Recommendations of Greenbury Committee -

Code of Best Practices

Introduction:
1. The purpose of the code is to set out best practice in determining and
accounting for Directors’ remuneration.
2. Detailed provisions have been prepared with large companies mainly
in mind, but the principles apply equally to smaller companies.
3. All listed companies in the UK should comply with the code to the
fullest extent practicable and include a statement about their compliance
in the annual report to the shareholders by their remuneration
Committees or elsewhere in their annual reports or accounts. Any areas
of non compliance should be explained and justified
Introduction (cont.):
4. The London Stock Exchange should introduce the following
continuing obligations for listed companies.
a. An obligation to include in their annual remuneration committee
reports to shareholders or their annual reports a general statement about
their compliance with Section A of the Code which should also explain
and justify any area of non compliance.
b. A specific obligation to comply with the provisions in Section B of the
Code which are not already covered by existing obligations and with
provision C 10 of the Code, subject to any changes of working which
may be desirable for legal or technical reasons.
5. Within Section B, provision B-3 requires remuneration committees to
confirm that full consideration has been given to Section C and D of the
Code.
 The Code
A. The Remuneration Committee:
1. To avoid potential conflict of interest, Board of Directors should set
up remuneration Committees of non-executive directors to determine on
their behalf and on behalf of shareholder within agreed terms of
reference the company’s policy on executive remuneration and specific
remuneration packages for each of the Executive directors including
pension rights and any compensation payments.
2. Remuneration Committee Chairman should account directly to the
shareholders through the means specified in this code for the decisions
their committees reach.
3. Where necessary, Company’s Articles of Association should be
amended to enable remuneration committees to discharge these functions
on behalf of the Board.
A. The Remuneration Committee (cont.):
4. Remuneration Committees should consist exclusively of Non-
executive Directors with no personal financial interest other than as
shareholders in the matters to be decided, no potential conflicts of
interests arising from cross directorships and no day to day involvement
in running the business.
5. The members of the Remuneration Committee should be listed each
year in the Committees’ report to shareholders (B1 below). When they
stand for re-election, the proxy cards should indicate their membership
of the Committee.
6. Th Board itself should determine the remuneration of the Non-
Executive Directors, including members of the remuneration committee,
within the limits set in the Articles of Association.
A. The Remuneration Committee (cont.):
7. Remuneration Committees should consult the company Chairman
and /or Chief Executive about their proposals and have access to
professional advice inside and outside the Company.
8. The Remuneration Committee Chairman should attend the Company’s
AGM to answers shareholders questions about the Directors
remuneration and should ensure that the company maintains contact as
required in the same way as for other matters.
9. The Committees Annual report to shareholders (B1 below) should not
be standard item of agenda for AGMs. But the Committee should
consider each year whether the circumstances are such that the AGM
should be invited to approve the policy set out in their report and should
minute the conclusions.
B. Disclosure and Approval Provision:
1. The Remuneration Committee should make a report each year to the
shareholders on behalf of the Board. The report should form part of, or
be annexed to, the Company’s Annual Report and Accounts. It should be
the main vehicle through which the Company accounts to the
shareholders for Directors’ remuneration.
2. The Report should set out the Company’s policy on executive
remuneration, including levels, comparator groups of companies,
individual components, performance criteria and measurements, pension
provisions, contracts of service and compensation commitments on early
termination.
3. The report should state that in framing its remuneration policy, the
Committee has given full consideration to the best practice provisions set
out in Sections C and D below.
B. Disclosure and Approval Provision (cont.):
4. The report should also include full details of all elements in the
remuneration package of each individual Director by name, such as basic
salary, benefits in kind, annual bonuses and long term incentive
schemes including share options.
5. Information on share options, including SAYE Options should be
given for each Director in accordance with the recommendation of the
Accounting Standards Board’s Urgent Issues Task force Abstract 10 and
its successors.
6. If grants under executive share options or other long term incentive
schemes are awarded in one large block rather than phased, the report
should explain and justify..
B. Disclosure and Approval Provision (cont.):
7. Also included in the report should be pension entitlements earned by
each individual director during the year, calculated on the basis to be
recommended by the Faculty of Actuaries and the Institute of Actuaries.
8. If annual bonuses or benefits in kind are pensionable the Report
should explain and justify.
9. The amounts received by and commitments made to each Director
under B4, B5 and B7 should be subject to audit.
10. Any service contracts which provide for, or imply, notice period in
excess of one year (or any provisions for predetermined compensation
on termination which exceed one years salary and benefits) should be
disclosed and the reasons for the longer notice period explained.
B. Disclosure and Approval Provision (cont.):
11. Shareholding and other relevant business interest and activities of the
Directors should continue to be disclosed as required in the Company’s
Acts and London Stock Exchange Listing Rules.
12. Shareholders should be invited specifically to approve all new long
term incentive schemes (including share options schemes) whether
payable in cash or shares in which Directors or Senior Executives will
participate which potentially commit shareholders’ funds over more than
one year or dilute the equity
C. Remuneration Policy:
1. Remuneration committees must provide the packages need to attract,
retain and motivate Directors of the quality required but should avoid
paying more than is necessary for the purpose.
2. Remuneration committees should judge where to position their
Company relative to other companies. They should be aware what other
comparable Company’s are paying and should take account of relative
performance.
3. Remuneration Committees should be sensitive to the wider scene,
including pay and employment conditions elsewhere in the Company,
specially when determining annual salary increases.
4. The performance related elements of remuneration should be designed
to align the interests of Directors and shareholders and to give Director’s
keen incentives to perform at the highest levels.
C. Remuneration Policy:
5. Remuneration committees should consider whether their Directors
should be eligible for annual bonuses. If so, performance conditions
should be relevant, stretching and designed to enhance the business.
Upper limits should always be considered. There may be a case for part
payment in shares to be held for a significant period.
6. Remuneration committees should consider whether their Directors
should be eligible for benefits under long term incentive schemes.
Traditional shares options schemes should be weighed against other
kinds of long term incentives schemes. In normal circumstances shares
granted should not vest and option should not be exercisable, in under
three years. Directors should be encouraged to hold their shares for a
further period after vesting or exercise subject to the need to finance any
costs of acquisitions and associated tax liability.
C. Remuneration Policy:
7. Any long term incentive schemes which are proposed should
preferably replace existing schemes or at least form part of a well
considered overall plan, incorporating existing schemes, which should be
approved as a whole by shareholders. The total rewards potentially
available should not be excessive (B12).
8. Grants under incentive schemes, including new grants under existing
share option schemes should be subject to challenging performance
criteria reflecting the company’s objectives. Consideration should be
given to criteria, which reflect the company’s performance relative to a
group of comparator companies in some key variables such as total
shareholder return
C. Remuneration Policy:
9. Grants under executive share options and other long term incentive
schemes should normally be phased rather than awarded in one large
block (B6).
10. Executive share options should never be issued at a discount.
11. Remuneration Committees should consider the pension
consequences and associated costs to the company of basic salary
increases, especially for Directors close to retirement.
12. In general, neither annual bonuses nor benefits in kind should be
pensionable (B8).
D. Service Contracts and Compensation:
1. Remuneration Committees should consider what compensation
commitments their Directors’ contracts of service, if any, would entail in
the event of early termination, particularly for unsatisfactory
performance.
2. There is strong case of setting notice or contract period at, or reducing
them to, one year or less (see B 10). Remuneration Committee should,
however, be sensitive and flexible, especially over timing. In some cases
notice or contract period of up to two years may be acceptable. Longer
period should be avoided wherever possible.
3. If it is necessary to offer longer notice or contract periods, such as
three years, to new Directors recruited from outside, such period should
reduce after the initial period.
D. Service Contracts and Compensation:
4. Within the legal constraints, remuneration committees should tailor
their approach in individual early termination cases to the wide variety
of circumstances. The broad aim should be to avoid rewarding poor
performance while dealing fairly with cases where departure is not due
to poor performance.
5. Remuneration Committees should take a robust time on payment of
compensation where performance has been unsatisfactory and on
reducing compensation to reflect departing Directors’ obligations to
mitigate damages by earning money elsewhere.
6. Where appropriate and in particular where notice or contract periods
exceed one year, companies should consider paying all or part of
compensation in installments rather than one lump-sum and reducing or
stopping payments when the former director takes on new employment.