The directors present their remuneration report for the year ended 31 December 2007.
Remuneration committee
The remuneration committee is responsible for recommending to the Board the broad policy for the remuneration of the Chairman, the Chief Executive, the executive directors and the company secretary. The remuneration of non-executive directors is a matter reserved to the Chairman and executive directors.
Within the terms of the agreed policy, the committee determines:
- the total individual remuneration package including, where appropriate, bonuses and share-based incentives;
- the targets for any performance-related incentives;
- the scope of any pension arrangements;
- contractual terms of engagement and any payments to be made on termination; and
- the policy for authorising claims for expenses from the Chairman or Chief Executive.
The committee also monitors the level and structure of remuneration for business unit presidents or managing directors and the head of corporate development.
The remuneration committee consists of the non-executive directors (who are all independent), these being at the date of this report Anthony Reading (chairman), Peter Chambré, John Hughes and John Warren. Andrew Given was a member of the remuneration committee until his retirement from the Board at the 2007 Annual General Meeting. John Poulter, Chairman of the Board, is in attendance at most meetings save during discussions relating to his own remuneration. The Chief Executive may also on occasions be in attendance by invitation and the committee takes into consideration his recommendations regarding the remuneration of his executive colleagues. The Chief Executive is not involved in discussions concerning his own remuneration.
The committee has appointed New Bridge Street Consultants LLP to advise on various aspects of the Chairman’s and executive directors’ remuneration. This firm did not provide any other services to the company during the year.
The terms of reference of the remuneration committee can be found on the company’s website and are available on request.
Remuneration policy
The Board, in considering the recommendations of the remuneration committee, complied throughout the year with the provisions of the Combined Code (including the principles for performance-related remuneration set out in Schedule A). The policy objective is to ensure that the high calibre managers required at board level are fairly and competitively remunerated and incentivised in a manner consistent with the group’s strategic objectives.
The remuneration committee also regularly reviews the balance between fixed and variable pay. The relative importance of the annual and longer-term variable incentives is to be enhanced following a review during the year. This review highlighted that the annual bonus potential and the base award level for long-term incentive awards were both below the market median. Accordingly, for 2008 the bonus potential and the level of base award were revised upward to bring them into line with the market median. Concurrent with these increases, the performance targets for full bonus vesting have been increased. Full details of the changes are set out below.
Salaries and fees
Base salaries and fees are established by reference to surveys of the terms offered by comparable UK quoted companies. The starting point for comparative surveys is the scope of the position and associated performance of the Chairman, each executive director and the company secretary. Excluding his own position and performance, the Chief Executive is responsible for the definition of the scope of positions and assessment of the performance of each executive director, for approval by the remuneration committee. Salaries are reviewed in December each year and are set at competitive levels, typically based around the market median, although the remuneration committee reserves the flexibility to respond to individual circumstances which may cause salaries to be set at a level higher or lower than market median. Market ranges are reviewed on a regular basis.
Bonuses
To align remuneration with shareholders’ interests, a significant proportion of executive directors’ potential total remuneration is related to annual corporate performance and it is intended that this emphasis should be enhanced in the future.
Under the 2007 arrangements, bonuses of up to 75% of base salary were achievable upon the attainment of demanding profitability and personal targets set in relation to carefully considered business plans. Going forward, the committee has determined, following receipt of advice from New Bridge Street Consultants LLP, that the bonus potential should be raised to 100%, consistent with median levels for comparable public companies. Bonus payments commence only at a level which shows an acceptable degree of financial progress year-on-year, with an “on-plan” performance yielding a payment of approximately half the maximum potential. Targets for maximum outturn are set at highly stretching, albeit attainable, levels (this level remaining unchanged notwithstanding the increase in maximum bonus potential). Bonuses are not pensionable.
Bonuses achieved in respect of 2007 performance were as follows (as a percentage of salary at 31 December 2007):
| J E O’Higgins | 70% |
| C G Watson | 73% |
| S C Harris | 65% |
| J C Webster | 68.33% |
Share-based incentives
The remuneration committee keeps under review the company’s share-based incentive arrangements and takes advice on market practice. The committee is of the view that offering senior management the opportunity to be awarded and then retain shares in the company is an important part of motivating and rewarding key employees so that they may participate in the future growth in value of the company. The Spectris Performance Share Plan (the “Plan”), approved by shareholders at the 2006 AGM, is intended to support this objective and to facilitate the retention of senior management over the longer term.
Under the Plan, annual awards of shares may be made which vest at the end of a three-year period subject to continued employment and the satisfaction of challenging performance conditions. The maximum award of performance shares that can be made to any participant in any financial year is limited to shares with a market value equal to 125% of the participant’s salary, although the committee’s general policy, from 2008, is to determine awards by reference to a base award over shares worth 100% of salary, which may then be flexed up or down from year to year depending on corporate and personal performance. Formerly the reference level for a base award of shares was 67% of salary. This has been revised upwards by the committee, following advice from New Bridge Street Consultants LLP, consistent with median levels for comparable public companies.
Awards are currently structured so that 50% of the award is subject to an earnings per share (“EPS”) target and 50% subject to a total shareholder return (“TSR”) target. Each condition operates over a fixed three-year period with no opportunity for retesting.
The performance criteria for grants made in 2006 and 2007 are summarised in the tables below:
| Company EPS performance |
% of award that vests (expressed as a percentage of one-half of the total number of shares subject to an award) | |
| Consumer Prices Index ("CPI") + 10% compound per annum ("c.p.a.") | 100% | |
| Between CPI + 5% and 10% c.p.a. | Pro-rata straight line between 25% and 100% | |
| CPI + 5% c.p.a. | 25% | |
| Less than CPI + 5% c.p.a. | 0% | |
| Company TSR performance relative to the FTSE 250 (excluding investment trusts) | % of award that vests (expressed as a percentage of one-half of the total number of shares subject to an award) | |
| Upper quartile or above | 100% | |
| Between upper quartile and median | Pro-rata straight line between 25% and 100% | |
| Median | 25% | |
| Below Median | 0% |
In conjunction with the increase in the normal level of award described above, it is intended that, for awards in 2008, the upper end of each vesting scale should be increased to a) CPI + 12% c.p.a. and b) upper quintile or above, thereby requiring more stretching performance for achievement of the increased potential.
If awards in excess of 100% of salary were to be granted, the committee has also undertaken that the percentage of an award that will vest for threshold performance will be limited to 25% of a participant’s base salary rather than 25% of the number of shares subject to an award, with pro-rata straight line vesting from this lower point up to 100% of the award.
The committee considers the above performance conditions to be an appropriate means of aligning the interests of participants with those of longer-term shareholders. The TSR performance condition will be measured independently by New Bridge Street Consultants LLP and the EPS condition will be verified by the company’s auditors.
It is the intention of the committee that all future share-based incentives granted to senior managers or executive directors are made under the Plan and that no further grants are made under the remaining 1999 executive share option scheme. No share option grants were made during 2007 or the year to date, nor are any grants envisaged. Executive directors may, however, continue to participate in grants made under the Spectris Savings Related Share Option Scheme which is applicable to all UK employees.
Mr Poulter has exercised all share option grants received during his previous service as an executive director. He did not receive share option grants after being appointed Chairman in 2001 and does not receive awards under the Plan.
Exercise of share options granted under the 1996 executive share plan (which was not renewed on expiry) or the 1999 executive share option scheme were subject to prior achievement of performance conditions, requiring compound annual growth in earnings per share before exceptional items and amortisation of goodwill (“EPS”) over three financial years to be between 3% and 5% ahead of the increase in the retail prices index (“RPI”). This condition has now been met for all option grants. EPS growth was selected as the appropriate pre-condition to exercise in order to ensure that share option gains would only be received if the company’s performance for shareholders had been enhanced.
Share retention
It is intended that each executive director should, subject to personal circumstances, build a retained shareholding in Spectris plc greater than two times base salary in value within a five-year period from appointment. Formerly the expectation was for each executive director to build a retained shareholding of one times salary, but this was revised upwards by the committee in conjunction with the 2008 enhancements to bonus and share-based incentives described in this report. Executive directors are required to apply the post-tax benefit of any vested plan awards or bonus payments exceeding 60% of base salary to the acquisition of shares until this level of shareholding is achieved.
Benefits
Company car and health insurance benefits are subject to income tax and none of these benefits are pensionable. The executive directors have defined contribution pension arrangements to which the company contributes at a rate of 25% of salary.
Contractual terms
All executive directors have rolling contracts subject to 12 months’ notice.
The committee has determined that contracts of employment should, going forward, contain a contractual best endeavours obligation to seek alternative employment in the event of serving of notice of termination by the company, and that full mitigation reflective of any earnings from a new position should apply so as to reduce the payments otherwise due from the company during the notice period. Additionally, in these circumstances, it is the current intention that bonus entitlements should be calculated to the date of notice of termination only and that a phased payment provision, subject to reduction as explained above and equivalent to 1.65 times monthly salary, should apply in lieu of all remuneration and benefits otherwise payable during the notice period and in full and final settlement of all employment-related claims. Mr O’Higgins’ and Mr Watson’s contracts of employment reflect these terms.
Mr Webster’s contract, concluded in 1998, provides for a predetermined compensation payment in lieu of notice (equivalent to total notice period remuneration – salary, bonus and benefits) in the event of termination by the employer within 12 months of a change in control of the group. Termination payments in other circumstances would be a matter for negotiation and remain, at the discretion of the committee, subject to mitigation and/or reduction for accelerated payment.
The Chairman, John Poulter, is retained on a contract of employment subject to six months’ notice and terminating at the 2008 AGM.
No compensation payments on termination of employment were made during the year.
External appointments
Executive directors may retain any payments received in respect of external non-executive appointments. Such appointments are limited to one per director at any time and are subject to the approval of the Board.
Remuneration below board level
Remuneration for presidents of the group’s trading companies is set at competitive levels to reflect the size, complexity and geographic locations of these businesses. Base salaries for presidents of the group’s European operations fall within a range between €160,000 and €260,000. Base salaries for presidents of the group’s US operations fall within a range between $220,000 and $300,000. Additionally, the group’s presidents participate in share awards under the Spectris Performance Share Plan (typically over 60% of base salary) and in profit-related bonus arrangements linked to base salary and payable against their business annual operating profit after exchange, plus or minus a financing charge/credit arising from changes in working capital over the year. On plan performance delivers a c. 30% of base salary bonus with the upper limit of the payment range delivering 50% of base salary.
Non-executive directors
Non-executive directors’ fees are agreed by the Chairman and executive directors by reference to market practice. There is no participation in bonus, share option, or pension arrangements and no participation in the Spectris Performance Share Plan. All non-executive directors’ conditions of appointment provide for a six-month period of notice within an initial term of three years from election by shareholders at the director’s first AGM. The appointment may be renewed by mutual agreement for a further three-year period.
Total shareholder return
The following graph indicates the value by the end of 2007 of £100 invested in Spectris plc 5p ordinary shares on 31 December 2002 compared with the value of £100 invested in the FTSE 250 index (excluding investment trusts) over the same period. The graph was selected as the most appropriate comparison measure because the company is a constituent member of the FTSE 250 index and the members of the FTSE 250 (excluding investment trusts) form the comparator group for the purposes of the TSR performance test under the Spectris Performance Share Plan.
Service contracts
The following table sets out a summary of the directors’ service contracts or terms of appointment. Directors’ service contracts provide for termination on the director reaching the age of 65.
| Date of contract |
Expiry date |
Notice period |
Length
of service at 22 February 2008 |
|||||
| Executive directors | ||||||||
| J E O'Higgins | 1.1.06 | 3.2.29 | 12 months | 2 years 1 month | ||||
| C G Watson | 1.10.06 | 4.2.23 | 12 months | 1 year 4 months | ||||
| J C Webster | 27.3.98 | 21.6.15 | 12 months | 14 years 4 months | ||||
| Non-executive directors | ||||||||
| P A Chambré | 1.8.06 | 16.5.10 | 6 months | 1 year 6 months | ||||
| J L M Hughes | 1.6.07 | 16.5.11 | 6 months | 8 months | ||||
| J W Poulter | 17.2.02 | 16.5.08 | 6 months | 19 years 9 months | ||||
| A J Reading | 10.3.04 | 16.5.10 | 6 months | 3 years 11 months | ||||
| J A Warren | 7.3.06 | 16.5.09 | 6 months | 1 year 11 months |
Mr Webster’s contract provides for a predetermined compensation payment in lieu of notice (equivalent to total notice period remuneration – salary, bonus and benefits) in the event of termination by the employer within 12 months of a change in control of the group.
Mr O’Higgins’ and Mr Watson’s contracts provide, subject to a duty of mitigation, for phased monthly payments equivalent to 1.65 times monthly salary in lieu of all remuneration and benefits otherwise payable during the notice period in full and final settlement of all employment-related claims.
Mr Poulter will retire from the Board, and his service contract will terminate, with effect from the date of the 2008 AGM, 16 May.
Directors’ remuneration and interests
The auditors are required to report on the information contained in the following sections a) to e).
| a)
Emoluments of directors excluding pension contributions (£'000) |
||||||||||||||||||||
| Salary and/ or fees |
Bonus | Benefits in kind |
Taxable expenses |
2007 Total |
2006 Total |
|||||||||||||||
| Executive directors | ||||||||||||||||||||
| J E O'Higgins | 380 | 266 | 14 | 3 | 663 | 647 | ||||||||||||||
| C G Watson | 250 | 183 | 11 | 3 | 447 | 128 | ||||||||||||||
| J C Webster | 238 | 163 | 20 | – | 421 | 416 | ||||||||||||||
| S Hare | – | – | – | – | – | 161 | ||||||||||||||
| S C Harris | 234 | 152 | 17 | – | 403 | 412 | ||||||||||||||
| Non-executive directors | ||||||||||||||||||||
| P A Chambré | 35 | – | – | – | 35 | 15 | ||||||||||||||
| J L M Hughes | 23 | – | – | – | 23 | – | ||||||||||||||
| J W Poulter | 125 | – | 1 | – | 126 | 126 | ||||||||||||||
| A J Reading | 40 | – | – | – | 40 | 40 | ||||||||||||||
| J A Warren | 40 | – | – | – | 40 | 29 | ||||||||||||||
| A F Given | 15 | – | – | – | 15 | 40 | ||||||||||||||
| M J Lamb | – | – | – | – | – | 15 | ||||||||||||||
| L G Murray | – | – | – | – | – | 15 | ||||||||||||||
| 1,380 | 764 | 63 | 6 | 2,213 | 2,044 | |||||||||||||||
Benefits in kind include company cars, private fuel and medical expenses insurance. Taxable expenses relate to allowances paid in lieu of company cars and private fuel.
During the year Mr Harris received £37,500 in respect of his appointment as a non-executive director of Brixton plc and Mr Webster received £35,000 in respect of his appointment as a non-executive director of Raymarine plc.
| b) Directors' pensions | ||||||||||||||||||||
| Company contributions to defined contribution plans: |
||||||||||||||||||||
| 2007 £'000 |
2006 £'000 |
|||||||||||||||||||
| J E O'Higgins | 95 | 65 | ||||||||||||||||||
| C G Watson | 63 | - | ||||||||||||||||||
| J C Webster | 60 | 57 | ||||||||||||||||||
| S Hare | - | 38 | ||||||||||||||||||
| S C Harris | 59 | 56 | ||||||||||||||||||
| The company contributes at the rate of 25% of salary. | ||||||||||||||||||||
| c)
Directors' total remuneration |
||||||||||||||||||||
| 2007 £'000 |
2006 £'000 |
|||||||||||||||||||
| Aggregate emoluments | 2,213 | 2,044 | ||||||||||||||||||
| Company pension contributions to defined contribution schemes | 277 | 216 | ||||||||||||||||||
| Gains made on exercise of share options | 1,561 | 344 | ||||||||||||||||||
| 4,015 | 2,604 | |||||||||||||||||||
| d)
Directors' interests in options to purchase ordinary shares |
||||||||||||||||||||
| Date granted | Options held |
Granted during |
Exercise |
Exercised during |
Share price at date of |
Lapsed during the year |
Options held |
Date exercisable |
Expiry date | |||||||||||
| J W Poulter | Mar 1999 | 20,518 | 321.6533 | 20,518 | 846.628 | Mar 2002 | Mar 2009 | |||||||||||||
| Mar 2000 | 48,715 | 513.1832 | 48,715 | 846.628 | Mar 2003 | Mar 2010 | ||||||||||||||
| 30,550 | 498.50 | 30,550 | 846.628 | Mar 2004 | Mar 2011 | |||||||||||||||
| 99,783 | 99,783 | 0 | ||||||||||||||||||
| SAYE | Oct 2006 | 1,529 | 618 | 1,529 | Dec 2009 | |||||||||||||||
| 1,529 | 1,529 | |||||||||||||||||||
| S C Harris | 40,000 | 468.5 | 40,000 | 920.2944 | Sep 2006 | Sep 2013 | ||||||||||||||
| 40,000 | 462 | 40,000 | 920.2944 | Mar 2007 | Mar 2014 | |||||||||||||||
| 35,000 | 406.25 | 35,000 | 717.7011 | Oct 2007 | Oct 2014 | |||||||||||||||
| 85,000 | 589 | 85,000 | Sep 2008 | Sep 2015 | ||||||||||||||||
| 200,000 | 115,000 | 85,000 | ||||||||||||||||||
| C G Watson | ||||||||||||||||||||
| SAYE | Oct 2007 | 1,146 | 837 | 1,146 | Dec 2010 | |||||||||||||||
| 1,146 | 1,146 | |||||||||||||||||||
| 30,202 | 513.1832 | 30,202 | 884.505 | |||||||||||||||||
| 18,839 | 498.50 | 18,839 | 884.505 | |||||||||||||||||
| 44,000 | 468.50 | 44,000 | 884.505 | |||||||||||||||||
| 40,000 | 462 | 40,000 | 884.505 | |||||||||||||||||
| 35,000 | 406.25 | 35,000 | 904.1659 | |||||||||||||||||
| 85,000 | 589 | 85,000 | ||||||||||||||||||
| 253,041 | 168,041 | 85,000 | ||||||||||||||||||
| 552,824 | 382,824 | 172,675 | ||||||||||||||||||
Shares other than those marked SAYE relate to executive share option grants. Entitlement to exercise grants under the Unapproved 1996 Executive Share Plan is conditional upon a performance criterion requiring compound growth in normalised earnings per share ("EPS") over three years up to 5% per annum in excess of the increase in the retail prices index (please refer to the Directors’ remuneration report for further explanation). No consideration was paid by any recipient in relation to the grant of an option and there were no changes to the conditions on which any option was granted during the year.
J W Poulter exercised 99,783 options under the Unapproved 1996 Executive Share Plan during the year. The gain on exercise was £376,505.
S C Harris exercised 6,403 options under the Approved 1999 Executive Share Option Scheme and 108,597 options under the Unapproved 1996 Executive Share Plan during the year. He exercised on 19 April 2007, 80,000 options and the gain on exercise was £364,036. He subsequently exercised on 20 November 2007, 35,000 options, retaining 15,124 shares and selling 19,876 shares at a gain of £109,008. Remaining options granted to S Harris lapsed on his leaving employment on 31 January 2008.
J C Webster exercised 168,041 options under the Unapproved 1996 Executive Share Plan during the year. He exercised 133,041 options on 22 March 2007, and the gain on exercise was £536,910. He subsequently exercised on 12 October 2007, 35,000 options at a gain of £174,271.
The aggregate gains on exercise for all directors were thus £1,560,730 (2006: £343,748).
e) Directors’ share awards under the Spectris Performance Share Plan
| Number of shares subject 1 Jan 07 |
Granted during the year |
Exercised during |
Lapsed during |
Number of shares subject to award at 31 Dec 07 |
Market value of each share award (p) |
Date exercisable |
Expiry date | |||||||||
| J E O'Higgins | 56,000 | 56,000 | 622.5 | May 2009 | May 2010 | |||||||||||
| 35,500 | 35,500 | 865 | Mar 2010 | Mar 2011 | ||||||||||||
| 91,500 | ||||||||||||||||
| S C Harris | 24,000 | 24,000 | 622.5 | May 2009 | May 2010 | |||||||||||
| 20,500 | 20,500 | 865 | Mar 2010 | Mar 2011 | ||||||||||||
| 44,500 | ||||||||||||||||
| C G Watson | 6,500 | 6,500 | 640.0 | Oct 2009 | Oct 2010 | |||||||||||
| 21,500 | 21,500 | 865 | Mar 2010 | Mar 2011 | ||||||||||||
| 28,000 | ||||||||||||||||
| J C Webster | 24,500 | 24,500 | 622.5 | May 2009 | May 2010 | |||||||||||
| 20,500 | 20,500 | 865 | Mar 2010 | Mar 2011 | ||||||||||||
| 45,000 | ||||||||||||||||
| Total | 111,000 | 98,000 | 209,000 |
The above awards were made as conditional rights to acquire shares (structured as nominal cost options) and the number of shares awarded were based on the mid-market closing price of the company’s shares on the business day prior to the date of grant. In respect of the 2007 awards, for each of Mr O’Higgins, Mr Harris, Mr Watson and Mr Webster the value of the award was equivalent to 80%, 75%, 75% and 75%, respectively, of his base salary at the date of grant. Following satisfaction, in whole or part, of the performance criteria attaching to the award (as summarised here), the directors may call for the release to them of the vested shares during the above shown exercise periods.
The awards granted to Mr Harris lapsed on his leaving employment on 31 January 2008.
f) Directors’ interests
The following directors or their families had beneficial interests in the ordinary shares of the company:
| Shareholdings | ||||
| 2007 31 Dec (or date of resignation) |
2007 1 Jan (or date of appointment) |
|||
| J W Poulter | 85,315 | 142,687 | ||
| J E O'Higgins | 15,000 | 15,000 | ||
| P A Chambré | 5,000 | 5,000 | ||
| J L M Hughes | 4,000 | - | ||
| A J Reading | 10,000 | 10,000 | ||
| J A Warren | 3,000 | 3,000 | ||
| C G Watson | 8,832 | – | ||
| J C Webster | 100,126 | 100,126 | ||
| A F Given | 5,000 | 5,000 | ||
| S C Harris | 19,924 | 1,000 | ||
There were no changes to the above interests between the year end and the date of this report.
No director had during the year or at the end of the year any material interest in any contract of significance to the group’s business.
At 31 December 2007 the middle market closing share price on the London Stock Exchange was 680p. The highest share price in the year was 988.5p and the lowest was 657p. At 31 December 2007 each of the executive directors was deemed to have a non-beneficial interest in 20,780 (2006: 67,491) ordinary shares held by the Trustees of the Spectris plc Employee Benefit Trust of which the directors are among the class of discretionary beneficiaries.
By order of the Board
A J Reading
Chairman of the Committee
22 February 2008