Annual Review & Notice of Meeting 2007

Summary report on Directors' remuneration

Introduction
This is a summary of the full Report on directors’ remuneration in the Annual Report, a copy of which is available on request or at www.bt.com/annualreport. The full report will be voted on at the 2007 Annual General Meeting.

Remuneration Committee
The Remuneration Committee sets the remuneration policy and individual packages for the Chairman, executive directors and other senior executives reporting to the Chief Executive. It also approves changes in the company’s long-term incentive plans, recommends to the Board those plans which require shareholder approval and oversees their operation.

Remuneration policy for executives
BT’s executive remuneration policy is to reward employees competitively, taking into account individual, line of business and company performance, market comparisons and the competitive pressures in the information and communications technology industry.
The policy for executive pay, in general terms, is for base salaries to be positioned within a range, consistent with prevailing market rates, with total direct compensation (basic salary, annual bonus and the value of any long-term incentives) to be at the upper quartile for sustained and excellent performance.

Main components of remuneration
Executive benefits packages comprise a mix of basic salary and performance-related remuneration, as follows:

Basic salary
This is reviewed annually.

Performance-related remuneration
•	Annual bonus – the annual bonus plan is designed to reward the achievement of results against set objectives. Targets in respect of corporate performance, set at the beginning of the financial year 2006/07 for each objective, were based on earnings per share, free cash flow and customer satisfaction. In addition, the Chief Executive is entitled to an award of deferred shares equal to two times his cash bonus. Executive directors are entitled to a bonus in the form of deferred shares with a value of 75% of the cash bonus. The shares vest after three years and act both as an incentive and a retention measure.
•	Long-term incentives – the BT Equity Incentive Portfolio, comprising share options, incentive shares and retention shares, is designed to ensure that equity participation is an important part of overall remuneration and aligned with shareholders’ interests. For the financial year 2006/07, the Committee granted incentive shares to executive directors, senior executives, key managers and professionals:
	–	Awards vest only if a predetermined performance target has been achieved.
	–	The performance measure is total shareholder return (TSR) calculated on a common currency basis and compared with a basket of companies in the European Telecom Sector.
	–	BT’s TSR at the end of the three-year measurement period must be in the upper quartile for all of the awards to vest. At median, 25% of shares under award would vest. Below that point none of the share awards would vest.
Retention shares are granted in special circumstances to help recruit or retain individuals with critical skills and to provide additional incentives. In the financial year 2006/07, seven awards were granted for recruitment and retention purposes. Andy Green, formerly Chief Executive BT Global Services, will be granted an award of retention shares, linked to the financial performance of that line of business, with a value of £217,000, in June 2007 (2006: £750,000). In recognition of the leading role which Andy Green will take in delivering the further transformation of the company, announced in April 2007, a retention share award with a value of £535,000 will be granted to him; the award will vest in two years’ time and will not be subject to performance conditions.

Financial year 2007/08 policy
The Remuneration Committee carried out a review of executive remuneration and, as a result, resolved to place a greater emphasis on long-term reward. Incentive share awards with an initial value in the range of 100% to 200% of salary will be awarded. Salaries have been increased to bring them more into line with the market. Ben Verwaayen’s salary will be increased to £800,000, Andy Green’s salary to £520,000, Hanif Lalani’s salary to £520,000, Ian Livingston’s salary to £560,000 and Paul Reynolds’ salary to £475,000.
François Barrault receives an annual salary of €750,000 (approximately £500,000).
The bonus targets for the Chief Executive and for the executive directors will continue unchanged.

Pension arrangements
Pensions are based on salary alone – bonuses, other benefits and long-term incentives are excluded.
Those directors and other employees, who joined the company prior to 1 April 2001, are members of the BT Pension Scheme, which is a defined benefits scheme. Andy Green is a member of the BT Pension Scheme. Hanif Lalani and Paul Reynolds are members of the Scheme but have opted out of future pensionable service accrual.
The executive directors, who opted out of future pensionable service accrual following the pensions simplification legislation which came into force on 6 April 2006, receive, as an alternative, a cash allowance annually. This is broadly cash neutral for the company.

Other benefits
Other benefits include some or all of: company car, fuel or driver, personal telecommunications facilities and home security, medical and dental cover, special life cover, professional subscriptions, and tax planning and financial counselling.

Service agreements
The policy is for the Chairman and executive directors to have service agreements providing for one year’s notice by the company. If BT terminates Sir Christopher Bland’s contract before it expires on 30 September 2007, he is entitled to payment of salary and the value of any benefits until that date. Ben Verwaayen is entitled to £700,000 on termination by BT. François Barrault, Andy Green, Hanif Lalani, Ian Livingston and Paul Reynolds are entitled to salary and benefits until the earlier of 12 months from notice of BT’s termination of the contract or the director obtaining full-time employment. Sir Mike Rake has a service agreement as a director and Chairman with effect from 26 September 2007.
See the following tables for details of directors’ emoluments and interests in shares.

Directors’ remuneration
The emoluments of the directors for the year ended 31 March 2007 and the benefits received under the long-term incentive plans were, in summary, as follows:

	Total 2007	Total 2006
	£’000	£’000

Salaries	3,167	3,058
Performance-related bonus	2,752	2,284
Deferred bonus in shares	2,767	2,441
Other benefits	223	203

	8,909	7,986
Payments to non-executive directors	528	467

Total emoluments	9,437	8,453
Gain on the exercise of share options	4	–
Value of shares vested under the executive share plans	2,633	652

Retirement benefits are accruing to three directors under defined contribution arrangements and to three directors and one former director under defined benefit arrangements.

Pensions
Sir Christopher Bland is not a member of any of the company’s pension schemes but in 2006/07 the company paid him £15,186 as a retirement allowance. B Verwaayen and I Livingston are not members of any of the company’s pension schemes but the company has agreed to pay an amount equal to 30% of salary towards pension provision.
The aggregate value of contributions paid, or treated as paid, to defined contribution schemes in the 2007 financial year was £88,245. A Green is a member of the BT Pension Scheme. Additional days of pensionable service are being purchased for A Green to bring his pensionable service at age 60 up to 40 years. H Lalani and P Reynolds are members of the BT Pension Scheme but have opted out of future pensionable service accrual and they each receive an annual cash amount equal to 30% of their salary towards pension provision.

	Basic salary and fees	Pension allowance net of pension contributions	Total salary and fees	Annual cash bonus	Expenses allowance	Other benefits excluding pension	Total 2007	Total 2006
	£’000	£’000	£’000	£’000	£’000	£’000	£’000	£’000

Sir Christopher Bland	500	15	515	–	–	36	551	532

B Verwaayen⁽¹⁾⁽²⁾	742	190	932	884	–	44	1,860	1,694

A Green⁽¹⁾	500	–	500	483	–	36	1,019	930

H Lalani⁽¹⁾⁽⁴⁾	450	135	585	444	–	39	1,068	759

I Livingston^(1)(2)(3)	525	102	627	507	19	12	1,165	1,110

P Reynolds⁽¹⁾⁽³⁾	450	135	585	434	19	18	1,056	834

M van den Bergh	93	–	93	–	–	–	93	59

M Alahuhta	45	–	45	–	–	–	45	8

C Brendish	50	–	50	–	–	–	50	50

P Hodkinson	55	–	55	–	–	–	55	8

Baroness Jay	50	–	50	–	–	–	50	50

D Lathen⁽⁵⁾	8	–	8	–	–	–	8	–

J F Nelson	55	–	55	–	–	–	55	52

C G Symon	115	–	115	–	–	–	115	87

Sir Anthony Greener⁽⁶⁾	57	–	57	–	–	–	57	115

L R Hughes⁽⁷⁾	–	–	–	–	–	–	–	38

	3,695	577	4,272	2,752	38	185	7,247	6,326

Notes

¹In addition, deferred bonuses payable in shares in three years’ time, subject to continued employment, were awarded to B Verwaayen (£1,366,000), A Green (£362,000), H Lalani (£333,000), I Livingston (£380,000) and P Reynolds (£326,000).

²Part of the pension allowance of 30% of salary for B Verwaayen and I Livingston was paid to them direct.

³Expense allowance includes a monthly cash allowance in lieu of a company car equivalent to £18,500.

⁴H Lalani received an additional cash payment of £150,000 on 30 June 2006 in respect of a special retention arrangement established on 1 July 2004 when he was Chief Financial Officer, BT Wholesale.

⁵D Lathen was appointed as a director on 1 February 2007.

⁶Sir Anthony Greener retired as a director on 30 September 2006.

⁷L Hughes retired as a director on 31 March 2006.

Summary of Directors ’ interests in shares and share plans
as at 31 March 2007, or date of appointment if later

	Beneficial shareholdings	^a	Number of shares under option	^b	Incentive and retention shares	^c	Deferred bonus awards	^d

Sir Christopher Bland	674,386		314,244		329,418		–

B Verwaayen	1,238,827		1,369,820		806,894		958,537

F Barrault^e	107		362,500		900,328		206,271

A Green	204,629		837,389		898,896		284,822

H Lalani	36,358		415,410		417,420		171,416

I Livingston	349,901		887,889		869,675		286,733

P Reynolds	147,169		787,309		483,675		261,310

M van den Bergh	13,621		–		–		–

M Alahuhta	20,000		–		–		–

C Brendish	30,920		–		–		–

P Hodkinson	4,622		–		–		–

Baroness Jay	10,185		–		–		–

D Lathen	–		–		–		–