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Summary directors’
remuneration report

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Diageo’s remuneration policy

The current remuneration policy was introduced in 2004 and continues to be based upon our wish to attract and retain the best global talent to deliver Diageo's strategy within a framework of good corporate governance.

The remuneration philosophy for senior executives is based on a belief in:

• Performance-related compensation; it influences and supports performance and the creation of a high performing organisation.
• Rewarding sustainable performance; it is at the heart of Diageo’s corporate strategy and is vital to meeting investors’ goals.
• Measuring performance over three years; it aligns with the time cycle over which management decisions are reflected in the creation of value in this business.
• Providing a balanced mix of remuneration; base salary, benefits, short term cash incentives, longer term equity incentives and pension.
• Providing a competitive total remuneration opportunity; it helps Diageo compete for the best talent among companies with global operations and global consumers.
• Simplicity and transparency.

The board of directors continues to set stretching performance targets for the business and its leaders in the context of the prevailing economic climate. To achieve these stretching targets requires exceptional business management and strategic execution to deliver performance. This approach to target setting reflects the aspirational performance environment that Diageo wishes to create.

In Diageo, annual incentive plans aim to reward the delivery of short term performance goals with commensurate levels of remuneration. Long term incentive plans aim to reward long term sustained
performance. Under both sets of plans, if stretching targets are achieved, high levels of reward may be earned. All incentives are capped to ensure that inappropriate business risk taking is neither encouraged nor rewarded.

In order to ensure incentive arrangements continue to have stretching performance targets that will drive
the business and its leaders over the medium to long term, the committee intends to review the current
remuneration arrangements during the next financial year. In 2008 this will coincide with the renewal of the TSR plan. As part of this process, the committee intends to engage with major investors on any significant changes that may result from the review.

Detailed remuneration policy for executive directors

Remuneration	Purpose	Delivery	Detailed policy
Base salary	– reflect the value of the individual and their role – reflect skills and experience	– cash – monthly – pensionable	– reviewed annually with changes usually taking effect from 1 October – benchmarked against the top 30 companies in the FTSE 100 excluding financial services businesses – positioned appropriately against the relevant comparator group for each role
Annual performance bonus	– incentivise year on year delivery of short term performance goals	– performance-related – cash – annual payment – non-pensionable	– entirely based on Diageo's overall financial performance – at least 70% based on profit measures – targets set by reference to annual operating plan – up to 100% of salary can be earned for on target performance with a maximum of 200% of salary payable for outstanding performance
Share options (SESOP)	– incentivise three year real earnings growth above a minimum threshold – provide focus on increasing Diageo's share price over the medium to longer term	– share options with an exercise price set at the market value on date of grant – value subject to meeting financial performance targets and the share price increasing above the grant value – long term incentive – discretionary annual grant	– maximum annual grant of 375% of salary – EPS performance test operates on a sliding scale – retest facility removed for options granted from October 2004 – exchange rate movements excluded from EPS performance against RPI calculation for all current and future grants
Share awards (TSR plan)	– incentivise three year total shareholder return relative to a selected peer group of companies – provide focus on delivering superior returns to shareholders	–shares – highly variable due to vesting schedule – long term incentive – discretionary annual award	– maximum annual initial award of 250% of salary – TSR performance test against a peer group of companies – none of the award vests for performance below median with a sliding scale applied to improvements in the ranking above median – for outstanding performance, achieving first or second position, 150% of the initial award vests
Pension	– provide competitive post-retirement compensation and benefits	– deferred income – payable on retirement in the form of a monthly pension with the option to take part as a lump sum	– pension accrues at 1/30 of annual base salary – maximum pension payable will not exceed 2/3 of final remuneration minus retained benefits – normal retirement age (NRA) is 62 – from 1 April 2006, employee contributions by executive directors were introduced – subject to election, benefits in excess of the Lifetime Allowance (LTA) are provided through an unfunded non-registered arrangement

The balance between fixed and variable elements of remuneration changes with performance. The anticipated normal mix between fixed and variable remuneration is that for £100 of remuneration earned, £33 will be fixed remuneration and £67 will be performance-related remuneration, excluding pensions and other benefits. In some years, the performance-related remuneration may be higher or lower depending on the performance of the business.

Senior executives are required to hold shares in Diageo to participate fully in the share option and share award plans. On 1 January 2007 the executive directors met the requirement by each holding company shares equivalent to at least 225% of their base salary.

The executive directors have service contracts which provide for six months’ notice by the director or 12 months by the company and contain non-compete obligations. In the event of early termination by the company without cause, the agreements provide for a termination payment to be paid, equivalent to 12 months’ base salary for the notice period and an equal amount in respect of all benefits. The remuneration committee may exercise its discretion to require half of the termination payment to be paid in monthly instalments and, upon the executive commencing new employment, to be subject to mitigation. If the board determines that the executive has failed to perform his duties competently, the remuneration committee may exercise its discretion to reduce the termination payment on the grounds of poor performance. PS Walsh’s service contract with the company is dated 1 November 2005. NC Rose’s service contract with the company is dated 14 February 2006.

Chairman’s and non-executive directors’ fees
Diageo’s policy on chairman’s and non-executive director fees is as follows:
– the fees should be sufficient to attract, motivate and retain world-class talent;
– fee practice should be consistent with recognised best practice standards for such positions;
– the chairman and non-executive directors should not participate in any of the company’s incentive plans;
– part of the chairman’s fees shall be paid in Diageo shares; and
– fees for non-executive directors are within the limits set by the shareholders from time to time.

The chairman and non-executive directors have letters of appointment; a summary of their terms and conditions of appointment is available at www.diageo.com.

Directors’ remuneration for the year ended 30 June 2007

					2007	2006
	Base salary(b) £000	Annual performance bonus(c) £000	Share incentive plan £000	Other benefits(d) £000	Total £000	Total £000
Chairman - fees
Lord Blyth(a)	512	-	-	29	541	545
Executive directors
NC Rose	596	883	3	18	1,500	1,392
PS Walsh	1,035	1,533	3	36	2,607	2,406
	1,631	2,416	6	54	4,107	3,798
Non-executive directors - fees
LM Danon	80	-	-	1	81	36
Lord Hollick	95	-	-	1	96	91
Dr FB Humer	80	-	-	1	81	79
M Lilja	80	-	-	1	81	82
WS Shanahan	74	-	-	1	75	76
HT Stitzer	65	-	-	1	66	61
JR Symonds	85	-	-	1	86	81
PA Walker	65	-	-	1	66	61
	624	-	-	8	632	567
Total	2,767	2,416	6	91	5,280	4,910

(a) £205,000 (2006 - £200,000) of Lord Blyth's remuneration in the year ended 30 June 2007 must be used for the monthly purchase of Diageo ordinary shares,which have to be retained until he retires from the company or ceases to be a director for any other reason.

(b) As at 30 June 2007 the annual salary payable to the chief executive was £1,050,000 and to the chief financial officer was £605,000. In the financial years ended 30 June 2007 and 30 June 2006, the percentage increases in base salary of the chief executive were 6% and 8% respectively,with an average increase over the two years of 7%. In the financial years ended 30 June 2007 and 30 June 2006, the percentage increases in the base salary of the chief financial officer were 7% and 9% respectively,with an average increase over the two years of 8%.These average increases are comparable with those made in companies in the pay benchmarking comparator group for these roles.

(c) The business results for the year ended 30 June 2007 are described in the business review. The level of performance achieved was above target resulting in an actual performance bonus equating to 146% of base salary.

(d) Other benefits may include company car and driver, fuel, product allowance, financial counselling, accompaniment by spouse on business travel when appropriate, medical insurance and life insurance premiums.

Long term incentive plans payment and gains for the year ended 30 June 2007
In addition to the above emoluments, in the year the executive directors received payments and made gains under long term incentive plans as follows:

			2007	2006
	2004 TSR award £000	Executive share option exercises £000	Total £000	Total £000
Executive directors
NC Rose	795	481	1,276	970
PS Walsh	1,389	2,304	3,693	1,751
Total	2,184	2,785	4,969	2,721

Beneficial share interests, including long term incentive plans

	Ordinary shares	Options(a)	TSR plan(b)	30 June 2007 Total	30 June 2006 Total
Lord Blyth	144,549	-	-	144,549	127,925
NC Rose	360,488	1,062,060	553,607	1,976,155	1,825,799
PS Walsh	637,833	2,555,278	1,206,285	4,399,396	4,475,209
LM Danon	2,000	-	-	2,000	2,000
Lord Hollick	5,000	-	-	5,000	5,000
Dr FB Humer	3,500	-	-	3,500	3,500
M Lilja	4,532	-	-	4,532	4,532
WS Shanahan	25,155	-	-	25,155	17,155
HT Stitzer	4,211	-	-	4,211	2,998
JR Symonds	5,159	-	-	5,159	5,000
PA Walker	44,250	-	-	44,250	44,250
Total	1,236,677	3,617,338	1,759,892	6,613,907	6,513,368

(a) Options granted under SESOP cannot normally be exercised unless a performance condition is satisfied. The current performance condition is based on the increase in Diageo’s adjusted EPS measure over a three year period. If the increase in this EPS measure is at least 15 percentage points greater than the increase in the RPI over the same period, then all the options can be exercised. If the increase in this EPS measure is at least 12 percentage points greater than that of the RPI but less than 15 percentage points, half of the options can be exercised. In respect of the 2003 SESOP, the grant was eligible for retesting under the Rules of the Plan and was measured again after 30 June 2007. The effect of movements in exchange rates is excluded from the comparison of the group’s EPS performance against the RPI under the SESOP for all current and future grants.

(b) This number reflects the maximum possible award of 150% of the shares initially awarded under the 2005 and 2006 TSR plans.Only 35% of the initial award of shares would be released for achieving position nine in the peer group of 18 companies for performance cycles from 1 January 2005 and no shares would be released for achieving a position of 10 or below. For each plan cycle, 150% of the shares initially awarded would only be released for achieving position one or two in the peer group.

For performance cycles from 1 January 2005, the peer group consists of Anheuser-Busch, Brown Forman, Cadbury Schweppes, Carlsberg, Coca-Cola, Colgate-Palmolive, Groupe Danone, Heineken, Heinz, Inbev, Nestlé, PepsiCo, Pernod Ricard, Procter & Gamble, SABMiller, Scottish & Newcastle and Unilever. The reserve company is L’Oreal.

Performance graph
The graph below shows the total shareholder return for Diageo and the FTSE 100 Index since 30 June 2002 using both spot and 12 month average share prices.The FTSE 100 Index reflects the 100 largest UK quoted companies by market capitalisation and has been chosen because it is a widely recognised performance benchmark for large UK companies. The graph shows that Diageo outperformed the FTSE 100 Index over this period using 12 month average share prices but underperformed on a spot price basis. The former measure is comparable with that used in the TSR plan,which measures TSR against a defined peer group of 17 other companies, over a three year performance period.