Report of The Board in relation to remuneration policy and practice
10.3.3 Long Term Incentive Plan and Special Long Term Bonus Plan – HBOS Executive Directors and Chairman
Details of the shares which have been conditionally awarded to Executive Directors and the Chairman under the plans are set out below. The performance conditions relating to these conditional awards are set out in the notes below.
Table 6a
| Grant effective from | At 31.12.06/ 01.01.07 | Granted (G) or Lapsed (L) in year | Added as a result of superior performance | Dividend reinvestment shares | Vested in year | At 31.12.07 | |
| Peter Cummings | Jan 03 | 18,750 | 18,750 | ||||
| Jan 04 | 27,894 | 4,260 | 4,069 | 36,223 | |||
| Jan 05 | 23,809 | 23,809 | |||||
| Jan 06 | 51,203 | 51,203 | |||||
| Jan 07 | 67,855 (G) | 67,855 | |||||
| 121,656 | 161,617 | ||||||
| Jo Dawson | Jan 04 | 25,569 | 3,905 | 3,730 | 33,204 | ||
| Jan 05 | 27,380 | 27,380 | |||||
| Jan 06 | 39,285 | 39,285 | |||||
| Jan 07 | 59,522 (G) | 59,522 | |||||
| 92,234 | 126,187 | ||||||
| Mike Ellis | Jan 04 | 75,313 | 11,503 | 10,987 | 97,803 | ||
| Jan 07 | 20,114 (G) | 20,114 | |||||
| 75,313 | 20,114 | ||||||
| Philip Gore-Randall | Jan 07 | 18,718 (G) | 18,718 | ||||
| 18,718 | |||||||
| Phil Hodkinson | Jan 04 | 55,788 | 8,521 | 8,139 | 72,448 | ||
| Jan 05 | 52,380 | 52,380 | |||||
| Jan 06 | 58,883 | 58,883 | |||||
| Jan 07 | 73,212 (G) | 73,212 | |||||
| 167,051 | 184,475 | ||||||
| Andy Hornby | Jan 04 | 80,195 | 12,249 | 11,700 | 104,144 | ||
| Jan 05 | 72,619 | 72,619 | |||||
| Jan 06 | 70,148 | 70,148 | |||||
| Jan 07 | 103,568 (G) | 103,568 | |||||
| 222,962 | 246,335 | ||||||
| Colin Matthew | Jan 04 | 54,393 | 8,308 | 7,935 | 70,636 | ||
| Jan 05 | 52,380 | 52,380 | |||||
| Jan 06 | 56,323 | 56,323 | |||||
| Jan 07 | 68,450 (G) | 68,450 | |||||
| 163,096 | 177,153 | ||||||
| Dennis Stevenson | Jan 04 | 73,221 | 10,480 | 12,106 | 95,807 | ||
| Jan 05 | 65,476 | 65,476 | |||||
| Jan 06 | 58,883 | 58,883 | |||||
| Jan 07 | 60,714 (G) | 60,714 | |||||
| 197,580 | 185,073 | ||||||
| Dan Watkins | Jan 04 | 15,275 | 2,333 | 2,228 | 19,836 | ||
| Jan 05 | 21,428 | 21,428 | |||||
| Jan 06 | 18,433 | 18,433 | |||||
| Jan 07 | 41,163 (G) | 41,163 | |||||
| 55,136 | 81,024 |
Notes to Table 6a
Note 1:
Shares under these plans were granted using the average market price in the last ten business days of the previous year, as follows:
| Plan and performance period | Share grant price £ |
| Jan 03 – Dec 05/07 | 6.40 |
| Jan 04 – Dec 06 | 7.17 |
| Jan 05 – Dec 07 | 8.40 |
| Jan 06 – Dec 08 | 9.765 |
| Jan 07 – Dec 09 | 11.20 |
Note 2:
Certain former Executive Directors retain interests under the plan. These remain subject to the same plan rules as apply to existing Executive Directors and the Notes apply in like manner. Details of these interests are set out below.
Table 6b
| Left | Grant effective from | At 31.12.06/01.01.07 | Granted (G) or Lapsed (L) in year | Added as a result of superior performance | Dividend reinvestment shares | Vested in year | At 31.12.07 | |
| George Mitchell | 31.12.05 | Jan 04 | 75,313 | 11,503 | 10,987 | 97,803 | ||
| Jan 05 | 67,261 | 67,261 | ||||||
| 142,574 | 67,261 | |||||||
| Sir James Crosby | 31.07.06 | Jan 04 | 108,089 | 16,510 | 15,769 | 140,368 | ||
| Jan 05 | 98,214 | 98,214 | ||||||
| 206,303 | 98,214 | |||||||
| Benny Higgins | 10.08.07 | Jan 06 | 128,008 | 128,008 | ||||
| May 06 | 30,425 | 30,425 | ||||||
| Jan 07 | 74,402 (G) | 74,402 | ||||||
| 158,433 | 232,835 |
Note 3:
The grants awarded in 2006 to Benny Higgins were awarded on terms set out in last year’s report. The 30,425 shares awarded in May 2006 were released to him on 8 January 2008 under the terms of his leaving arrangements. The closing market price of the Group’s ordinary shares on the date of release was £6.97.
Note 4:
Awards are not pensionable.
Note 5:
The performance period for the January 2004 grant ended on 31 December 2006. HBOS’s TSR over the performance period exceeded the weighted average of the comparator group by 3.40% p.a. so 113.33% of share grants were released to grant recipients. The shares granted in January 2004 vested on 28 February 2007. The closing market price of the Group’s ordinary shares on that date was £10.81. In addition, dividend reinvestment shares have been released to grant recipients as set out in the table and as provided for under the rules of the plans. The dividend reinvestment shares are the additional shares which would have accrued on the overall share grants actually released had dividends due during the performance period been reinvested in shares.
Note 6:
As explained in last year’s report, for the 2003 grants, all participants could choose to take any shares released after three years based on the three year performance outcome or could continue to participate in the plan for a further two years and take shares at that point based on the better of the three year and the five year performance outcomes. This design feature sought to motivate participants continually to sustain strong performance or to improve lesser performance for their benefit and the benefit of shareholders. This feature does not apply for the 2004 grants and does not apply for any grants in subsequent years, to reflect the preference on ‘retesting’ expressed by most major institutional investors. With the exception of Peter Cummings, all Executive Directors chose to take their 2003 grants in 2006 based on the three year performance outcome.
Note 7:
In the case of the Chairman, it is not possible to include him in the standard Long Term Incentive Plan. Nor is it possible to include him in such an arrangement where the grant is denominated in shares. He is therefore included as the sole participant in the Special Long Term Bonus Plan where the grants are awards of notional shares. He will become entitled to the cash value of any notional shares on vesting but has agreed that this value will, subject to any withholdings for income tax or National Insurance, be applied in acquiring HBOS shares on his behalf.
Note 8:
The number of shares to be released to participants is dependent on the Group’s annualised TSR over a three year period, compared to the annualised weighted average TSR of a basket of comparator companies over an equivalent period. For the grant effective from January 2003, a five year period could also apply. This basket of companies comprises:
- for the January 2003 and 2004 grants: Abbey National, Aviva, Barclays, Legal & General, Lloyds TSB, Prudential, Royal & Sun Alliance and Royal Bank of Scotland, but with Abbey National replaced by Alliance & Leicester, Bradford & Bingley and Northern Rock with effect from 1 July 2004. The Committee decided to remove Abbey National from the comparator group, in respect of the January 2003 and 2004 grants, effective from the end of June 2004 (immediately before bid activity started); and replace it with Alliance & Leicester, Bradford & Bingley and Northern Rock effective from the start of July 2004;
- for the January 2005 and subsequent grants: Alliance & Leicester, Aviva, Barclays, Bradford & Bingley, Legal & General, Lloyds TSB, Northern Rock, Prudential, Royal & Sun Alliance and Royal Bank of Scotland. The weighting of this basket was amended with effect from January 2007 as set out in Section 7.4.
Shares have been or will be released as follows:
| Group’s relative TSR performance | Amount released as a % of share grant |
| 0% p.a. (or below) | 0 |
| +3% p.a. | 100* |
| +6% p.a. (or above) | 200 |
Intermediate positions are determined by interpolation.
* Shown as granted in Tables 6a and 6b.
Note 9:
The performance period for the January 2005 grant ended on 31 December 2007. HBOS’s TSR over the performance period fell short of the weighted average of the comparator group by 2.63% p.a., so no share grants will be released to grant recipients in March 2008.
The performance period for the January 2006 grant does not end until 31 December 2008. So far, HBOS’s TSR over the two year elapsed period falls short of the weighted average of the comparator group by 12.99%.
The performance period for the January 2007 grant does not end until 31 December 2009. So far, HBOS’s TSR over the one year elapsed period falls short of the weighted average of the comparator group by 8.76%.
Chart 1
Performance of HBOS for January 2005 awards
This chart shows the Total Shareholder Return (TSR)
performance of HBOS against the weighted average TSR
of its comparator group over the 3-year performance period
of the January 2005 award. 
Source: Datastream
Note 10:
The additional deferred incentive payable to Peter Cummings to recognise and respond to market practice in his divisional specialism as outlined earlier in this report, was £1,320,000. The award will vest shortly after 31 December 2010 and will be payable to him in shares, which will be purchased at the prevailing market price at that time.