REMUNERATION POLICY

The Chairman and Chief Executive are invited to attend meetings. They are not present when matters affecting their own remuneration arrangements are considered. No director or executive is involved in any decision relating to his or her remuneration. Non-executive directors who are not members of the Committee are entitled to receive papers and minutes of the Committee. The Committee had access during the year to professional advisers, both from within the company and externally: Kepler Associates (remuneration consultants), who were appointed by the company; Ben Verwaayen, Chief Executive; Hanif Lalani, Group Finance Director; Alex Wilson, Group HR Director and Larry Stone, Company Secretary. They provided advice that materially assisted the Committee in relation to directors’ remuneration in the financial year 2006/07. Remuneration consultants provide a range of data and advisory services covering all aspects of executive pay, bonus arrangements, shares and benefits. The Committee agreed that Kepler Associates may advise both the Committee and BT, and should be invited to attend meetings when major remuneration policy issues were discussed.
     BT’s policy is to reward its senior executives competitively, taking account of the performance of individual lines of business and the company as a whole, comparison with other FTSE 30 companies and the competitive pressures in the information and communications technology industry. This has been crucial as BT’s revenues from traditional business have fallen and new wave services, generated mainly from networked IT services and broadband, have been developed to provide revenue growth. To ensure that key people are both recruited and retained, base salaries are positioned within a range, consistent with prevailing market rates, with the potential for total direct compensation (basic salary, annual bonus – cash and deferred shares – and the expected value of any long-term incentives) to deliver upper quartile remuneration for sustained and excellent performance. A significant proportion of the total executive remuneration package is variable and is linked to corporate performance. Remuneration arrangements and performance targets are kept under regular review to achieve this.
     As members of the Board, all Committee members receive and review an annual corporate social responsibility report detailing the way in which the company manages social, ethical and environmental issues. The Committee is satisfied that the structure for the remuneration of the executive directors and senior executives does not raise environmental, social and governance risks by inadvertently motivating irresponsible behaviour.

(ii) Packages and financial year 2006/07 operation
The remuneration package is made up of some or all of the following:

Basic salary
Salaries are reviewed annually, but increases are made only where the Committee believes that adjustments are appropriate to reflect contribution, increased responsibilities and/or market pressures. No base pay changes were proposed or made for executive directors in 2006/07, save that the Committee agreed increases in annual base salary effective from 1 June 2006 for Ben Verwaayen and Hanif Lalani to bring their remuneration more into line with the market.

Performance-related remuneration
Annual bonus
The annual bonus plan is designed to reward the achievement of results against set objectives.
     For the financial year 2006/07, on-target and maximum (requiring truly exceptional performance) bonus levels for executive directors, as a percentage of salary, were set at 60% and 110% respectively. In addition, executive directors are entitled to a bonus in the form of deferred shares with a value of 75% of the cash bonus.
     The Chief Executive has a target cash bonus of 85% of salary and a maximum cash bonus, for exceptional performance, of 130% of salary. He is also entitled to an award of deferred shares, equal to two-times his cash bonus, subject to an overall cap of three-times salary (cash plus deferred shares) in any one year.
     Under his contract, the Chairman is not entitled to a bonus.
     Corporate performance targets, set at the beginning of the financial year 2006/07, were weighted such that 40% of the bonus potential was based on EPS (earnings per share), 40% on free cash flow and 20% on customer satisfaction. Delivery against these operational targets is a key determinant of success and supports BT’s strategy for transformation and growth. The Committee agreed that in calculating earnings per share for purposes of the annual bonus, volatile items which would be reported under IFRS should be excluded. The impact of market movements in foreign exchange and financial instruments plus the net finance income relating to the group’s pension liabilities were excluded from the target.
     For the executive directors and other relevant senior executives, (but not Openreach executives, see ‘Openreach’) the importance of meeting these operational targets is recognised by linking 100% of their potential bonus to BT’s corporate performance. The Committee retains the flexibility to enhance or reduce bonus awards in exceptional circumstances.

Payment against corporate targets in the financial year 2006/07
 

Earnings per share – weighting 40% of target			Free cash flow – weighting 40% of target			Customer satisfaction – weighting 20% of target			Total % of target
80			80			13			173

(Note – threshold reflects 50% of target; target is 100%; and stretch is 200%)

The deferred share element of the annual bonus is paid under the DBP (Deferred Bonus Plan). The shares vest and are transferred to the executive after three years if still employed by the company. There are no additional performance measures for the vesting of deferred share awards. The Committee considers that deferring a part of the annual bonus in this way also acts as a retention measure and contributes to aligning management with long-term shareholder interests.
     The deferred awards for Ben Verwaayen, Andy Green, Hanif Lalani, Ian Livingston and Paul Reynolds at the end of the financial year 2006/07, and for François Barrault on 24 April 2007 when he was appointed as a director, are contained in the Deferred Bonus Plan awards table. The initial values of the awards to be granted in respect of the financial year 2006/07 are given in the Remuneration review.

Long-term incentives
The BT Equity Incentive Portfolio (the Portfolio) is designed to ensure that equity participation is an important part of total remuneration and that overall directors’ remuneration is aligned with shareholders’ interests. It comprises three elements: share options, incentive shares and retention shares. Incentive shares were used for equity participation in the financial year 2006/07. Retention shares are used principally as a recruitment or retention tool. No options were granted in the financial year 2006/07.
     Under his service agreement, the Chairman is not entitled to receive annual grants of incentive awards or options.
     Normally, awards vest and options become exercisable only if a predetermined performance target has been achieved. The performance measure for outstanding awards and options is total shareholder return (TSR), calculated on a common currency basis and compared with a relevant basket of companies. TSR for these purposes was calculated by the law firm, Allen & Overy. TSR links the reward given to directors with the performance of BT against the shares of other major companies. For grants in the financial years 2002/03 and 2003/04, the comparator group was the FTSE 100 at 1 April in each year. For grants in the financial year 2004/05, 2005/06 and 2006/07, TSR was measured against a group of companies from the European Telecom Sector. This comparator group was chosen because the companies face similar market sector challenges to BT and are within the sector in which BT competes for capital.

At 1 April 2006, the group contained the following companies:

BT Group Belgacom Cosmote Mobile Telecommunications Deutsche Telekom France Telecom Hellenic Telecom Portugal Telecom Royal KPN Swisscom

Telecom Italia Telecom Italia Mobile Telefonica Telecom Moviles Telekom Austria Telenor TeliaSonera Vodafone Group

     All the above companies, with the exception of Telecom Moviles were members of the comparator group at 1 April 2005; Cable & Wireless, 02 and TDC were also members of the group. At 1 April 2004, Belgacom was not a member of the group but Mobistar and Tele2 were members.
     The TSR for a company is calculated by comparing the return index (RI) at the beginning of the performance period to the RI at the end of the period. The RI is the TSR value of a company measured on a daily basis, as tracked by independent analysts, Datastream. It uses the official closing prices for a company’s shares, adjusted for all capital actions and dividends paid. The initial RI is determined by calculating the average RI value taken daily over the six months prior to the beginning of the performance period, the end value is determined by calculating the average RI over the six months up to the end of the performance period. This mitigates the effects of share price volatility. A positive change between the initial and end values indicates TSR growth.

Incentive shares
For the financial year 2006/07, the Committee granted incentive shares to executive directors, senior executives, key managers and professionals.
     Awards of incentive shares vest after a performance period of three years, if the participant is still employed by BT and a performance measure has been met. Dividends paid on the shares during the three-year period are reinvested in further shares and added to the awards. For awards of incentive shares granted in the financial years 2004/05, 2005/06 and 2006/07, TSR at the end of the three year period must be in the upper quartile relative to the comparator group for all of the shares to vest. At median, 25% of the shares under award will vest. Below that point, none of the shares under award will vest. The proportion of shares that vests reduces on a straight-line basis between the upper quartile and median positions. There will be no re-testing, and no matching shares are being offered to any executive on vesting of the incentive shares.
     At 31 March 2007, the TSR for the 2004/05 awards was at 8th position against the comparator group of 20 companies. As a result, 55% of the awards will vest in May 2007.
     The details of incentive share awards held by Ben Verwaayen, Andy Green, Hanif Lalani, Ian Livingston and Paul Reynolds at the end of the financial year 2006/07, and by François Barrault on 24 April 2007 when he was appointed as a director, are contained in the table in the Remuneration review - incentive share award.

Share options
No share options were granted in 2006/07. The last grant of share options was in the financial year 2004/05.
     The price at which shares may be acquired under the Global Share Option Plan (GSOP) is the market price at the date of grant. Options are exercisable after three years, subject to a performance target being met.
     For options granted subject to a TSR measure, BT’s TSR at the end of the three-year period must be in the upper quartile for all of the options to be exercisable. At median, 30% of the options will be exercisable. Below that point, none of the options may be exercised. The proportion of options that are exercisable reduces on a straight-line basis between upper quartile and median performance. Options were granted in the 2002/03, 2003/04 and 2004/05 financial years. The options granted in the 2002/03 financial year did not, after re-testing, meet the TSR target at the end of the performance period on 31 March 2007 and lapsed on that date. For options granted in the financial year 2003/04, TSR had reached 85th position at the first measurement relative to the FTSE 100 and performance will be re-tested in the financial year 2007/08. If the performance measure is not met, the options will lapse.
     For options granted in the financial year 2004/05 there were no re-testing provisions, and the policy of the Committee is for there to be no re-testing for future equity awards. At 31 March 2007, TSR for these options was at 8th position against the comparator group of 20 companies and, as a result, 58% of the options will become exercisable from June 2007.
     The option granted to Sir Christopher Bland on 22 June 2001 as part of his recruitment package is not subject to a performance measure as it matched a personal investment in BT shares of £1 million.
     The details of the options held by Sir Christopher Bland, Ben Verwaayen, Andy Green, Hanif Lalani, Ian Livingston and Paul Reynolds at the end of the financial year 2006/07 and by François Barrault on 24 April 2007 when he was appointed as a director, are contained in the table in the Remuneration review - Share options.

Retention shares
Retention shares are granted under the RSP (Retention Share Plan) to individuals with critical skills, as a recruitment or retention tool. In some cases, they are granted to key employees who have contributed to good corporate performance to assist retention. As a result, shares currently under award are not generally linked to a corporate performance target. The length of the retention period before awards vest is flexible although this would normally be three years unless the Committee agreed otherwise. The shares are transferred at the end of the specified period if the individual is still employed by BT.
     Retention shares are used in special circumstances and, in the financial year 2006/07, seven awards were granted of which three awards were made for recruitment purposes.
     As a retention measure in his role as Chief Executive, BT Global Services, Andy Green receives awards of retention shares linked to BT Global Services’ financial performance in 2005/06 and 2006/07. The target award was equivalent to 100% of salary with a maximum of 150% of salary. The first award with a value of £750,000 was granted in June 2006. The second award with a value of £217,000 will be granted in June 2007. The awards vest three years after the date of grant subject to continued employment. In recognition of the leading role which Andy Green will take in delivering the next phase of transformation of the company over the next two years, a further retention share award with a value of £535,000 will be granted to him in June 2007. The vesting of the award will be after two years and will not be subject to performance conditions.
     The awards under the RSP held by Sir Christopher Bland and Ian Livingston at the end of the financial year 2006/07 and by François Barrault on 24 April 2007 when he was appointed as a director, or which vested during the year, are contained in the table in the Share awards under long-term incentive plans.

Other share plans
The executive directors and the Chairman may participate in BT’s HM Revenue & Customs (HMRC) approved all-employee share plans, the Employee Sharesave Scheme and Employee Share Investment Plan, on the same basis as other employees. There are further details of these plans in note 31 to the accounts.

Dilution
Treasury shares are generally used to satisfy the exercise of share options, the grant of share awards and for the all-employee share plans. At the end of the 2006/07 financial year, treasury shares equivalent to 6.2% of the issued share capital would be required for these purposes. It is estimated that treasury shares equivalent to approximately 1% of the issued share capital will be required for all the employee share plans in 2007/08.

(iii) Annual package – financial year 2007/08
The Remuneration Committee has carried out a review of executive remuneration and, as a result, resolved to place a greater emphasis on long-term reward.

Long-term reward
To provide appropriate incentives, to recognise good performance in recent years and to help rebalance overall remuneration to long-term reward, incentive share awards with an initial face value in the range of 100% to 200% of salary will be awarded. Awards will have a fair market value in the range of 44.5% to 89% of salary respectively.

Salaries
Salaries have been increased in order to bring the overall packages more into line with the market.

Annual bonus plan
The Remuneration Committee has reviewed the structure of the corporate scorecard for the annual bonus plan. The annual bonus will continue to reward performance against EPS, free cash flow and a customer-related measure. Given the importance of excellent customer service to the company, the weighting of the customer-related element will be increased to 30%; the EPS and cash flow elements will each be reduced to 35%.
     In addition, the existing customer-related element of the scorecard, customer satisfaction, will be changed to customer service to reflect the drive to improve the efficiency of the service provided to customers. This is in line with programmes in the business designed to reflect new quality assurance and efficiency measures.
     As in the previous two financial years, for purposes of calculating EPS for the scorecard, volatile items reported under IFRS have been excluded from the target.
     The bonus levels for the Chief Executive and the executive directors will continue unchanged. For the Chief Executive, at target, two thirds of any bonus will continue to be payable in deferred shares.
     The Committee believes that the group performance targets for the financial year 2007/08 are more challenging than the outturn for 2006/07.

Proportion of fixed and variable remuneration
The targeted composition of each executive director’s performance-related remuneration, excluding pension, for the financial year 2007/08, comprising annual and long-term incentives, will be:
 

			Fixed Base Pay			Variable			Total
B Verwaayen			23%			77%			100%
F Barrault			37%			63%			100%
A Green			34%			66%			100%
H Lalani			37%			63%			100%
I Livingston			34%			66%			100%
P Reynolds			40%			60%			100%

Total remuneration comprises base salary, annual bonus – cash and deferred shares – and the expected value of awards under BT’s long-term incentive plans, excluding retention shares.

Openreach
In the Undertakings given to Ofcom on 22 September 2005, BT agreed that the incentive elements of the remuneration of executives within Openreach should be linked to Openreach performance rather than BT targets or share price. These incentives cannot be provided by way of BT shares.
     As a result, special arrangements were put in place for Openreach executives in 2005/06. The annual bonus is linked to all Openreach targets and long-term incentives are paid in cash instead of shares.
     Openreach executives participate in the BT HMRC-approved all-employee share plans on the same terms as other BT employees. In addition, there were no changes to the pension arrangements of these executives.
     None of the executive directors participates in the Openreach incentive plans.

(iv) Other matters
Executive share ownership
A mandatory shareholding programme was introduced for the financial year 2005/06 onwards. This is to encourage executive directors and certain other executives to build up a shareholding in the company over time by retaining shares received either as a result of participating in a BT employee share plan (other than the shares sold to pay a National Insurance or income tax liability) or from on-market purchases. The Chief Executive is required to build up a shareholding of 2 x salary and the remaining executive directors 1.5 x salary. Given that a large part of an executive’s remuneration is already variable, the requirement excludes the need to make a further personal investment to build up the shareholding should share plan awards not vest. Current shareholdings are set out in Directors' interests. Progress towards meeting these targets has been made during the financial year 2006/07.

Pensions
Those directors and other employees, who joined the company prior to 1 April 2001, are eligible for membership of the BT Pension Scheme, which is a defined benefit scheme. The benefits of the executive directors who are members of the scheme are set out in the Remuneration review - pensions. The executive directors, who have opted out of future pensionable service accrual following the pension simplification legislation which came into force on 6 April 2006, receive, as an alternative, a cash allowance annually. The benefits for executive directors who are covered by this are set out in the Remuneration review - pensions. This is broadly cash neutral for the company.
     BT closed the BT Pension Scheme to new members from 1 April 2001. From this date, provision is generally made on a defined contribution basis. The company agrees to pay a fixed percentage of the executive’s salary each year which can be put towards the provision of retirement benefits. Additionally, a lump sum equal to four times salary is payable on death in service. The benefits for the executive directors who are covered by this are set out on in the Remuneration review - pensions.
     Pension provision for all executives is based on salary alone – bonuses, other elements of pay and long-term incentives are excluded.

Other benefits
Other benefits for the Chairman and the senior management team include some or all of the following: company car, fuel or driver, personal telecommunications facilities and home security, medical and dental cover for the director and immediate family, special life cover, professional subscriptions, and personal tax planning and financial counselling. The company has a permanent health insurance policy to provide cover for the Chairman and certain executive directors who may become permanently incapacitated.

Service agreements
It is the policy for the Chairman and executive directors to have service agreements providing for one year’s notice. It may be necessary on recruitment to offer longer initial periods to new directors from outside BT, or circumstances may make it appropriate to offer a longer fixed term. All of the service agreements contain provisions dealing with the removal of a director through poor performance, including in the event of early termination of the contract by BT. During the financial year 2006/07, Sir Christopher Bland’s service agreement was extended to provide for his resignation as Chairman on 25 September 2007 and his resignation as a director on 30 September 2007 instead of at the conclusion of the 2007 AGM. On termination of his contract by BT before 30 September 2007, he is entitled to payment of salary and the value of any benefits until that date. Sir Mike Rake, who will replace Sir Christopher Bland as Chairman, entered into a service agreement as a director and Chairman to take effect from 26 September 2007. Ben Verwaayen’s contract entitles him on termination of his contract by BT to payment of £700,000. The contracts of François Barrault, Andy Green, Hanif Lalani, Ian Livingston and Paul Reynolds entitle them on termination of their contract by BT to payment of salary and the value of benefits until the earlier of 12 months from notice of termination or the director obtaining full-time employment. If the contract of an executive director (other than that of the Chairman, François Barrault and Hanif Lalani) is terminated by BT within one year of BT entering into a scheme of arrangement or becoming a subsidiary of another company, he will be entitled to receive the higher of that current year’s on-target bonus or the previous year’s bonus, the market value of shares awarded under an employee share ownership plan or deferred bonus plan that have not vested, together with a year’s salary and the value of any benefits.
     The Committee has reviewed contracts taking into account the joint statement of best practice on executive contracts and severance by the Association of British Insurers and the National Association of Pension Funds, and other relevant guidelines, and believes that contract terms are generally in line with best practice. The clause described above dealing with termination following BT entering into a scheme of arrangement or becoming a subsidiary of another company will be excluded from contracts for new appointments. This clause was not included in the contracts of François Barrault and Hanif Lalani.

Outside appointments
The Committee believes that there are significant benefits, to both the company and the individual, from executive directors accepting non-executive directorships of companies outside BT. The Committee will consider up to two external appointments (of which only one may be to the Board of a major company), for which a director may retain the fees. Ben Verwaayen as a non-executive director of United Parcel Service (UPS), receives an annual fee of US$75,000. On 1 May 2006, he was granted 1,051 shares of restricted UPS common stock amounting to US$85,000 and on 8 February 2007 he was granted 1,501 shares of UPS restricted common stock amounting to US$110,000. Ian Livingston received an annual fee of £45,000 as a non-executive director of Ladbrokes plc until he resigned as a director on 31 October 2006. Paul Reynolds, as a non-executive director of E-Access in Japan, receives an annual fee of ¥3,200,000 (approximately £14,000). Andy Green is a non-executive director of NAVTEQ in the US. He is entitled to receive an annual fee of US$60,000 and an annual grant of restricted stock units to the value of US$125,000. François Barrault, as a director of eServGlobal in Australia, receives an annual fee of €36,000. In 2003, he was granted 500,000 options over eServGlobal shares; 50% have an exercise price of A$0.15 per option and 50% have an exercise price of A$0.40 per option.

Non-executive directors’ letters of appointment
Non-executive directors have letters of appointment. They are appointed for an initial period of three years. During that period, either party can give the other at least three months’ notice. At the end of the period the appointment may be continued by mutual agreement. Further details of appointment arrangements for non-executive directors are set out in the Report of the Directors. The letters of appointment of non-executive directors are terminable on notice by the company without compensation.

Non-executive directors’ remuneration
Eight of the directors on the Board are non-executive directors who, in accordance with BT’s articles of association, cannot individually vote on their own remuneration. Non-executive remuneration is reviewed by the Chairman and the Chief Executive and discussed and agreed by the Board. Non-executive directors may attend the Board discussion but may not participate in it.
     The Board last reviewed fees in 2004 and plans to review them again in the 2007/08 financial year.
     The basic fee for non-executive directors is £40,000 per year. An additional fee for membership of a Board committee is £5,000 per year and a further £5,000 for chairing a committee. Sir Anthony Greener, who was Deputy Chairman and senior independent director until he retired on 30 September 2006 and also chaired both the Remuneration Committee and the Audit Committee, received total fees of £115,000 per year. Maarten van den Bergh, who was appointed Deputy Chairman and senior independent director from 1 October 2006 and chairman of the Remuneration Committee from that date, and who is also chairman of the Pension Scheme Performance Review Group, receives total fees of £120,000 per year. Carl Symon receives an annual fee of £70,000 as chairman of the Equality of Access Board (a Board Committee), which was established on 1 November 2005.
     To align further the interests of the non-executive directors with those of shareholders, the company’s policy is to encourage these directors to purchase, on a voluntary basis, £5,000 of BT shares each year. The directors are asked to hold these shares until they retire from the Board. This policy is not mandatory.
     No element of non-executive remuneration is performance-related. Non-executive directors do not participate in BT’s bonus or employee share plans and are not members of any of the company pension schemes.


Directors’ service agreements and contracts of appointment
The dates on which directors’ initial service agreements/letters of appointment commenced and the current expiry dates are as follows:

Chairman and executive directors		Commencement date				Expiry date of current service agreement or letter of appointment
Sir Christopher Bland		1		May 2001		Sir Christopher Bland’s service agreement was extended on 19 February 2007 so that it will terminate on 30 September 2007.
B Verwaayen		14		January 2002		The contract is terminable by the company on 12 months’ notice and by the director on six months’ notice.
F Barraulta		24		April 2007
A Green		19		November 2001
H Lalani		7		February 2005
I Livingston		8		April 2002
P Reynolds		19		November 2001
Non-executive directors
M van den Bergh		1		September 2000		Letter of appointment was for an initial period of three years. The appointment was extended for three years in 2003 and extended for a further three years in 2006. The appointment is terminable by the company or the director on three months’ notice.
C Brendish		1		September 2002		Letters of appointment were for an initial period of three years. Appointments were extended for a further three years and are terminable by the company or the director on three months’ notice.
Baroness Jay		14		January 2002
J F Nelson		14		January 2002
C G Symon		14		January 2002
Sir Anthony Greener		1		October 2000		Letter of appointment was for an initial period of three years. The appointment was extended for a further three years. Terminated 30 September 2006.
M Alahuhta		1		February 2006		Letters of appointment are for an initial period of three years and are terminable by the company or the director on three months’ notice. The appointment is renewable by mutual agreement.
P Hodkinson		1		February 2006
D Lathen		1		February 2007

a	François Barrault also has a management agreement, dated 26 April 2004, which he entered into when he was appointed President, BT International. This agreement is terminable by the company on 12 months’ notice and by François Barrault on six months’ notice.

There are no other service agreements or material contracts, existing or proposed, between the company and the directors.
There are no arrangements or understandings between any director or executive officer and any other person pursuant to which any director or executive officer was selected to serve. There are no family relationships between the directors.

The directors, as a group, beneficially own less than 1% of the company’s ordinary shares.

Performance graph
This graph illustrates, as required by the Companies Act 1985, the performance of BT Group plc measured by TSR relative to a broad equity market index over the past five years. We consider the FTSE 100 to be the most appropriate index against which to measure performance for these purposes, as BT has been a constituent of the FTSE 100 throughout the five-year period and the index is widely used. TSR is the measure of the returns that a company has provided for its shareholders, reflecting share price movements and assuming reinvestment of dividends.

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