This report is made by the Board on the recommendation of the Remuneration Committee. The first part of the report provides details of remuneration policy. The second part provides details of the remuneration, pensions and share plan interests of the Directors for the year ended 22 March 2008. The Directors confirm that this report has been drawn up in accordance with Schedule 7A of the Companies Act 1985.
A resolution will be put to shareholders at the Annual General Meeting (“AGM”) on 15 July 2008 asking them to approve this report.
Remuneration Committee
The Remuneration Committee is chaired by Bob Stack, Chief Human Resources Officer of Cadbury Schweppes plc. The Committee comprises Bob Stack, Anna Ford and Val Gooding, all of whom are independent Non-Executive Directors. The Committee met four times in 2007/08.
Tim Fallowfield, Company Secretary, acts as secretary to the Committee. Philip Hampton, Justin King and Imelda Walsh, Human Resources Director, are invited to attend Committee meetings. The Committee considers their views when reviewing the remuneration of the Executive Directors and Operating Board Directors. They are not involved in discussions concerning their own remuneration.
The responsibilities of the Committee include:
- determining and agreeing with the Board the broad remuneration policy for the Chairman, Executive Directors and the Operating Board Directors;
- setting individual remuneration arrangements for the Chairman and Executive Directors;
- recommending and monitoring the level and structure of remuneration for those members of senior management within the scope of the Committee, namely the Operating Board Directors and any other executive whose salary exceeds that of any Operating Board Director; and
- approving the service agreements of each Executive Director, including termination arrangements.
The Committee’s terms of reference are available on the Company’s website (www.j-sainsbury.co.uk/governance).
The Committee is authorised by the Board to appoint external advisers if it considers this beneficial. Over the course of the year, the Committee was advised by Deloitte & Touche LLP (“Deloitte”) whose consultants attended each Committee meeting and received copies of all the relevant papers. Deloitte also advised the Company on organisational, human resources, unrelated internal audit matters and IT consulting services. Towers Perrin provided comparative data which was considered by the Committee in setting remuneration levels. The Committee has also been advised by Linklaters, who also provided legal advice to the Company, whilst Total Shareholder Return (“TSR”) calculations are supplied by UBS, who provided broking and banking services to the Company during the year.
Remuneration policy
It is the intention of the Committee that Executive and Operating Board Directors’ remuneration should be competitive, both in terms of base salary and total remuneration, taking into account the individual Director’s role, performance and experience. This approach is designed to promote the Company’s short and long-term success through securing and retaining high calibre executive talent. Basic salary is targeted around the median of the market with an opportunity to earn above median levels of total reward in return for exceptional performance. A significant proportion of the total remuneration package is performance related, aligning management’s and shareholders’ interests. Remuneration policies and practices are aligned with the key corporate strategy, targets and objectives and are designed to create long-term value for shareholders.
In 2006, following an extensive consultation exercise with shareholders and institutions, the Committee formulated a new incentive framework (the “Value Builder” framework) to support the business strategy over the medium to longer term. This was consistent with best practice and was approved by shareholders at the 2006 AGM.
The Value Builder framework is based upon a number of key principles so as to:
- build on the sales-led recovery plan announced in 2004 by embedding key measures of financial and capital efficiency;
- support strong performance of the core business and delivery of shareholder value by generating quality earnings, growing profits and generating cash for future investments and/or return to shareholders;
- provide a common focus for the top 1,000 managers (from Chief Executive to supermarket store managers) on critical business measures;
- retain and motivate talent for the longer term; and
- provide competitive reward opportunities for delivering exceptional performance.
The Value Builder framework is a key part of the Company’s total remuneration package and consists of two elements, a deferred annual bonus plan with a performance related share match and a long-term incentive plan. These plans are described in detail below.
Set out in the relevant sections below is an overview of how the Committee intends to align the remuneration framework with these key principles over the next financial year.
Components of remuneration
The main remuneration components for the Executive Directors and Operating Board Directors are set out below:
i) Basic salary
Basic salary for each Executive Director is determined by the Committee, taking account of the Director’s performance, experience and responsibilities. The Committee also reviews Operating Board Directors’ salaries taking similar factors into account. The Committee considers salary levels in comparable companies by referring to the pay practices across the UK retail sector, in companies with an annual sales revenue over £5 billion and also in companies with a market capitalisation of between £3-£10 billion. This approach ensures that the best available benchmark for the Director’s specific position is obtained. The Committee also has regard to economic factors, remuneration trends and the level of salary increases throughout the Company when determining Executive Directors’ salaries.
For 2008/09, the Executive Directors’ salaries were increased by 2.5 per cent, consistent with wider pay adjustments made for management and central non-management colleagues. With effect from 23 March 2008, the base salary of Executive Directors has been increased as follows:
Justin King from £850,000 to £872,000 per annum
Darren Shapland from £500,000 to £513,000 per annum
Mike Coupe from £475,000 to £487,000 per annum
ii) Incentive arrangements
In addition to basic salary, the Company currently operates incentive arrangements that comprise an annual bonus plan and long-term incentive plans. The Committee believes that incentive opportunities provided under these plans reflect an appropriate balance between personal and Group performance. As such, they align the rewards of Directors with the Company’s immediate business priorities and the longer-term interests of shareholders.
The balance between the fixed (basic salary and pension) and variable (annual bonus and long-term incentive plan) elements of remuneration changes with performance, and the variable proportion of total remuneration increases significantly for increased levels of performance. For median performance, since the introduction of the deferred annual bonus plan and long-term incentive plan, it is anticipated that between 50 to 60 per cent of total remuneration for Executive Directors will be performance related.
Incentive arrangements for Executive Directors and Operating Board Directors for the 2007/08 financial year consisted of the Deferred Annual Bonus Plan and Value-Builder Share Plan. Awards earned under each of the incentive plans are non-pensionable. The following section describes those plans in detail, together with the J Sainsbury plc Share Plan 2005 (known as “the Making Sainsbury’s Great Again Plan”), which is now closed and no further grants will be made under it.
During 2008, the Remuneration Committee will carry out a review of remuneration policy to ensure that it continues to support the Company’s long-term strategic goals and provide market competitive reward opportunities.