Report of the Board Committee on Executive Remuneration

Directors’ remuneration
The Board Committee on Executive Remuneration comprises non-executive directors of the company. It has been chaired since 1 January 1996 by Sir Colin Marshall, non-executive Deputy Chairman, and its members are shown elsewhere. The Committee was previously chaired by Paul Bosonnet until his retirement as non-executive Deputy Chairman on 31 December 1995. Sir Colin Marshall joined the Committee on 20 September 1995 and Dr Iain Anderson on 1 November 1995. Sir Michael Bett was a member until his retirement as a director on 31 January 1996. The Committee determines the remuneration, benefits and terms and conditions of employment of the executive directors and the members of the company’s Executive Committee. The Committee met six times during the year ended 31 March 1996.

The Committee considers that the company complies with Section A of the best practice provisions of the Stock Exchange Listing Rules. The Committee has also given full consideration to Section B of the best practice provisions in framing its remuneration policy.

BT’s executive remuneration policy is to reward senior executives competitively. The Committee does not seek to maintain any strict market position but rather to ensure that pay is set appropriately and in the knowledge of pay practice amongst appropriate comparators. The Committee focuses on the largest companies by market capitalisation, i.e. the FT-SE 100 and in particular on those organisations where the complexity of roles, of the business and the extent of international scope are comparable. The Committee obtains advice and information from external experts.

The main components of the remuneration package for executive directors are:
  • Basic salary
    Salaries are reviewed annually. However, in times of low inflation/market movement the Committee does not seek automatically to increase salaries each year.This year the total salaries of executive directors will increase from 1 July 1996 by 3.4%; individual increases range from zero to 14.6%. During the year ended 31 March 1996, the Committee made some significant adjustments to the salaries of selected senior executives, to align them more closely with the external market, taking into account their responsibilities and contribution to the business.

  • Annual bonus
    The Committee believes that annual bonus awards are an appropriate mechanism for rewarding senior executives who have achieved results against stretching targets. The annual bonus plan is currently capped at 50% of salary for directors and the norm for bonuses, averaged over five years, is around 35%. Targets are set at the beginning of the financial year in accordance with the Quality Plan and Budget and the BT Corporate Score Card. The measures are those which the Committee and the Board believe are key to delivering shareholder return and long-term growth of the group - for example, profitability, earnings per share, quality of service, productivity and expansion of international business. After the end of the financial year, the Committee meets to consider the performance of the executive directors and members of the Executive Committee on the basis of group and divisional results, personal contribution and the advice of the Chairman and the Chief Executive. The determination of reward for performance is made rigorously but not mechanistically. The Committee will decide the extent to which performance has been "on target", below target or above. The Chairman and the Chief Executive were eligible for bonuses for part only of the year. Bonus awards for executive directors for the year under review, on an annualised basis, ranged from 34% to 45%.

  • Long Term Remuneration Plan
    The Long Term Remuneration Plan (LTRP) was operated for the second time in 1995. The grant of awards under the LTRP was approved by shareholders at the 1995 AGM. Seventy senior executives now participate. The plan was designed to ensure that BT’s remuneration package remains competitive; to encourage personal investment in BT shares; to foster community of interest with shareholders; to encourage key executives to stay with BT and to link reward and long-term corporate performance more effectively.
    Under the plan, which runs on a five-year rolling basis, participants receive a contingent award of BT shares. Participants are encouraged to invest up to half their annual bonus, net of tax, in BT shares, which are held in trust under the plan for five years, in order to obtain the full benefits.
    If participants invest up to half their annual bonus, net of tax, that investment is matched by the company on a gross basis once, twice or three times (depending on the responsibilities of the individual) with an award of performance-linked shares. Participants also receive an award of service-linked shares equivalent in value to half their annual bonus. Again, this award is matched once, twice or three times by an award of performance-linked shares. To date the maximum matching multiple for both performance and service-linked shares has been two. For the 1995 operation of the plan, the initial value of awards as a percentage of salary ranged from 12% to 60%.
    All shares are held in trust and dividends reinvested in further BT shares for the potential benefit of participants. At the end of five years the service-linked shares will be transferred to participants if they are still employed by BT. The remaining performance-linked shares will be transferred only if, in addition, BT has met a pre-determined performance measure. The measure is Total Shareholder Return (TSR) which is defined as share price growth plus reinvested dividends compared to the FT-SE 100.
    When considering whether to operate the plan each year, the Committee reviews both the size of awards and the performance measure to ensure they are appropriate and challenging. During the year, the views of a number of institutional shareholders and bodies representing institutional and other investors were sought about the plan.
    As a result of this consultation, the Committee has decided to modify the plan including revising the target range for TSR. Currently, only if BT’s TSR ranks in the top 40 companies at the end of five years will all the performance-linked shares be transferred to the participant. If BT’s TSR is below 80th position, none of the performance-linked shares will be transferred. Between 40th and 80th position, a proportion of the shares, which increases from 25% to 100% as the ranking improves, will be transferred.
    For future operations of the plan, BT’s TSR will have to rank in the top 30 companies for all the performance-linked shares to be transferred to the participant. The proportion of shares transferred will decrease on a straight line basis from 30th to 70th position, at which point, no shares will be transferred.
    Initial awards will in future be subject to a maximum value of 100% of salary.

  • BT Share Option Scheme
    The share option scheme for senior executives was not renewed after its expiry in January 1995. The last options were granted in December 1994. During the year under review there were no exercises of options by directors under this scheme. In 1995, Sir Iain Vallance and Dr Rudge each exercised options over 1,714 shares under the BT Employee Sharesave Scheme in which all employees of the company are eligible to participate.

  • Other benefits
    These include car and driver, fuel, personal telephone facilities and personal call allowance, medical cover for the director and immediate family and financial counselling.

  • Pensions
    Funding through the BT Pension Scheme (BTPS) is the primary means of securing pensions for the executive directors and their dependants. Company pensions are based on salary alone - bonus, other benefits and long-term incentives are excluded. For members of the BTPS, the company contributed 9.5% of salary to the scheme and the individual contributed 6% of salary in the year ended 31 March 1996.
    The policy for the executive directors is to provide pension benefits of 2/3rds final salary. The way in which this is provided will depend on when the individual joined the company and can be either through the BTPS or through non-approved, unfunded arrangements or a combination of both.
    Sir Iain Vallance is a member of the BTPS. Following his decision to step down as Chief Executive, the Committee reviewed Sir Iain’s pension arrangements and modified his benefits so as to provide him with the flexibility to retire at any time after age 55 with a pension equivalent to 2/3rds of his final salary. His spouse’s contingent pension is 2/3rds of his pension.
    The excess of the entitlement above that provided by the BTPS is unfunded. The pension arrangements for Sir Iain Vallance are set out in further detail below.
    Unfunded arrangements were agreed for Sir Peter Bonfield as part of his recruitment package, to provide for a pension of 2/3rds of his final salary at age 60, inclusive of any retained benefits from his previous employment, and a spouse’s contingent pension of 2/3rds of his pension.
    When recruiting, if an individual’s pension expectation has been disrupted by changes in employment and/or a lower "transferred in" service credit in the BTPS, the company may purchase additional service in the BTPS. This is the case for Dr Rudge and Mr Brace.
    All employees in the company have death in service cover to the value of three times salary. For senior employees, including the executive directors, there is additional cover equal to annual salary which is funded through a separate insurance policy.

Service agreements
All the executive directors have service agreements. It is the policy of the Committee for these to be one-year rolling contracts. All service agreements contain provision for the removal of a director through poor performance.

Sir Iain Vallance’s contract is subject to twelve months’ notice either side which can expire at any time after 5 August 1997. Dr Rudge’s existing contract expires on 5 August 1997 and it is intended to extend it to 31 October 1997, the last day of the month in which he reaches the age of 60. The company intends to offer Mr Brace a one-year rolling contract in August 1996 to replace his existing contract which expires on 5 August 1997. Sir Peter Bonfield, who joined the company as Chief Executive on 1 January 1996, has an initial three-year contract which may be terminated at any time after 31 December 1998 by either party giving 12 months’ notice.

Sir Ewen Fergusson and Dr Anderson have contracts of appointment as non-executive directors which expire on 23 May 1996 and 31 October 1998, respectively. The Board has agreed to continue Sir Ewen Fergusson’s appointment from 24 May 1996 subject to a one-year period of notice on either side.

With the appointment of the new Chief Executive and the subsequent Board restructuring, it was mutually agreed that Mr Hepher, the former Group Managing Director, would leave on 31 December 1995 before the expiry of his contract. In these circumstances, the company is abiding by the terms of his contract and Mr Hepher continues to receive his salary and contractual benefits until his service contract expires on 5 August 1997. He may also exercise options held under the BT Share Option Scheme until 31 December 1996.

Non-executive directorships

The Committee believes the company benefits from executive directors accepting appointments to non-associated companies as non-executive directors. All appointments require the approval of the Committee. The Committee will normally allow one appointment although, where it is appropriate and in the company’s interest, more than one may be allowed. The practice has been for directors to retain fees from non-executive appointments.

Non-executive directors’ remuneration
In line with the recommendations in the Greenbury Report, remuneration for non-executive directors is determined by the Board based on the recommendations of the Board Committee on Non-Executive Remuneration whose members are the Chairman and the Chief Executive. The basic fee for non-executive directors is £19,500 per year. Additional fees (ranging for each committee from £3,000 to £5,000 per year) are paid for additional duties on Board committees. They also receive the use of telecommunications equipment while they are directors. Sir Colin Marshall receives an inclusive fee of £65,000 per year as Deputy Chairman.

It is intended to review these fees during 1996 with any changes to be effective from 1 January 1997.

Directors’ remuneration
The remuneration (excluding pension arrangements) of the directors, including the Chairman who was the highest paid director, was as follows:
Benefits
excluding pension(a)
Salary and fees Bonus Total




1996
£000
1995
£000
1996
£000
1995
£000
1996
£000
1995
£000
1996
£000
1995
£000




Sir Iain Vallance 476.3 465.0 162.0 115.0 19.2 19.3 657.5 599.3
Sir Peter Bonfield 118.8 - 42.5 - 4.5 - 165.8 -
A W Rudge 268.8 245.0 100.0 63.0 13.4 15.0 382.2 323.0
R P Brace 233.8 215.0 85.0 54.0 14.2 82.5(b) 333.0 351.5
A J Booth - 65.0 - - - 9.2 - 74.2
M L Hepher 373.1(c) 415.0 154.0 100.0 16.2(c) 21.6 543.3 536.6
Sir Colin Marshall 34.1 - - - 0.4 - 34.5 -
J I W Anderson 11.4(d) - - - - - 11.4 -
M Argent 82.1 140.0(e) - 19.0 32.7(f) 18.0 114.8 177.0
B Breuel 19.5 - - - - - 19.5 -
Sir Ewen Fergusson 30.0 30.0 - - 0.2 0.2 30.2 30.2
Y M Newbold 27.1(d) 25.5 - - 0.2 0.2 27.3 25.7
J K Oates 26.8 21.0 - - 0.2 - 27.0 21.0
B C Roberts - - - - - - - -
Rt Hon Lord Tebbit 27.7 25.5 - - - - 27.7 25.5
Sir Michael Bett 31.3 27.5 - - 1.4 13.0 32.7 40.5
P G Bosonnet 56.3 75.0 - - - - 56.3 75.0
Sir Geoffrey Mulcahy - 5.6 - - - - - 5.6
Sir David Scholey - 13.6 - - - - - 13.6





Total remuneration 1,817.1 1,768.7 543.5 351.0 102.6 179.0 2,463.2 2,298.7





(a) Includes such benefits as company car, petrol, driver, personal telephone facilities, medical cover, financial counselling and share schemes.

(b) Includes £66,888 reimbursement of relocation expenses.

(c) For the period ended 31 December 1995. Under the terms for his leaving the company, Mr Hepher continues to receive his salary and contractual benefits until his service contract expires on 5 August 1997. The total salary payable for the period 1 January 1996 to 5 August 1997 is £686,600 and benefits are estimated at £57,700. For the year ended 31 March 1996, he received a bonus of £154,000.

(d) Payments to non-executive directors include fees paid to their principal employer of £11,375 for Dr Anderson and £12,750 for Mrs Newbold.
(e) Includes salary as an executive director for the period to 31 July 1994.

(f) Benefits include a company car, valued at £19,500, transferred to Mr Argent.

The directors’ long-term remuneration benefits, through the exercise of share options, were as follows:

1996
£000

1995
£000
Sir Iain Vallance 3.0 640.8
A W Rudge 3.3 -
M Argent
-
7.0
The figures in the above table are based on the amount by which the market value of the shares on the date of exercise exceeded the option price.
Sir Peter Bonfield joined the Board on 1 January 1996, Sir Colin Marshall and Mrs B Breuel on 1 April 1995 and Dr J I W Anderson on 1 November 1995. In the previous financial year, Mr J K Oates joined the Board on 1 June 1994 and Mr B C Roberts on 14 October 1994. Mr Roberts receives no remuneration as a non-executive director of the company.

Mr M L Hepher and Mr P G Bosonnet retired on 31 December 1995. Sir Michael Bett retired on 31 January 1996; he remains chairman of Cellnet Group Limited, a subsidiary company. Mr M Argent had special responsibilities from the date of his retirement as an executive director on 31 July 1994 until 31 December 1995. In the previous financial year, Mr A J Booth and Sir Geoffrey Mulcahy retired on 30 June 1994 and Sir David Scholey on 14 October 1994.

The detailed pension arrangements for the Chairman are as follows. Sir Iain Vallance is a member of the BT Pension Scheme and during the year he contributed 6% of his salary to the scheme and the company made payments of £46,039 (1995 - £44,952). This consisted of £45,244 (9.5% of salary) which the company contributed to the scheme and £795 top-up life insurance cover. As referred to above, the Chairman’s pension arrangements have been modified during the year, and the main part of the provision for the year of £838,000 (1995 - £51,150) for his unfunded pension benefits is to cover the possibility of his retiring after his 55th birthday on a full pension.

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