Annual report 2010 - Imperial Tobacco Group

First ElementFifty per cent of the award has a performance criterion based on average growth in adjusted earnings per share based onan agreed protocol, after adjusting for inflation over the period of the award. At the Remuneration Committee’s request, ourAuditors perform agreed upon procedures on the calculations. Twelve and a half per cent of this element (i.e. 6.25 per centof the potential total award) vests if Real Annual EPS Growth equals three per cent and 100 per cent of this element (i.e. 50per cent of the potential total award) vests if Real Annual EPS Growth equals or exceeds 10 per cent. Between these twopoints this element vests on a straight-line basis.Second ElementTwenty five per cent of the potential total award has a performance criterion based on TSR relative to the FTSE 100 Index asdescribed below.The performance criterion for this element is based on a sliding scale depending on TSR achieved over the relevant period.No vesting of this element occurs unless the Company’s TSR ranks it in the top 50 per cent of the companies of the FTSE100 Index.At this performance threshold 30 per cent of this element (i.e. 7.5 per cent of the potential total award) vests. If the returnranks the Company in the top 25 per cent of the Index this element (i.e. 25 per cent of the potential total award) vests in full.Between these thresholds this element vests on a straight-line basis.Third ElementTwenty five per cent of the potential total award has a performance criterion based on TSR relative to a bespoke comparatorgroup as described below.The performance criterion for this element is also based on a sliding scale depending on TSR achieved over the relevant period.No vesting of this element occurs unless the Company’s TSR exceeds that of the bottom six companies constituting acomparator group comprising 12 tobacco and alcohol companies as detailed below. At this performance threshold, 30 percent of this element (i.e. 7.5 per cent of the potential total award) vests. If the return ranks the Company in the top three ofthe comparator group, this element (i.e. 25 per cent of the potential total award) vests in full. Between these thresholds thiselement vests on a straight-line basis.The comparator group for the November 2010 award remains:AB InBev Altria Group Inc. British American Tobacco PLC Carlsberg A/SDiageo PLC Heineken N.V. Imperial Tobacco Group PLC Japan Tobacco Inc.Philip Morris International Inc. Pernod Ricard S.A. Reynolds American Inc. SABMiller PLCTo ensure our Executive Directors and senior managers are incentivised to drive our underlying performance and to ensurethat corporate actions or fluctuations in exchange rates do not unduly affect comparative underlying performance theRemuneration Committee has agreed the following protocols:– if a company within the bespoke comparator group is delisted during the performance period it will be replaced from thestart of the performance period, in an agreed order, by a substitute company from a pre-determined list of Lorillard Inc,Foster’s Group Limited and Molson Coors Brewing Company;– if any company in the comparator group undertakes a rights issue during the performance period a cash neutral approachof selling a portion of rights to take up the balance of the rights (commonly known as ‘tail swallowing’) will be applied; and– to remove the undue influence of exchange rate fluctuations, TSR calculations are measured in the currency in which eachcompany is listed.The TSR calculations use share prices of each comparator group company averaged over a period of three months todetermine the initial and closing prices rather than those applying on a single day. It is assumed that the cash flow ofdividend payments is recognised on the date shares are declared ex dividend. This method is considered to give a fairerand less volatile result as improved performance has to be sustained for several weeks before it effectively impacts on theTSR calculations.The TSR calculations are performed independently by Alithos Limited.Each element operates independently and is capable of vesting regardless of the Company’s performance in respect of theother elements.During the year the Remuneration Committee reviewed the performance criteria, award policy, comparator group and vestingschedules for LTIP awards and decided that the three elements remain the most important measures that drive and measuresustainable improvement in shareholder value and support our longer-term KPIs, discussed on pages 22 to 24. The TSRcriteria reflect comparative performance against the appropriate FTSE sector and the bespoke comparator group ofcompanies. The EPS criterion reflects a key part of the Group’s strategy to create sustainable shareholder value.Vesting of AwardsOn vesting, a participant is granted an option to acquire the relevant number of shares. The option may be exercised at anytime up to the seventh anniversary of its date of grant. Within this framework the vesting process in a number of jurisdictionsoutside the UK is amended to conform to local securities and tax legislation.89