BTPLC Annual Review 2006 - Summary Report on Directors' remuneration

SUMMARY REPORT ON DIRECTORS’ REMUNERATION

INTRODUCTION
This is a summary of the full Report on directors’ remuneration in the Annual Report and Form 20-F 2006, a copy of which is available on request or at www.bt.com/annualreport The full report will be voted on at the 2006 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 around the mid-market, with total direct compensation (basic salary, annual bonus and the value of any long-term incentives) to be at the upper quartile only 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. Basic salaries remained unchanged in 2005/06 with the exception of an increase agreed for Paul Reynolds to reflect his responsibility for delivering the 21st Century Network and a number of key productivity and process improvements.

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 2005/06 for each objective, were based on earnings per share, free cash flow and customer satisfaction. Approximately 43% of any total bonus is payable in the form of deferred shares under the Deferred Bonus Plan. 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. For the financial year 2005/06, the Committee decided to grant incentive shares instead of the previous year’s combination of share options and incentive shares:

	–	Awards vest only if a predetermined performance target has been achieved.
	–	The performance measure is total shareholder return (TSR) 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 exceptional circumstances to help recruit or retain individuals with critical skills. In the financial year 2005/06, 14 awards were made for recruitment and retention purposes, including one award made to Ian Livingston in connection with his appointment as Chief Executive, BT Retail. A retention arrangement was also introduced last year for Andy Green, Chief Executive BT Global Services, linked to performance targets for that line of business. Under this arrangement, an award of retention shares, with a value of £750,000, will be granted in June 2006.

Financial year 2006/07 policy
No material policy changes were made by the Committee; a small increase was made in bonus potential for target and stretch achievement by executive directors against the corporate scorecard to maintain market competitiveness. From 1 June 2006, Ben Verwaayen’s annual base pay will be increased to £750,000 – his first increase since joining BT in 2002 – and Hanif Lalani’s annual base pay will be increased to £460,000, following his successful assumption of, and continuing performance in, the Group Finance Director’s role. Cash-based bonus and incentive plans were agreed for Openreach executives, as required by Undertakings agreed with Ofcom.

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, Hanif Lalani and Paul Reynolds are members of the BT Pension Scheme.
     Retirement provision for executive directors and other senior executives who joined BT on or after 1 April 2001 is generally made on a defined contribution basis – the company agrees to pay a fixed percentage (typically around 30%) of the executive’s salary each year towards the provision of retirement benefits.
     The Committee reviewed the impact of the Lifetime Allowance under the pension simplification legislation which came into force from 6 April 2006. As a result, BT offered those members affected the option to opt out of future accruals of pensionable service and in its place to receive a cash allowance annually (30% of salary for executive directors affected). This was 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 the Chairman’s contract before it expires – at the end of the 2007 AGM – he is entitled to payment of salary for 12 months from termination or until the 2007 AGM if that is shorter. Ben Verwaayen is entitled to £700,000 on termination by BT. 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. See the tables opposite for details of directors’ emoluments and interests in shares.

DIRECTORS’ REMUNERATION
The emoluments of the directors for the year ended 31 March 2006 and the benefits received under the long-term incentive plans were, in summary, as follows:

	Total	Total
	2006	2005
	£’000	£’000

Salaries	3,058	3,237
Performance-related bonus	2,284	1,449
Deferred bonus in shares	2,441	600
Other benefits	203	419

	7,986	5,705
Payments to non-executive directors	467	391

Total emoluments	8,453	6,096
Gain on the exercise of share options	–	–
Value of shares vested under the executive share plans	652	2,132

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 the company matches his contributions of 10% of the earnings cap, to a personal pension plan. 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 2006 financial year was £63,360. A Green, H Lalani and P Reynolds are members of the BT Pension Scheme. Additional days of pensionable service are being purchased for A Green, H Lalani and P Reynolds to bring their pensionable service at age 60 up to 40 years.

		Pension allowance net of pension contributions				Other benefits excluding pension
							Total 2006
	Basic salary and fees
			Total salary and fees	Annual cash bonus	Expenses allowance
			Total salary and fees	Annual cash bonus	Expenses allowance			Total 2005
	£’000	£’000	£’000	£’000	£’000	£’000	£’000	£’000

Sir Christopher Bland	500	–	500	–	–	32	532	532

B Verwaayen⁽¹⁾⁽²⁾	700	178	878	784	–	32	1,694	1,512

A Green⁽¹⁾	500	–	500	400	–	30	930	684

H Lalani⁽¹⁾	400	–	400	320	–	39	759	207

I Livingston⁽¹⁾⁽²⁾	525	136	661	420	19	10	1,110	816

Dr P Reynolds⁽¹⁾⁽³⁾	433	–	433	360	19	22	834	653

Sir Anthony Greener	115	–	115	–	–	–	115	115

M Alahuhta	8	–	8	–	–	–	8	–

M van den Bergh	59	–	59	–	–		59	55

C Brendish	50	–	50	–	–	–	50	50

P Hodkinson	8	–	8	–	–	–	8	–

L R Hughes	38	–	38	–	–	–	38	21

Baroness Jay	50	–	50	–	–	–	50	50

J Nelson	52	–	52	–	–	–	52	50

C G Symon	87	–	87	–	–		87	50

	3,525	314	3,839	2,284	38	165	6,326	4,795


	Notes
¹	In addition, deferred bonuses payable in shares in three years’ time, subject to continued employment, were awarded to B Verwaayen (£1,316,000), A Green (£300,000), H Lalani (£240,000), I Livingston (£315,000) and P Reynolds (£270,000).
²	Part of the pension allowance of 30% of salary for B Verwaayen and I Livingston was paid to them direct.
³	P Reynolds sacrificed £225,000 of his bonus for the financial year 2005/06 and the company has paid an equivalent amount into the BT Pension Scheme to provide him with additional benefits on a defined contribution basis.

			Number of shares under option		Incentive and retention shares

SUMMARY OF DIRECTORS’ INTERESTS IN SHARES AND SHARE PLANS
as at 31 March 2006
							Deferred bonus awards
	Beneficial shareholdings
	Beneficial shareholdings	^a		^b		^c		^d

Sir Christopher Bland	674,257		314,244		314,785		–

B Verwaayen	951,497		3,656,458		588,242		835,367

A Green	152,645		1,545,032		391,726		230,629

H Lalani	14,360		655,197		260,283		87,886

I Livingston	313,110		1,637,155		949,538		234,913

Dr P Reynolds	98,050		1,453,319		336,138		215,936

Sir Anthony Greener	60,007		–		–		–

M Alahuhta	20,000		–		–		–

M van den Bergh	12,040		–		–		–

C Brendish	30,920		–		–		–

P Hodkinson	4,622		–		–		–

L R Hughes	6,800		–		–		–

Baroness Jay	8,214		–		–		–