Governance - Xstrata

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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 www.xstrata.com | 123 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. Overview Strategy Performance Governance Financials
124 | Governance Remuneration report continued Summary of performance conditions During 2008, 2009 and 2010, executive directors were granted market value options and Free Share awards under the LTIP. The vesting of both the options and Free Share awards is subject to the satisfaction of stretching performance conditions over a three-year performance period. Half of the options and Free Share awards are conditional on Xstrata’s TSR relative to a peer group and half are conditional on the Group’s real cost savings relative to targets set on a stretching scale over the three-year period, as set out below. For the awards conditional on TSR, 25% of the combined award will vest if TSR growth is at the median of the specified peer group, the full 50% of the combined award will vest for TSR growth at or above the second decile, with straight-line vesting between these points. No vesting will occur for TSR growth below median performance. For the remaining award, vesting is conditional on the Group’s real cost savings relative to targets set on a stretching scale: 5% of the combined award will vest for 1% cost savings, 35% for 2% cost savings and 50% for 3% or more cost savings, with straight-line vesting between these points. No vesting will occur for cost savings that are less than 1%. Real cost savings will be measured in relation to operating costs after adjusting for the effects of inflation, exceptional events/items such as natural disasters, excluding depreciation, commodity price-linked costs, effects of currencies on translation of local currency costs and planned life of mine adjustments. Since the Group’s share price and those of its peers are significantly influenced by the cycle in commodity prices, the Remuneration Committee considers TSR relative to a peer group to be an appropriate performance measure as it rewards relative success in growing shareholder value through the development and execution of the corporate strategy. The Remuneration Committee is also satisfied that TSR will be a genuine reflection of the Group’s underlying financial performance. The use of the second measure, Group real cost savings relative to targets, reflects the Group’s strategic initiative to add shareholder value through productivity and cost efficiencies. The Remuneration Committee is also mindful of the Group’s commitment to ethical and sustainable practices and that a positive approach in this area should support solid TSR performance. The performance targets are not capable of being retested at the end of the performance period, so that any proportion of a Free Share award or option that does not vest after three years will lapse, although vested options will remain exercisable for a maximum of seven years or such shorter period as the Remuneration Committee may specify (after which they will lapse). In the event of a change of control, all Free Share awards and options will vest in full or (in certain circumstances) may be exchanged for equivalent options or LTIP awards over shares in the acquiring company. The peer group of global mining companies used to determine the vesting of the options and Free Share awards conditional on TSR under the LTIP, comprises the same comparator group used to form the Xstrata Share Indices for the Chief Executive’s AVP for the relevant year, as detailed above. The Remuneration Committee may, at its absolute discretion, vary, add, remove or alter the companies making up the peer group when events happen that cause the Remuneration Committee to consider that such a change is appropriate to ensure that the performance condition continues to represent a fair measure of performance. This is with the provision or on the condition that the Remuneration Committee reasonably considers such a varied or amended performance condition is not materially easier or more difficult to satisfy. In calculating the TSR, the common currency of US dollars will be used and the share price of a notional parcel of shares of the Group and the companies in the specified peer group will be averaged over a period preceding both the start and end of the relevant performance period. The Remuneration Committee has resolved that averaging over a three-month period eliminates the volatility in spot share prices that could otherwise distort the assessment of whether the target has been met. The TSR of the Group and each member of the peer group over any performance period is calculated by taking the growth between the closing value and the base value of 100 shares expressed as a percentage of the base value, on the assumption that any net dividend per share paid by any company during the relevant performance period is reinvested in shares on the last day of the month during which the relevant shares go ex-dividend. This calculation is subject to such adjustments to closing value and base value as the Remuneration Committee considers appropriate to reflect any variation of share capital or any merger, takeover, reconstruction, demerger or change in listing status by any member of the peer group or upon any other events that the Remuneration Committee considers may materially distort the calculation. 2008 LTIP award At 31 December 2010, the Group was ranked 13th out of the peer group of 15 companies (including Xstrata) in terms of TSR for the 2008 award. If this is the outcome at the end of the three-year performance period on 4 April 2011 then no part of the 2008 award linked to TSR will vest (although up to 50% of the overall combined award could vest depending on the extent to which the cost saving targets are met). 2009 LTIP award As at 31 December 2010, the Group was ranked sixth out of the peer group of 17 companies (including Xstrata) in terms of TSR for the 2009 award. If this is the outcome at the end of the three-year performance period on 12 March 2012 then 77.78% of each executive director’s 2009 award linked to TSR will vest (i.e. 38.89% of the overall combined award, and a further 50% of the overall combined award could vest depending on the extent to which the cost saving targets are met). 2010 LTIP award As at 31 December 2010, the Group was ranked 10th out of the peer group of 17 companies (including Xstrata) in terms of TSR for the 2010 award. If this is the outcome at the end of the three-year performance period on 18 February 2013 then no part of the 2010
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Governance - Xstrata

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