Governance - Xstrata

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Executive Committee Bonus Plan Executive directors and the other members of the Executive Committee are eligible to participate in the Executive Committee Bonus Plan (the Bonus Plan). The Bonus Plan focuses on the achievement of annual objectives that align the short-term financial performance of the Group with the creation of shareholder value. The bonus is based on Xstrata’s operational performance as measured by return on equity and net profit. Specific targets for return on equity and the proportion of net profits that make up the bonus pool are determined each year by the Remuneration Committee. Before the pool is finalised, the Remuneration Committee actively considers whether the pool is appropriate in light of the other key financial and non-financial drivers of future shareholder value, including the Company’s health, safety, environment, and community performance. For both 2008 and 2009, despite the Group’s robust return on equity and net profits, the available bonus pool was not fully utilised. This was in recognition of the general market conditions and the impact of the global financial crisis. Despite exceptional performance in 2010, the Remuneration Committee has exercised active discretion and taken a holistic view of performance against a backdrop of ongoing market recovery from the global financial crisis and, as such, will again not utilise the entire bonus pool available. Any payment under the Bonus Plan is subject to a performance hurdle; for the financial years ending 31 December 2010 and 2011 it will be set such that the Group’s return on equity will be at least equal to the Group’s average cost of borrowing. If this hurdle is not reached, the bonus pool will be zero. The Remuneration Committee has the discretion to vary the basis of calculation and the performance targets for subsequent years. The amount of the bonus pool that is distributed in any one year, and the relative proportions payable to each participant (or, at the discretion of the Remuneration Committee, to a trust for his/her benefit) will be at the discretion of the Remuneration Committee. Individual performance criteria have been agreed with each participant and include health, safety, environmental, community, employee development, operational, financial and other criteria. Performance against these individual criteria will be evaluated by the Remuneration Committee in determining individual allocations from the bonus pool. The maximum bonus payable under the Bonus Plan for executive directors is 300% of salary. The highest level of bonus will only be available for truly outstanding performance. Bonuses will be payable in up to three tranches, as follows: � the maximum bonus a participant is eligible to receive in cash will be limited to 100% of the individual’s base salary; � any additional bonus up to a further 100% of base salary will be deferred for a period of one year; and � any remaining bonus up to the further maximum 100% of base salary will be deferred for a period of two years. www.xstrata.com | 121 The deferred elements take the form of an award of Xstrata shares granted either on a net or gross basis subject to conditions or an award of a nil-cost option over Xstrata shares. In respect of a net deferred award, the appropriate amounts of tax and social security are deducted from the deferred portion of the bonus and remitted to the relevant tax authority. The remainder (or net amount) is invested in Xstrata shares acquired in the market which are held by the trustees on behalf of the executive director, subject to transfer restrictions and forfeiture conditions. The removal of transfer restrictions and forfeiture conditions is subject to the executive director remaining in employment throughout the deferral period. If the net deferred award shares are forfeited, the executive director must reimburse the tax and social security paid. Net deferred awards may be transferred with the consent of the Remuneration Committee and on such terms and to such persons (or categories of person) as they specify. Such transfers will normally only be permitted where there will be no immediate realisation of economic benefit by means of a sale to an unconnected third party. Awards made on a gross basis are a conditional right to receive Xstrata shares. The number of shares awarded is determined by reference to the price at which concurrent awards under the Xstrata plc Long Term Incentive Plan (LTIP) are made. The vesting of the gross deferred awards is also subject to the executive director remaining in employment with Xstrata throughout the deferral period. Tax and social security will be payable by the executive director upon vesting. Gross deferred awards are not transferable. A nil-cost option award is structured on the same basis as a gross deferred award except that the executive director may call the shares under option following vesting at any time during the exercise period. The number of shares awarded under option is determined by reference to the price at which concurrent awards under the LTIP are made. The vesting of an option is subject to the executive director remaining in employment with Xstrata throughout the deferral period. The Remuneration Committee may determine the life of the option up to a maximum of 10 years. The option is not transferable and is equity settled following exercise. Tax and social security will be payable by the executive director upon exercise of the option or such earlier date as relevant local tax law may provide. The executive director must reimburse his employer to the extent that any social security liability payable by his employer in respect of the exercise of the option exceeds the social security liability that would have been payable had the option been exercised on the vesting date at the then prevailing share price. There is no intention to use newly issued ordinary shares for the Bonus Plan and any shares required for the satisfaction of deferred bonus awards will be acquired by market purchase. Deferred bonus awards are not pensionable. Long-term incentive arrangements All equity-based awards are subject to an overall limitation on the number of shares issued, transferred from treasury, or that remain issuable pursuant to awards of 10% within any 10-year period after the listing date. Overview Strategy Performance Governance Financials
122 | Governance Remuneration report continued Added Value Incentive Plan The Added Value Incentive Plan (AVP) was designed to incentivise the Chief Executive by providing a share of the long-term value he creates for shareholders over and above the value created by Xstrata’s peer companies and to create alignment with shareholders by means of share ownership. During 2010, the AVP terminated in respect of the grant of new awards with the consequence that no further awards will be granted under it. The last award under the AVP was made in 2009 and, as from 2010, the Chief Executive has participated in the LTIP. Only the plan cycles commencing in 2008 and 2009 remain open under the AVP. The 2005 plan cycle, which vested in 2008, did not proceed to Phase 2 and the 2006 and 2007 plan cycles, in each case, neither vested nor proceeded to Phase 2. The Chief Executive’s participation in any open plan cycle of the AVP is contingent on his maintaining a holding of at least 350,000 ordinary Xstrata shares. Payments under the AVP are based upon the growth in the Company’s total shareholder return (TSR) over the relevant performance period relative to an index of global mining companies, which form the Xstrata TSR Index. Performance is assessed over periods of both three years (Phase 1) and five years (Phase 2) from the date of award. At the end of a Phase 1 performance period, Xstrata’s TSR is calculated and compared to the Xstrata TSR Index which determines the added value created over the performance period. If this figure is positive, it is multiplied by a participation percentage (which is 0.5% for the 2008 plan cycle and 0.3% for the 2009 plan cycle) to calculate the Phase 1 base reward. No payments will be made if Xstrata underperforms against the Xstrata TSR Index. There is a cap which applies to the calculation at the end of the Phase 1 performance period. If the cap has been applied then the Chief Executive will become eligible for Phase 2 of a plan cycle. The comparator group for the TSR and share price indices At the end of the Phase 2 performance period, the calculation will be carried out in the same way as at the end of Phase 1, but only to the extent that performance exceeds the applicable cap. Neither the 2006 nor the 2007 plan cycles entered Phase 2. It is not expected that the 2008 plan cycle will enter Phase 2. The Remuneration Committee recognises that the absolute value received by shareholders is higher when outperforming a rising market than outperforming a market which is static or falling. Two modifiers are therefore applied. First, the Phase 1 and Phase 2 base rewards are increased or decreased in line with the Xstrata share price index measured against the comparator group. Second, a reduction is made for lower levels of absolute performance, by applying a multiplier to the indexed base rewards to calculate the final rewards. For the 2008 and 2009 plan cycles, for absolute TSR of 25% and above, a multiplier of 1 will be applied; and for absolute TSR of -25% or below, a multiplier of 0.5 will be applied. Between -25% and +25% straight-line interpolation will apply. Provided Xstrata’s TSR is at least equal to the Xstrata TSR Index, the Phase 1 final reward under each plan cycle will be at least $1 million. 50% of the final reward for a phase of a plan cycle shall be payable in cash or in shares, as determined by the Remuneration Committee, as soon as practicable following determination of the final reward for that phase by the Remuneration Committee. Of the remaining 50% of a Phase 1 final reward, 25% shall be deferred for a period of one year and 25% shall be deferred for a period of two years. Phase 2 is calculated over a five-year period, with 50% of any additional award paid at the end of that period and the remaining 50% deferred for a further year. Deferred awards are indexed to the Xstrata share price over the period of deferral. The Xstrata TSR and share price indices will be weighted by market capitalisation. The comparator group for the 2008 and 2009 open plan cycles comprises relevant global mining firms. This group is identical to that used for the LTIP described below: 2008 2009 2010 2011 Alcoa Inc Anglo American plc Arch Coal Inc BHP Billiton plc Coal & Allied Industries Ltd Eramet SA Grupo Mexico SA de CV Korea Zinc Inc Lonmin plc Norddeutsche Affinerie AG Peabody Energy Corp Rio Tinto plc Teck Cominco Ltd Umicore SA Alcoa Inc Anglo American plc Arch Coal Inc BHP Billiton plc Eramet SA Freeport McMoran Copper & Gold Inc Grupo Mexico SA de CV Impala Platinum Holdings Ltd Korea Zinc Inc MMC Norilsk Nickel Norddeutsche Affinerie AG Peabody Energy Corp Rio Tinto plc Teck Cominco Ltd Companhia Vale do Rio Doce (Vale) Vedanta Resources plc As for 2009 As for 2009
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Governance - Xstrata

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