Part 1 of this Report sets out the Company’s remuneration policies for the Directors for the year ended 30 September 2009. These policies are likely to continue to apply in future years, unless there are specific reasons for change, in which case shareholders will be informed appropriately. Part 2 sets out audited details of the remuneration received by Directors during the year ended 30 September 2009.

 

 

PART 1. REMUNERATION POLICIES (NOT SUBJECT TO AUDIT)

EXECUTIVE DIRECTORS  

 

Remuneration Committee

 The Remuneration Committee is responsible for developing the remuneration policy for the Executive Directors and for determining their individual packages and terms of service. In establishing this policy, and to ensure consistency with the arrangements for other management levels, the Remuneration Committee has regard to pay and conditions throughout the Group and is also responsible for setting the remuneration packages of the executive management team. The Committee’s terms of reference are available on the Company’s website.

 

The Committee met 5 times during the year. The composition of the Committee has remained unchanged during the year and comprises Mr. D.R. Evans (Chairman), Sir Richard Needham and Mrs. S.J. Pirie. The Chief Executive, Mr. P.C. Slabbert and the Company Secretary, Mr. M. Ingrey-Counter, are invited to attend meetings except when matters relating to their own remuneration arrangements are discussed. The Committee also uses external independent professional advisers. During the year an executive salary benchmarking report was commissioned from Ernst & Young LLP.  KPMG is the Company's independent actuarial advisor on pension matters and  will provide the Committee with information on executive pension arrangements when required. New Bridge Street Consultants provide performance monitoring data for review by the Committee in relation to the Performance Share Plan.

 

Guiding Policy

The Remuneration Committee’s aim is to ensure that the structure of executive remuneration supports the achievement of the Company’s performance objectives and, in turn, increases shareholder value. The Remuneration Committee reviews executive remuneration arrangements regularly to ensure that they remain effective, competitive and appropriate to the Group’s circumstances and prospects, and monitors incentive award levels and consequent company liabilities.

 

The Company’s guiding policy on executive remuneration is that:

 

§       executive remuneration packages should take into account the linkage between pay and performance by both rewarding effective management and by making the enhancement of shareholder value a critical success factor in the setting of incentives, both in the short and the long term; and

 

§       the overall level of salary, incentives, pension and other benefits should be competitive when compared with other companies of a similar size and global spread.

 

Remuneration elements

Executive remuneration comprises four elements: annual salary; short-term bonus; longer-term performance shares and other benefits (including pension). In line with the Company’s emphasis on performance-related pay, bonus payments are dependent on the Company’s annual financial performance, while the receipt of performance shares is dependent on enhanced relative returns to shareholders over a three-year period. The following table illustrates the proportion of variable pay to base salary for the Chief Executive and the Group Finance Director for 2009/10, assuming target or maximum performance related pay.

 

Proportion of performance related pay to salary

Salary

In setting salary levels, the Remuneration Committee considers the experience and responsibility of executives and their personal performance during the previous year. The Committee also takes account of salary levels within other companies of a similar size and global spread, as well as the rates of increases for other employees within the Company. The Remuneration Committee reviews salaries with effect from January each year.

 

The annual base salary as at 30 September 2009 for Mr. P.C.Slabbert is £220,000 and for Mr. A.G.Lewis is £135,000.

 

Annual bonus

The executives' annual bonus arrangements are focused on the achievement of the Company’s short-term financial objectives. Before the start of each year, the Remuneration Committee sets financial performance targets for the year. These are designed to be stretching and for the bonus for 2009/10 will be based on the following:

 

§  Group PBIT budget achievement (30%)

§  Year on year PBITE growth (30%)

§  The ratio of Group operating cashflow to Group operating profit (30%)

§  Achievement of personal performance targets (10%)

 

The maximum bonus potential for 2009/10 under these arrangements is 80% of salary for the Chief Executive and 70% of salary for the Group Finance Director. Bonus payments are not pensionable.

 

Profit Incentive Bonus Scheme (PIBS)

In 2009 the Remuneration Committee approved the continuation of the Profit Incentive Bonus Scheme as a short-term measure to focus the attention of the senior managers only on the immediate objective of improving the Company's profitability. Performance is measured quarterly against a Group budgeted profit figure. When this is equalled or exceeded, participants receive $5,000. The maximum annual bonus amount is $20,000. The Executive Directors and other members of the executive team participated in the scheme as part of the eligible group throughout the last financial year, during which three of the four awards were payable. The scheme will continue in 2010 but will exclude the eight members of the Executive team.

 

Performance Share Plan (PSP)

The Remuneration Committee introduced this Plan with shareholder approval at the AGM in 2002 and this year shareholders are being asked to approve a replacement. The existing Plan came into effect from 1 October 2001, with the aim of motivating Executive Directors and other senior executives to achieve performance superior to the Company’s peers and to deliver sustainable improvement in shareholder returns. This is reflected in the Plan’s performance condition which compares the total return received by the Company’s shareholders in terms of share price growth and dividends (total shareholder return or “TSR”) over a period of time with the total returns received by shareholders in companies within a pre­determined and appropriate comparator group.

 

Under the Plan, Executive Directors and a limited number of other senior executives receive conditional share awards (which may be in the form of nil-cost options) in respect of the Company’s shares. The actual number of shares that each participant receives depends on the Company’s TSR performance over a three-year period compared to the TSR performance within a comparator group comprising the FTSE SmallCap index, excluding investment trusts. Over a three year period:

 

§  If the Company’s TSR performance is below the median TSR of the comparator group, no shares will vest.

§  If the Company’s TSR performance is equal to the median TSR of the comparator group, 40% of the shares may vest.

§  If the Company’s TSR performance is equal to, or exceeds, the upper quartile TSR of the comparator group, 100% of the shares may vest.

§  If the Company’s TSR performance is between the median and upper quartile TSR of the comparator group, shares may vest on a pro-rata basis.

 

The above schedule reflects the Remuneration Committee’s intention to reward only TSR performance which outperforms the comparator group and the same measures are proposed for the 2010 Plan. In addition, the Committee may reduce the number of shares which will vest or decide that no shares will vest if it considers that the financial performance of the Company or the performance of the participant does not justify vesting.

 

The maximum value that can be granted under the Plan in any year is 100% of salary. It is the Remuneration Committee’s current intention that, as before, only the Chief Executive should receive the maximum conditional grant, with the Group Finance Director receiving 80% of salary.

 

The above schedule reflects the Remuneration Committee’s intention to reward only TSR performance which outperforms the comparator group and the same measures are proposed for the 2010 Plan. In addition, the Committee may reduce the number of shares which will vest or decide that no shares will vest if it considers that the financial performance of the Company or the performance of the participant does not justify vesting.

 

The maximum value that can be granted under the Plan in any year is 100% of salary. It is the Remuneration Committee’s current intention that, as before, only the Chief Executive should receive the maximum conditional grant, with the Group Finance Director receiving 80% of salary.

 

Performance graph

The following graph illustrates the total return, in terms of share price growth and dividends on a notional investment of £100 in the Company over the last three years relative to the FTSE Small Cap Index (excluding investment trusts). This index was chosen by the Remuneration Committee as a competitive indicator of general UK market performance for companies of a similar size.

Shareholding guidelines

Under shareholding guidelines approved during 2004, executives participating in the Performance Share Plan during the year are required to build up and retain a shareholding in the Company. For Executive Directors the shareholding requirement is equivalent to 1.5 times base salary and for other executives the shareholding requirement is equivalent to 1.0 times base salary. The Executive Directors and senior executives are required to retain a portion of any awards that vest under the Performance Share Plan until their respective shareholding guideline is met.

 

 

Dilution

The Company reviews the awards of shares made under the various all-employee and executive share plans in terms of their effect on dilution limits. In respect of the 5% and 10% limits recommended by the Association of British Insurers, the relevant percentages were 4.64% and 7.03% respectively based on the issued share capital at 30 September 2009. Under the 2010 Plan it is proposed to increase the 5% limit to 10%.  It has been the Company’s practice to use an Employee Share Ownership Trust in order to meet its liability for shares awarded under the Performance Share Plan. At 30 September 2009 there were 666,191 shares held in the Employee Share Ownership Trust which will either be used to satisfy awards granted under the Plan to date, or in connection with awards to be made under the 2010 Plan, if approved. A Hedging Committee has been established to ensure that the Employee Share Ownership Trust holds sufficient shares to satisfy existing awards made under the Plan and any future awards to be made under the 2010 Plan, if approved, by buying shares in the market or causing the Company to issue new shares.  

 

Pensions and other benefits

The current Executive Directors (Mr. P.C. Slabbert and Mr. A.G. Lewis) are both based in the UK and are members of the Avon Rubber Retirement and Death Benefits Plan. Until 30 September 2009, when the final salary section of the Plan closed to future accrual of benefits, Mr. Slabbert was a member of the Senior Executive Section which provided members with a defined level of benefit on retirement depending on length of service and earnings. Members can receive a pension of up to two-thirds of pensionable salary on retirement from age 60, provided the minimum service requirement of 20 years has been met. On death in service, a lump sum of four times pensionable salary is paid, along with a spouses’ pension of one half of the member’s prospective pension. When an Executive Director dies after retirement, a spouse’s pension of one half of the member’s pension is paid. During the year, Mr Slabbert, like all members, has been required to make contributions to the scheme at a rate of 7.5% of salary. For the year commencing 1 October 2009 Mr. Slabbert is a member of the money purchase section of the Plan (see below).

 

In line with Company policy for new employees in the UK, any UK-based Executive Directors joining the Company with effect from 1 February 2003 are offered defined contribution arrangements.

 

Mr. Lewis is therefore a member of the money purchase section of the Plan. Members receive a pension based upon the size of their retirement account on retirement from age 65. On death in service, a lump sum of four times pensionable salary is paid, along with a spouses’ pension of one quarter of the member’s pensionable salary. Both Mr Slabbert and Mr Lewis receive a company pension contribution of 15% of salary.

 

Executive Directors’ basic salaries are the only pensionable element of their remuneration packages. Executive Directors are entitled to participate in employee healthcare plans and to receive a car allowance and related expenses.

 

Neither of the Executive Directors is currently appointed as a non-executive director of any limited company outside the Group. The Remuneration Committee will establish a policy on the treatment of any fees received by Executive Directors in respect of such non-executive roles when required.

 

 

Contracts

The Company’s policy is that Executive Directors should normally be employed on a contract which may be terminated either by the Company or the Executive Director giving 12 months notice and which otherwise expires on retirement, currently at age 60 for Mr. Slabbert and age 65 for Mr. Lewis. The Company may terminate the contract early without cause by making a payment in lieu of notice by monthly instalments of salary and benefits to a maximum of 12 months, with reductions for any amounts received from providing services to others during this period.

 

The Remuneration Committee may vary these terms if the particular circumstances surrounding the appointment of a new Executive Director demand it. The Remuneration Committee strongly endorses the obligation on an Executive Director to mitigate any loss on early termination and will seek to reduce the amount payable on termination where it is appropriate to do so. The Committee will also take care to ensure that, while meeting its contractual obligations, poor performance is not rewarded. The Executive Directors’ contracts contain early termination provisions consistent with the policy outlined above.

 

The table below summarises key details in respect of each Executive Director's contract.

 

 

	Contract date	Years to expected retirement	Company notice period	Executive notice period
P.C. Slabbert A.G. Lewis	28 September 2009 28 September 2009	13 27	12 months 12 months	12 months 12 months

 

 

CHAIRMAN AND NON-EXECUTIVE DIRECTORS

The Chairman and Non-Executive Directors receive a fixed fee for their services. Fee levels are determined by the Board in light of market research and advice provided by Hanson Green, which also provides services in connection with the proposed recruitment of new Non-Executive Directors. Fee levels are reviewed from time to time. The Chairman and the Non-Executive Directors do not participate in any Board discussions or vote on their own remuneration, nor do they participate in any incentive or benefit plans.

 

The Chairman and the Non-Executive Directors each have a letter of appointment which specifies an initial period of appointment. The initial period for Mrs. Pirie was three years and this was extended for a further three years on 1 March 2008. Sir Richard Needham’s and Mr. Evans' appointments are also for an initial period of three years. Chairman and Non-Executive Director appointments are subject to Board approval and election by shareholders at the annual general meeting following appointment and, thereafter, re-election by rotation every three years. The Chairman and any Non-Executive Director who has served for more than nine years since first election are subject to annual re-election by shareholders. There are no provisions for compensation payments on early termination in the Chairman’s and the Non-Executive Directors’ letters of appointment. The date of each appointment is set out below, together with the date of their last re-election.

 

	Date of initial  appointment	Date of last re-election
The Rt. Hon. Sir Richard Needham	26 January 2007	23 January 2008
D.R. Evans	1 June 2007	23 January 2008
S.J. Pirie OBE	1 March 2005	21 January 2009

 

DIRECTORS' INTERESTS

Beneficial interests of Directors, their families and trusts in ordinary shares of the Company were:

 

	At the end of the year	At the beginning of the year
The Rt. Hon. Sir Richard Needham	56,246	41,246
S.J. Pirie OBE	44,000	35,500
D.R. Evans	40,000	30,000
P.C. Slabbert	22,833	22,833
A.G. Lewis	-	-

The register of Directors’ interests contains details of Directors’ shareholdings and share options.

 

There were the following movements in Directors’ shareholdings between the end of the financial year and 19 January 2010.

Sir Richard Needham purchased a further 16,200 shares to take his shareholding to 72,446 ordinary shares. Mrs S.J. Pirie purchased a further 6,000 shares to take her shareholding to 50,000 ordinary shares.

 

 

 

PART 2. DETAILS OF REMUNERATION (AUDITABLE INFORMATION)

 

The following information has been audited by the Company’s auditors PricewaterhouseCoopers LLP, as required by the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008.

 

Directors’emoluments
	Basic salary & fees £’000	Other benefits*   £’000	Annual bonus**   £’000	PIBS ***   £’000	Compensation for loss of office £’000	Total 2009   £’000	Total 2008   £’000
Directors holding office throughout 2008 and 2009
The Rt. Hon. Sir Richard Needham (Chairman)	70	-	-	-	-	70	70
D.R. Evans (Non-Executive)	40	-	-	-	-	40	39
S.J. Pirie OBE (Non-Executive)	40	-	-	-	-	40	40
P.C. Slabbert (highest paid Director)	219	17	120	10	-	366	192
Total 2009	369	17	120	10	-	516	-
Total 2008	322	19	-	-	-	-	341
Appointments and resignations
B. Duckworth OBE (Non-Executive) (resigned 30.11.07)	-	-	-	-	-	-	7
A.G. Lewis (appointed 08.09.08)	132	15	61	10	-	218	10
T.K.P. Stead (resigned 08.09.08)	-	-	-	-	-	-	408
Total 2009	501	32	181	20	-	734	-
Total 2008	466	33	-	-	267	-	766

 

*Other benefits are described in Pensions and benefits above..

 

**The Remuneration Committee determined at its meeting on 17 November 2009 that the criteria for making an award under the annual bonus scheme had been met. The sums referred to represent 91% of the maximum potential entitlement.

 

*** Three of the four quarterly awards were approved by the Remuneration Committee in 2009.

 

No Director waived emoluments in respect of the year ended 30 September 2009 (2008: nil).

 

Executive Directors' pensions

 The Stock Exchange Listing Rules require the disclosure of certain additional information relating to the pensions of Executive Directors under defined benefit schemes. The information is set out below.

 

 

	P.C. Slabbert
Accrued entitlement as at 30 September 2009	£60,721 p.a.
Increase in accrued entitlement over the period	£18,267 p.a.
Contributions paid by each Director over the period	£16,406
Transfer value at 30 September 2008	£468,365
Transfer value at 30 September 2009 or date of retirement if earlier	£756,064
Increase in transfer value over the year (net of Directors’ contributions)	£271,293
Increase in accrued entitlement over the period (excluding inflation of 5.0%)	£16,144 p.a.
Transfer value of increase in accrued pension (net of Director’s contributions)	£184,614

 

 

In respect of Mr. A.G. Lewis, company contributions to the money purchase section of the plan were £19,875.

 

All transfer values have been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11.

 

The transfer values of the accrued entitlement represent the value of assets that the pension scheme would need to transfer to another pension provider on transferring the scheme’s liability in respect of Director’s pension benefits. They do not represent sums payable to individual Directors and, therefore, cannot be added meaningfully to annual remuneration.

 

The accrued entitlement shown is the amount that would be paid each year at normal retirement age, based on service to the end of the current year. The accrued lump sum, under the defined benefit scheme, for Mr Slabbert at 30 September 2009 was £281,400 (2008: £212,270).

 

Performance Share Plan 2002 (the 2002 Scheme)

For grants of options or conditional awards made to date pursuant to the 2002 Scheme, the performance conditions have been based on the Company’s TSR relative to the TSR of a comparator group, comprising the FTSE Small Cap companies (excluding investment trusts).

 

A list of the number of shares under option granted at nil cost, to Executive Directors and senior employees, prior to 30 September 2009 and following approval of the 2002 Scheme by shareholders is set out below:

 

	Granted 2005/6 (for the qualifying period ending 30 Sept 2008)*	Granted 2006/7 (for the qualifying period ending 30 Sept 2009)**	Granted 2007/8 (for the qualifying period ending 30 Sept 2010)	Granted 2008/9 for the qualifying period ending 30 Sept 2011)***	Lapsed in year	Total option awards outstanding at 30 Sept 2009
P.C. Slabbert	55,652	66,494	130,067	460,714	(252,213)	460,714
A.G. Lewis	-	-	-	222,857	-	222,857
Former Directors****	99,939	73,683	26,302	-	(99,939)	99,985
Other senior employees	51,942	46,754	170,710	541,776	(242,183)	568,999*****

 

*As explained in last year’s report the awards granted under the 2005/6 cycle did not vest during the year.

 

**The Remuneration Committee agreed on 16 October 2009 that the 2006/7 awards did not vest as the Company’s TSR performance did not exceed the median performance of the comparator group.

 

***These awards were reduced to 69% of entitlement at the discretion of the Remuneration Committee..

 

****This includes awards granted to Mr. T.K.P. Stead (stood down 21 April 2008, resigned as a Director on 8 September 2008 and retired on 15 May 2009). All these awards were pro-rated and may vest at the end of the qualifying periods, subject to satisfaction of the applicable measures.

 

*****This figure includes 541,776 in respect of key management as defined in note 9 of the financial statements.

 

The market price at the award date for the 2008/9 award was 32.2 pence, for the 2007/8 award was 165.0 pence , for the 2006/7 award was 154.0 pence and for the 2005/6 award was 172.5 pence.

 

Sharesave option schemes

As at 30 September 2009 none of the Directors had outstanding options relating to sharesave option schemes. Other employees held options over 46,252 ordinary shares (2008: 161,052), exercisable between 2008 and 2012, at option prices ranging from £1.00 to £1.72. All options are over ordinary shares of £1 each.

 

As at 30 September 2009, the market price of Avon Rubber p.l.c. shares was £0.79 (2008: £0.695). During the year the highest and lowest market prices were £0.875 and £0.25 respectively.

 

The Remuneration Report has been approved by the Board of Directors and signed on its behalf by:

David Evans

Chairman of the Remuneration Committee

19 January 2010

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