Annual report and financial statements 2008

Remuneration report

Part 1: Unaudited information

What are the current short-term and long-term incentive schemes?

Annual Bonus Scheme – short-term incentive
Deferred Share Bonus Plan – long-term incentive

The Annual Bonus Scheme is reviewed each year and designed to drive profitability and sales across the whole organisation. The bonus potential for executive directors is 60% of salary for on-target performance and 250% of salary for maximum performance. There is a compulsory deferral of any bonus paid into shares for all senior managers. Further details of the Deferred Share Bonus Plan can be found in note 12 to the financial statements.

Bonus scheme outcome of 2007/08

The targets set for 2007/08 were extremely challenging in a very difficult trading year for retailers. As a result, the very stretching Corporate Profit Before Tax (PBT) target set at the start of the year was not reached and therefore the executive directors will not receive any bonus payment under this scheme in 2008. Some senior managers and other employees in Head Office and Retail will receive a bonus as they have delivered local sales and profit targets in accordance with the scheme rules.

Bonus scheme for 2008/09

The scheme remains in principle unchanged, with bonus potentials still at 60% to 250% of salary for executive directors. Sir Stuart Rose, Ian Dyson and Steven Sharp will continue to be measured entirely on PBT targets. Kate Bostock and Steven Esom will have bonus targets based 50% on PBT, with the remaining 50% based on the achievement of profit and sales in their respective business areas i.e. clothing and food.

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Performance Share Plan (PSP) – Long-term incentive

This remains the primary long-term incentive for the ‘Top 100’ managers in the organisation. The plan normally allows for awards up to 200% of salary, although up to 400% of salary may be awarded to recognise exceptional performance or to address key retention issues.

The performance targets are based on adjusted earnings per share (EPS) over a three-year period. EPS has shown substantial growth over the time since the first grants were made in July 2005. The first awards under this plan will vest in full in July 2008 as the Company has significantly outperformed the challenging EPS targets that were set.

The Committee has reviewed the use of alternative performance measures but considers that EPS is still the most effective measure of management performance, in addition to being simple to understand and a transparent measure of the Company’s success and shareholder return.

In 2007, four awards were made in excess of 200% of salary, recognising exceptional performance. The Committee is likely to award a very small number over 200% in 2008 to ensure retention of key individuals.

The targets for 2008 awards have been set by the Remuneration Committee following consultation with our 10 largest investors, in addition to the ABI and RREV. The principle of splitting the performance targets as adopted last year will continue, with any element of an award over 200% having a more stretching target. While the Company’s financial performance continued to improve in 2007/08, and we are confident in its long-term growth prospects, the short-term economic outlook means that it is likely to be much more difficult to achieve such high growth in the next few years. To this end, the Committee considers that the EPS ranges set for the 2008 awards are at least as challenging as the previous EPS ranges were when they were set. Before any 2008 PSP awards in excess of 200% of salary vest, the Committee will first satisfy itself that it is reasonable to approve vesting of the awards, taking into account the Company’s actual performance over the three-year performance period as well as EPS performance. The targets for all awards are:

 
Average Annual EPS Growth
in excess of Inflation (RPI)
  
Award
20% vesting
100% vesting
Adjusted EPS for
start of scheme1
2005
8%
15%
22.2p
2006
5%
12%
31.4p
20072
4%
10%
40.4p
20073
4%
12%
40.4p
20082
3%
6%
43.6p
20083
3%
8%
43.6p

1 The base EPS figure for 2005 Awards was 23.5p, which was the adjusted EPS figure for 2004/05 on a proforma basis. The figure has been restated to 22.2p as the Group is now reporting under IFRS. Full details of EPS are described in note 8 to the financial statements of the Annual report.
2 Awards up to 200% of salary.
3 Awards between 200% and 400% of salary.

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Executive Share Option Scheme – Long-term incentive

No grants have been awarded under the Executive Share Option Scheme for the year under review. Whilst the Company can still make awards under the scheme adopted at the 2005 AGM, there is no intention currently to use the scheme on a regular basis. The Committee will review the use of the scheme and may grant awards if it is appropriate to do so.

The final outstanding options will vest in full in June 2008 having achieved their EPS targets. The targets were based on adjusted EPS growth measured from the date of grant to the most recent financial year end as follows:

  • RPI plus an average of 3% per annum for 50% of each grant; and
  • RPI plus an average of 4% per annum for the remaining 50% of each grant.

Executive directors (excluding Steven Esom) have options granted in 2004 under the 2002 scheme which met their targets in 2007 and are exercisable in full as shown in the Directors' interests in long-term incentive schemes table.

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All-Employee Share Schemes – Long-term incentive

The Company has offered a Save As You Earn (SAYE) scheme called Sharesave since 1981. The scheme was renewed by shareholders at the 2007 AGM for a further 10 years. Executive directors can also participate in this scheme. Details of participation by executive directors in Sharesave are given in part 2 of this report.

The scheme is subject to HMRC rules which limit the maximum amount saved to £250 per month. When the savings contract is started, options are granted to acquire the number of shares that the total savings will buy when the contract matures, at a discounted price set at the start of the scheme. Options cannot normally be exercised until a minimum of three years has elapsed.

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