Governance - Xstrata

In the event of one or more constituents undergoing a takeover,
merger, dissolution, variation in capital or any other event that will
materially affect calculation of an index, the Remuneration
Committee shall determine how this should be reflected in the index
calculation. The Remuneration Committee may add other relevant
competitors to the index if required.
In the event of a change of control, all open plan cycles will vest
immediately, subject to and to the extent of satisfaction of the
vesting criteria at that time. The final reward under each open plan
cycle will be calculated as if the performance period terminated on
the date of the transaction, save that the Remuneration Committee
has discretion to disapply the cap that would otherwise apply in the
calculation of the Phase 1 return. In the event of the Chief Executive
ceasing to be an Xstrata employee as a result of death, ill health or
disability, all open plan cycles will vest immediately, subject to and to
the extent of satisfaction of the vesting criteria at that time. The final
reward under each open plan cycle will be calculated as if the
performance period terminated on the date of cessation of
employment. In the event of the Chief Executive ceasing to be an
Xstrata employee other than in the circumstances described above,
all plan cycles will lapse and no payments will be made unless the
Remuneration Committee in its absolute discretion determines
otherwise. In the event of a variation in the capital of Xstrata, the
participation percentages may be adjusted in such a way as the
Remuneration Committee determines.
2008 AVP cycle
As at 31 December 2010, the decrease of Xstrata’s TSR was 46.44%,
the decrease of the Xstrata TSR index was 1.2% and the decrease of
the Xstrata Share Price Index was 7.16%, as calculated under the
AVP for the 2008 plan cycle. If this is the outcome at the end of the
three-year period on 26 March 2011, no payment will be made
under the plan.
2009 AVP Cycle
As at 31 December 2010, the increase of Xstrata’s TSR was
210.77%, the increase of the Xstrata TSR index was 160.58%,
and the growth of the Xstrata Share Price Index was 152.01%, as
calculated under the AVP for the 2009 plan cycle. The determination
of any award under the 2009 plan cycle will be made at the end of
the Phase 1 performance period on 17 April 2012 and, if appropriate,
at the end of the Phase 2 performance period on 17 April 2014.
Vested awards under the AVP can be settled in cash. The
Remuneration Committee has discretion, however, to settle deferred
awards in shares if it considers this to be appropriate.
Long Term Incentive Plan
Executive directors are eligible to participate in the LTIP. The LTIP is
designed to promote the long-term success of the Group as it aims
to focus management’s attention on continuous and sustainable
improvements in the underlying financial performance of the Group
and on the delivery of superior long-term returns to Xstrata’s
shareholders. It provides executives with the opportunity to earn
superior levels of reward but only for outstanding performance.
Participation in the LTIP is targeted at those employees with ability to
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influence shareholder value. In addition, the LTIP further aligns
the interests of shareholders and management by encouraging
executives to build a shareholding in the Group.
An award under the LTIP comprises a conditional award of shares
(Free Shares) and a grant of market value share options. The two
elements are complementary and ensure that the cyclical nature of
the industry does not have an excessively adverse effect on employee
remuneration in circumstances where the performance of the Group
has otherwise been good, relative to that of competitors.
The LTIP provides for the form of award to be varied in jurisdictions
where this is desirable for tax or regulatory reasons. For example,
in some countries, Free Shares are structured as nil-cost options or
bonus options.
The Free Share awards are subject to stretching performance
conditions and will ensure that where the Group has performed well
over the specified performance period of three years, participants
will be rewarded even if there is no substantial share price growth
due to external factors, such as commodity prices or general
economic conditions. The option element will only provide a benefit
to participants when shareholders also benefit from future share
price growth. The options will be subject to stretching performance
targets to ensure that windfall growth in the share price as a result
of external factors does not deliver rewards that are not justified by
the performance of the Group, relative to its peer group. The policy
regarding performance targets is discussed in more detail below.
In determining the value of Free Share awards the value of the
underlying shares will be used. The value of the option at grant will
be based on a Black-Scholes valuation of the option (or a similar
approach), which the Remuneration Committee considers represents
both the cost to Xstrata of providing the benefit and the value of the
option itself as a component of the total remuneration package. The
option value at grant will be subject to a lower and upper limit as
determined by the Remuneration Committee from time to time. This
valuation will be used to determine the number of shares over which
an option will be granted.
Using the method above, the value ratio of Free Share awards to
share options for awards made during 2010 was in general 1:1,
based on the value at the time of grant. The Remuneration
Committee has determined that this 1:1 ratio should be maintained
for the 2011 LTIP awards but may change the ratio for future awards
if it is thought appropriate.
The Remuneration Committee has determined that awards will be
made annually under the LTIP to minimise the impact of share price
volatility and to reflect existing best practice. The rules of the LTIP
provide that the aggregate value of options and Free Share Awards
made to an individual in any one year may not exceed an amount
equal to two times base salary in normal circumstances (although,
in exceptional circumstances, the limit may be up to, but may not
exceed, four times base salary).
The current LTIP will expire in May 2012.
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