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The directors present their remuneration report for the year ended 31 December 2006.

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, Andrew Given and John Warren. 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 relative importance of fixed and variable pay and considers the current balance to be appropriate.

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 performance of each executive director for approval by the remuneration committee. Salaries 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 corporate performance and it is intended that this balance should continue. Bonuses of up to 75% of base salary are achievable dependent upon the attainment of demanding targets set in relation to carefully considered business plans. In a typical year bonus payments will commence only at a level which shows an acceptable degree of financial progress year–on–year, whilst an outturn payment of around 35% is set at an achievable but stretching target. A profit before tax target range is established for bonus payments from 0% up to 50% of base salary. The remaining 25% bonus potential comprises two parts; a 0% to 15% element based on a highly stretching profit before tax or other financial target and a 0% to 10% element based on achievement of specific individual objectives. Such bonuses are not pensionable and the executive directors have undertaken that any bonus payment resulting from the 50-75% plan will, after deduction of tax, be used for the purchase of shares in the company until the intended once times salary shareholding is achieved.

Mr O'Higgins' and Mr Watson's bonus arrangements for 2006 incorporated contractual guarantees. For Mr O'Higgins the 25% bonus element was guaranteed at the maximum figure, with no guarantee in respect of the 50% profit before tax bonus. Mr Watson's bonus payment for 2006 across both bonus elements was guaranteed to be a minimum of 30%, with the outturn percentage, whether 30% or higher, being pro-rated to reflect his three months' service in the year. These entitlements were negotiated as part of the terms of their joining the company. There will be no guaranteed elements for either of them in the current or subsequent years.

75% bonuses were achieved in respect of 2006 performance.

Share-based incentives

It is intended that each executive director should, subject to personal circumstances, build (through the vesting of performance share awards, the exercise of option grants and the achievement of bonuses) a retained shareholding in Spectris plc greater than once times salary in value within a five-year period from appointment.

The remuneration committee keeps under constant 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 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 Annual General Meeting, 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 suitably 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 is to determine awards by reference to a base award over shares worth 67% of salary, which may then be flexed up or down depending on corporate and personal performance.

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 are summarised in the tables below:

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 further 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 2006 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, should the renewal of the scheme be approved by shareholders at the 2007 Annual General Meeting.

Mr Poulter retains certain of the share option grants received during his previous service as an executive director, but has not received any grants since 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 at the 2006 Annual General Meeting) or the 1999 executive share option scheme remain subject to prior achievement of performance conditions, requiring compound growth in earnings per share before exceptional items and amortisation of goodwill ("EPS") over three financial years to be ahead of the increase in the retail prices index ("RPI"). 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. EPS figures to be used will be those published in the audited accounts for each financial year. Following the transition to International Financial Reporting Standards, the remuneration committee will ensure that EPS figures continue also to be calculated on a UK GAAP basis to enable the base and final EPS figures to be calculated consistently.

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.

The contracts for all other executive directors only provide for a predetermined compensation payment in lieu of notice (equivalent to total notice period remuneration – salary, bonus and benefits) in the event of termination 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 Annual General Meeting.

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 €140,000 and €240,000. Base salaries for presidents of the group's US operations fall within a range between $160,000 and $260,000. Additionally, the group's presidents participate 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 capital employed over the year. Two-thirds of the bonus is paid in Year One with one-third of the bonus retained for 12 months. This can be grown by up to a further 50% in Year Two, subject to further growth in profitability in that year. The maximum payment is 75% 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 Annual General Meeting. 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 2006 of £100 invested in Spectris plc 5p ordinary shares on 31 December 2001 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.

This graph shows the value, by 31 December 2006, of £100 invested in Spectris on 31 December 2001 compared with the value of £100 in the FTSE 250 Index (excluding investment trusts). The other points plotted are the values at intervening financial year-ends.

Service contracts

The following table sets out a summary of the directors' service contracts or terms of appointment. Directors' service contracts now provide for termination on the director reaching the age of 65 in accordance with the Equality (Age) Regulations 2006.

Mr Harris' and Mr Webster's contracts provide for a predetermined compensation payment in lieu of notice (equivalent to total notice period remuneration – salary, bonus and benefits) in the event of termination 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.

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