesting.This gives executive directors a six-year incentive structure, which isdesigned to ensure their interests are aligned with those of shareholders.Where shares vest, the executive director will receive additional sharesrepresenting the value of the re-invested dividends.Timeline for 2012-2014 share elementPerformance periodAwardRetention periodVesting2012 2013 2014 2015 2016 2017 2018Release146 BP Annual Report and Form 20-F 2011