Long-Term Incentive Arrangements
British Airways Performance Share Plan 2005
The British Airways Performance Share Plan (PSP) is the long-term incentive plan awarded to key senior executives of the Company, those most directly involved in shaping and delivering the medium- to long-term business goals of the Company. The plan was approved by shareholders at the annual general meeting in 2005. The PSP consists of an award of the Company’s shares which vests subject to the achievement of predefined performance conditions (see below) in full or in part at the third anniversary of award. No payment is required from individuals when the shares are awarded or when they vest. The Remuneration Committee supervises the operation of the PSP. Awards worth up to 150 per cent of an executive’s base salary can be granted under the PSP. For the 2008 award, both the Chief Executive and the Chief Financial Officer will receive this level of award. Other members of the Leadership team will receive awards equivalent to 100 per cent of their respective base salaries.
There are two performance conditions and these operate independently of each other. This means that meeting either of the conditions would trigger a payment without the need to meet the other performance condition. 50 per cent of each award will be subject to a Total Shareholder Return (TSR) performance condition, measured against a group of other airline companies, and the other 50 per cent will be subject to an average operating margin performance condition. The use of two separate but complementary performance conditions creates an alignment to both the airline industry (via the TSR measure) and also the Company’s internal financial performance measure (via the operating margin measure).
Both of these performance conditions will be measured over a single three-year performance period which begins on April 1 prior to the award date. The awards will not vest until the third anniversary of the date of award as mentioned on page 6 of the Remuneration Committe Report . The Remuneration Committee selected these performance conditions because they are challenging and aligned to shareholders’ interests.
TSR measures the financial benefits of holding a company’s shares and is determined by share price performance along with any dividends which are paid. None of the shares that are subject to the TSR performance condition will vest unless the Company’s TSR performance is at the median (50th percentile) of the airline comparator group. If median performance is achieved, 25 per cent of the shares (i.e. 12.5 per cent of the total award) vest. There is then a sliding scale at the top of which all of the shares vest in full (i.e. the full 50 per cent of shares which are subject to the TSR performance condition) if the Company’s TSR performance is at or above the upper quintile (top 20 per cent) of the comparator group. The comparator groups of airlines used in the 2005, 2006 and 2007 awards are shown in the table below:
| Air Canada | Lufthansa |
| Air France | Northwest Airlines |
| Air New Zealand | (2005 award only) |
| Alitalia | Qantas Airways |
| All Nippon Airlines | Ryanair |
| American Airlines | SAS |
| Cathay Pacific Airways | Singapore Airlines |
| Continental Airlines | Southwest Airlines |
| Delta Airlines | United Airlines |
| (2005 award only) | (2006 and 2007 awards only) |
| easyJet | US Airways |
| Iberia | (2006 and 2007 awards only) |
It is currently intended that the comparator group for awards that are made in 2008 will be the above companies, except that Air Berlin will replace Southwest Airlines. Southwest Airlines is not deemed to be a suitable comparator as its operation is confined to the US domestic market.
For the 50 per cent of the shares that are subject to the operating margin performance condition, vesting will be as follows:
| Average annual operating margin over performance period | ||||
|---|---|---|---|---|
| Award | Performance period | 0% vests | 25% of shares (ie. 12.5% of total award) vest | 100% of shares (ie. 50% of total award) vest |
| 2005 award | 2005/06 – 2007/08 | Less than 7% | 7% | 10%+ |
| 2006 award | 2006/07 – 2008/09 | Less than 8% | 8% | 10%+ |
| 2007 award | 2007/08 – 2009/10 | Less than 8% | 8% | 11%+ |
| 2008 award | 2008/09 – 2010/11 | Less than 5% | 5% | 10%+ |
A sliding scale of vesting operates for performance between the minimum and maximum vesting points.
As with previous awards under the PSP, the Remuneration Committee has set an operating margin target which takes into account anticipated market and economic conditions and is considered to be stretching.
Shareholding guideline
A shareholding guideline has been adopted, linked to the two share-based incentive schemes introduced in 2005, the Deferred Share Plan and the Performance Share Plan. Executives will be expected to retain no fewer than 50 per cent of the shares (net of tax) which vest from these two schemes until they have built up a shareholding equivalent to 100 per cent of basic salary. This policy aims to further align the interests of executives and shareholders.
British Airways Deferred Share Plan 2005
The British Airways Deferred Share Plan (DSP) was adopted by the Board in September 2005 and is the mechanism for delivering the deferred element of the annual bonus. The only award under the DSP to date was made in November 2006. An award of deferred shares to the value of 50 per cent of the bonus earned was made to qualifying executives. Other than on retirement or redundancy the shares will be subject to forfeiture if the executive leaves during the three-year deferral period. On vesting, executives will receive the benefit of any dividends paid over the deferred period.
For further information regarding these schemes, can be found on page 5, 6 and 7 of this report which contains details of awards to executive directors granted this year and in prior years under current and historic share incentive schemes and also see note 33 to the financial statements.
British Airways All-Employee Share Ownership Plans
In July 2000, the Company obtained shareholders’ approval to implement any aspect of the new all-employee share plans now known as share incentive plans. The approval permits the Company to operate a partnership share plan which would allow employees in the UK to buy shares from their pre-tax salary and would allow the Company to give matching or free shares to those participants in the share plan. Financial limitations would apply to any new plan. No plans are currently in operation.
Service contracts
Each of the two executive directors serving at the year end has a rolling contract with a one-year notice period. As a matter of policy, in the event of new external appointments, the length of service contracts would be determined by the Remuneration Committee in the light of the then prevailing market practice. However, the Remuneration Committee recognises that, in some cases, it may be necessary to offer a contract with a notice period in excess of one year in order to attract a new executive director. In these circumstances, the Remuneration Committee acknowledges that the notice period should reduce to one year after the initial period in accordance with paragraph B.1.6 of the Combined Code.
The service contracts for the serving directors include the following terms:
| Executive director | Date of contract | Unexpired term/notice period |
|---|---|---|
| Willie Walsh | March 8, 2005 | terminable on 12 months’ notice |
| Keith Williams | January 1, 2006 | terminable on 12 months’ notice |
There are no express provisions for compensation payable upon early termination of the executive directors’ contracts other than normal payments due during the notice period. In the event of early termination, the Company’s policy is to act fairly in all circumstances and the duty to mitigate would be taken into account. The Remuneration Committee has noted the ABI/NAPF joint statement on Executive Contracts and Severance. The executives’ contracts include a pay in lieu of notice provision and are subject to mitigation provisions during the second six months of the notice period. Neither of the contracts provides for compensation to be paid in the event of a change of control of the Company. Copies of the two service contracts can be viewed on the Company’s website.
External non-executive directorships
The Board encourages executive directors to broaden their experience outside the Company by taking up non-executive appointments from which they may retain any fee. The Company’s consent is required before an executive can accept such an appointment and permission will only be given in appropriate circumstances. During the year in question, Willie Walsh earned fees of €31,000 as a non-executive director of Fyffes Plc. He retired from the Board of Fyffes Plc on October 31, 2007.
Pension schemes
The Company has three main pension schemes. Two of these, APS and NAPS, are defined benefit schemes and are closed to new members. The third scheme, the British Airways Retirement Plan (BARP), has been available to new joiners since April 1, 2003 and is a defined contribution scheme. Willie Walsh is a member of BARP and receives a contribution of 12 per cent of salary. Keith Williams is a member of both NAPS and an unfunded unapproved retirement scheme. Provision for payment of a surviving dependant’s pension on death and lump sum payments for death in service is also made. Only basic salary is pensionable. Further details of pension provision are set out on page 4 of this report.