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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 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.

SUMMARY OF DIRECTORS’ INTERESTS IN SHARES AND SHARE PLANS

 
as at 31 March 2006                
      Number of shares under option   Incentive and retention shares      
          Deferred bonus awards  
  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
 
 
 
 








 
J Nelson
50,000
 
 
 
 








 
C G Symon
15,069
 
 
 
 








 
 
2,411,591
 
9,261,405
 
2,840,712
 
1,604,731
 








 
Executive directors are also able to participate in BT’s all-employee share plans.  
   
Notes
a
Beneficial shareholdings include shares held in the director’s own name or by close family members.
b  
Options granted under the Global Share Option Plan are normally exercisable in full between the third and tenth anniversaries of their date of grant only if a corporate performance target has been met. Option prices range between 187p and 318p.
c
Retention shares are used as a recruitment and retention tool. They vest after three years and are transferred to participants, if they are still employed by the company.
d  
Awards of shares are directly linked to the value of annual bonuses. The shares vest after three years and are transferred to participants, if they are still employed by the company. Details of deferred bonus awards in respect of the financial year 2005/06 are given in the notes to the table above. Awards in respect of the deferred bonuses will be granted in June 2006.
 

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