The following report from, and the recommendations of, the remuneration committee have been approved without amendment by the board for submission to shareholders.
Composition and terms of reference
During the financial year ended 31 March 2003 the members of the remuneration committee were Lord Renwick of Clifton (in the chair), Mr Kahn, Lord Fellowes (from September 2002), Mr Manser and Mr Morland. Following completion of the acquisition of Miller, Mr Bible joined meetings as an observer.
The remuneration committee deals with the remuneration of the executive directors and other members of the executive committee, as well as approving all grants and awards under the company's share incentive plans. Consideration is also given to the company's group-wide compensation and incentive policies to ensure alignment.
In the course of its deliberations, the remuneration committee has considered the views of the chief executive, Mr Mackay, on the remuneration and performance of his colleagues on the executive committee. The group secretary, Mr Tonkinson, and the group human resources director, Mr Nel, have also provided information relating to such matters as expatriate pay for international deployments and equity usage through share incentive plans.
The remuneration committee has continued to employ Mercer Human Resource Consulting (Mercer), which provides advice to the company on pensions and risk matters, to provide independent market information and remuneration advice on an ongoing basis. Other advisors, including Lovells, the company's legal advisors, and Channel Consulting in South Africa have also provided information and advice as required for the remuneration committee to fulfil its responsibilities.
The remuneration committee has operated a framework of policies, within which it has set the remuneration package for each executive director, which applies the principles of Section 1 of the Combined Code and the Code of Best Practice. It is the policy of the remuneration committee that executive directors should have 12-month contracts. Current practice fully complies with this policy.
The overall policy of the remuneration committee has been to ensure that executive directors and senior managers are rewarded for their contribution to the group's operating and financial performance at levels which take account of industry, market and country benchmarks. The basic objective of the policy is that members of the executive committee should receive remuneration which is appropriate to their scale of responsibility and performance and which will attract, motivate and retain individuals of the necessary calibre.
In the application of its policy, the remuneration committee also has had regard to the necessity of being competitive in the different parts of the world in which the company operates.
The remuneration committee has implemented its policy by providing for each executive director a remuneration package comprised of annual base salary, an annual cash bonus plan, long-term incentives through participation in share option and performance share plans, pension contributions, other security and health benefits and benefits in kind. The base salaries, pensions and other benefits provided are intended to establish a level of "fixed" pay which is competitive with the median provision of the chosen comparators. The variable pay elements provided by short and long-term incentives are intended to provide superior total pay opportunities if the company's performance merits that.
The short-term and long-term incentives provided to the executives have been based on multiples of base pay and have been provided under plans, details of which are set out in the following pages. In order to promote an identity of interest with shareholders, share incentives are considered to be critical elements of executive remuneration policy.
The remuneration committee has also been examining ways to target salaries at the median but to provide the opportunity through short and long-term incentives for executives to receive upper quartile pay for superior performance. As a result the remuneration committee has been reviewing both the structure and levels of short-term incentive opportunity to keep them in line with market practice. Full disclosure will be provided to shareholders of any changes to the annual bonus plan.
Executive directors' salaries
For those executives whose primary responsibilities were for operations of business units outside the UK, part of base pay was also related to appropriate benchmarks in their theatres of operation. Information from Channel Consulting in South Africa on market pay levels for chief executives of companies comparable to those of SABMiller's regional operations showed the need for substantial adjustments to maintain appropriately competitive pay levels for the two executives based there.
In the cases of Mr Lloyd, Mr Mackay and Mr Wyman,100% of salary was determined by reference to the UK market. In the case of Mr Adami, salary was determined on the assessment that 40% of his time was spent on SABMiller plc duties and therefore related to the UK market, while 60% was on duties for The South African Breweries Ltd and related to the South African market. In the cases of Mr Parker and Mr Simms,the applicable percentages were 30% on SABMiller plc duties and 70% on duties in the Africa and Asia and European divisions with headquarters in South Africa and Hungary, respectively.
Following the enlargement, increased market capitalisation and greater complexity of the group, at its September 2002 meeting the remuneration committee reviewed and revised the salaries of Mr Mackay and Mr Wyman, with effect from 9 July 2002 (when the Miller transaction was approved), as the remaining two executive directors of the group, to align them with those of their comparators in FTSE 100 companies of similar market capitalisation.
Details of their revised salaries applying from 1 April 2002 and from 9 July 2002, and the percentage changes from 31 March 2002 levels are shown in the table below:
|Executive directors' at 31 March 2003||Effective date||2003
|E A G Mackay||From 1/4/02||575,000||508,800|
|M I Wyman||From 1/4/02||355,000||315,000|
|Details of salaries paid to the former executive directors for the period from 1 April 2002 to 31 July 2002 are given in the table of directors' emoluments on page 52. Short- and long-term incentive remuneration, described in the following paragraphs is determined annually as a factor or multiple of basic salary and is awarded, or vests, as the case may be, in a strict relationship to pre-set performance targets.|
Annual incentive plans
In addition to base salary, each of the executive directors and members of the executive committee was entitled to participate in an annual bonus plan to reward the achievement of group financial, divisional financial (where applicable), strategic and personal performance objectives agreed by the remuneration committee. Under this plan the chief executive might earn a bonus of up to 80% of base salary and the chief financial officer and other executive committee members up to 65%.
For the chief executive, the chief financial officer and Mr Lloyd the proportions of maximum bonus derived from the different sets of measures were 60% group financials, 20% strategic objectives and 20% personal objectives. For the other executive directors the proportions of maximum bonus derived from the different sets of measures were 30% group financials, 40% divisional financials and 30% strategic and personal objectives.
At its meeting on 21 May 2003, the remuneration committee received assessments of the performance of the executives participating in the bonus plans against their agreed targets. In the light of the financial performance of the company and the achievement of a significant increase in the group's earnings per share, the remuneration committee agreed the payments of bonuses as shown below to the executive directors:
|2003 bonus||% of Salary||2002 bonus|
|E A G Mackay||£425,000||68||£275,000|
|M I Wyman||£215,000||55||£160,000|
Long Term Incentive Plans
Share Option Schemes
On the acquisition of Miller Brewing Company, shareholders approved the establishment of share incentive arrangements for employees of the company principally in the Americas. These arrangements have taken form in the SABMiller International Employee Share Scheme and the SABMiller International Employee Stock Appreciation Rights Scheme.
All grants of options or rights over shares under these plans have to be at the market value of the company's shares at the time of grant.
Executive directors have only been permitted to participate in the Approved Share Option Scheme (in which participation is limited at any time to £30,000 of outstanding options) and the Executive Share Option No 2 Scheme. In the latter scheme grants are made on an annual basis to a maximum of 200% of the chief executive's base salary and 150% of the chief financial officer's base salary (other executive committee members may be granted up to either 125% or 150%, depending on their roles and responsibilities), following changes agreed in 2001.
Options granted under the Approved and the No 2 Schemes may normally only be exercised between three and ten years after grant. The right to exercise is dependent on the achievement of adjusted earnings per share (eps) growth targets, calculated on the basis of the definition of Headline Earnings in the Institute of Investment Management and Research's Statement of Investment Practice No.1, chosen because of their ready visibility both to executives and to shareholders:
Performance Share Award Scheme
Normally awards under this plan are made annually to a value of 100% of base salary for the chief executive, 75% of base salary for other executive directors and up to 50% of base salary for other senior executives. The table on page 55 gives details of the awards made in 2002 and awards still outstanding from previous years.
For normal awards under this plan, vesting will only occur if over the three years after grant the company's total shareholder return (TSR) exceeds the median TSR of a comparator group of companies identified at the time of award. For the June 2000 awards the comparator group comprised both brewing and other beverage companies to reflect the company's presence in non-alcoholic beverages. For the June 2001 and May 2002 awards the comparator group was refined to focus only on international brewers, reflecting the company's strategic priority.
On exceeding the median performance of the relevant comparator group, 25% of the award will vest and on reaching the upper quartile, 100% of the award will vest. Between these levels of achievement awards vest pro rata. TSR is calculated using the equation:
TSR = (1+ Z)XY
where X is the base price (the average of the daily closing share prices over the three months preceding the start of the measurement period); Y is the final price (the average of the daily closing share prices over the three months immediately preceding the end of the measurement period); and Z is the sum of the fractions of an ordinary share purchaseable by reinvestment of the dividends paid during the measurement period on the relevant payment dates. Relative TSR was chosen as the performance measure because it allows for performance to be measured relative to other companies and reflects the benefit to shareholders of management effort.
The board disclosed in the shareholder circular on the acquisition of Miller Brewing Company its intention of making additional performance share awards to the chief executive and chief financial officer of 240,000 and 160,000 shares, respectively. The board considered it important to strengthen the remaining executive directors' alignment with shareholder interests and to retain them during the demanding period of integration that lies ahead, to secure value creation for shareholders of SABMiller plc.
The board had undertaken extensive consultations with institutional shareholders and shareholder representative bodies before deciding that exceptional performance share awards were the best way to accomplish this. Those special awards were made within the rules of the SABMiller plc Performance Share Award Scheme with effect from 9 July 2002, the date of the completion of the transaction, and were as set out in this table.
Each award may vest after three years, dependent on the performance achieved and subject to continued employment of the executive. At the third anniversary of the effective date of the awards the remuneration committee will consider the performance of the company over the period, looking at:
The base price for the TSR calculation will be 477p, the average of the daily closing share price in the three months to 3 April 2002 (the last dealing day prior to confirmation that SAB plc was in talks to acquire Miller Brewing Company). The comparator group is the same 15 companies above and 15 companies below SAB plc in the FTSE 100 on 28 March 2002 used as the reference group for the 2002 executive pay reviews.The companies comprising the TSR comparator groups for all the Performance Share Awards which had not yet vested or lapsed at 31 March 2003 are listed below:
|June 2000 awards||June 2001 and May 2002 awards|
|Cadbury Schweppes||Asia Pacific Breweries|
|Coca-Cola Beverages||Carlsberg A|
|Diageo Coors||Adolph B|
|Fosters Brewing Group||Femsa UBD|
|Greene King||Fosters Brewing Group|
|Grolsch (Kon)||Greene King|
|Kirin Brewery||Hartwall A*|
|Scottish & Newcastle||Kirin Brewery|
|Whitbread Holdings||Lion Nathan|
|Wolverhampton & Dudley||Molson A|
San Miguel B
Scottish & Newcastle
|Wolverhampton & Dudley|
|*Hartwall was acquired by Scottish & Newcastle in December 2002 and has been removed from the group for future measurement.|
July 2002 awards
3i Group, Alliance & Leicester, Allied Domecq, Amersham, Associated British Foods, BOC Group, Cable & Wireless, Dixons, Friends Provident, Gallaher Group, Granada, Hanson, Hilton Group, ICI, Invensys, Kingfisher, Land Securities, Next, Old Mutual, P&O Princess Cruising, Powergen, Rentokil Initial, Royal & Sun Alliance, Scottish & Newcastle, Scottish & Southern Energy, Smith & Nephew, Smiths Group, United Utilities,Wm Morrison Supermarkets, Wolseley.
During the year the company made contributions for the executive directors to the SABMiller Executive Pension Scheme, an Approved Occupational Pension Scheme established as a self-administered money purchase scheme. The rate of contribution paid in respect of each executive director's £ sterling based salaries was 15.6%, to the extent allowed by the earnings cap. Contributions in relation to salary above the earnings cap were given as additional taxable pay. Having elected not to join the scheme, Mr Simms was given his contributions entirely as additional taxable pay.
The Committee intends to review the age-related adequacy of contribution levels in the year ahead. Contributions for the South African based executives were also made in regard to their Rand base salaries to defined contribution group retirement schemes of their employer companies in South Africa, in accordance with the rules of those schemes on a continuation basis at the rate of 19.8% of base salaries.
The value of contributions made to each executive director in regard to qualifying service during the financial year is included in the Summary of Emoluments Paid table.
It is the group's policy to provide occupational retirement funding schemes on a money purchase basis wherever possible so as to minimise the company's funding risk. Where feasible, the company applies this policy to its new acquisitions.
Service contracts of all the executives are renewable annually on a rolling basis. Notice to be given by the executives to the company or its subsidiaries under their contracts is 12 months. Notice to be given by the company to the executives is 12 months. Mr Lloyd, Mr Mackay and Mr Wyman had service contracts with the company.
Mr Simms had separate service contracts with the company, for duties
in relation to the company, and with South African Breweries International
Management Ltd (a Guernsey-based subsidiary of the company) for his
role in the management of the European operations.
The subsidiary service contracts, where in place, are subservient to the SABMiller plc contracts.
Under the service contracts with the company, a payment in lieu of notice may be made on termination of employment. Such payment shall be calculated by reference to the executive's base salary plus company pension contributions for the relevant period, less any deduction considered by the company to be appropriate and reasonable to take account of accelerated receipt and the executive's duty to mitigate his loss.
During the year, as a consequence of the acquisition of Miller Brewing Company, Mr Adami, Mr Lloyd, Mr Parker and Mr Simms agreed to resign as directors of the company and their service contracts were varied accordingly.
The execution dates of the contracts of Mr Mackay and Mr Wyman were, respectively, 27 February 1999 and 26 February 1999.
The executive directors are provided with medical insurance, permanent health insurance, company car or car allowance (at their choice) and death in service benefit. Mr Lloyd has continued to receive housing allowance at the rate of £8,333 per month to assist with the cost of accommodation following his relocation to the UK, subject to a 36-month limit.
Non-executive directors' fees
For membership of the audit, remuneration or corporate accountability and risk assurance (CARAC) committees over a full year a non-executive director will receive a fee of £5,000; as chair of the audit, remuneration or CARAC committees a non-executive director will receive a fee of £6,000 over a full year. Membership of the nomination committee attracts no additional fees but the chair of that committee receives an additional £8,000. As senior non-executive director, Lord Fellowes receives an additional fee for this role of £5,000 pa.