Deferred Annual Bonus Plan 2006
Since its introduction, the Deferred Annual Bonus Plan has applied to the top levels of management including Executive Directors and currently comprises around 40 participants in total.
The first deferral took place in June 2007, in respect of the 2006/07 bonus awards and a second deferral was made in June 2008, in respect of the 2007/08 bonus awards. Whilst the Plan (which solely measures TSR performance relative to the peer group set out below) has merits which were supported by the Committee on its introduction in 2006, the Committee believes that these have been limited in the last two years by the takeover approaches in relation to the Company and by consolidation in the retail sector. Accordingly, as a result of the remuneration review the final deferral under the Plan will be made in June 2009, in respect of bonus awards earned for the 2008/09 financial year, and once this has occurred, no further deferrals will be made other than in exceptional circumstances.
Under the Plan, a percentage of the Executive Directors’ earned annual bonuses is deferred into the Company’s shares for a period of three years. The compulsory deferral for Justin King is 25 per cent of his bonus, with 20 per cent compulsory deferral for Darren Shapland and Mike Coupe. In addition, Executive Directors may elect to defer a further proportion of their annual bonus, provided it does not exceed their compulsory deferral level. In respect of the 2007/08 bonus award, Justin King decided to defer the maximum level of 25 per cent of his bonus on a voluntary basis. Darren Shapland deferred 20 per cent of his bonus, the maximum allowed on a voluntary basis.
The Plan measures the Company’s TSR performance over a three-year period against a bespoke UK and European retail comparator group comprising: Ahold, Carrefour, Casino, Delhaize, DSG International, Home Retail Group, Kingfisher, Marks & Spencer, Metro, Morrisons, Next and Tesco.
Up to two matched shares may be awarded for each share deferred depending on the extent to which the TSR measure is achieved. No shares are awarded for below median performance, and the full match will only apply where the Company achieves first place within the comparator group. At median position the match will be 0.5 shares for each deferred bonus share and the share match will be pro-rated at every position between median and first place.
To the extent that the performance condition is met at the end of the three-year performance period, the matched shares will be added to the deferred bonus shares. The deferred bonus shares and half of the matched shares can be accessed immediately, while the remainder will be held over for a further year. Dividends or their equivalents will accrue on shares that vest.
Long-term Incentive Plan 2006
The top 1,000 managers in the Company participate in this Plan (known as ‘the Value Builder Share Plan’), from the Chief Executive to supermarket store managers, and share common performance measures.
Under the Plan a core award of shares in the Company is granted to all participants, calculated as a percentage of their salaries and scaled according to grade. As set out below, dependent upon performance, core awards can grow by up to four times. No awards vest for performance below the threshold levels.
Following the remuneration review, the Committee has determined that for 2009/10, it will:
- reduce long-term incentive awards under the Plan from those made since 2007. A core award of 50 per cent of salary will be granted to Justin King and of 40 per cent of salary to both Darren Shapland and Mike Coupe. This is compared to core awards of 62.5 per cent and 50 per cent of salary allocated to Justin King, and Darren Shapland and Mike Coupe, respectively, in both 2007 and 2008;
- leave the performance matrix scale and performance conditions unchanged (subject to the revisions below); and
- calculate cash flow per share by using the actual cash contributions in respect of future service benefits that are made to its pension schemes (both defined contribution and defined benefit arrangements), rather than apply the non-cash IAS 19 driven actuarial numbers. Additionally, any pension surplus/deficit will be excluded from the calculation of capital employed. This approach will better reflect the level of cash generated by, and the capital base of, the Company, as well as mitigate any volatility.
As in prior years, the vesting of awards is based on the performance of two stretching co-dependent performance conditions: Return on Capital Employed (“ROCE”) and a cash flow per share measure, both of which are assessed over a three-year performance period. There is no retesting.
These measures are designed to continue to build on the sales-led recovery plan and focus on creating further shareholder value. ROCE measures the efficiency with which new cash is invested and through which existing capital delivers profit, driving both cost savings and operational efficiencies. Cash flow per share captures the Company’s operational efficiency as well as the Company’s ability to generate cash for future investment or return to shareholders. The Plan’s measures are key indicators of business success and therefore create a further direct link between the interests of management and shareholders.