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For the financial year 2004/05, on-target and maximum (requiring truly exceptional performance) bonus levels for executive directors and OC members, as a percentage of salary, were 75% and 150%, respectively, and for the Chief Executive they were 127.5% and 195%, with one-third of any bonus payable in the form of deferred shares. Under his contract the Chairman is not entitled to a bonus. Targets, in respect of corporate performance, set at the beginning of the financial year 2004/05 for each objective, to which specific weights were attached, were based on earnings per share, free cash flow and customer satisfaction. Delivery against these operational targets will be a key determinant of success and supports BT’s strategy for transformation and growth. For the three line of business Chief Executives, 75% of the potential bonus was linked to BT’s corporate performance and 25% to the performance of their respective line of business. For all other relevant executives, bonuses were based solely on corporate performance. The Committee retains the flexibility to enhance or reduce bonus awards in exceptional circumstances.
The deferred share element of the annual bonus is paid under the Deferred Bonus Plan (DBP). The shares are held in trust and 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 interest. These deferred awards for Ben Verwaayen, Andy Green, Hanif Lalani, Ian Livingston and Paul Reynolds at the end of the financial year 2004/05 are contained in the deferred bonus table. The initial values of the awards are in note f in the Directors' emoluments table.
Under his service agreement, the Chairman is not entitled to receive annual grants of long-term 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 TSR (total shareholder return) compared with a relevant basket of companies. 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 2001/02, 2002/03 and 2003/04, the comparator group was the FTSE 100 at 1 April in each year and for grants in the financial year 2004/05, TSR was measured against a comparator group of companies from the European Telecom Sector. At 1 April 2004, the group contained the following companies:
The base price at the beginning of the performance period is calculated by averaging the share price of BT and other companies in the comparator group over the six months to 31 March prior to the award. However, for the awards granted in the financial year 2002/03, the period was from 19 November 2001 (the date of the O2 demerger) to 31 March 2002. The end price is the average of the share price over the six months to the end of the performance period, adjusted for all capital actions and dividend payments that occur during the performance period.
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 those points. For options granted in the financial year 2002/03, if the performance measure is not met in full at the first measurement, it may be re-tested against a fixed base in years four and five and for options granted in the financial year 2003/04 may be re-tested in year five. If TSR has not reached the median at the end of the fifth year, previously unexercisable options will lapse. For options granted in the financial year 2002/03, TSR had reached 74th position at the first measurement relative to the FTSE 100 and performance will be re-tested in the financial year 2005/06. For options granted in the financial year 2004/05 there will be no re-testing, and the policy of the Committee going forward is for there to be no re-testing. The one-off grant of additional options in the financial year 2002/03 to the senior executives most responsible for delivering BT’s strategic plan lapsed on 31 March 2005, as the required 35% compound annual growth in BT’s earnings per share over three years (equivalent to 22 pence per share at the end of the 2005 financial year) was not achieved. The grant was not subject to a re-testing condition. 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 2004/05 are contained in the share options table. 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 2004/05 are contained in the share awards table.
Retention shares are used only in exceptional circumstances and, in the financial year 2004/05, six awards were made for recruitment purposes, none of which was to an executive director or OC member. The Committee has approved the grant of an award of retention shares to Ian Livingston with an initial market value of £1m, to help secure his appointment and long-term retention as Chief Executive, BT Retail. It is expected that these will be granted at the end of May 2005 and will vest in two tranches. The awards under the RSP held by Sir Christopher Bland, Ben Verwaayen and Ian Livingston at the end of the financial year 2004/05, or which vested during the year, are contained in the vesting of outstanding awards table.
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