Information not subject to audit

Introduction

This report to shareholders covers:

• The policy under which the executive directors, the Chairman and the non-executive directors are remunerated; and
• Details of the remuneration and share interests of the executive directors and the fees paid to the Chairman and the non-executive directors.

It provides the information required by the Directors' Remuneration Report Regulations 2002 (the Regulations) and describes how the Company applies the principles of the Combined Code in relation to executive directors' remuneration. The Company confirms that it complies with the requirements of the Combined Code.

The report was approved by the remuneration committee (the committee) on February 6, 2006 and was signed on the Board's behalf by Carl Symon as the Chairman of the committee. A resolution will be put to shareholders at the Annual General Meeting (AGM) on May 3, 2006 inviting them to approve this report.

The 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. It also makes recommendations to the Board on the remuneration of the Chairman. A copy of the committee's terms of reference is available in the Investors section on the Group's website at www.rolls-royce.com

The committee consists exclusively of independent, non-executive directors. At January 1, 2005, it was chaired by Carl Symon and its other members were Peter Byrom and Carl-Peter Forster. With effect from February 9, 2005, the Hon Amy Bondurant and Sir John Taylor joined the committee, with the chairmanship and other members of the committee remaining unchanged throughout the year.

In 2005, Simon Robertson, Chairman, Sir John Rose, Chief Executive, John Rivers, Director – Human Resources, and Charles Blundell, Company Secretary, attended meetings by invitation of the committee but were not present during any discussion of their own emoluments.

The committee met on six occasions in 2005 and details of members' attendance are set out in the Board committees.

Advice to the remuneration committee

The committee may call for information and advice from advisers inside and outside the Group. In 2005, Simon Robertson and Sir John Rose made recommendations to the committee relating to the performance of their direct reports. Internal support was provided primarily by John Rivers, advised by Deloitte & Touche LLP. Additional advice was provided by senior employees from Human Resources, Finance and Business Development.

The committee received advice on remuneration matters from Deloitte & Touche LLP and the Company's lawyers, Freshfields Bruckhaus Deringer. During 2005, Deloitte & Touche LLP also advised the Group on tax, assurance, pensions and corporate finance.

Remuneration policy

The policy framework

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.

Accordingly the Board has adopted, on the recommendation of the committee, a remuneration policy reflecting the following broad principles which it will continue to apply in 2006:

• 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;
• a significant proportion of total remuneration should be based on Group and individual performance, both in the short and long term; and
• 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.

When determining remuneration the committee 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.

The main components of remuneration

The 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 James Guyette, a housing allowance.

The committee considers that there should be a continuing emphasis on those elements of remuneration, such as annual and long-term incentives, which directly influence the performance of senior executives.

Base salaries

In 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 for companies of a similar size and complexity. All salary increases must be justified on the basis of performance and are not automatic.

Other benefits are generally at the median of market practice.

Annual incentives

Executive directors and selected senior executives participate in the Annual Performance Related Award plan (APRA). For UK participants APRA awards do not form part of pensionable earnings.

Target and maximum APRA bonus opportunity

Under APRA as operated in 2005, executive directors were eligible for awards in accordance with the table below:

	Target bonus (as a % of salary)1	Maximum bonus (as a % of salary)1
John Cheffins	48	80
Colin Green2	48	80
James Guyette	48	80
Dr Mike Howse	48	80
Sir John Rose	60	100
Andrew Shilston	48	80
Colin Smith3	37.5	62.5

1. It is possible for a bonus award to be increased by a further 20 per cent to reflect exceptional personal performance.
2. The award for Colin Green reflected the performance of the business sector for which he is responsible, in addition to Group and personal objectives.
3. Colin Smith was appointed as an executive director on July 1, 2005. His maximum bonus award was increased from 45 per cent to 80 per cent from the date of his appointment as an executive director.

Performance measures

The APRA performance measures set by the committee are based on the Group's annual operating plans. For 2005, the measures for executive directors included underlying profit, average cash balance, cash flow and personal performance against specific personal objectives. Forty per cent of any APRA bonus depends on personal performance against these specific objectives.

In 2005, to emphasise the importance of the corporate result, the APRA bonus pool available for distribution to all participants was generated solely by the financial performance of the Group and no bonus would have been available to any participant unless the Group achieved predetermined performance targets. The performance of the business sector in which an executive is employed is also a factor in that it determines the extent to which an executive has access to the pool generated by corporate performance.

All executive directors have a high proportion of their annual remuneration at risk. For the Chief Executive, his 120 per cent maximum bonus opportunity means that 55 per cent of his combined basic pay and bonus opportunity is directly related to annual financial and personal performance. In 2005, the level of achievement against the financial measures was sufficient to generate 95 per cent of the bonus for individual participants.

Deferred APRA award

One third of the value of APRA 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 remain an employee of the Group for 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 personal and business financial performance; the release of deferred share awards is not dependent on the achievement of any further performance conditions. The deferred share element operated for 2005 will result in share awards as described in the directors' emoluments table. The committee intends to maintain the deferred share element in respect of 2006. 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.

Other annual incentives

The same targets 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. Those executives participating in APRA are excluded from the All-Employee Bonus Scheme.

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 2005 and it is not intended that the plan will be operated again. DSIP grants made in 2002 vest in April 2006.

Long-term incentives

In 2003 the committee completed a review of long-term incentive arrangements and concluded that the introduction of a new plan, the Rolls-Royce Group plc Performance Share Plan (PSP), would provide stronger incentives to improve Group performance than executive share options. Shareholders approved the introduction of the PSP at the 2004 AGM. As stated in the 2004 Annual report, the committee does not intend to make further grants under the Rolls-Royce 1999 Executive Share Option Plan.

Rolls-Royce Group plc Performance Share Plan

The PSP is designed to reward and incentivise selected senior executives who can influence the long-term performance of the Group.

Under the rules of the PSP selected executives are granted conditional share awards entitling them to a number of shares determined by reference to corporate performance over a three-year performance period. The measures of corporate performance are cash generation, earnings and total shareholder return. These measures are considered particularly important in generating shareholder value and are explained in more detail in performance measures. There is no retesting of the performance criteria and no automatic vesting in the event of a take-over.

PSP award levels

The sizes of the awards under the PSP are aimed at the median of the marketplace for UK companies of a similar size and complexity to the Group. In 2005, Sir John Rose received an award of shares with a market value at the time of grant of 100 per cent of his annual salary. For other executive directors and business heads the grant was 66.6 per cent, and 50 per cent for other members of the Group Executive. During the year the committee reviewed the PSP award levels against market practice and for 2006 it is intended that the award level policy will be 110 per cent, 80 per cent and 65 per cent of annual salary respectively for the Chief Executive, executive directors and business heads, and other members of the Group Executive. The rules of the PSP permit grants of up to 200 per cent of annual salary. As described below, it is possible for the number of shares under an award to be increased by a further 25 per cent based on the Company's Total Shareholder Return (TSR) performance.

Performance measures

No shares will be released from the PSP unless the growth in the Company's Earnings Per Share (EPS) exceeds the UK retail price index by three per cent per year over the performance period.

The number of shares released (if any) will be determined in accordance with Cash Flow Per Share (CPS) targets, which will not be adjusted for inflation. CPS is calculated as cash flow after interest, taxation and capital expenditure, but before cost of business acquisitions or proceeds of disposals and payments to shareholders, divided by the weighted average number of shares in issue.

Shareholders have authorised the committee to set CPS performance targets for future grants provided that, in the committee's reasonable judgement, the targets are no less challenging in the light of the Group's business circumstances and its internal forecasts than the targets for the initial grant in 2004 as approved by shareholders.

The following CPS targets will apply to the grants to be made in 2006:

Aggregate CPS over three-year performance period	Percentage of maximum award released
52p	30%
69p	100%

The committee believes that these CPS targets are challenging and that the performance necessary to achieve awards towards the upper end of the range is stretching. They should not, therefore, be interpreted as providing guidance on the Group's performance over the relevant period.

Intermediate levels of performance attract pro rata releases. The shares released will be determined by the total CPS generated over the three-year period.

The Company's TSR over the performance period will be compared with the TSR of the companies constituting the FTSE 100 index on the date of grant. This comparison will be carried out by an external independent agency. 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 are calculated from a base year, which is the year before grant.

In line with the committee's established policy, it is envisaged that existing shares will be used to satisfy awards, but in order to provide flexibility, the PSP rules permit the issue of new issue shares within standard limits.

Share retention policy

The committee requires participants in the PSP to retain at least one half of the number of after tax shares released from the PSP until their retirement, except that shares may be sold within one year before the normal or agreed retirement date or on leaving for any other reason once a committed date has been agreed. This exception is intended to ensure that participants are not disadvantaged under capital gains tax rules on leaving employment.

Executive share option plan

As mentioned in the Performance Share Plan, following the introduction of the PSP it is not intended to continue granting executive share options.

The exercise of existing options is subject to a performance condition that the Company's growth in underlying EPS must exceed the UK retail price index by an average of three per cent per year over a rolling three-year period. These performance conditions apply to all the executive directors. The committee reviews achievement of the EPS target annually.

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.

All-employee share plans

The 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 Group's all-employee share plans on the same terms as other employees. There are three main elements to these arrangements:

• the ShareSave Plan - a savings-related share option plan available to all employees. This plan 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;
• 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 2005; and
• the 'Partnership Share' element of the Share Incentive Plan under which UK employees may make regular purchases of shares from pre-tax income.

International Financial Reporting Standards

The committee is working closely with the audit committee to monitor and react appropriately to any impact which the introduction of International Financial Reporting Standards (IFRS) may have on the performance measures under annual and long-term incentive plans. In particular, since many of the performance targets were set based on UK GAAP, but will be measured under IFRS, appropriate adjustments will be made to ensure that performance is measured on a consistent basis.

Service contracts

The committee's policy is that executive directors appointed to the Board are offered notice periods of 12 months. 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.

The following table summarises the terms of executive director's service contracts:

	Date of contract	Unexpired term	Notice period Company	Notice period individual
John Cheffins	4 May 2001	12 months	12 months	6 months
Colin Green	1 March 1991	12 months	12 months1	6 months
James Guyette	29 September 1997	Indefinite	30 days2	30 days
Sir John Rose	4 December 1992	12 months	12 months1	6 months
Andrew Shilston	5 November 2002	12 months	12 months	6 months
Colin Smith	1 July 2005	12 months	12 months	6 months

1. In the event of the service contracts for Sir John Rose or Colin Green being terminated by the Company, other than in accordance with the contracts' terms, they are entitled to receive a liquidated sum calculated as 12 months' salary and benefits. Performance related payments are not covered under this arrangement, although an annual bonus may be paid if the executive is in post at the end of the year.
2. James Guyette has a contract with Rolls-Royce North America Inc, drawn up under the laws of the State of Virginia. It provides that on termination without cause he is entitled to 12 months' severance pay without mitigation, and in addition appropriate relocation costs.

Executive directors' directorships of other companies

During 2005, Sir John Rose was a non-executive director of Eli Lilly and Company until his resignation on October 14, 2005. James Guyette was a director of the Private Bank and Trust Company of Chicago, Illinois and of priceline.com Inc. and Andrew Shilston was a non-executive director of Cairn Energy PLC.

In all these cases, the director retained the relevant fees from serving on the boards of these companies, as shown in the table below:

External directorship fees

	Payment received £000
James Guyette1,2	48
Sir John Rose1,3	25
Andrew Shilston	45

1. Sir John Rose and James Guyette were paid in US dollars translated at $1.82 = £1.
2. In addition to an annual fee, James Guyette received 8,000 stock options in priceline.com at an option price of US$22.59 per share. He also received 3,000 stock options in Private Bank at an option price of US$30.59 per share.
3. Following the resignation of Sir John Rose from the board of Eli Lilly and Company, he received 1,216 shares in respect of the release of shares from the Lilly Directors' Deferral Plan.

Non-executive directors

The Chairman and the non-executive directors have letters of appointment rather than service contracts. No compensation is payable to the Chairman or to any non-executive director if the appointment is terminated early.

Non-executive directors' fees

The Board takes account of independent market surveys in determining the fees payable to the Chairman and the non-executive directors. The committee makes recommendations to the Board on the remuneration of the Chairman. The fees paid to the Chairman and non-executive directors are shown in the emoluments table.

Up to April 2005, each non-executive director received an annual fee of £30,000. In addition, fees of £6,000 per annum were paid to members of the audit, remuneration and nominations committees, with the chairmen of the audit and remuneration committees receiving a further £6,000 per annum.

In February 2005 the Board reviewed the fees payable to non-executive directors as reported in the 2004 Annual report. It concluded that there was a strong case for increasing the non-executive directors' fees to more competitive levels in order to reflect the increased responsibilities and time commitments which changes in corporate governance were imposing on all non-executive directors. The Board therefore agreed that with effect from May 2005 a non-executive director would receive an annual fee of £50,000 covering his or her membership of the Board and of Board committees. The audit committee chairman and the remuneration committee chairman would receive additional fees of £15,000 and £12,000 per annum respectively. The senior independent director would receive an additional fee of £5,000 per annum for carrying out this role.

The Chairman and the non-executive directors are not eligible to participate in any of the Group's share schemes, incentive 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 market purchases of shares in the Company on a monthly basis.

Performance graph

The Company's Total Shareholder Return performance over the previous five years compared to a broad equity market index is shown in the graph below. The FTSE 100 has been chosen as the comparator index because it contains a broad range of other leading UK listed companies.

Information subject to audit

Individual directors' emoluments and compensation

The individual director's emoluments are analysed as follows:

	2005									2004
			Annual Performance Related Award plan (APRA)
	Basic salaries £000	Board and committee fees £000	Cash bonus £000	Deferred shares1 £000	Total APRA £000	SRS payments2 £000	Taxable benefits3 £000	Aggregate emoluments excluding pensions contri-butions4 £000		Aggregate emoluments excluding pensions contri-butions4 £000
John Cheffins	459	—	189	94	283	—	24	766		772
Colin Green	378	—	154	77	231	—	30	639		657
James Guyette5	371	—	209	104	313	—	38	722		648
Dr Mike Howse6	162	—	108	—	108	—	12	282		585
Sir John Rose	685	—	383	191	574	—	17	1,276		1,285
Andrew Shilston	422	—	211	106	317	51	13	803		775
Colin Smith7	125	—	68	34	102	—	6	233		—
Hon Amy Bondurant	—	45	—	—	—	—	—	45		36
Peter Byrom	—	65	—	—	—	—	—	65		52
Iain Conn8	—	43	—	—	—	—	—	43		—
Carl-Peter Forster	—	47	—	—	—	—	—	47		40
Simon Robertson	—	330	—	—	—	—	—	330		5
Ian Strachan	—	47	—	—	—	—	—	47		40
Carl Symon	—	57	—	—	—	—	—	57		46
Sir John Taylor	—	43	—	—	—	—	—	43		5
Euan Baird9	—	—	—	—	—	—	—	—		54
Lord Moore of Lower Marsh10	—	—	—	—	—	—	—	—		250
Sir Robin Nicholson11	—	14	—	—	—	—	—	14		42
Sir John Weston12	—	—	—	—	—	—	—	—		37
	2,602	691	1,322	606	1,928	51	140	5,412		5,329

1. Shares forming part of the bonus under APRA have been valued at date of award. An investment is expected to be made by March 31, 2006 when the trustee will acquire the required number of shares at the prevailing market price.
2. Payments made to Andrew Shilston in connection with his participation in the Rolls-Royce Supplementary Retirement Scheme (SRS) enabling him to discharge the income tax liability incurred by him on the contributions made by the Group into the SRS.
3. Taxable benefits include the following: company car or car allowance, private medical insurance and financial counselling, and in the case of James Guyette, a housing allowance and appropriate club membership fees.
4. Details of the directors' pensions are set out on in Pensions.
5. James Guyette was paid in US dollars translated at $1.82 = £1.
6. Dr Mike Howse retired as a director with effect from June 30, 2005. The emoluments shown in the table above are the amounts paid up to his date of retirement from the Board.
7. Colin Smith was appointed to the Board as a director with effect from July 1, 2005. The emoluments shown in the table above are the amounts paid from his date of appointment to the Board.
8. Iain Conn was appointed to the Board as a non-executive director with effect from January 20, 2005.
9. Euan Baird resigned as Chairman with effect from June 21, 2004.
10. Lord Moore of Lower Marsh retired as interim Chairman with effect from December 31, 2004.
11. Sir Robin Nicholson retired as a non-executive director with effect from May 4, 2005.
12. Sir John Weston retired as a non-executive director with effect from December 1, 2004.

Payments made to former directors of the Company

Dr Mike Howse retired from the Board on June 30, 2005. The Board considered it to be in the interests of the Company to retain his expertise in engineering for a period following his retirement. He continued to be employed by the Group and received a salary totalling £49,000 and benefits of £12,000 between his date of retirement from the Board and the year end.

Lord Moore of Lower Marsh retired as interim Chairman on December 31, 2004. He has continued to chair the Trustees of the Rolls-Royce Pension Fund and the Investment Sub-Committee of the Trustees and attends meetings of the Trustees audit committee. Lord Moore received an annual fee of £35,000.

Sir Robin Nicholson retired as a non-executive director on May 4, 2005. He was retained by Rolls-Royce Fuel Cell Systems Limited for his management and technical expertise, and to provide advice on business related matters. Sir Robin was paid an annual fee of £30,000.

Phil Ruffles retired from the Board on October 18, 2001. He was retained by Rolls-Royce Fuel Cell Systems Limited to give general advice on the best contacts and direction for the business. Phil Ruffles received a fee of £1,270 for each day (or a pro rata amount for any part day) that he performed these services. It is expected that he will spend approximately five working days on this activity per year.

Directors' share interests

At December 31, 2005, the directors and their immediate families had beneficial interests in the ordinary shares and B Shares 1 of the Company, as shown in the following table:

	Ordinary shares				B Shares
	January 1, 2005*	Changes in 2005	December 31, 2005§		January 1 2005*	Changes in 2005	December 31, 2005§
John Cheffins2	164,748	65,868	230,616		123,850	(123,850)	—
Colin Green	196,796	56,199	252,995		—	—	—
James Guyette2	180,982	60,968	241,950		7,707,750	(7,707,750)	—
Dr Mike Howse2, 3	90,088	47,260	137,348		3,696,750	(3,696,750)	—
Sir John Rose	300,618	97,533	398,151		—	—	—
Andrew Shilston	127,948	4,187	132,135		—	—	—
Colin Smith4	13,079	254	13,333		—	417,800	417,800
Hon Amy Bondurant	3,400	136	3,536		—	—	—
Peter Byrom	148,110	(1,110)	147,000		—	—	—
Iain Conn5	—	3,184	3,184		—	18,800	18,800
Carl-Peter Forster	1,967	3,764	5,731		—	—	—
Sir Robin Nicholson6	17,437	222	17,659		—	—	—
Simon Robertson	20,000	395	20,395		—	—	—
Ian Strachan	11,500	—	11,500		—	—	—
Carl Symon	6,551	215	6,766		—	—	—
Sir John Taylor	—	5,098	5,098		—	—	—

* or date of appointment if later.

§ or date of retirement if earlier.

1. Non-cumulative redeemable preference shares of 0.1p each.
2. On January 5, 2005 John Cheffins, James Guyette and Dr Mike Howse converted their B Share holdings into 50; 3,083 and 1,478 ordinary shares respectively.
3. Dr Mike Howse retired as a director with effect from June 30, 2005.
4. Colin Smith was appointed a director with effect from July 1, 2005.
5. Iain Conn was appointed a non-executive director with effect from January 20, 2005.
6. Sir Robin Nicholson retired as a non-executive director with effect from May 4, 2005.

On January 3, 2006, Iain Conn received 80,460 B Shares. On January 4, 2006 Colin Smith converted his B Shares holding into 117 ordinary shares. On January 4, 2006, pursuant to elections submitted, the following directors received ordinary shares in respect of the conversion of B Shares: John Cheffins 2,163; Colin Green 2,515; James Guyette 2,269; Sir John Rose 3,735; Andrew Shilston 1,240; Colin Smith 124; Hon Amy Bondurant 33; Peter Byrom 1,375; Carl-Peter Forster 55; Simon Robertson 191; Carl Symon 63 and Sir John Taylor 47. Iain Conn purchased 223 shares on January 9, 2006 and 222 shares on February 7, 2006 under arrangements made for non-executive directors to purchase shares on a monthly basis using a percentage of their after tax fees. Otherwise there have been no changes in the directors' interests between December 31, 2005 and February 8, 2006.

In addition the directors are, for Companies Act purposes, interested in the 68,536,712 Rolls-Royce Group plc shares held by the Rolls-Royce 2003 Employee Share Trust.

Shares held in trust

Shares held in trust under the Profit Sharing Share Scheme¹

	Ordinary shares				B Shares2
	January 1,	Changes in	December 31,		January 1,	Changes in	December 31,
	2005*	2005	2005§		2005*	2005	2005§
John Cheffins3	3,830	(3,830)	—		191,500	(191,500)	—
Colin Green	3,660	(3,660)	—		—	—	—
Dr Mike Howse4	2,615	(2,615)	—		—	—	—
Sir John Rose	4,361	(4,361)	—		—	—	—

'Partnership Shares' held in trust under the Share Incentive Plan⁵

	Ordinary shares				B Shares2
	January 1, 2005*	Changes in 2005	December 31, 2005§		January 1, 2005*	Changes in 2005	December 31, 2005§
Colin Green6, 7	2,096	572	2,668		—	—	—
Sir John Rose6, 7	2,096	572	2,668		—	—	—
Andrew Shilston6, 7	1,652	557	2,209		—	—	—
Colin Smith6, 7, 8	2,409	259	2,668		—	—	—

'Free Shares' held in trust under the Share Incentive Plan⁹

	Ordinary shares				B Shares2
	January 1, 2005*	Changes in 2005	December 31, 2005§		January 1, 2005*	Changes in 2005	December 31, 2005§
John Cheffins10, 11	4,911	1,402	6,313		180,700	(180,700)	—
Colin Green10	4,996	1,332	6,328		—	—	—
Dr Mike Howse4	3,699	47	3,746		—	—	—
Sir John Rose10	4,996	1,332	6,328		—	—	—
Andrew Shilston10	2,332	1,246	3,578		—	—	—
Colin Smith8, 10	1,046	—	1,046		—	—	—

* or date of appointment if later.

§ or date of retirement if earlier.

1. Under the Profit Sharing Share Scheme, shares vest after three years.
2. Non-cumulative redeemable convertible preference shares of 0.1p each.
3. On January 5, 2005, pursuant to an election submitted, John Cheffins converted his B Share holding and received 76 ordinary shares.
4. Dr Mike Howse retired as a director with effect from June 30, 2005.
5. Under the 'Partnership Share' element of the Share Incentive Plan, shares vest on the fifth anniversary of each monthly purchase.
6. On January 4, 2006, pursuant to elections submitted, Colin Green, Sir John Rose, Andrew Shilston and Colin Smith received 24, 24, 20 and 24 ordinary shares respectively following the conversion of B Shares.
7. Colin Green, Sir John Rose, Andrew Shilston and Colin Smith purchased 28 shares each respectively on January 9, 2006 and February 7, 2006 under the Inland Revenue approved Share Incentive Plan.
8. Colin Smith was appointed a director with effect from July 1, 2005.
9. Under the 'Free Share' element of the Share Incentive Plan, shares vest after five years.
10. On January 4, 2006, John Cheffins, Colin Green, Sir John Rose, Andrew Shilston and Colin Smith received 59, 59, 59, 33 and 10 ordinary shares respectively following the conversion of B Shares.
11. On January 5, 2005, pursuant to an election submitted, John Cheffins converted his B Share holding and received 72 ordinary shares.

Share options

The directors, at December 31, 2005, held the following options under the Rolls-Royce plc Executive Share Option Scheme, the Rolls-Royce 1999 Executive Share Option Plan and the Rolls-Royce International ShareSave Plan.

All employees were eligible for options under the International ShareSave plan, and the 1997 (7 year), 1999 (5 year) and 2001 (3 year) plans matured on February 1, 2005. Options awarded under the Rolls-Royce 1999 Executive Share Option Plan vest on February 9, 2006 and March 28, 2006.

	January 1, 2005*	Granted in 2005	Lapsed in 2005	Exercised in 2005	December 31, 2005§1	Exercise price	Market price at date exercised	Aggre- gate gains 2005 £000	Aggre- gate gains 2004 £000	Exercis- able dates-->
John Cheffins	72,250			72,250	—	176p	358.50p	132		—
	15,444				15,444	194p				2006-2010
	118,405				118,405	194p				2006-2010
	173,612				173,612	216p				2006-2011
	4,398			4,398	—	108p	253.00p	6		—
	398,936				398,936	188p				2006-2012
	499,189				499,189	77p				2006-2013
	694,445				694,4452	216p				2007-2011
	1,976,679			76,648	1,900,031	172p3		138
Colin Green	4,756			4,756	—	205p	264.50p	3		—
	154,441				154,441	194p				2006-2010
	162,038				162,038	216p				2006-2011
	279,255				279,255	188p				2006-2012
	465,910				465,910	77p				2006-2013
	3,103				3,1034	141p				2006
	648,149				648,1492	216p				2007-2011
	4,053				4,0534	194p				2007
	551				5514	108p				2007
	1,722,256			4,756	1,717,500	172p3		3	38
James Guyette	114,581				114,5815	269p				2006-2009
	167,799				167,799	194p				2006-2010
	179,161				179,161	216p				2006-2011
	4,398			4,398	—	108p	267.50p	7		—
	450,140				450,140	188p				2006-2012
	506,084				506,084	77p				2006-2013
	3,122				3,1224	141p				2006
	716,641				716,6412	216p				2007-2011
	—	1,397			1,3974	298p				2009
	2,141,926	1,397		4,398	2,138,925	178p3		7
Dr Mike Howse6	63,836				63,836	194p				2006-2010
	69,445				69,445	216p				2006-2011
	1,407			1,407	—	108p	264.50p	2		—
	199,468				199,468	188p				2006-2012
	138,889				138,8892	216p				2007-2011
	473,045			1,407	471,638	201p3		2	24
Sir John Rose	116,750			116,750	—	176p	358.50p	213		—
	283,141				283,141	194p				2006-2010
	254,630				254,630	216p				2006-2011
	638,298				638,298	188p				2006-2012
	798,702				798,702	77p				2006-2013
	2,894				2,8944	141p				2006
	1,018,519				1,018,5192	216p				2007-2011
	7,662				7,6624	108p				2007
	3,120,596			116,750	3,003,846	171p3		213
Andrew Shilston	633,117				633,117	77p				2006-2013
	633,117				633,117	77p
Colin Smith7	3,862				3,862	194p				2006-2010
	15,444				15,444	194p				2006-2010
	19,676				19,676	216p				2006-2011
	99,734				99,734	188p				2006-2012
	166,364				166,364	77p				2006-2013
	78,704				78,7042	216p				2007-2011
	1,780				1,7804	194p				2007
	6,362				6,3624	141p				2008-2009
	2,396				2,3964	108p				2009
	—	1,233			1,2334	298p				2011
	394,322	1,233			395,555	148p3

* or date of appointment if later.

§ or date of retirement if earlier.

1. Unless otherwise indicated all the above options were granted under the Rolls-Royce plc Executive Share Option Scheme and the Rolls-Royce 1999 Executive Share Option Plan and are subject to the achievement of performance targets. All options 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 236p and 430.50p during 2005. The closing price on December 31, 2005 was 427.50p.
2. Supplementary options - vesting of these options is subject to attainment of significant personal share holding targets and the requirement that the growth in EPS exceeds an average of six per cent year on year as well as exceeding the UK RPI by three per cent 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. Weighted average exercise price of December 31, 2005 balance.
4. Sharesave plans.
5. Performance target achieved. Option capable of exercise.
6. Dr Mike Howse retired as a director with effect from June 30, 2005.
7. Colin Smith was appointed as a director with effect from July 1, 2005.

Long-term incentive awards

The directors as at December 31, 2005 had the following share awards in the Annual Performance Related Award plan:

* or date of appointment if later.

§ or date of retirement if earlier.

1. Under the Annual Performance Related Award plan, shares vest after two years. Shares went into trust in 2003, 2004 and 2005 at prices of 76.46p, 220.00p and 260.19p. At December 31, 2005, the amounts stated in the emoluments table representing the 2005 APRA deferred shares had not yet been applied by the Trustee to purchase shares. An investment is expected to be made by March 31, 2006 when the trustee will acquire the required number of shares at the prevailing market price. The market value per share which vested under the Annual Performance Related Award plan during 2005 was 245.75p.
2. Under the Deferred Share Incentive plan shares vest after three years. Shares went into Trust in 2003 at a price of 76.46p.
3. Dr Mike Howse retired as a director with effect from June 30, 2005.
4. Colin Smith was appointed as a director with effect from July 1, 2005.

Conditional awards, granted under the Rolls-Royce Group plc Performance Share Plan (PSP) to executive directors in 2004 and 2005, are set out below. The number of shares released will be dependent upon certain performance criteria being achieved over a three-year performance period.

* or date of appointment if later.

§ or date of retirement if earlier.

1. Dr Mike Howse retired as a director with effect from June 30, 2005.
2. Colin Smith was appointed as a director with effect from July 1, 2005.

The number of shares released on the achievement of the EPS and CPS targets will be increased by 25 per cent if the Total Shareholder Return exceeds the median for the FTSE 100 companies over the three-year performance period.

Pensions

James Guyette participates in pension plans sponsored by Rolls-Royce North America Inc.

All other executive directors who are under their normal retirement ages are members of the Group's UK pension schemes. These schemes are funded and approved defined benefit pension schemes providing, at retirement, a pension of up to two thirds of final remuneration.

New HM Revenue and Customs (HMRC) pensions regulations are effective from April 2006. There is no intention to compensate directors or other senior executives for any additional tax they may be required to pay as a result of these regulations.

The committee has determined that where further pension accrual would exceed the new HMRC annual and/or lifetime allowances applicable from April 6, 2006, executives may choose to opt out of pension accrual and receive a cash allowance in lieu of pension provision. Alternatively, as permitted under the new pension regime, the committee will have the discretion to enable the drawing of pension benefits to commence while the executive is still in employment with the Group. In such circumstances the pension schemes provide for appropriate early retirement factors to reduce the pension payable.

Details of the pension benefits, which accrued over the year in the Group's approved UK defined benefit pension schemes, are given below⁸. The pension position of Dr Mike Howse, who passed his normal retirement age in 2004 and who is excluded from the table below, is described below⁵:

1. The figure in brackets is the increase in pension/retirement lump sum during the year ended December 31, 2005 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. Transfer values calculated on this basis will vary up or down from one year to the next due to changes in financial conditions, principally long-term interest rates from which the Actuary derives the assumptions used to place a capital value on the pension entitlement. Whilst fluctuating up or down in individual years, transfer values generally trend upwards over time as individuals complete more service and become older. A large part of the increase in transfer values over 2005 is attributable to falls in the market interest rates on which the transfer value calculations are based.
4. The figure in brackets is the transfer value of the increase in pension/retirement lump sum during the year ended December 31, 2005 excluding the effect of inflation, and net of the member's own contributions.
5. Dr Mike Howse ceased to accrue pension benefits after reaching his normal retirement age on July 1, 2004. He began receiving his pension benefits from this date, although he remained an executive director until he retired from the Board on June 30, 2005. No pension benefits were therefore earned by Dr Mike Howse over the six month period in 2005 while he remained a director.
6. The Group operates the Rolls-Royce Supplementary Retirement Scheme (SRS). The purpose of the SRS 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 SRS is restricted to executive directors and to a limited number of senior executives. The members of the SRS include Andrew 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 the SRS during 2005 have been added to the increase in transfer value over 2005 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 £51,000 to Andrew Shilston directly in order to meet the income tax liability that he will incur on these employer contributions to the unapproved plan.
7. Colin Smith was appointed as a director with effect from July 1, 2005. The additional pension earned and the corresponding transfer value relate only to the period for which he was a director ie to the period July 1, 2005 to December 31, 2005. For Colin Smith, the comparator transfer value figure at the start of the year is the value as at June 30, 2005, immediately before his date of appointment as a director.
8. 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.
9. Benefits are translated at US$1.82 = £1.
10. The lump sum entitlement shown is that which would be paid on immediate retirement based on service to the end of the year.
11. The transfer values have been calculated on the basis of actuarial advice.
12. James 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 which, as cash balance arrangements, operate on the same basis as defined contribution except a guaranteed minimum rate of interest of four per cent is applied to investments. 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, James Guyette is a member of two 401(k) defined benefit savings plans in the USA, one qualified and one non-qualified, to which both he and his employer, Rolls-Royce North America Inc., contribute. The aggregate employer contribution invested in the cash balance and 401(k) plans each year is calculated with reference to taxable basic and annual incentive compensation to reflect market practice in the USA. However, this is capped at no more than 26 per cent of basic salary. James Guyette is also a member of an unfunded non-qualified deferred compensation plan in the USA, to which his employer makes notional contributions calculated with reference to his basic salary. Employer contributions to the 401(k) and deferred compensation plans during 2005 have been added to the increase in transfer value over 2005 for the defined benefit plans, and are therefore included in the figures shown in the right hand column of the second table.

Approval of the directors' remuneration report

The directors' remuneration report above was approved by the Board of directors on February 8, 2006.

Carl G Symon

Chairman of the Remuneration Committee

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