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

Directors’ remuneration reportThe maximum number of shares that can be awarded will be 5.5 timessalary for the group chief executive and 4 times salary for the otherexecutive directors. Performance shares will only vest to the extent thatperformance conditions, as described below, are met and subject to thecommittee concluding that this is appropriate. The history of vesting ofthe share element is shown below.History of share element vesting% of maximum vested10080604020peers. It will explain any adjustments in the directors’ remuneration reportfollowing vesting, in line with its commitment to transparency.Shareholding policyThe committee’s policy, reflected in the Executive Directors’ IncentivePlan (EDIP), continues to be that each executive director builds andmaintains a significant personal shareholding in BP to create strongalignment with shareholders. Executive directors, under the policy, arerequired to build a share base equating to five times salary, within areasonable time from their appointment. Each director’s shareholding asat 31 December 2011 is set out on page 117.2004-2006 2005-2007 2006-2008 2007-2009 2008-2010 2009-2011Performance conditionsPerformance conditions for the 2012-2014 share element will be alignedwith the company’s strategic agenda which continues to focus on valuecreation, reinforcing safety and risk management, and rebuilding trust.Vesting of shares will be based one-third on BP’s total shareholder return(TSR) compared to the other oil majors, reflecting the central importanceof restoring the value of the company. A further one-third will be basedon the operating cash flow of the company, reflecting a central elementof value creation. The final one-third will be based on a set of strategicimperatives; in particular, reserves replacement, process safety, andrebuilding trust.For the relative measures, TSR and the reserves replacement ratio,the comparator group will consist of ExxonMobil, Shell, Total and Chevron.This group can be altered if circumstances change, for example, if there issignificant consolidation in the industry. While a narrow group, it continuesto represent the comparators that both shareholders and managementuse in assessing relative performance.The TSR will be calculated as the share price performance overthe three-year period, assuming dividends are re-invested. All share priceswill be averaged over the three-month period before the beginning andend of the performance period. They will be measured in US dollars.The reserves replacement ratio is defined according to industry standardspecifications and its calculation is audited. As in previous years, themethodology used for the relative measures will rank each of the fiveoil majors on each measure. Performance shares for each componentwill vest at levels of 100%, 70% and 35% respectively, for performanceequivalent to first, second and third rank. No shares will vest for fourth orfifth place.Operating cash flow has been identified as a core strategic priorityof the company. As has been communicated publicly, the target is togrow operating cash flow to $33 billion by 2014 based on $100/bbl oilprice assumption. Below $31 billion, there will be no vesting under thiscomponent. Between $31 billion and $35 billion there will be a straightline vesting from 60% to 100% respectively.Finally the remaining strategic imperatives relating to processsafety and rebuilding trust will be determined by a mixture of internaltargets and external assessment. In the case of process safety, highpotential incidents and major incident announcements will providethe key factual data as well as the input of the SEEAC. The rebuildingtrust component will include both external and internal surveys thatwill be used by the committee, along with input from the other boardcommittees, to judge performance. The results will be explained insubsequent directors’ remuneration reports.The committee considers that this combination of quantitativeand qualitative measures reflects the long-term value creation priorities ofthe company as well as the key underpinnings for business sustainability.As in previous years, the committee may exercise its discretion, in areasonable and informed manner, to adjust vesting levels upwards ordownwards if it concludes that the formulaic approach does not reflectthe true underlying health and performance of BP’s business relative to itsDirectors’ remuneration reportBP Annual Report and Form 20-F 2011 147