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 are framed around the following
key principles:
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total rewards should be set at levels that are competitive in the relevant market; |
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a significant proportion of the Executive
Directors’ total reward should be performance based.
These 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; and |
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incentive
plans, performance measures and targets should be
stretching and aligned as closely as possible with
shareholders’ interests. |
Executive Directors’ remuneration
Remuneration packages for Executive
Directors consist of the following elements:
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salary; |
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annual bonus
including the Deferred Share Plan; |
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long-term incentive, the Performance Share Plan; |
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all-employee share plans; |
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pension contributions; and |
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non-cash benefits. |
Salary
Salaries are reviewed annually and targeted broadly at
the median position against 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. 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
of safety and customer service performance. 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.
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 Remuneration Committee believes that requiring
Executive Directors to invest a substantial amount of
their bonus in National Grid shares 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 receive an award over shares 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 for
Executive Directors is 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 in two parts, a
June award based on the current maximum of 125% 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.
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.
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 a group of comparator companies
which included companies in the energy distribution
sector including UK and international utilities. The
performance condition for the June 2005 award onwards
was amended, following consultation with our major
shareholders, 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.
For awards made in 2005 and 2006, no shares will be
released under the TSR part of the award if the
Company’s TSR over the three year period, 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.
In calculating TSR, for all awards, it is assumed
that dividends are reinvested.
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) by 3% (threshold performance), 30% of
the shares under the EPS part of the award will
