Information not subject to audit
Members: Dr Martin Read (Chairman), Maarten van den Bergh, Alison Reed, Jim Lawrence (from January 1, 2008).
Committee and advisers
The Company’s Remuneration Committee determines on behalf of the Board, within the agreed terms of reference, the overall remuneration packages for the executive directors, the members of the Leadership team, the Chairman and the Company Secretary. Its members are all independent non-executive directors of the Company, none of whom has any personal financial interest, other than as a shareholder, in the matters to be decided.
The Company currently participates in four main salary survey sources – run by Hay, Monks (PwC), New Bridge Street Consultants and Towers Perrin. Data is extracted from each of these in determining the Company’s approach to base-pay market rates, and identifying competitive market practice in respect of the other remuneration elements. The Remuneration Committee is aware of the risk of an upward ratcheting of remuneration that can result from the use of pay surveys.
New Bridge Street Consultants LLP (which became Hewitt New Bridge Street on March 18, 2008 (Hewitt)) are advisers to the Remuneration Committee and gave advice to the Committee that materially assisted it. Their terms of reference are available for inspection on the Company’s investor relations website. The Chairman, Chief Executive, Chief Financial Officer, Company Secretary, Acting Director for People, Director People and Organisational Effectiveness and Reward Manager, all assisted the Committee in its deliberations but none of them participated in any decisions relating to their own remuneration. None of those who materially assisted the Committee in its deliberations was appointed by the Remuneration Committee other than Hewitt. Towers Perrin and Hay provided no other services to the Company other than advice on remuneration matters during 2007/08. In addition to its advice on remuneration, Hewitt also provided some advice to the Company on general employee reward and on pensions. PwC also provided other services relating to the Internal Control function of the Company.
Where appropriate, the Committee consults with investors about its proposals. The terms of reference of the Committee are available on the Company’s website.
Executive directors
Policy
The Company’s remuneration policy was first approved by shareholders at the annual general meeting in 2001 and remains unchanged both in relation to the year under review and 2008/09 as well as for the foreseeable future.
The Company’s remuneration policy is to provide compensation packages at market rates which reward successful performance and attract, retain and motivate managers. The remuneration packages offered by the Company are comparable with other UK-based international businesses of similar size and nature to the Company.
In fixing packages, the Committee has regard to the compensation commitments which would result in the event of early termination.
Remuneration package
The Committee reviewed the remuneration package for executive directors during the year to ensure that it remains consistent with this policy. It concluded that the structure of the existing package remains generally appropriate, but that the executive directors’ total target remuneration was significantly below market median, primarily due to below-market levels of incentive opportunity. The Committee considers that the Chief Executive and Chief Financial Officer are high calibre, talented individuals and that the Company needs to offer its senior executives competitive remuneration packages with a sufficient level of incentive pay to retain them and to reward them appropriately if the Company performs well. Therefore, as noted below, following consultation with the Company’s major shareholders and the main shareholder bodies, the Committee decided to increase the bonus maximum for the executive directors for 2008/09. The proposed changes are intended to bring the executive directors’ total target remuneration closer to the market median.
The package for the executive directors for 2007/08 and 2008/09 consists of a basic salary, benefits-in-kind (including private healthcare, a car and fuel and non-contractual travel concessions), pension, an annual bonus scheme (including a deferred element payable in shares) and participation in the Performance Share Plan. The proportion of performance-related variable remuneration, through the bonus scheme and awards under the Performance Share Plan, is approximately 60 per cent of total target remuneration (excluding pension arrangements).
The policy in relation to base salaries aims to target base salaries at around the market median. The strategy for incentive pay is intended to increase the expected value to make the package more market-competitive for executive directors, but to retain as its aim the achievement of a market median value, subject to the achievement of stretching targets. Between them, the elements of the remuneration package provide a good balance between the achievement of short- and longer-term goals linked to the creation of shareholder value.
Basic salary
The basic salary reflects the level of responsibility of the executive director, his or her market value and individual performance. The Committee’s objective is to offer basic salaries around the market median level. In reviewing basic salary, independent external advice is taken on salaries for comparable jobs in similar companies from the survey sources referred to previously. The Committee has regard to the performance of the individuals and the pay and employment conditions elsewhere in the Company when determining annual salary increases.
The Committee has recently reviewed base salaries and from July 1, 2008, Willie Walsh’s base salary will be £735,000 and Keith Williams’ will be £440,000.
Annual bonus
The amount of annual bonus available for distribution to senior executives for 2007/08 was subject to a maximum limit of 100 per cent of salary.
An executive director was potentially able to earn up to 10 per cent of salary based on his personal contribution against objectives. In addition, whatever was earned for personal performance was then subject to a multiplier based on the Company’s performance against the following measures:
| Performance measure | Potential multiplier |
|---|---|
| Operating margin | Up to 4.5 x |
| Customer recommendation | Up to 1.5 x |
| Punctuality | Up to 1.5 x |
| Employee involvement | Up to 1.5 x |
No multiplier was to be applied unless the minimum operating margin target was achieved. The Committee retained discretion to prevent any bonus payments if the Company’s performance was judged by it to be inadequate.
The Company achieved its operating margin target of 10 per cent, but did not achieve its targets in respect of customer recommendation, punctuality and employee involvement, and no bonus multiplier was awarded in respect of these measures.
Half of the bonus is payable in the form of deferred shares (under the British Airways Deferred Share Plan) which vest after three years (as detailed on page 2 of Report of the Remuneration Committee), normally subject to continued employment over that period. On vesting, executives will receive the benefit of any dividends paid over the deferral period.
For 2008/09, an executive director’s bonus will be based one third on operating margin, one third on customer recommendation and one third on punctuality. The Committee will continue to set demanding targets on each of these measures. Unlike previous years, these three measures will operate independently. However, no bonus will be payable on the customer recommendation or punctuality measures unless the Company reports a pre-tax profit. The Committee was not satisfied that the employee involvement measure used in 2007/08 was appropriate for use in 2008/09 and has asked that this should be reviewed over the next year with a view to reintroducing it in 2009/2010.
As was mentioned above, the Committee decided to increase the bonus maximum for the Chief Executive and Chief Financial Officer for 2008/09. Accordingly, a total maximum of 150 per cent and 125 per cent of salary respectively would be available if the Company achieved the maximum performance on all of the three measures. The amount of bonus awarded is then determined according to personal performance. If nothing is earned on the Company measures, up to 15 per cent of salary and 12.5 per cent of salary is payable as a cash-only bonus for personal performance. Otherwise half of any bonus will be payable in the form of deferred shares as was the case for 2007/08. The Committee also retains discretion to prevent any bonus payments if the Company’s performance is judged by it to be inadequate.