This section of the report explains the Company's remuneration strategy and policy, the individual components of executive directors' remuneration and details of their service contracts as required by legislation.
Remuneration strategy and 2008 review
The Committee undertook a major review of the remuneration strategy in the second half of 2007 and as a result made a number of changes for 2008 which:
- brought the remuneration packages into line with market competitive levels;
- simplified the arrangements to improve line-of-sight between performance and reward;
- shifted the focus towards long-term sustainable growth in earnings per share (EPS);
- reinforced the key aspects of the Group's Corporate Responsibility agenda;
- directly aligned short-term and long-term reward through compulsory deferral of part of the annual incentive into the Share Matching Plan for all executive directors; and
- increased the gearing to drive for high performance as most of the improvement in the package is only delivered for achieving more stretching targets.
This review was set out in detail in last year's report. Following the annual review in November 2008, the Committee concluded that the current remuneration strategy remains appropriate, and intends to continue with the executive remuneration policy as detailed in this report in 2009 and subsequent years for executive directors, and this policy will be flowed down to the most senior executives within the Group globally (approximately 280) to create a consistent global approach to reward. The principles of the remuneration strategy are applied consistently across the Group below this level, taking account of seniority and local market practice.
The Committee will continue to consult on material changes with principal shareholders.
Summarised below is the Company's remuneration strategy and policy for executive directors, together with the individual elements of the package and their purpose.
To provide a remuneration package that:
- helps to attract, retain and motivate
- is aligned to shareholders' interests
- is competitive against the appropriate market
- encourages and supports a high-performance culture
- is fair and transparent
- can be applied consistently throughout the Group
- Set base salary at around median of the relevant market competitive level
- Reward stretching superior performance with upper quartile reward
- Balance between:
- short-term and long-term reward
- fixed and variable reward
- with balance becoming more long-term and more highly geared with seniority
- Directly align short-term and long-term reward through compulsory deferral of annual incentive into the Share Matching Plan
- Competitive package of benefits
| Package | Purpose |
|---|
| Base salary |
Recognise market value of role and individual's skills, experience and performance |
| Annual Incentive |
To drive and reward annual performance of individuals, teams and the Company on both financial and non-financial metrics, including behaviours |
| Share Matching Plan |
Directly align short-term and long-term reward through compulsory deferral of annual incentive into shares, and drive and reward delivery of sustained long-term EPS performance through co-investment aligned to interests of shareholders |
| Performance Share Plan |
Drive and reward delivery of sustained long-term EPS and Total Shareholder Return (TSR) performance aligned to interests of shareholders |
| Pension provision |
Provide competitive retirement benefits which reward long-term performance through seniority, and loyalty through long service |
| Other benefits |
Provide competitive cost effective benefits package through leveraging the Company's size and scale |
| Global all-employee incentive plan |
Reward all employees globally for Group performance, encouraging employee share ownership aligned to interests of shareholders |
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Appointment of new Chief Executive
Prior to the annual review of remuneration strategy, the Company announced on 27 June 2008 the appointment of Ian King, previously Chief Operating officer – UK/RoW, as Chief Executive with effect from 1 September 2008. The Committee agreed a package for Ian King which it considered to be competitive and appropriate to incentivise him to deliver the next phase of the Company's strategy. This comprised annual base salary of £850,000, maximum annual incentive opportunity for 2008 of 225% of base salary (pro-rated for the period from appointment) and total award of Performance Shares in 2008 of 250% of base salary.
The following sections describe in more detail the subsequent 2008 review and the specific arrangements for executive directors.
Approach to the 2008 remuneration review
The 2008 review not only considered the Company's executive remuneration packages against the market but also the Company's performance to date and its corporate strategy for the next five years.
Information on the market for comparable management positions was provided by PwC so that the Committee could form a view as to where to position the various elements of the package relative to comparable companies.
The methodology used was to construct appropriate comparator groups for the individual positions, taking account of company size, scale of operations and breadth of role. The comparator group for the UK executive directors comprised the FTSE 50 companies (excluding financial services and retail) with market capitalisation nearest to that of BAE Systems. The Committee believes that using market capitalisation creates alignment between the value placed on the Company and the value placed on the executives who manage it. The six largest companies were also excluded as were several others to arrive at a comparator group of 23 companies (11 larger and 12 smaller) which the Committee believed appropriate for benchmarking UK executive directors’ packages.
For the US Chief Operating Officer, regression analysis was used on US aerospace, defence and general industry sector data to produce appropriate market figures consistent with the size and scale of the US business, adjusting where necessary to reflect the extra responsibility for his plc board role.
The base salary, total cash reward (base salary plus annual incentive), total direct reward (total cash reward plus long-term incentives) and total reward (total direct reward plus pension) were analysed at the median and upper quartile for the relevant posts in the comparator group companies. This gives the Committee a view on the competitiveness of the individual elements of the package as well as the package as a whole.
The Committee also reviewed market trends around the individual elements of remuneration to ensure that the structure of the package stays in line with market practice. The remuneration structure overall also takes account of the performance of the individual, the Company as a whole and the pay and conditions of Group employees.