Report of the remuneration committee

Remuneration committee

The remuneration committee is chaired by Mr Farnes with Messrs Neathercoat, Corbyn and Newell and Mrs de Moller serving throughout the year. None of the members who have served during the year had any personal interest in the matters decided by the committee, or any day-to-day involvement in the running of the business and, therefore, are considered to be independent.

The committee’s responsibilities include determining remuneration packages for the executive directors and selected other senior executives. It also oversees the operation of the group’s bonus scheme and performance share plan and considers whether the schemes encourage the taking of excessive business risk. The full terms of reference of the committee are available on the company’s website.

Hewitt New Bridge Street (HNBS) – a trading name of Hewitt Associates – was retained to provide independent assistance to the committee regarding the operation of the performance share plan and bonus scheme. In particular, HNBS determine the extent of vesting of outstanding share awards and ensure that the measures used for both schemes are comparable and consistent. Hewitt Associates provided no other services to the group during the year. No director had any involvement in determining his own remuneration although some of the matters considered by the committee were discussed with Mr Burns. The company secretary acted as secretary to the committee.

Remuneration policy

The key aims of the committee’s remuneration policy for senior executives are:

• to ensure that the company attracts, retains and motivates executives that have the skills and experience necessary to make a significant contribution to the delivery of the group’s objectives;
• to incentivise key executives by use of a remuneration package that is appropriately competitive with other real estate companies taking into account the experience and importance to the business of the individuals involved, whilst also having broad regard to levels of remuneration in similar sized FTSE 350 companies and that of the company’s senior management;
• to align, as far as possible, the interests of the senior executives with those of shareholders by providing a significant proportion of the directors’ total remuneration potential through a balanced mix of short and long-term performance related elements; and
• to ensure that incentive schemes are subject to appropriately stretching performance conditions and designed so as to be consistent with best practice.

Elements of remuneration package

A full review of executive remuneration arrangements was carried out by HNBS during 2007 and a revised remuneration structure applied from 2008. The committee is satisfied that this structure remains appropriate for 2010. The key elements of this structure are outlined below:

a) Base salary and benefits
Base salaries for executive directors are reviewed annually by the committee with changes being effective from 1st January. At the review carried out in December 2009, the committee agreed a basic increase of approximately 5% for 2010 which took into account the excellent performance of the management team over the past year and the increasingly competitive market in the sector for top performing executives. This follows the decision in 2008 to award no basic increase. The increase for 2010 does not apply to Mr Wisniewski who has only been recently appointed as finance director or to Mr Odom, who retired from the board in February 2010 and who will cease to be an employee following the AGM.

Messrs George, Williams and Silverman joined the board with below market salaries. The committee has, over a number of years, been awarding them additional salary increases above the basic increase, as a reflection of their increasing experience and importance to the business, so as to move them over time to an appropriate market benchmark. At the December 2009 review, the committee agreed an additional £20,000 increase for Messrs George and Williams. In respect of Mr Silverman, who joined the board more recently, the committee agreed an additional £30,000 increase which begins to close the gap between his salary and that of the other directors but which still leaves a significant differential. These amounts are in addition to the 5% basic increase awarded by the committee.

Resultant salaries effective from 1st January 2010, or the date of appointment if later, (2009 equivalents in brackets) are:

J.D. Burns £525,000 (£500,000),
S.P. Silver £450,000 (£425,000),
N.Q. George £335,000 (£300,000),
P.M. Williams £335,000 (£300,000),
D.M.A. Wisniewski £315,000 (n/a),
D.G. Silverman £275,000 (£235,000).

The executive directors receive a pension contribution worth 20% of base salary to a defined contribution scheme or a salary supplement in lieu of this contribution. The principal benefits in kind comprise a company car and medical insurance.

b) Annual bonus
The annual bonus structure remained unchanged in 2009 from 2008 and will be applied again in 2010. The scheme offers a maximum bonus potential for Messrs Burns and Silver of 150% of salary and for the other executive directors, 125% of salary.

Any bonus worth up to 100% of salary is paid in cash. Any bonus earned above 100% of salary is compulsorily deferred in shares with half released 12 months after award and the remainder released 24 months after award. These shares will be potentially forfeitable if the executive leaves prior to the share release date.

The bonus is based 75% on two financial measures, namely net asset value (NAV) growth compared to the total return of the properties in the IPD Central London Offices Index and total return (being NAV growth plus dividends) measured against that of other major real estate companies. An additional 25% is available for the committee to award at its discretion.

Provision has been made for an estimated bonus for 2009 of 62.5% of the maximum potential. In making this estimate, the committee has given due regard to the group’s total return performance which placed it in the upper quartile of the comparator group together with the other achievements outlined earlier in the report and accounts.

c) Long-term incentives
The group’s Performance Share Plan (PSP) was established in 2004, with a number of changes approved by shareholders at the 2008 AGM.

The maximum permitted annual award of shares under the plan is 200% of salary (with a higher limit of 300% of salary for use in the event of exceptional circumstances such as recruitment). The committee’s policy for 2010, consistent with 2009, is to limit awards to no more than 175% of salary for Messrs Burns and Silver and 150% of salary for other directors.

Vesting of awards under the PSP will normally occur to the extent that pre-set performance targets have been satisfied provided that the executive is still employed at the end of the three-year vesting period. Performance targets for awards granted in 2010 will be as follows:

• 50% of an award will be determined by the company’s total shareholder return (TSR) compared to that of the companies listed below:

  Big Yellow Group plc
  Capital & Regional plc
  Great Portland Estates plc
  Hammerson plc
  Land Securities plc
  Liberty International plc
  Minerva plc
  Quintain Estates and Development plc
  St Modwen Properties plc
  Segro plc
  Shaftesbury plc
  The British Land Company plc
  Workspace Group plc

  TSR will be measured over a single three-year performance period from the date of grant and will be calculated by comparing average performance over three months prior to the start and the end of the performance period. TSR calculations are performed independently for the committee by HNBS; and

• 50% of an award will be determined by the company’s NAV growth compared to the total return from properties in the IPD Central London Offices Index over the performance period. Performance will be measured over a single three-year period from the start of the financial year in which the award is granted.

This mix of measures is felt by the committee to be appropriate as it rewards executives for achieving above market levels of growth in asset value and above market returns to shareholders.

The committee will have discretion to reduce the extent of vesting in the event that it feels that performance against the relevant measure of performance (whether TSR or NAV growth) is inconsistent with underlying financial performance.

Awards will be satisfied by either newly issued shares or shares purchased in the market. Any use of newly issued shares will be limited to corporate governance compliant dilution limits contained in the scheme rules.

Details of outstanding share entitlements under the scheme, along with associated performance conditions, are set out in table 2 below.

Shareholding guideline

Following the independent review in 2007, and in line with best practice, the company has a share ownership guideline for executive directors requiring them to retain at least half of any share awards vesting from 1st January 2009 as shares (after paying any tax due on the shares) until they have a shareholding worth at least 100% of their salary (200% of salary for the CEO).

Service contracts

The service contracts of Messrs Burns and Silver are dated 20th May 1997 whilst those of Messrs George and Williams are dated 31st March 1999 and that of Mr Silverman 2nd January 2008. These contracts have no stated termination date but require 12 months’ notice of termination by the company or six months’ notice by the executive. A provision is included whereby the company will pay, by way of liquidated damages, a cash amount equivalent to 12 months’ salary, benefits in kind and a pension contribution or salary supplement of at least 20% of basic salary. No defined contractual entitlement to compensation arises from a change of control of the company. Mr Wisniewski’s service contract is dated 1st February 2010. His contract reflects the latest developments in employment law and practice, as advised by Slaughter and May and, in addition to terms similar to those of the other directors, includes certain post-termination restrictions and a mitigation clause. Under this mitigation clause, instead of paying the liquidated damages provision outlined above, the company can, at its discretion, alternatively make monthly payments throughout the notice period until the executive obtains an alternative employment at which point (except in the event of the company giving notice following a change of control) monthly payments cease or are reduced depending upon the value of remuneration arising from the alternative role. If this clause is used by the company, monthly payments would comprise one-twelfth of the total of his annual basic salary, annual pension contribution, annual value of benefits in kind and 20% of his maximum bonus potential.

Chairman and non-executive directors

The remuneration for the chairman is set by the full board. The remuneration for non-executive directors, which consists of fees for their services in connection with board and board committee meetings and, where relevant, for additional services such as chairing a board committee, is set by the whole board. Neither the chairman nor non-executive directors are eligible for pension scheme membership and do not participate in the company’s bonus or equity-settled incentive schemes.

The non-executive directors do not have service contracts and are appointed for three-year terms which expire as follows: Mr Neathercoat, 28th February 2011; Mr Ivey, 12th December 2011; Mr Corbyn, 23rd March 2012; Mr Farnes, 31st March 2012; and Mrs de Moller and Mr Newell, 31st January 2013. Mr Rayne has a letter of appointment, which runs for three years, expiring on 31st January 2013. In addition to his fee as chairman, it provides for a car, driver and secretary, together with a contribution to his office running costs. His letter of appointment also contains provisions relating to payment in lieu of notice, which are similar to those for the executive directors.

Under the rules of the group’s bonus scheme the level of the 2009 bonus entitlement can only be ascertained once the results of all the comparator companies have been announced.

The under-provision of the 2008 bonus, which has been recognised in the 2009 results, is the amount by which the final award under the bonus scheme exceeded the estimated amount included in the 2008 results. This revision was required because the committee could not determine the final bonus payments until the results of all the comparator companies had been announced (which followed the publication of last year’s remuneration report) and the group’s final ranking was higher than anticipated at the time that the estimate was prepared.

The total remuneration for 2008, which was previously disclosed as £4,162,000, has been revised to allow a correct comparison to be made between the two years.

Mr Burns received fees of £40,000 (2008: £40,000) in respect of his position as a non-executive director of The Davis Service Group. In accordance with the committee’s policy, the fees are retained by Mr Burns.

Details of the conditional share awards held by directors and employees under the group’s performance share plan at 31st December 2009 are given in table 2 below:

For all awards granted under the PSP:

• half of the shares vest based on TSR performance relative to a comparator group of companies. This element will only vest if the committee is also satisfied that the TSR performance reflects underlying financial performance; and
• half of the shares vest based on NAV performance compared to the total return of the properties in the IPD Central London Offices Index.

The TSR comparator group comprises the constituents, as at the date of grant, of the FTSE All-Share Real Estate Index for awards granted up to 2007 and a defined comparator group of real estate companies for awards in 2008 and 2009. The comparator group for 2010 is set out in the Elements of remuneration package section above. 25% of awards subject to the TSR target vest for median performance over the three-year performance period increasing to full vesting for upper quartile performance.

If the group’s NAV performance matches that of the median performing property in the index over the three-year performance period, 25% of awards subject to the NAV target vest. Vesting increases on a sliding scale to full vesting for matching the return from the upper quartile performing property in the index (awards up to 2007) or for out-performing the median performing property by 5% per annum (awards in 2008 and 2009).

The performance criteria in respect of the 2006 award were measured on 5th April 2009 and showed a vesting percentage of 36.5%. The balance of the awards lapsed. As required, before allowing any vesting, the committee considered whether the group’s TSR performance reflected its underlying financial performance. Having considered a range of key financial indicators, including profits and NAV performance, the committee concluded that this was the case.

Share option schemes

Details of the options held by directors and employees under the group’s executive share option schemes at 31st December 2009 are given in table 3 below.

No options were granted or lapsed during 2009 or 2008 and no options were exercised during 2008. The weighted average exercise price of options exercised in 2009 was £6.63 and the weighted average market price at the date of exercise was £12.03.

The exercise of options granted under the 1997 Executive Share Option Scheme is subject to a three-year performance criteria. This states that a year’s options can only be exercised once the growth of the group’s net asset value per share over a subsequent three-year period exceeds the increase of the IPD Central London Office Capital Growth Index over the same period by 6% or more.

All options other than those that become exercisable on 8th June 2009, have met this criteria.

Following the acquisition of LMS, options that had already vested under the LMS Executive Share Option Scheme were converted to options over Derwent London shares. Details of these options, all of which are exercisable, are given in table 4 below:

No options were granted, exercised or lapsed during 2009 and no options were granted during 2008. The weighted average exercise price of options exercised during 2008 was £11.27 and the weighted average market price at the date of exercise was £14.31.

In respect of the options outstanding at 31st December 2009 in table 4 the weighted average exercise price is £9.52 (2008: £9.52) and the weighted average remaining contracted life is 2.4 years (2008: 3.4 years).

The market price of the 5p ordinary shares at 31st December 2009 was £13.20 (2008: £7.25). During the year, they traded in a range between £4.60 and £13.89 (2008: £6.07 and £16.01).