Corporate Governance - Remuneration Report

This remuneration report sets out the Company´s policy on the remuneration of Executive and Non-Executive Directors, together with details of Directors´ remuneration packages and service contracts. The report was approved by the Board on 4 March 2008 and signed on its behalf by Graham Menzies, Chairman of the Remuneration Committee. Shareholders will be asked to approve the Directors´ Remuneration report and a resolution to that effect will be proposed at the Annual General Meeting on 8 May 2008.

This report has been prepared by the Remuneration Committee on behalf of the Board in accordance with the requirements of the Directors´ Remuneration Report Regulations 2002 (the "Regulations") and the Listing Rules. The Regulations require that the auditors report to the members of the Company on the "auditable" part of the Directors´ Remuneration Report and state whether, in their opinion, that part of the Report has been prepared in accordance with the Regulations. This Report has therefore been split into separate sections for unaudited and audited information.

UNAUDITED INFORMATION


REMUNERATION COMMITTEE AND ADVISERS

The Board of Directors believes that the responsibility for remuneration policy and its cost is a matter for the full Board. It is the role of the Remuneration Committee to ensure that the Company´s remuneration policy provides competitive rewards for its Executive Directors and Senior Managers taking into account the Company´s performance and the markets in which it operates. The Remuneration Committee considers the specific remuneration packages for the Executive Directors, the Company Secretary and other members of senior management and then makes recommendations to the Board. The Remuneration Committee currently consists of Graham Menzies (Chairman) and Stephen Rogers who are both independent Non-Executive Directors. Mark Wild, Group Counsel and Company Secretary, attends Remuneration Committee meetings in an advisory capacity and acts as the Committee´s Secretary. Roger Boyes, Non-Executive Chairman, and Robert Barr, Chief Executive, also attend meetings by invitation but are not present when their personal remuneration is discussed and reviewed.

The Board will keep the remuneration policy (as detailed in this report) under review during the financial year ending 31 December 2008 and subsequent years to ensure that the Company´s reward programmes remain competitive and provide appropriate incentive for performance.

REMUNERATION POLICY


REMUNERATION POLICY FOR NON-EXECUTIVE DIRECTORS

The remuneration of Non-Executive Directors is determined by the Group Board without reference to the Remuneration Committee. The initial period of appointment is three years, renewable for a further three year period with the agreement of the Board and the relevant Director, in each case terminable at the will of either party. There are no provisions for notice periods or compensation in the event of termination and no element of Non-Executive Directors´ remuneration is performance related.

REMUNERATION POLICY FOR EXECUTIVE DIRECTORS

The Company´s policy on Directors´ remuneration for 2008 and subsequent financial years is to base its remuneration policy for its Executive Directors on a remuneration package designed to incentivise the Directors to meet the Company´s financial and strategic objectives. Its aim is to offer competitive remuneration to attract, retain and motivate high calibre people, having regard to the size and complexity of the Group´s business operations and to align Executive Directors´ interests with those of shareholders through incentive schemes based upon individual and Group performance. The total potential cash remuneration will be targeted at the upper quartile of market data obtained externally. Total potential cash remuneration is basic salary together with maximum annual bonus that could be achieved. The Board regards the performance related bonus and long term incentives to be of primary importance in aligning Directors´ remuneration with shareholder value.

The main components of the remuneration of Executive Directors are:

  1. basic salary – salaries for Executive Directors are based on median market rates drawn from external market data and take account of an Executive´s experience, responsibilities and performance. Executive Directors´ salaries are reviewed annually by the Remuneration Committee.
  2. benefits – benefits (which are not performance related) comprise taxable non-cash emoluments in respect of the provision of company cars and medical insurance, which are provided as part of the Executive Directors´ service contracts in line with practice in other listed companies of similar size.
  1. performance related bonus – bonus scheme designed to encourage profit improvement and cash management. For the year ended 31 december 2007, the maximum performance related cash bonus which could be earned was 100 per cent. of basic salary and was based on pre-tax profit and cash management improvement targets (net of the cost of accounting for the bonus) defined at the start of the financial year and adjusted only for the impact of acquisitions on the targets.

The Remuneration Committee has considered the extent to which the performance criteria have been met and has recommended to the Board that a bonus of 17.5 per cent. of basic salary is payable to Robert Barr, Mike Richards and Mark Wild. Alan Parker will receive a bonus of 14.38% of basic salary. The bonus payments will be made in March 2008.

For 2008, the annual performance related bonus scheme will have a maximum award of 100 per cent. of base salary with any award over 70 per cent. of base salary paid by the issue of shares in the Group, deferred for two years. The performance targets for 2008 have already been set and communicated to the Executive Directors and senior management.

  1. long term incentives – the Remuneration Committee is responsible for ensuring that the Company´s long term incentive schemes provide Robert Barr, Mike Richards and Mark Wild, together with senior management, with an appropriate performance related financial incentive and that they are operated in accordance with rules approved by shareholders in general meeting.
  1. At an Extraordinary General Meeting held on 17 November 2006, shareholders approved The Performance Share Plan (the "PSP 2006") which replaced the Company´s existing incentive arrangements. The PSP 2006 was designed specifically to link the interests of participants with those of shareholders and to deliver gains to participants which are directly linked to those which shareholders are able to realise.

The maximum value of shares which may be awarded to a participant in any one financial year has been set for 2007 and beyond at:

The PSP 2006 provided for conditional awards of shares to be made which will vest, subject to performance, after three years. There are two performance measures. Firstly there is a Total Shareholder Return ("TSR") measure, which is measured against that of the other constituent companies of the FTSE Small Cap Index. For the full award to vest, the Company must be in the top 25 per cent. If the Company is in the bottom half of the comparator group, no part of the award will vest. At the median, one-quarter of the award will vest. Awards will vest pro-rata from 25 per cent. to 100 per cent. determined on a straight-line basis, where the Company´s position is between the median and the upper quartile of the comparator group. The second performance measure is that, in any event, the Remuneration Committee must be satisfi ed that the Company´s TSR reflects its underlying financial performance.

The ESBP provides for the deferral in share awards of any bonus earned above a threshold of 70 per cent. of basic salary for the Executive Directors as noted in (iii) above. Any awards of deferred shares will:

No awards have been made under the ESBP.

The DSP replaces participation in the PSP 2006 for senior managers and is based solely on the performance of the individual participant´s business. Its key terms are:

Discretionary awards were made under the DSP to the Managing directors of the Avenco businesses on acquisition in August 2007 and the first annual awards under the DSP will be made in March 2008 following the announcement of the results for 2007.

PERFORMANCE GROUP
Set out below is a chart showing TSR for each of the last five financial years, compared to the companies comprising the FTSE Small Cap Index. The FTSE Small Cap Index was selected as it represents a broad equity market index and an appropriate comparator group of companies.

Renumeration Performance

This chart shows the value, by the end of 2007, of £100 invested in the Company on 31 December 2002 (assuming dividends reinvested) compared with the value of £100 invested (assuming dividends reinvested) in the FTSE Small Cap Index.

FUNDING OF SHARE SCHEMES

It is the Company´s current intention to satisfy the requirements of its share schemes, in a method best suited to the interests of the Company, either by acquiring shares in the market or, subject to institutional guidelines, issuing new shares.

SERVICE CONTRACTS

The Company´s policy on Executive Director and Senior Executive service contracts is that they be rolling contracts terminable by the Company on not more than twelve-months´ notice and that bonus payments are not pensionable and do not form part of contractual remuneration.

The Company has entered into the following contracts with its Executive Directors:

  1. an agreement dated 10 January 2005 between the Company and Robert Barr ("RB") pursuant to which RB agrees to serve as Group Chief Executive. The agreement is terminable by the Company on twelve-months´ notice or by RB on three-months´ notice. Under the agreement, RB is entitled to a basic annual salary (currently at the rate of £290,000 per annum) and certain other benefits. RB is entitled to a cash related bonus. The maximum bonus which could be earned for the year ended 31 December 2007 was 100 per cent. of basic salary, based on pre-tax profit and cash management improvement targets;
  2. Alan Parker ("AP") entered into a service agreement dated 7 February 2005 with Heywood Williams, pursuant to which AP agreed to serve as a Divisional Managing Director of the Group; by a letter dated 20 September 2006, AP was appointed as a Board Director of Heywood Williams and his job title was amended accordingly. The agreement is terminable by the Company on twelve-months´ notice or by AP on three months´ notice. Under his agreement AP is entitled to a basic annual salary (2007: £170,000 per annum) and certain other benefits. AP is entitled to a cash related bonus. The maximum bonus which could be earned for the year ending 31 December 2006 is 100 per cent of basic salary;1
  3. an agreement dated 28 January 2008 between the Company and Mike Richards ("MR") pursuant to which MR agrees to serve as Group Finance Director.The agreement is terminable by the Company on twelve-months´ notice or by MR on three-months´ notice. Under the agreement, MR is entitled to a basic annual salary (currently at the rate of £170,000 per annum) and certain other benefits. MR is entitled to a cash related bonus. The maximum bonus which could be earned for the year ended 31 December 2007 was 100 per cent. of basic salary, based on pre-tax profit and cash management improvement targets;
  4. Mark Wild ("MW") has entered into a service agreement dated 10 January 2005 with Heywood Williams, pursuant to which MW agreed to serve as a Group Financial Controller and Company Secretary; by a letter dated 12 September 2007, MW was appointed to the Board of Heywood Williams as Group Counsel and his job title was amended accordingly. The agreement is terminable by the Company on twelve-months´ notice or by MW on three-months´ notice. Under his agreement MW is entitled to a basic annual salary (currently at the rate of £147,500 per annum) and certain other benefits. MW is entitled to a cash related bonus. The maximum bonus which could be earned for the year ending 31 December 2007 was 100 per cent. of basic salary; and
  5. a letter agreement dated 2 January 2008 (effective from 1 January 2008) with William Schmuhl ("WS") which supersedes all prior arrangements, representations and understandings. This agreement is for a fixed period of one year concluding on 31 December 2008 and is subject to review by both parties for a possible extension of the terms of the agreement. The letter agreement provides for the payment of a fee to WS amounting to $150,000 per annum.

    6. The Company has entered into the following arrangements with the Non-Executive Directors:

    1. a letter of appointment with Roger Boyes ("RBy") dated 4 January 2007 (effective from 1 January 2007 for a fixed period until 11 March 2008) which supersedes all prior agreements. RBy´s appointment pursuant to this letter was for a fixed period until 11 March 2008 renewable for a three-year period. With the agreement of the Board, RBy´s appointment, terminable at the will of either party, has been renewed until 11 March 2011. RBy is currently entitled to an annual fee of £105,000;
    2. a letter of appointment with Graham Menzies ("GM") dated 5 March 2004 (subsequently amended). This appointment, terminable at the will of either party, was for a fixed term of three years, renewable for a further three-year period with the agreement of the Board and the relevant Director. GM´s appointment was renewed for a further three years to 5 March 2010. GM is currently entitled to an annual fee of £36,000; and
    3. a letter of appointment with Stephen Rogers ("SR") dated 27 June 2007. This appointment, terminable at the will of either party, for a fixed term of three years until 4 July 2010 is renewable for a further three-year period with the agreement of the Board and the relevant Director. SR is currently entitled to an annual fee of £36,000.

    ¹ Alan Parker resigned as a director on 8 January 2008.

    The service contracts for Robert Barr, Mike Richards and Mark Wild contain provisions for pre-determined compensation on termination of employment which would equate to a sum equivalent to salary, Company pensions contributions and benefits in kind for one year. William Schmuhl is not entitled to compensation for termination of appointment other than payment in lieu of notice. There is no entitlement to compensation for termination of appointment for any of the three Non-Executive Directors.

    Save as disclosed above, there are no existing or proposed service contracts between any of the Directors and any member of the Group which provide for payment of pre-determined amounts of compensation in the event of early termination. The Company will have regard to the general duty to mitigate when agreeing any termination packages. Copies of each Director´s service agreement will be available for inspection prior to and during the Annual General Meeting.

    DIRECTORS´ REMUNERATION


    The emoluments of the Directors for the year ended 31 December 2007, excluding pension entitlements, share options and PSP awards, are shown below:

     
    Fees
    £000
    Basic
    Salary
    £000
    Benefits¹
    £000
    Annual
    Bonus
    £000
    Total
    2007
    £000
    2006
    £000
     
    EXECUTIVE DIRECTORS
    Robert Barr
    -
    286
    21
    51
    358
    457
    Alan Parker²
    -
    170
    12
    24
    206
    68
    Mike Richards ³
    43
    5
    7
    55
    -
    Richard Whiting
    -
    137
    14
    -
    151
    292
    Mark Wild4
    -
    45
    5
    8
    58
    -
    William Schmuhl
    76
    -
    -
    -
    76
    221
    NON-EXECUTIVE DIRECTORS
    Roger Boyes
    105
    -
    -
    -
    105
    118
    Graham Menzies
    36
    -
    -
    -
    36
    36
    Edward Roderick5
    15
    -
    -
    -
    15
    36
    Stephen Rogers 6
    18
    -
    -
    -
    18
    -
     
    Total 2007
    250
    681
    57
    90
    1,078
    -
     
    Total 2006
    328
    491
    42
    367
    -
    1,228
     

    ¹ The remuneration package of each Executive Director includes non-cash benefits comprising provision of a company car and private health insurance.
    ² Alan Parker resigned as a Director on 8 January 2008.
    3As from date of appointment on 1 October 2007.
    4As from date of appointment on 11 September 2007.
    5Up to date of resignation on 31 May 2007.
    6As from date of appointment on 4 July 2007.

    During the year Robert Barr served as a Non-Executive Director on the Board of White Young Green Plc, for which he received a fee of £30,000. He is not required to pass his fee for this appointment to the Company.

    DIRECTORS´ INTERESTS
    The beneficial, family and contingent interests of the Directors in the share capital and options over shares in the Company are summarised below.

    AT 31 DECEMBER 2007


     
    Beneficial shares number
    Performance share plan number
    Share options (SRSOS) Number
    Total Shares Number
    Robert Barr
    20,000
    1,248,050
    22,951
    1,180,054
    Roger Boyes
    6,292
    -
    -
    6,292
    Graham Menzies
    6,350
    -
    -
    6,350
    Alan Parker¹
    30,988
    490,975
    24,826
    488,514
    Mike Richards²
    -
    -
    -
    -
    Stephen Rogers³
    -
    --
    -
    -
    William schmuhl
    67,500
    --
    -
    67,500
    Mark Wild 4
    25,000
    344,826
    24,826
    394,690

    ¹ Resigned 8 January 2008.
    ² Appointed 1 October 2007.
    3Appointed 4 July 2007.
    4Appointed 11 September 2007.

    AT 31 DECEMBER 2007

    Details of options over the Company’s ordinary shares granted to Directors under the Company’s SRSOS are set out below:

     
    Number of options at 1 Jan 2007 or date of appointment
    Granted during year
    Exercised during year
    Number of options at 31 Dec 07
    Average exercise price
    Range of exercisable dates
    Robert Barr
    22,951
    -
    -
    22,951
    72p
    1 Jun 2010
    to 1 Dec 2010
    Alan Parker
    24,826
    -
    -
    24,826
    72p
    1 Jun 2012
    to 1 Dec 2012
    Mark Wild
    24,826
    -
    -
    24,826
    72p
    1 Jun 2012
    to 1 Dec 2012

    1Resigned 8 January 2008.

    Options granted under the SRSOS are subscribed for under a three, five or seven-year savings contract and are normally exercisable during a period of six months following completion of the contract. They do not contain any performance criteria.

    Details of awards made pursuant to the PSP 2006 are set out below:

     
    Maximum number of shares awarded 1 Jan 2007 or date of appointment
    Award during year
    Date of award
    Market price at date awarded of award
    Lapsed award
    Date lapsed
    Maximum number of shares 31 Dec 2007
    Range of exercisable dates
    Robert Barr
    1,248,050
    343,874
    29 Mar 2007
    101.2p
    454,821
    23 sep 2007
    1,137,103
    3 oct 2008 to 29 Mar 2010
    Alan Parker
    490,975
    117,589
    29 Mar 2007
    101.2p
    175,864
    23 sep 2007
    432,700
    3 oct 2008 to 29 Mar 2010
    Mark Wild
    344,864
    -
    -
    -
    -
    -
    344,864
    3 oct 2008 to 29 Mar 2010

    1Resigned 8 January 2008.

    Full details of Directors’ shareholdings, share options and awards under the PSP are contained in the Company’s Register of Directors’ Interests, which is open to inspection at the Company’s Registered Office.

    COMPANY SHARE PRICE
    During the year, the price of the Company´s ordinary shares ranged from 45.75p to 112.00p. The closing mid market price of the Company´s ordinary shares on 31 December 2007 was 45.75p.

    DIRECTORS´ PENSION ENTITLEMENTS
    Robert Barr receives a cash supplement from the Company equal to 33.3 per cent. of basic salary in lieu of pension, which amounted to £95,417 for 2007 (2006: £90,833). Robert Barr is also provided with life cover of four times his basic salary in the event of his death-in-service.

    Richard Whiting, Alan Parker, Mark Wild and Mike Richards all participated in a contributory registered defined benefit scheme during the year. Prior to 6 April 2006, the scheme provided benefits based on basic salary up to the level of the earnings cap at an accrual rate of 1/40th for Richard Whiting, 1/45th for Alan Parker and an approximate overall accrual rate of 1/45.6th for Mark Wild. Post 5 April 2006, the scheme provides benefits based on full basic salary and an accrual rate of 1/40th for Richard Whiting and Mike Richards, 1/45th for Alan Parker and 1/39.4th for Mark Wild. All Directors are provided with life cover of five times basic salary in the event of death-in-service.

    DIRECTORS´ PENSION ENTITLEMENTS

    The following table sets out both the amount and transfer value of the benefits Richard Whiting and Alan Parker have become entitled to in respect of the Company´s registered pension scheme over the year:

     
    Age
    Accrued pension at 31 Dec 2007 £000 p.a.
    Increasein accrued pension during the year £000 p.a.
    Increase in accrued pension during the year, net of inflation £000 p.a.
    Directors’ contributions during the year £000
    Transfer value of accrued pension at 31 Dec 2006 £000
    Transfer value of accrued pension at 31 Dec 2007 £000
    Transfer value of increase in accrued pension over the year, before inflation less Directors’ contributions £000
    Increase in transfer value over the year, Directors’ contributions £000
    Richard Whiting
    43
    16
    4
    4
    7
    75
    102
    19
    20
    Alan Parker 2
    49
    28
    5
    4
    10
    159
    191
    22
    22
    Mark Wild 3
    47
    35
    4
    4
    8
    201
    240
    24
    31
    Mike Richards 3
    48
    1
    1
    1
    2
    n/a
    7
    5
    5

    ¹The end of year benefits for Richard Whiting have been calculated using a date of leaving of 11 September 2007. The transfer value reflects market conditions at 31 December 2007.
    ² Alan Parker resigned as a Director on 8 January 2008.
    3Mark Wild and Mike Richards were appointed to the Board with effect from 11 September 2007 and 1 October 2007 respectively.

    The transfer values have been calculated in accordance with the guidance note GN11 published by the Institute and Faculty of Actuaries.

    Once in payment, pensions attributable to service after 5 April 2007 are guaranteed to increase in line with price inflation up to 5% each year. Pensions that were earned before 6 April 1997 that are in excess of any Guaranteed Minimum Pension do not attract any guaranteed increases once in payment. On death before normal retirement age, but after service has ceased, a spouse’s pension is payable of 50% of the Director’s pension at the date of death. For death in retirement, a spouse’s pension of two-thirds of the Director’s pre-commutation pension is payable plus subsequent increases. Children’s allowances may also be paid.

    Contributions of £9,563 (2006: £10,337) on behalf of William Schmuhl were paid during the year to money purchase pension arrangements.

    GRAHAM MENZIES
    Remuneration Committee Chairman
    4 March 2008