Annual Bonus Plan
All bonus plans across the Company are aligned under a set of shared common principles. For 2007/08 Board and management plans retained the same key targets based on profit, sales and product availability, plus an element for personal performance. The Executive Directors, Operating Board Directors and all colleagues shared annual targets focused on sales and availability. Availability is measured across all stores on a regular basis by an independent third party, conducting random and unannounced store visits. In determining bonus payments for 2007/08, the Committee took account of individual performance over a difficult and challenging year, as well as performance against the key financial/business targets of profit, sales and availability. A payment will be made to Executive Directors in June 2008.
The 2007/08 bonus plan for store colleagues was based on the achievement of availability and customer service targets, measured in their individual stores, and a corporate sales target. As a result of stores and corporate performance in 2007/08, around 117,000 colleagues will receive a bonus payment in respect of the 2007/08 financial year totalling around £47 million.
For the 2008/09 year, the maximum annual bonus opportunity will remain at 150 per cent of salary for Justin King and 100 per cent for Darren Shapland and Mike Coupe. The Plan’s performance measures will continue to be based around profit, sales, availability and personal performance. For 2008/09 the greatest weighting will be on profit.
Deferred Annual Bonus Plan 2006
The Deferred Annual Bonus Plan applies to the top levels of management including Executive Directors and currently comprises around 40 participants in total. The first deferral took place in June 2007, in respect of the 2006/07 bonus awards. The next deferral will take place in June 2008.
The Committee believes that there should be a strong link between short-term and long-term performance both in terms of business targets and associated rewards. Subject to the Company’s TSR performance against an industry comparator group, there will be an opportunity for the shares deferred from the Executive Directors’ bonus awards to be matched by up to two times, dependent upon the extent to which the TSR performance measure has been met. The Plan is consistent with the Company’s remuneration policy, is designed to support the achievement of both short-term and long-term performance targets, introduces a further retention element and helps to promote share ownership among senior management.
Under the Plan, a percentage of Executive Directors’ earned gross annual bonuses is deferred into the Company’s shares for a period of three years. The compulsory deferral for Justin King is 25 per cent of his gross bonus, with 20 per cent compulsory deferral for Darren Shapland and Mike Coupe. In addition, Executive Directors’ may elect to defer a further proportion of their gross annual bonus, provided it does not exceed their compulsory deferral level. In respect of the 2006/07 bonus award, Justin King decided to defer the maximum level of 25 per cent of his bonus on a voluntary basis. Darren Shapland and Mike Coupe deferred 20 per cent of their bonus, the maximum allowed on a voluntary basis.
To create a greater alignment between the Executive Directors’ and shareholders’ interests, the Plan measures the Company’s TSR performance over a three-year period against a bespoke UK and European retail comparator group comprising: Ahold, Carrefour, Casino, Delhaize, DSG International, Home Retail Group, Kingfisher, Marks & Spencer, Metro, Morrisons, Next and Tesco. Alliance Boots was removed from the comparator group following its de-listing.
Up to two matched shares may be awarded for each share deferred depending on the extent to which the TSR measure is achieved. No shares are awarded for below median performance, and the full match will only apply where the Company achieves first place within the comparator group. At median position the match will be 0.5 shares for each deferred bonus share and the share match will be pro rated at every position between median and first place.
To the extent that the performance condition is met at the end of the three-year performance period, the matched shares will be added to the deferred bonus shares. The deferred bonus shares and half of the matched shares can be accessed immediately, while the remainder will be held over for a further year. Dividends or their equivalents will accrue on shares that vest.
Long-term Incentive Plan 2006
The top 1,000 managers in the Company participate in this Plan (known as “the Value Builder Share Plan”), from the Chief Executive to supermarket store managers, and share common performance measures.
Under the Plan a core award of shares in the Company is granted to all participants, calculated as a percentage of their salaries and scaled according to grade. As set out below, dependent upon performance, core awards can grow by up to four times. No awards vest for performance below the threshold levels. For 2008, following a review of the market competitive environment, the Remuneration Committee determined that in order to retain and incentivise its executive talent beyond the business milestones set in 2004, a maximum core award of 62.5 per cent of salary will be made to Justin King in 2008. Core awards of 50 per cent will be made to Darren Shapland and Mike Coupe.
Awards vest based on the performance of two stretching co-dependent performance conditions: Return on Capital Employed (“ROCE”) and a cash flow per share measure, both of which will be measured over the three-year performance period. There is no retesting.
These measures are designed to continue to build on the sales-led recovery plan and focus on creating further shareholder value. ROCE measures the efficiency with which new cash is invested and through which existing capital delivers profit, driving both cost savings and operational efficiencies. Cash flow per share captures the Company’s operational efficiency as well as the Company’s ability to generate cash for future investment or return to shareholders. In addition, the measures complement the sales, earnings and availability targets set under the annual bonus plan, and the TSR targets attached to the bonus deferral. The Plan measures are key indicators of business success and therefore create a further direct link between the interests of management and shareholders.