Report of The Board in relation to remuneration policy and practice
Appendix
Remuneration in HBOS generally
Principal features
This section outlines the structure of remuneration in HBOS for the vast majority of colleagues. Each role in HBOS is positioned in one of ten categories, Levels 1-9 and the Executive Directors. The level of a role is determined by the knowledge required to do it, the challenge of delivering the required job outputs and the accountability which the role carries. The level then, in broad terms, determines the salary range which can apply for the role; the short term incentive and long term incentive structures; and the range of benefit and product offerings available.
Details of the remuneration arrangements which apply to those in Levels 8 and 9 and Executive Directors are given in the main body of the report.
The table below sets out the number of colleagues and full-time equivalents (‘FTE’) in other levels and the typical inter-quartile full-time equivalent salary range applying to colleagues in each such level. Different ranges apply to different groups of colleagues depending on role specialism and geographic location.
| Level | Number of colleagues | Number of FTE colleagues | FTE salary range (£000) |
| 1 | 35,000 | 30,500 | 13.5-17 |
| 2 | 15,500 | 15,000 | 20-24.75 |
| 3 | 13,000 | 12,500 | 27.75-35.5 |
| 4 | 6,750 | 6,500 | 38.5-49.25 |
| 5 | 3,000 | 2,750 | 54.25-74 |
| 6 | 800 | 800 | 74.5-108.5 |
| 7 | 175 | 175 | 125-165 |
This data includes international colleagues but excludes joint venture company colleagues.
Remuneration is, for all colleagues, generally made up of four elements, namely salary, short term incentive schemes, long term incentive schemes and benefits. HBOS adopts a “total reward” approach so that colleagues appreciate the totality, the flexibility and the performance drivers of their reward package.
Salary
HBOS salary policy is to manage salaries in aggregate, by Level, around (and generally in practice up to) the appropriate market median. Whilst finance sector generic medians establish baseline positions, businesses benchmark according to role specialism and to geographic location. The alignment of practice with policy is one we aspire to deliver by matching average salaries with the market median position, whilst managing actual salaries to reflect personal skills, experience, performance and business vulnerability.
Short Term Schemes
HBOS has short term incentives which are annual, operating plan aligned, generally team based and built around line of sight issues. Participants know that these incentives give a real chance of a zero outcome and, equally, a real chance of a maximum outcome which, in cash terms, may be equivalent to 20% of salary or more. The cash incentive levels for 2008 are generally as follows:
| Incentive as % of salary | |||
| Level | Minimum | Target | Maximum |
| 1-4 | 0 | 10-12 | 20-30 |
| 5 | 0 | 17.5 | 35 |
| 6 | 0 | 35 | 70 |
| 7 | 0 | 45 | 67.5 |
Long Term Schemes
Almost every colleague in HBOS enjoys four (for Level 7, five) long term incentive propositions, each share-based.
Firstly, sharekicker. Colleagues in Levels 1–6 who choose to buy shares with their net cash STI get 50% more shares after three years provided they remain in the service of the Group or rank as a qualifying leaver. For colleagues in Level 7, their sharekicker opportunity is performance based, and hence “at risk”, and determined by EPS performance, resulting in between 0% and 200% more shares as described in Section 7.4.
Secondly, sharesave. Colleagues who choose to save up to £3,000 p.a., by monthly instalments, are given the option, at the end of three, five or seven years, to buy shares based on the share price around the invitation date, discounted by up to 20%.
Thirdly, share options/free shares. In 2002, 2003 and 2004, colleagues were given share options over 20% of salary; and these can be crystallised after a minimum of three and a maximum of six years. In 2005, 2006 and 2007, colleagues were given free shares based on 5% of salary (maximum £3,000 p.a.); and these will crystallise after a minimum of three years.
Fourthly, sharebuy. From 2007, colleagues who choose to buy shares from pre-tax salary can do so, utilising up to £1,500 p.a. or 10% of basic salary, whichever is the lesser. If the shares are retained in trust for five years or more, they can be removed tax free.
Finally, share grants. Colleagues in Level 7 were given annual share grants over 33.33% of salary in each of the years 2002 to 2007. The same arrangements will apply in 2008. The level of grant released is conditional on relative TSR performance against a weighted finance sector basket, over a three year period with no grant released for performance which matches (or is worse than) the average and with twice the grant released for out-performance of 3% p.a. or more (intermediate positions being determined by interpolation), as described in Section 7.4.
Benefits
Our key benefits are pensions, paid leave, company cars, healthcare, mortgage arrangements and preferential terms for some Group products. We increasingly seek to package them as an overall flexible benefits proposition and a comprehensive product offering.
Some existing colleagues have defined benefit pension arrangements. Some existing colleagues have, and all new colleagues are eligible for, defined contribution pension arrangements. Both include death and ill health benefits.
In April 2006 service related pension accrual under final salary pension arrangements ceased for those whose pension interest then exceeded the ‘Lifetime Allowance’ of £1.5m. In broad terms, this is equivalent to a maximum pension of £75,000 p.a., or such higher amount as had accrued by April 2006. Similar cessations applied under money purchase pension arrangements. Affected colleagues receive an annual nonpensionable cash allowance, payable monthly, in lieu of such service related pension accrual or money purchase pension contributions. This cash allowance will not count as salary for the purposes of the incentive schemes.
Similar cessations took place in April 2007 and will take effect in April 2008 (and in each subsequent April) as more colleagues’ pension interests exceed the ‘Lifetime Allowance’ applicable at that time.