Report of The Board in relation to remuneration policy and practice
7.4 Longer term incentive plans
The longer term incentive plans for Executive Directors and colleagues in Level 9 and Level 8 have two key elements.
Under the first element, participants are granted conditional shares shortly after the start of the financial year equal to the number of shares secured by a percentage of the participant’s salary and based on the price of the Group’s shares, using the average market price in the last ten business days of the previous financial year. For awards in 2008, grant levels will be as follows:
| Category | Conditional share grant as a % of salary |
| Executive Directors | 133.33 |
| Level 9 | 100 |
| Level 8 | 66.67 |
The number of shares ultimately released to participants under the plan is dependent on the Group’s annualised TSR (defined as the gross overall return on ordinary shares of HBOS after all adjustments for capital actions and reinvestment of dividends or other income) over three year periods, compared to an annualised weighted average TSR of a basket of comparator companies (Alliance & Leicester; Aviva; Barclays; Bradford & Bingley; Legal & General; Lloyds TSB; Northern Rock; Prudential; Royal Bank of Scotland; and Royal & Sun Alliance) over equivalent periods.
To better match the business profile of the Group, with effect from 1 January 2007 the Committee decided to amend the weighting of the basket of comparator companies, so that Alliance & Leicester, Bradford & Bingley, Lloyds TSB and Northern Rock are included at 150% of their market capitalisations; with Barclays and Royal Bank of Scotland included at 50% of their market capitalisations. This amendment applies to all future awards and to outstanding awards for performance from 1 January 2007 onwards. The comparator group was determined prior to the government placing Northern Rock in temporary public ownership. The Committee will be deciding how the comparator group should be adjusted to reflect this at a forthcoming meeting.
For awards in 2008, any releases early in 2011 will be as follows:
| Group’s relativeTSR performance | Amount to be released as a % of share grant |
| 0% p.a. (or below) | 0 |
| +1.5% p.a. | 100 |
| +3% p.a. (or above) | 200 |
Intermediate positions will be determined by interpolation.
If the relative TSR performance does not exceed 0% p.a. after three years, the conditional share grant lapses. There is no retest in this or any other circumstance.
The Committee believes that TSR remains the most appropriate performance measure because it is a robust and transparent measure of the creation of shareholder value; that a relative measure is more competitively appropriate than an absolute one; and that a weighted average group made up of the biggest banking and insurance companies is the most valid comparator and gives a more effective performance test than a traditional ranking-based league table.
Calculations of TSR performance are undertaken independently of the Group by New Bridge Street Consultants LLP for the purposes of determining outcomes under the plan.
Provided that the weighted average TSR of the comparator companies is at least 0% p.a., HBOS shareholders will have to enjoy an additional return equivalent to at least £2.5bn over 2008-2010 for share grant participants in 2008 to enjoy maximum releases early in 2011. The estimated face value of conditional share grants for 2008 is about £24.9m in respect of about 220 participants. Maximum releases would amount to about £49.8m plus share growth plus dividends.
Under the second element, participants may choose to invest some or all of their cash shorter term incentive outcomes (as described in Section 7.3) in the Group’s shares for a three year period; with the number of shares ultimately released to participants under the plan dependent on the Group’s annualised growth in EPS in excess of the RPI. For investments early in 2008, releases early in 2011 will be as follows:
| Group’s real EPS performance | Amount to be added as a % of amount invested* |
| 0% p.a. (or below) | 0 |
| +3% p.a. | 100 |
| +6% p.a. (or above) | 200 |
Intermediate positions will be determined by interpolation.
* For the Chief Executive, the amounts added are one quarter higher than those shown above.
If the real EPS performance does not exceed 0% p.a. after three years, the investment opportunity lapses. There is no retest in this or any other circumstance.
The Committee believes that EPS is an appropriate performance measure because it is a robust and transparent measure and regarded as the best rounded long term absolute measure of financial performance.
The incentive performance targets for both the first and second elements of the plan are different from those which applied in 2005-07. The Committee decided to reduce these incentive performance targets to better ensure that we can recruit and retain the calibre of colleague we require – and engage with and motivate them to deliver our stretching operational targets – during the current volatile financial era. The Committee will review these incentive performance targets, for the plans which will apply in 2009-11, towards the end of 2008.
The Committee is making no amendments to the first element of the incentive plans for 2006-08 and 2007-09.
The Committee is, however, making some amendments to the second element of the incentive plans for 2006-08 and 2007-09 (for prospective, and not retrospective, performance periods), so that, during 2008 and 2009, they operate in a manner consistent with the plan for 2008-10.
Executive Directors and colleagues in Level 9 and Level 8 have never been granted executive share options by HBOS and will not be granted executive share options in 2008. There are no plans to grant executive share options to these individuals in future years.
The Executive Directors and other senior colleagues may participate in the free share plan, in the sharesave plan and in the sharebuy plan. These are all standard HMRC approved schemes, available to nearly all colleagues, with no performance conditions.