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Director's Reports
Remuneration policy
The Remuneration Committee determines remuneration policy and practices with the aim of attracting, motivating and retaining high calibre Executive Directors and other senior employees to deliver value for shareholders and high levels of customer service, safety and reliability in an efficient and responsible manner. The Remuneration Committee sets remuneration policies and practices in line with best practice in the markets in which the Company operates. Remuneration policies continue to be framed around the following key principles:
total rewards should be set at levels that are competitive in the relevant market;
a significant proportion of the Executive Directors' total reward should be performance based. Performance based incentives will be earned through the achievement of demanding targets for short-term business and personal performance as well as long-term shareholder value creation, consistent with our Framework for Responsible Business which can be found at: www.nationalgrid.com/corporate/ About+Us/CorporateGovernance/Other;
for higher levels of performance, rewards should be substantial but not excessive; and
incentive plans, performance measures and targets should be stretching and aligned as closely as possible with shareholders' interests.
It is currently intended to continue this policy in subsequent years.
Executive Directors' remuneration
Remuneration packages for Executive Directors consist of the following elements:
salary;
annual bonus including the Deferred Share Plan;
long-term incentive, the Performance Share Plan;
all-employee share plans;
pension contributions; and
non-cash benefits.
Salary
Salaries are reviewed annually and targeted broadly at the median position in the relevant market. In determining the relevant market, the Remuneration Committee takes account of the regulated nature of the majority of the Company's operating activities along with the size, complexity and international scope of the business. For UK-based Executive Directors, a UK market is used and a US market is used for US-based Executive Directors. In setting individual salary levels, the Remuneration Committee takes into account business performance, the individual's performance and experience in the role; and salary practices prevailing for other employees in the Company.
Annual bonus including the Deferred Share Plan (DSP)
Annual bonuses are based on achievement of a combination of demanding Company, individual and, where applicable, divisional targets. The principal measures of Company performance are adjusted earnings per share (EPS) and cash flow; the main divisional measures are divisional operating profit and divisional cash flow. Financial targets represent 70% of the bonus. Individual targets, representing 30% of the bonus, are set in relation to key operating and strategic objectives and include overriding measures for safety and customer service performance. The Remuneration Committee sets targets at the start of the year and reviews performance against those targets at year end. The Remuneration Committee may use its discretion to reduce payments to take account of significant safety or service standard incidents, or to increase them in the event of exceptional value creation.
Performance against Company and divisional financial targets for this year is shown in the table below:
| Financial measures | Level of performance achieved in 2006/07 as determined by the Remuneration Committee |
|
|---|---|---|
| Company targets | Divisional targets | |
| Adjusted EPS | Stretch | |
| Cash flow | Stretch | |
| Operating profit | Between Target and Stretch (i) | |
| Cash flow | Stretch (ii) | |
| Earnings | Between Threshold and Target (iii) | |
(i) Except Transmission, where Stretch performance was achieved.
(ii) Except Transmission, where between Target and Stretch performance was achieved.
(iii) US Distribution financial measure only.
In 2006/07, the maximum annual bonus opportunity for Executive Directors was 100% of base salary, with 50% being paid for target performance. As outlined above, the maximum will be increased to 150% of base salary for the 2007/08 performance year, with 40% of the bonus (60% of salary) being paid for target performance. One half of any bonus earned is automatically deferred into National Grid shares (ADSs for US-based Executive Directors) through the DSP. The shares are held in trust for three years before release. During this time, they are not owned by the Executive Directors and, therefore, no dividends are paid. The Remuneration Committee may, at the time of release of the shares, use its discretion to pay a cash amount equivalent to the value of the dividends that would have accumulated on the deferred shares. For the 2007/08 bonus and onwards, the deferred shares may be forfeited if the Executive Director ceases employment during the three year holding period as a ‘bad leaver’, for example, resignation. The newly introduced forfeiture provisions will serve as a strong retention tool.
The Remuneration Committee believes that requiring Executive Directors to invest a substantial amount of their bonus in National Grid shares increases the proportion of rewards linked to both short-term performance and longer-term total shareholder returns. This practice also ensures that Executive Directors share a significant level of personal risk with the Company's shareholders. In line with US market practice, US-based Executive Directors' bonuses are pensionable.
Long-term incentive - Performance Share Plan (PSP)
Executive Directors and approximately 350 other senior employees who have significant influence over the Company's ability to meet its strategic objectives, may receive an award which will vest subject to the achievement of performance conditions set by the Remuneration Committee at the date of grant. The value of shares (ADSs for US-based Executive Directors) constituting an award (as a percentage of salary) varies by grade and seniority subject to a maximum, for Executive Directors, of 125% of salary. As outlined above, subject to shareholder approval being obtained, we will grant awards to Executive Directors in 2007 with a value of 200% of salary. The provisions in the PSP rules will allow awards up to a maximum value of 250% of salary, in order to provide a degree of flexibility for the future. Therefore, if approved by shareholders, the 2007 award will be granted in two parts, a June award based on the current maximum of 125% of salary and a second award after the announcement of our interim financial results, for the difference up to 200% for Executive Directors. This will result in the 2007 award, should performance criteria be met, being released to participants in two parts, in June 2011 and November/December 2011.
Awards were made at the maximum percentage of 125% of salary to Executive Directors in the year 2006/07. Shares vest after three years, subject to the satisfaction of the relevant performance criteria. Vested shares must then be held for a further period (the retention period) after which they are released to the participant on the fourth anniversary of the date of grant. During the retention period, the Remuneration Committee has discretion to pay an amount, equivalent in cash or shares, to the dividend which would have been paid on the vested shares.
Under the terms of the PSP, the Remuneration Committee may allow shares to vest early to departing participants, including Executive Directors, to the extent the performance condition has been met, in which event the number of shares that vest will be pro-rated to reflect the proportion of the performance period that has elapsed at the date of departure.
Awards made in June 2003 and June 2004 were based on the Company's Total Shareholder Return (TSR) performance over a three year period relative to the TSR performance of the following group of comparator companies:
|
Ameren Corporation AWG plc Centrica plc Consolidated Edison, Inc. Dominion Resources, Inc. E.ON AG Electrabel SA Endesa SA Enel SpA Exelon Corporation FirstEnergy Corporation FPL Group, Inc. Gas Natural SDG SA |
Iberdrola SA International Power plc Kelda Group plc Pennon Group plc RWE AG Scottish Power plc Scottish & Southern Energy plc Severn Trent plc The Southern Company, Inc. Suez SA United Utilities plc Viridian Group plc |
In calculating TSR for the 2003 and 2004 awards, it is assumed all dividends are reinvested. No shares will be released if the Company's TSR over the three year period, when ranked against that of each of the comparator companies, falls below the median. For TSR at the median, 30% of the shares awarded will be released, 100% of the shares awarded will be released for TSR ranking at the upper quartile or above. For performance between median and upper quartile, the number of shares released is calculated on a straight-line basis.
Following consultation in 2005 with our major shareholders, new performance conditions were introduced for the 2005 award onwards, so that 50% of any award is based on the Company's TSR performance when compared to the FTSE 100 (on the date of grant) and 50% is based on the annualised growth of the Company's EPS. This approach will continue going forward.
These measures are used because the Remuneration Committee continues to believe they offer a balance between meeting the needs of shareholders (by measuring TSR performance against other large UK companies) and providing a measure of performance (EPS growth) over which the Executive Directors have direct influence. The Remuneration Committee considers the PSP performance conditions to be at least as challenging as the previous single performance criterion.
In calculating TSR for the 2005 and 2006 awards, it is assumed that all dividends are reinvested. No shares will be released under the TSR part of the award if the Company's TSR over the three year performance periods, when ranked against that of the FTSE 100 comparator group, falls below the median. For TSR at the median, 30% of those shares will be released, 100% will be released where National Grid's TSR performance is 7.5% above that of the median company in the FTSE 100 (upper target).
The EPS measure is calculated by reference to National Grid's real EPS growth. Where annualised growth in adjusted EPS (excluding exceptional items and including continuing operations only) over the three year performance periods exceeds the average annual increase in RPI (the general index of retail prices for all items) over the same period by 3% (threshold performance), 30% of the shares under the EPS part of the award will be released, 100% of the shares will be released where EPS growth exceeds RPI growth by 6% (upper target). As part of our proposals for the 2007 awards, we intend to increase the performance required for 100% vesting of the shares for EPS growth exceeding RPI growth by 8% (upper target), which the Remuneration Committee considers to be more challenging.
For performance (for each target) between threshold and the upper target, the number of shares released is calculated on a straight-line basis.
If the Remuneration Committee considers, in its absolute discretion, the underlying financial performance of the Company does not justify the vesting of awards, even if either or both the TSR condition and the EPS condition are satisfied in whole or in part, it can declare that some or all of the award lapses.
No re-testing of performance is permitted for any of the PSP awards that do not vest after the three year performance period and any such awards lapse.
The performance criterion for the 2003 award was not reached and this award has lapsed in full.
Executive Directors' remuneration package
Illustrated below is the current remuneration package for Executive Directors (excluding pensions, all-employee share plans and non-cash benefits) for both ‘maximum stretch’ performance and assuming ‘on target’ performance based on 50% for the annual bonus plan; and TSR and EPS performance such that 37.5% of PSP awards are released to participants at the end of the performance period and subsequent retention period.
On the same basis, illustrated below is the proposed remuneration package for Executive Directors except, ‘on target’ performance is based on 40% (60% of salary) for the annual bonus plan and 60% for PSP awards.
All-employee share plans
Sharesave: Employees resident in the UK, including UK-based Executive Directors, are eligible to participate in HM Revenue and Customs approved all-employee Sharesave schemes. Under these schemes, participants may contribute between £5 and £250 in total each month, for a fixed period of three years, five years or both. Contributions are taken from net salary. At the end of the savings period, these contributions can be used to purchase ordinary shares in National Grid at a discount capped at 20% of the market price set at the launch of the scheme.
Share Incentive Plan (SIP): Employees resident in the UK, including UK-based Executive Directors, are eligible to participate in the SIP. Contributions up to £125 are taken from participants' gross salary and used to purchase ordinary shares in National Grid each month. The shares are placed in trust and if they are left in trust for at least five years, they can be removed free of UK income tax and National Insurance Contributions.
US Incentive Thrift Plans: Employees resident in the US, (including US-based Executive Directors), are eligible to participate in the Thrift Plans, tax-advantaged savings plans (commonly referred to as 401(k) plans) provided for employees of National Grid's US companies. These are defined contribution pension plans that give participants the opportunity to invest a maximum of 50% of salary (pre-tax) and/or up to 15% of salary (post-tax) up to applicable Federal salary limits (US$220,000 for calendar year 2006 and US$225,000 for 2007). The Company then matches 100% of the first 2% and 75% of the next 4% of salary contributed, resulting in a maximum matching contribution of 5% of salary up to the Federal salary cap. Employees may invest their own and Company contributions in National Grid shares or various mutual fund options.
Pensions
Current UK-based Executive Directors are provided with final salary pension benefits. The pension provisions for the UK-based Executive Directors are designed to provide a pension of one thirtieth of final salary at age 60 for each year of service subject to a maximum of two thirds of final salary, including any pension rights earned in previous employment. Within the pension schemes, the pensionable salary is normally the base salary in the 12 months prior to leaving the Company. Life assurance provision of four times pensionable salary and a spouse's pension equal to two thirds of the Executive Director's pension are provided on death.
UK-based Executive Directors who joined the Company after 31 May 1989 have been able to participate in an unfunded scheme in respect of those benefits earned on pay above the HM Revenue and Customs Earnings Cap. An appropriate provision in respect of the unfunded scheme has been made in the Company's balance sheet.
In response to the pensions taxation legislation which came into force on 6 April 2006 (A Day), the Remuneration Committee ensured the pension policy post A Day did not provide the Executive Directors with additional benefit accrual as a result of the change in pensions taxation. The current UK-based Executive Directors have elected to participate in the unfunded scheme in respect of any benefits in excess of the Lifetime Allowance or their Personal Lifetime Allowance. These Executive Directors are able to cease accrual in the pension schemes and take a 30% cash allowance in lieu of pension if they so wish. These choices are in line with those offered to current senior employees in the Company, except the cash allowance varies depending upon organisational grade.
Mike Jesanis participated in a qualified pension plan and an executive supplemental retirement plan provided by National Grid's US companies, prior to ceasing employment as an Executive Director on 31 December 2006. These plans are non-contributory defined benefit arrangements. The qualified plan is directly funded, while the supplemental plan is indirectly funded through a ‘rabbi trust’. Benefits are calculated using a formula based on years of service and highest average compensation over five consecutive years. In line with many US plans, the calculation of benefits under the arrangements takes into account salary, bonuses and incentive share awards (the DSP) but not share options or the PSP awards. The normal retirement age under the qualified pension plan is 65. The executive supplemental plan, however, provides unreduced pension benefits from age 55. On the death of the participating Executive Director, the plans also provide for a spouse's pension of at least 50% of that accrued by the participating Executive Director. Benefits under these arrangements do not increase once in payment.
Non-cash benefits
The Company provides competitive benefits to Executive Directors, such as a fully expensed car or a cash alternative in lieu of car and fuel, use of a driver when required, private medical insurance and life assurance. Business expenses incurred are reimbursed in such a way as to give rise to no benefit to the Director.
Flexible Benefits Plan
Additional benefits may be purchased under the Flexible Benefits Plan (the Plan), in which UK-based Executive Directors, along with most other UK employees, have been given the opportunity to participate. The Plan operates by way of salary sacrifice, that is, the participants' salaries are reduced by the monetary value used to purchase benefits under the Plan. Many of the benefits are linked to purchasing additional healthcare and insurance products for employees and their families. A number of the Executive Directors participate in this Plan and details of the impact on their salaries are shown in table 1A.
A similar plan is offered to US-based employees. However, it is not a salary sacrifice plan and therefore does not affect salary values. Mike Jesanis participated in this plan.
Share ownership guidelines
Executive Directors are required to build up and retain a shareholding representing at least 100% of annual salary. This will be achieved by retaining at least 50% of the after-tax gain on any options exercised or shares received through the long-term incentive or all-employee share plans and will include any shares held beneficially.
Share dilution through the operation of share-based incentive plans
Where shares may be issued or treasury shares reissued to satisfy incentives, the aggregate dilution resulting from executive incentives will not exceed 5% in any 10 year period. Dilution resulting from all incentives, including all-employee incentives, will not exceed 10% in any 10 year period. The Remuneration Committee reviews dilution against these limits regularly and under these limits, the Company currently has headroom of 3.9% and 5.8% respectively.
Executive Directors' service contracts
Service contracts for all Executive Directors provide for one year's notice by either party. The Remuneration Committee operates a policy of mitigation of losses in the event of an Executive Director's employment being terminated by the Company. If this occurs, the departing Executive Director would be expected to mitigate any losses incurred as a result of the termination. Therefore, entitlement to the payment of 12 months' remuneration on early termination is not automatic, but instead is based on the circumstances of the termination. The Remuneration Committee, in determining any other such payments, will give due regard to the comments and recommendations of the UK Listing Authority's Listing Rules, the Combined Code on Corporate Governance, as issued by the Financial Reporting Council, and other requirements of legislation, regulation and good governance.
| Date of contract | Notice period | |
|---|---|---|
| Executive Directors | ||
| Steve Holliday | 1 April 2006 | 12 months |
| Roger Urwin (i) | 17 November 1995 | 12 months |
| Steve Lucas | 13 June 2002 | 12 months |
| Nick Winser | 28 April 2003 | 12 months |
| Mark Fairbairn (ii) | 23 January 2007 | 12 months |
| Edward Astle | 27 July 2001 | 12 months |
| Mike Jesanis (iii) | 8 July 2004 | 12 months |
(i) Roger Urwin left the Board on 31 December 2006.
(ii) Mark Fairbairn was appointed to the Board on 1 January 2007.
(iii) Mike Jesanis left the Board on 31 December 2006.
External appointments and retention of fees
With the approval of the Board in each case, Executive Directors may normally accept an external appointment as a non-executive director of another company and retain any fees received. The table below details the Executive Directors who served as non-executive directors in other companies during the year ended 31 March 2007.
| Company | Retained fees (£) | |
|---|---|---|
| Executive Directors | ||
| Steve Holliday | Marks and Spencer Group plc | 60,000 |
| Roger Urwin | Utilico Investment Trust plc (ii) | 16,500 |
| Alfred McAlpine plc (ii) | 17,000 | |
| Steve Lucas | Compass Group PLC | 70,000 |
(i) Fees paid for the period 1 April 2006 to 31 December 2006.
(ii) Fees paid for the period 1 September 2006 to 31 December 2006.
Non-executive Directors' remuneration
Non-executive Directors' fees are determined by the Executive Directors subject to the limits applied by National Grid's articles of association. Non-executive Directors' remuneration comprises an annual fee (£35,000, which rose to £45,000 on 1 January 2007) and a fee for each Board meeting attended (£1,500) with a higher fee for meetings held outside the Non-executive Director's country of residence (£3,000, which rose to £4,000 on 1 January 2007). An additional fee of £12,500 is payable for chairmanship of a Board Committee and for holding the position of Senior Independent Director. The Audit Committee chairman receives a chairmanship fee of £15,000 to recognise the additional responsibilities commensurate with this role. The Chairman is covered by the Company's personal accident and private medical insurance schemes and the Company provides him with life assurance cover, a car (with driver when appropriate) and fuel expenses. Non-executive Directors do not participate in the annual bonus plan or in any long-term incentive plan, nor do they receive any pension benefits from the Company.
Non-executive Directors' letters of appointment
The Chairman's letter of appointment provides for a period of six months' notice to give the Company reasonable security with regard to his service. The terms of engagement of Non-executive Directors other than the Chairman are also set out in letters of appointment. For all Non-executive Directors, their initial appointment and any subsequent reappointment is subject to election by shareholders. The letters of appointment do not contain provision for termination payments.
| Date of letter of appointment |
End of period of appointment |
|
|---|---|---|
| Non-executive Directors | ||
| Sir John Parker | 27 March 2007 | 2009 AGM |
| Ken Harvey | 27 March 2007 | 2009 AGM |
| Linda Adamany (i) | 20 October 2006 | 2007 AGM |
| John Allan | 3 November 2005 | 2008 AGM |
| Paul Joskow | 3 November 2005 | 2008 AGM |
| Stephen Pettit | 27 March 2007 | 2009 AGM |
| Maria Richter | 30 September 2003 | 2007 AGM |
| George Rose | 27 March 2007 | 2009 AGM |
(i) Linda Adamany was appointed to the Board on 1 November 2006.