© Rolls-Royce Group plc 2004
Legal information
Information not subject to auditThis report provides the information required by the Directors’ Remuneration Report Regulations 2002 (the Regulations). It also describes how the principles of the Combined Code in relation to executive directors’ remuneration are applied by the Company. The Company confirms that it complies with the requirements of the Combined Code as it applied in 2003. The Group operates in a highly competitive, international market. Its business is complex, technologically advanced and has long time horizons. The Group is committed to achieving sustained improvements in performance and this depends crucially on the individual contributions made by the executive team and by employees at all levels. The Board therefore believes that an effective remuneration strategy plays an essential part in the future success of the Group by providing incentives which create a close identity of interest with shareholders. A resolution will be put to shareholders at the Annual General Meeting (AGM) on May 5, 2004 inviting them to approve this report. The remuneration committeeThe remuneration committee (the committee) has responsibility for making recommendations to the Board on the Group’s policy towards executive remuneration. The committee determines, on the Board’s behalf, the specific remuneration packages of the executive directors and a number of senior executives. The committee reviewed its remit in 2003 and its revised terms of reference are available on the Investors section of the Group’s website at www.rolls-royce.com.The committee consists exclusively of independent, non-executive directors and has been chaired by Mr C G Symon throughout the year. Until November 13, 2003 its other members were Mr P J Byrom, Lord Moore of Lower Marsh, Sir Robin Nicholson and Sir John Weston. With effect from November 14, 2003 the other members were Mr P J Byrom, Mr C-P Forster and Sir John Weston. In 2003 Mr D E Baird, the Chairman of the Company, and Sir John Rose, the Chief Executive, attended meetings by invitation but were not present during any discussion of their own emoluments. The committee met on six occasions in 2003 and details of members’ attendance are set out in the Report of the directors. Advice to the remuneration committeeThe committee appoints its own consultant to provide it with independent advice. During 2003 the committee’s consultant was Mercer Human Resource Consulting (Mercer).The committee may also call for information and advice from other advisers inside and outside the Group. In 2003, the Chairman and the Chief Executive made recommendations to the committee relating to the performance of their direct reports and on the appropriateness of particular remuneration proposals to the Group’s needs. Internal support was provided primarily by the Director – Human Resources, Mr J R Rivers, advised by Deloitte & Touche LLP. The Company Secretary, Mr C E Blundell, also provided support to the committee. Ad hoc advice has been provided by employees from Human Resources, Finance and Business Development when required. The committee has received advice on the proposed During 2003, Deloitte & Touche LLP also advised the Group on corporate tax, transfer pricing, customs duties, environmental issues and risk management. Mercer also provided support on insurance matters, remuneration and pensions. Remuneration policyThe policy frameworkThe Board has adopted, on the recommendation of the committee, a remuneration policy reflecting the following broad principles which it will continue to apply in 2004:i) the remuneration of executive directors and other senior executives should reflect their responsibilities and contain incentives to deliver the Group’s performance objectives; it must also be capable of attracting and retaining the individuals necessary for business success; ii) a significant proportion of total remuneration should be based on Group and individual performance, both in the short and long term; and iii) the system of remuneration should establish a close identity of interest between senior executives and shareholders through measures such as encouraging the acquisition of a significant shareholding in the Company. The policy takes into account pay and employment conditions elsewhere in the Group. The committee regularly reviews both the competitiveness of the Group’s remuneration structure and its effectiveness in incentivising executives to enhance value for shareholders over the longer term. It considers that a successful remuneration policy needs to be sufficiently flexible to take account of future changes in the Group’s business environment and in remuneration practice. In 2003 the committee reviewed the effectiveness of the Group’s long-term incentive arrangements. In the light of the outcome of this review shareholders will be asked to approve the changes to the long-term incentive arrangements which are described below. The main components of remunerationThe main components of remuneration comprise: base salary, annual incentive arrangements, long-term share based incentives and pension and life assurance benefits. Executive directors and senior executives are also entitled to a company car or car allowance, private medical insurance, financial counselling and, in the case of Mr J M Guyette, a housing allowance.The committee considers that there should be a continuing and increasing emphasis on those elements of remuneration, such as annual and long-term incentives, which directly influence the performance of senior executives. Base salariesIn determining the relative importance of these elements of remuneration, the committee believes that base salaries should be set at levels required to recruit and retain high quality senior executives.The committee believes that base salaries should be set with reference to the median-level of the relevant marketplace. Performance-related incentive plans should provide the opportunity of increasing total earnings to the upper quartile of the marketplace if performance justifies it. All executive directors have a high proportion of their annual remuneration at risk. The 80 per cent bonus opportunity means that up to 44 per cent of their combined base pay and bonus is directly related to annual financial and personal performance. All salary increases are required to be justified on the basis of performance and are not automatic. Other benefits are generally at the median of market practice. Annual incentivesExecutive directors and senior executives participate in the Annual Performance Related Award plan (APRA). Under APRA as operated in 2003, they were eligible for awards of up to 80 per cent of base salary on the achievement of predetermined targets. In the case of the Chief Executive the maximum was 100 per cent. It is possible for these maximum awards to be increased by 20 per cent to reflect exceptional performance. APRA awards do not form part of pensionable earnings. The APRA performance targets set by the committee are based on the Group’s annual operating plans. For 2003, the measures for executive directors included underlying profit, average cash balance, cash flow and personal performance through specific personal objectives. In the case of Mr C H Green, the award also reflected the performance of the business sector for which he is responsible. For 2004, the nature of the performance targets is unchanged.There is a long-term incentive element in APRA as one third of the value is delivered in the form of a deferred award in the Company’s shares. A participant who is granted a deferred share award under APRA must normally continue to hold these shares and remain an employee of the Group for a period of two years from the date of the award in order to retain the full number of shares, although shares will be released early in certain circumstances including retirement or redundancy. The value of any deferred share awards is derived from the annual bonus criteria and is therefore dependent on Company and business financial performance; the release of deferred share awards is not dependent on the achievement of any further performance conditions. This deferred share element was operated for 2003, resulting in the share awards described in the Directors' remuneration report. The committee intends to maintain the deferred share element in respect of 2004 and future years. This arrangement provides a strong link between performance and remuneration, promotes a culture of share ownership amongst the Group’s senior management and encourages decisions in the long-term interest of shareholders. The same targets that are set for APRA are used for the All Employee Bonus Scheme which enables all employees worldwide to receive a bonus of up to two weeks pay, based on corporate and business performance. A deferred share incentive plan (DSIP) was operated for 2002 which was restricted to a small number of key executives, including executive directors. No awards under the DSIP were made in respect of 2003 and it is not intended that the plan will be operated again. Long-term incentivesThe committee has completed a review of long-term incentive arrangements and subject to shareholders giving their approval at the forthcoming AGM, intends to adopt a new Performance Share Plan and not to make further grants under the
During 2003, the committee has conducted a review of the Group’s
executive remuneration arrangements with advice from Mercer. |
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Intermediate levels of performance will attract pro rata releases. The shares released will be determined by the total CPS generated over the three year period. CPS is defined as: Cashflow after interest, taxation and capital expenditure, but before cost of business acquisitions or proceeds of disposals and dividends; Divided by the weighted average number of shares in issue calculated in accordance with FRS 14. The committee reserves the right to vary CPS performance targets for future grants provided that in its reasonable judgment the new targets are no less challenging in the light of the Group’s business circumstances and its internal forecasts. The Company’s Total Shareholder Return (TSR) over the performance period will be compared with the TSR of the companies constituting the FTSE 100 index on the date of grant. If the Company’s TSR exceeds the median of that group of companies, the number of shares due to be released to an executive following achievement of the EPS and CPS targets will be increased by 25 per cent. EPS and TSR performance measures will be calculated from a base year which is the year before grant. The committee has selected the above targets for the arrangement for the following reasons: – the EPS trigger prevents any award from vesting unless there is a significant increase in underlying earnings; – CPS provides a tangible target which can be directly influenced by executive management and which in the medium term supports earnings; and – TSR reflects the performance of an investment in the Company compared with investing in the FTSE 100 generally. It is proposed that the Chief Executive would receive annual grants over shares with a market value at the time of grant of 100 per cent of his annual salary. In accordance with the principles above, exceptional performance could result in shares being released which exceed this nominal maximum and which are equivalent to 125 per cent of his salary at the time of grant. In the case of other executive directors the nominal maximum of the annual grant will be 66.6 per cent for executive directors and 50 per cent for other members of the Group Executive. The Plan permits grants up to 200 per cent of annual salary. The Plan is designed to provide awards which are at the median of the marketplace for UK companies of similar size and complexity to the Company. It will also be applied to other executives below Board level with awards being made on a pro rata basis. In line with the committee’s established policy, it is envisaged that existing issued shares will be used to satisfy awards, but in order to provide flexibility, the Plan rules permit the issue of new issue shares, within standard limits. Shareholders will be asked to give their approval to a ten year life for the Plan. Full details of the Plan are contained in Appendix 1 to the explanatory notes of the Notice of AGM for 2004. In the event of shareholders deciding not to approve the Plan, the committee will continue to use the executive share option plan. Executive share option planIt is not intended to continue the current practice of granting executive share options if theThe exercise of options is subject to a performance condition that the Company’s growth in EPS, as defined by Financial Reporting Standard 14, must exceed the UK retail price index by an average of three per cent per annum over a rolling three-year period. These performance conditions apply to all the executive directors. Achievement of the EPS target is reviewed annually by the committee. In 2001, in order to help meet a series of demanding challenges, key members of the executive team, including the executive directors, received a larger than normal level of grant. As described in the Company’s 2001 Annual Report, this award had more demanding performance criteria and personal share ownership requirements. Long-term incentive planThe Company has in place a long-term incentive plan, theShare retention policyThe committee will require participants in theAll employee share plansThe committee believes that share-based plans make a significant contribution to the close involvement and interest of all employees in the Group’s performance. Executive directors are eligible to participate in the Company’s all-employee share schemes on the same terms as other employees. There are three main elements to these arrangements:i) the Sharesave Scheme – a savings-related share option scheme available to all employees. This scheme operates within specific tax legislation (including a requirement to finance the exercise of the option using the proceeds of a monthly savings contract). The exercise of the option is not subject to the achievement of a performance target; ii) the ‘Free Share’ element of the Share Incentive Plan, under which UK employees receive shares of up to the equivalent of one week’s pay as part of the Company component of any bonus paid for 2003; and iii) the ‘Partnership Share’ element of the Share Incentive Plan under which UK employees may make regular purchases of shares from pre-tax income. The effect of the corporate restructuring on share plansAt the 2003 AGM, shareholder approval was given to a revised corporate structure for the Group involving the creation of a new holding company. The committee considered the implications of this restructuring proposal for the Company’s share plans and concluded that the introduction of the new holding company should neither advantage nor disadvantage participants in any way.Accordingly, the committee exercised its powers under the relevant rules to prevent any holders of executive share options from being able to exercise their options on an accelerated basis as a result of the restructuring. Participants have been able to exchange their rights over Service contractsThe committee’s policy is that executive directors appointed to the Board are offered notice periods of one year. The committee recognises that in the case of appointments to the Board from outside the Group, it may be necessary to offer a longer initial notice period, which would subsequently reduce to 12 months after that initial period.The committee has a defined policy on compensation and mitigation to be applied in the event of a UK director’s contract being prematurely terminated. In these circumstances, steps are taken to ensure that poor performance is not rewarded. When calculating termination payments, the committee takes into account a range of factors such as age, length of service contract and the director’s obligation to mitigate his or her own loss. Sir Ralph Robins, who retired as Chairman of the Company on January 31, 2003, had a service agreement with Sir John Rose and Mr C H Green have service agreements with Mr J P Cheffins has a service agreement with Mr J M Guyette has a contract, dated September 27, 1997, with Dr M G J W Howse has a service agreement with Mr A B Shilston has a service agreement with Executive directors’ directorships of other companiesSir John Rose was appointed a non-executive director of Eli Lilly and Company on December 1, 2003. During 2003 Mr A B Shilston was a non-executive director of AEA Technology plc, Mr C H Green was a non-executive director of BAA plc and Mr J M Guyette was a director of the Private Bank and Trust Company of Chicago, Illinois and was appointed as a director of priceline.com Inc. on November 21, 2003. In all these cases, the director retained the relevant fees from serving on the boards of these companies, as shown in the table below:
Non-executive directorsThe non-executive directors do not have service contracts. No compensation is payable to any non-executive director if their appointment is terminated early.Mr D E Baird was appointed non-executive Chairman on February 1, 2003. He is not entitled to participate in any of the Group’s share schemes, performance pay arrangements or pension schemes and would not receive any compensation in the event of early termination. He served as a non-executive director of the Company from November 1, 2002 to January 31, 2003 prior to his appointment as Chairman. Non-executive directors’ feesThe fees paid to non-executive directors are determined by the Board who are informed by independent market surveys. Each non-executive director receives an annual fee and, in addition, a fee in relation to Board committee work. Non-executive directors do not participate in any of the Group’s share schemes, performance pay arrangements or pension schemes. A facility is in place which enables non-executive directors to use some or all of their fees, after the appropriate statutory deductions, to make private purchases of shares in the Company on the open market, on a monthly basis.The Board reviewed non-executive directors’ fees in 2003 and increased them with effect from August 1, 2003. Details of the new fees are given in the Director's remuneration report. Performance graphsUnder the Regulations, the report is required to contain a graph showing the Company’s Total Shareholder Return (TSR) performance over the previous five years compared to a broad equity market index. The graph below shows the performance of the Company compared to the FTSE 100. The FTSE 100 has been chosen as the comparator index as it contains a broad range of other leading UK listed companies. |
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Information not subject to audit
Mr C E Blundell was a director of the Company between March 21,
2003 and April 10, 2003. This directorship was incidential to Mr C
E Blundell’s role as Company Secretary and Director of Government
Relations and during this period Mr C E Blundell neither received
any remuneration for his directorship nor performed any qualifying
services for the Company. |
Mr C H Green, Mr J M Guyette, Dr M G J W Howse, Mr P J Byrom, Mr C G Symon and Sir John Weston took 2,850; 2,630; 1,327; 2,468; 109; and 69 shares respectively instead of cash dividends in January 2004. Lord Moore of Lower Marsh and Sir John Weston purchased 1,395 and 165 shares respectively on January 7, 2004 and 1,422 and 157 shares respectively on February 9, 2004 under arrangements made for directors to purchase shares on a monthly basis using a percentage of their after tax fees. Sir John Rose, Mr C H Green and Mr A B Shilston purchased 72 and 69 shares each respectively on January 7, 2004 and February 9, 2004 under the Inland Revenue approved Share Incentive Plan. Otherwise there have been no other changes in the directors’ interests between December 31, 2003 and February 11, 2004. In addition the directors are, for Companies Act purposes, technically interested in the 401,283 |
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Shares held in trust |
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| Shares held in trust under the annual profit sharing scheme 1 | ||||
| January 1, 2003 |
Vested during 2003 |
Granted during 2003 |
December 31, 2003§ |
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| Sir John Rose | 11,592 | 3,576 | — | 8,016 |
| Mr J P Cheffins | 8,104 | 1,797 | — | 6,307 |
| Mr C H Green | 8,984 | 2,572 | — | 6,412 |
| Mr J M Guyette | — | — | — | — |
| Dr M G J W Howse | 4,968 | 1,063 | — | 3,905 |
| Mr A B Shilston | — | — | — | — |
| Sir Ralph Robins2 | 10,162 | — | — | 10,162 |
Shares held in trust under the share incentive plan 3 |
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| January 1, 2003 |
Vested during 2003 |
Granted during 2003 |
December 31, 2003§ |
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| Sir John Rose | 192 | — | 1,208 | 1,400 |
| Mr J P Cheffins | — | — | — | — |
| Mr C H Green | 192 | — | 1,208 | 1,400 |
| Mr J M Guyette | — | — | — | — |
| Dr M G J W Howse | — | — | — | — |
| Mr A B Shilston | — | — | 966 | 966 |
Shares held in trust under the share bonus scheme 4 |
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| January 1, 2003 |
Vested during 2003 |
Granted during 2003 |
December 31, 2003§ |
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| Sir John Rose | — | — | 3,614 | 3,614 |
| Mr J P Cheffins | — | — | 3,614 | 3,614 |
| Mr C H Green | — | — | 3,614 | 3,614 |
| Mr J M Guyette | — | — | — | — |
| Dr M G J W Howse | — | — | 3,614 | 3,614 |
| Mr A B Shilston | — | — | 1,011 | 1,011 |
| § | or date of retirement if earlier. |
| 1 | Under the profit sharing share scheme, shares vest after three years. |
| 2 | Sir Ralph Robins retired as a director with effect from January 31, 2003. |
| 3 | Under the share incentive plan, shares vest on the fifth anniversary of each monthly purchase. |
| 4 | Under the share bonus scheme, shares vest after five years. |
| § | or date of retirement if earlier. | ||||||||||||
| * | Performance target achieved. Option capable of exercise. All other executive share options listed above are subject to stringent targets which have yet to be achieved. | ||||||||||||
| 1 | Unless otherwise indicated all the above options were granted under the executive share option scheme and are subject to the achievement of performance targets. All options granted under the executive share option scheme were granted at the market value on the date of issue and no discount was applied. No options were varied during the year and no consideration was paid for the grant of options. The market price of the Company's ordinary shares ranged between 64.25p and 190.00p during 2003. The closing price on December 31, 2003 was 177.25p. | ||||||||||||
| 2 | Supplementary options – vesting of these options is subject to the attainment of significant personal share holding targets and the requirement that growth in EPS exceeds an average of 6% year on year as well as exceeding the UK RPI by 3% per annum over a rolling three year period. The increases are measured from the year 2000 or the base year of the rolling three year period, whichever is the more stringent. | ||||||||||||
| 3 | Sharesave schemes. | ||||||||||||
| 4 | Weighted average exercise price of December 31, 2003 balance. | ||||||||||||
| 5 | Sir Ralph Robins retired as a director with effect from January 31, 2003. | ||||||||||||
| § | or date of retirement if earlier. | ||||||||||
| 1 | Under the Annual Performance Related Award plan, shares vest after two years. Shares went in to Trust in 2001, 2002 and 2003 at prices of £2.146, £1.829 and £0.7646 respectively. At the date of this report, the amounts stated in the emoluments table representing APRA entitlements had not yet been applied by the Trustee to purchase shares. An investment is expected to be made by March 31, 2004 when the Trustee will procure the acquisition of the required number of shares at the prevailing market price. | ||||||||||
| 2 | Under the deferred share incentive plan shares vest after three years. Shares went into Trust in 2003 at a price of £0.7646. | ||||||||||
| 3 | Sir Ralph Robins retired as a director with effect from January 31, 2003. | ||||||||||
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Details of the retirement benefits, which accrued over the year in the defined benefit plans sponsored by Rolls-Royce North America Inc., are given below. |
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Increase in accrued retirement lump sum during the year ended Dec 31, 20031 £000pa |
Total accrued retirement lump sum entitlement at the year ended Dec 31, 20038 £000pa |
Transfer value of accrued retirement lump sum as at Dec 31, 20039 £000 |
Transfer value as at Dec 31, 2002 of accrued retirement lump sum at that date9 £000 |
Increase in transfer value over 2003 net of the member's own contributions4 £000 |
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| Mr J M Guyette7,10 | 43 | (35) | 229 | 229 | 186 | 326 | (318) | |||||
| 1 | The figure in brackets is the increase in pension/retirement lump sum during the year ended December 31, 2003 but in this case excluding the effect of inflation. | ||||||||||||
| 2 | The pension entitlement shown is that which would be paid annually on retirement, based on service to the end of the year. | ||||||||||||
| 3 | The transfer values stated represent liabilities of the Rolls-Royce sponsored pension schemes and not sums paid to the individuals. The transfer values have been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11 (GN11). GN11 covers individual transfer calculations and the above figures have been calculated using assumptions certified by the Actuaries as being consistent with GN11. | ||||||||||||
| 4 | The figure in brackets is the transfer value of the increase in pension/retirement lump sum during the year ended December 31, 2003 excluding the effect of inflation, and net of the member's own contributions. | §||||||||||||
| 5 | The Group operates the Rolls-Royce Supplementary Retirement Scheme (SRS). The purpose of the scheme is to fund pension provision above the pensionable earnings cap which was imposed on approved pension schemes under the 1989 Finance Act. Membership of the scheme is restricted to executive directors and to a limited number of senior executives. The members of the scheme include Mr A B Shilston. He joined the Group after the introduction of the earnings cap and his terms and conditions on joining the Group included a commitment to provide pension and life cover based on total salary, in line with other directors and senior executives. Employer contributions to this plan during 2003 have been added to the increase in transfer value over 2003 for the approved defined benefit plans, and are therefore included in the figures shown in the right hand column of the first table. In addition, the employer has paid £37,000 to Mr A B Shilston directly in order to meet the income tax liability that he will incur on these employer contributions to the unapproved plan. | ||||||||||||
| 6 | Members of the schemes have the option to pay Additional Voluntary Contributions. Neither the contributions nor the resulting benefits are included in the above table. | ||||||||||||
| 7 | Benefits are translated at US$1.64=1. | ||||||||||||
| 8 | The lump sum entitlement shown is that which would be paid on immediate retirement based on service to the end of the year. | ||||||||||||
| 9 | The transfer values have been calculated on the basis of actuarial advice. | ||||||||||||
| 10 | Mr J M Guyette is a member of two defined benefit plans in the USA, one qualified and one non-qualified. He accrues a retirement lump sum benefit in both of these plans. The aggregate value of the retirement lump sums accrued in these two plans, and the transfer values of these benefits, are shown in the second table. In addition, Mr J M Guyette is a member of two 401(K) Savings Plans in the USA, one qualified and one non-qualified, to which both he and his employer, |
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