Industry leader - Inchcape

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34Inchcape plc Annual report and accounts 2006Board report on remuneration continuedBase salaryBase salaries are set by the Committee, taking into accountthe individual’s level of responsibility, experience, andperformance. Base salary is the only element of remunerationwhich is pensionable.In setting base salary, the Committee also takes accountof salary levels in comparable companies. For 2006,the comparator group was made up of twenty five generalindustry companies, almost all being companies in the FTSE mid250 index. Those companies were chosen because they wereof a similar size and complexity (measured in terms of revenues,market capitalisation, employee numbers and internationalscope) as the Company. Executive Directors’ salary increasesin 2006 took into account the relevant median data fromthis comparator group and the individual’s performance,and having regard to levels of pay increases for otherGroup employees.For 2007, the Committee has reviewed the comparator group,to ensure its continuing relevance to Inchcape, and has madea number of revisions. In particular, the revised comparatorgroup has a greater retail focus and includes companies withstrong consumer emphasis, in line with the Group’s strategicaims and its desire to attract retail talent.Annual bonusDuring 2006 the Executive Directors participated in a bonusplan based 70.0% on profit before tax (PBT), 20.0% on workingcapital, and 10.0% on the achievement of personal objectives.In respect of 2006, the bonus plan for André Lacroix wasstructured to yield a bonus of 50.0% of base salary if targetperformance was achieved and higher payments forperformance above target to a maximum of 110.0% of basesalary. Barbara Richmond’s bonus plan was structured to yielda bonus of 40.0% of base salary if target performance wasachieved and higher payments for performance above targetto a maximum of 90.0% of base salary. In 2006, the Companymet its performance targets set at the start of the yearfor PBT and working capital. Both André Lacroix and BarbaraRichmond had different individual personal objectives relatedto the development of the Group in relation to the newstrategy. The goals related to relevant quantitive non-financialmetrics, the achievement of strategic milestones and thedemonstration of appropriate leadership behaviours. They bothfully achieved their personal objectives in 2006. The resultantbonuses for André Lacroix, and Barbara Richmond are shownin the remuneration table on page 37. Graeme Potts’ bonus isalso shown on the table. He stepped down from the Boardand left the Company in September 2006 and the bonus paidreflects his length of service in the year and performanceagainst relevant targets.Adjustments to Executive Directors’ bonus plans have beenmade for 2007 to reflect market best practice and to providefurther alignment with the Company’s new business strategy.Bonus will be based 70.0% on Economic Profit, 20.0% on NetPromoter Score and 10.0% on achievement of personalobjectives. Economic Profit was chosen as the Committeebelieves that this is the measure most aligned with shareholdervalue as it is intended to place a greater emphasis on capitalefficiency and cash generation. Net Promoter Score waschosen as it is a measure being used to measure customersatisfaction across the Group and is in line with the Group’sbusiness strategy of being the most customer centricautomotive retailer. For André Lacroix and Barbara Richmond,their bonus plans will yield a bonus of 50.0% of base salary iftarget performance is achieved and higher payments forperformance above target to a maximum of 120.0% of basesalary.Deferred bonus planThe Deferred Bonus Plan (‘The Plan’) is a voluntary planand is available to Executive Directors and certain othersenior executives. The purpose of the Plan is to give participantsa share-linked reward that is related to the participant’scommitment to maintaining a shareholding in the Company.Details of awards made to Executive Directors in 2006 underthe Plan are shown in note 4 on page 39.Participants may invest a minimum of 10.0% and a maximum of75.0% of any net of tax bonus award to acquire ordinary sharesin the Company. These shares will then be matched with a onefor one matching share at the end of a three year period.In addition, to comply with current best practice and to alignExecutive Directors’ rewards under the Plan to shareholders’interests, there is a performance condition attached to thevesting of their matching shares. That test is EPS growth ofRPI +3.0% per annum, with no retesting. EPS is measuredin the same manner as for the Executive Share Option Plan.Subject to that performance condition being met, theDirector’s shares being held in trust for three years and theDirector remaining an employee of the Group, they willbecome entitled to be awarded shares to an amount equalto the gross amount of the bonus used to acquire ordinaryshares in the Company.For 2007, the Company is proposing to amend the DeferredBonus Plan and redesignate it as the Co-Investment plan,where Executive Directors can invest up to 50.0% of their posttax annual salary to acquire ordinary shares in the Company(in future years the Committee may determine thatcircumstances justify that up to 100% of post tax annual salarymay be invested). These shares will then be matched at theend of a three year period. The match will be determined byperformance against a cumulative Economic Profit target.If the target level of RPI +3.0% per annum is achieved, thena one for one share match will occur. A maximum two forone match will occur if cumulative Economic Profit achievesa target level of RPI +12.0% per annum or greater. At pointsbetween these two levels, matching will take place on astraight line basis. Economic profit has been chosen becausethe Committee believes this is a key driver of the Company’snew business strategy. Economic Profit is underlying operatingprofit after tax less the weighted average cost of capitalmutiplied by the capital employed. The Committee intendsthat the figure for Economic Profit will be disclosed. It isintended that the Co-Investment plan will also be extendedon a broadly similar basis to certain other senior executivesbelow the Board.Executive share option planUnder the Plan, share options are granted to ExecutiveDirectors and certain other senior executives throughout theGroup. The option price is calculated by rounding up thearithmetic average of the market quotations of a share for thethree dealing days immediately preceding the date of grant.The 2006 option grant covered over 250 participants across theworld. Details of share options granted to Executive Directors in2006 are shown in note 3 on pages 38 and 39.
35Inchcape plc Annual report and accounts 2006Options now granted vest according to a sliding scale:25.0% of the award will vest if earnings per share (EPS) growthof RPI +3.0% per annum is achieved over the initial three yearperiod, with all of the award vesting if EPS growth is RPI +8.0%per annum or greater. Options will vest on a straight line basisbetween these two points. No options will vest if EPS growthis less than RPI +3.0% per annum. There will be no retesting.The Committee has retained EPS as the performance measurefor the Executive share option plan. The Committee believesthe retention of EPS as the measure used under the executiveshare option plan, operating alongside Economic Profit usedunder the Co-Investment plan, will provide an importantbalance between the Group’s desire for both sustained growthand the need for emphasis on capital efficiency and cashgeneration. EPS will continue to be the headline earnings perordinary share, which excludes volatile one-off matters suchas exceptional items. In exceptional circumstances, theCommittee has the right to adjust the published EPS, as itconsiders appropriate. In respect of outstanding awards withattaching EPS performance measures, under all of theCompany’s share-based plans, the Committee has decidedin its discretion to adjust the EPS figure for 2006 to remove theeffect of a one-off non-replicable, low effective tax rate. Theadjustment reduces the EPS figure used in the incentive plansfor 2006 by around 3.0% but will not impact the actual vestingof any awards with performance periods ending in 2006.The Committee believes this will ensure a more accuratereflection of the Company’s underlying performance withinthe context of the Company’s share plans. Finally, in lightof changes to accounting standards, the RemunerationCommittee has continued to make necessary adjustmentsto ensure a consistent basis in respect of the EPS measureused to evaluate performance.During the year, except for Barbara Richmond who receiveda grant of four times base salary following her recruitment.the Committee made annual grants of two times basesalary taking into account the Executive Director’s and theCompany’s performance. This grant level is necessary to keepthe Company’s long term incentive provision in line with themarket. Grants in excess of the two times limit may be requiredin the future in the event of new hires or developments inmarket practice. In this regard, the Committee has the flexibilityunder the Plan rules to increase the maximum allowableannual grant level to four times base salary if required.SAYE share option schemeThe Inchcape SAYE share option scheme is open to employeesin the UK with at least three months’ service. Participantsmake monthly savings for a three year period. At the endof the savings period share options become exercisablefor a six month period.Executive share ownershipTo emphasise the importance the Committee places onexecutive share ownership, Executive Directors are currentlyexpected to hold a fixed number of shares equivalent to100.0% of base salary. They have up to five years from 2004,or date of appointment as an Executive Director (if later),to reach this shareholding target.For 2007 onwards, this will increase to 200.0% of base salary.The Executive Directors will have five years from 2007 to reachthis shareholding target.At the end of the year, by reference to the share price at thatdate, Executive Directors’ share ownership levels were as follows:Shareownership(expressed aspercentageagainstName of Directorbase salary)André Lacroix 166%Barbara Richmond (appointed 3 April 2006) 72%Retirement benefitsThe Inchcape Group (UK) Pension Scheme provides benefitsfor Executive Directors and certain other senior executives atthe normal retirement age of sixty five, equal to a maximumof two-thirds of final base salary where salary has a schemespecific ceiling of £108,600 in the 06/07 tax year, subject tocompletion of between twenty year’s and forty year’s service.Pensions in payment are guaranteed to increase in line withthe lesser of 5.0% and the increase in the RPIThe Scheme requires members who join after March 2005to contribute 7.0% of base pay up to the scheme specificceiling of £108,600 in the 06/07 tax year.Executives whose base salary is capped are paid a monthlycash supplement to enable them to make their own pensionarrangements. The Executive Directors who received suchsupplements in the year are Barbara Richmond and GraemePotts until he left the Company. Details of the amounts paidare shown in note 1 on page 37. André Lacroix, who joined theCompany on 1 September 2005, received a cash supplementof 40.0% of his base salary in lieu of formal pension provision. Heis not a member of the Inchcape Group (UK) ManagementPension Scheme except in respect of the life assurance benefitfor death in service.A lump sum life assurance benefit of four times full base salaryis provided on death in service, along with for pension schememembers a spouse’s pension of either half or two-thirds of theprospective member’s pension. Childrens’ pensions may alsobe payable, up to one-third of the member’s pension.
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