Keller reports

Remuneration report

Introduction
In preparing this report, the Committee has complied with
the Directors’ Remuneration Report Regulations 2002, which introduced new statutory requirements for the disclosure of directors’ remuneration in respect of periods ending on or after 31 December 2002. The report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the board has applied the Principles of Good Governance relating to directors’ remuneration. As in the previous year, a resolution to approve the report will be proposed at the forthcoming Annual General Meeting of the Company.

The Regulations require the auditors to report to the Company’s members on the “auditable part” of the remuneration report and to state whether, in their opinion, that part of the report has been properly prepared in accordance with the Companies Act 1985 (as amended by the Regulations). The report has therefore been divided into separate sections for unaudited and audited information. Within the unaudited section, the report deals with
the remuneration policy that is to be followed in respect of 2003, summarises the results of a remuneration survey which was undertaken during the year and describes arrangements which applied during 2002.

Remuneration Committee
The Company has established a Remuneration Committee
(“the Committee”) in accordance with the recommendations of the Combined Code. The names of members of the Committee during the year and, where there has been a change during the year, their date of appointment or retirement, are given below:


Director	Appointment date	Retirement date

Dr K Bond		9 May 2002
E G F Brown	13 December 2001
K F Payne
Dr H Peipers		9 May 2002
R T Scholes	7 February 2002

Mr Brown took over as Chairman of the Committee, following
Dr Bond’s retirement in May.

The principal function of the Committee is to agree with the board the framework and policy for the remuneration of the Group’s executive management and to determine, on behalf of the board, the remuneration packages of the executive directors.

No member of the Committee has any personal financial interest (other than as a shareholder), conflict of interest arising from cross-directorships or day-to-day involvement in running the business. No director plays a part in any discussion about his own remuneration. As discussed in the Corporate governance, the board considers Mr Brown, Mr Payne and Mr Scholes to be independent directors.

In determining the directors’ remuneration for the year, the Committee consulted Dr West, the chairman and Mr Dobson, the chief executive about its proposals except in relation to their own remuneration. The Committee also appointed MCG Consulting to advise on the remuneration survey. In January 2003, New Bridge Street Consultants were appointed by the board to advise on long-term incentive arrangements, which are discussed below. Neither of these firms has provided any other services to the Group. However, MCG’s parent, DLA, is the Company’s legal adviser.

Remuneration policy and arrangements
The objective of the remuneration policy is to ensure that members of the executive management of the Company are provided with appropriate incentives to encourage enhanced performance and are, in a fair and responsible manner, rewarded for their individual contributions to the success of the Company. Each director is assessed individually so that his remuneration is directly related to his performance over time and so that a significant proportion of his remuneration package is performance related.

During the year, a review of executive remuneration was undertaken on behalf of the Committee, comparing all elements of remuneration against over 30 comparator businesses, having regard to size, profitability and geographic spread. The review was undertaken by the company secretary under the guidance of MCG Consulting, which advised on the scope and methodology of the survey, sense checked the data against its own data sources and provided an independent challenge to the analysis and conclusions.

The survey showed that, in the 2001 calendar year
(the period under review), the Company’s earnings per share (EPS) growth was in the market upper quartile, whilst total remuneration levels including pension (but excluding any share based emoluments) were found to be below the market median.

The survey reviewed the Company’s long term incentive arrangements against the comparator groups. Notwithstanding the difficulty in quantifying the value of awards under share-based, long term incentive schemes, as market values fluctuate, the analysis did indicate that the Company was somewhat behind the market in terms of the number of shares over which options were granted and the value of options granted as a percentage of salary.

In light of the findings of the remuneration survey, the Committee has agreed the principle that base salary should be set broadly in line with the median for executives who have sustained performance in a role of comparable standing and that directors should be able to achieve total remuneration at the market upper quartile level when justified by performance.

There are five main elements of the remuneration
package for executive directors and senior managers: basic
salary, performance related annual bonus, long term incentive arrangements, pension arrangements and other benefits:

(i) Basic salary
An executive director’s basic salary is determined by the Committee before the start of each year and when an individual changes position or responsibility. In deciding appropriate levels, the Committee considers the Group as a whole and seeks to be competitive, but fair, using information provided both by external and internal sources. As noted above, the Committee has agreed the principle that base salary should be set broadly in line with the market median.

(ii) Performance related annual bonus
Performance related annual cash bonuses are designed to reward contribution and to encourage the achievement of targeted levels of performance over the short term.

The maximum annual cash bonuses are set by the Committee and are subject to stretching targets linked to the Group’s operating performance in the year and to individual performance against objectives set by the Committee.
The performance related bonus is not pensionable.
Following the remuneration survey, it was decided that the maximum bonus potential be increased to 50% of basic
annual salary from 1 January 2003. This is consistent with
the market median maximum bonus.

(iii) Long term incentive arrangements
The Company’s long term incentive arrangements are intended to encourage directors and other key employees to focus on long term, strategic corporate objectives and to further align the interests of management and shareholders. They consist of share option arrangements and a deferred annual bonus scheme, further details of which can be found below.

Since the end of the year, the Committee has initiated
a review of long term incentive arrangements. The review is ongoing and the Committee has not yet determined to what
extent it may result in a change in the policy relating to long term incentive arrangements.

Share option arrangements
Since 2001, the Group has operated an Inland Revenue approved executive share option plan (“the Approved Plan”) and an unapproved share option plan (“the Unapproved Plan”).

Under the Approved Plan, the total market value of shares at the date of grant over which any participant may be awarded options is £30,000. At any time, the total number of new issue shares over which options may be granted (under all share option plans of the Company) in any consecutive ten-year period must not exceed 10% of the issued ordinary share capital.

Under the plans, options are being granted annually.
The rules of the plans provide that, except in exceptional circumstances, in any 12-month period, a participant may not be granted options over shares (under all share option plans of the Company) having a market value in excess of his or her gross remuneration (excluding bonuses and benefits in kind) in that 12-month period. In exceptional circumstances, such as the need to recruit a key executive, this individual limit may be exceeded. The limit was exceeded in respect of options granted to Mr Dobson, Mr Atkinson and Mr Ewen in 2002, following a steep increase in the share price between the date of approving the options and the date of granting the options.

Options granted under the plans are only exercisable when the Company has achieved average annual growth in adjusted EPS of not less than 4% above the increase in the retail price index over at least three consecutive years from the date of grant. Adjusted EPS is calculated before the amortisation of goodwill. There is flexibility to “re-test” the performance condition at the end of the fourth year if the condition is not met over the initial three year period following grant. If the performance condition is not achieved by the end of the fourth year, the option will lapse. The Committee selected EPS for the performance condition because it provides participants with the incentive to increase earnings, a key indicator of the underlying financial performance of the Company.

The Approved and Unapproved Plans were introduced
in 2001 to replace an Inland Revenue approved executive share option scheme which was established in 1994 and which by 2001 no longer reflected best practice (“the 1994 Scheme”). No new options have been granted under the 1994 Scheme since 1995 and it is the intention that no new options will be granted under this scheme in the future.

Deferred Annual Bonus Scheme
The Keller Group plc Deferred Annual Bonus Scheme (“the DABS Scheme”), a long term incentive plan for the executive directors and a limited number of senior employees, was adopted in 1998 and terminated on 21 June 2000 in accordance with its rules. No further awards will be granted under the DABS Scheme but the provisions of the DABS Scheme remain in force with regard to awards that have already been granted.

The operation of the DABS Scheme was subject to the discretion of the board. Participants in the DABS Scheme were required to defer 50% of their performance related annual bonus in the form of shares in the Company for a period of three years. At the end of the three-year deferral period, matched shares could be awarded up to a maximum of two matched shares for every one share deferred, depending on a combination of performance requirements. These are annual growth in adjusted EPS and the Total Shareholder Return (TSR) performance of the Group against a group of construction industry comparator companies.

Once the matched shares have unconditionally vested, participants have the option of selling their shares or earning additional matched shares at the rate of one for every five shares retained for a further two-year period.

No award of shares, matched shares or additional matched shares form part of a participant’s pensionable salary.

Details of the shares awarded are shown on page 34 under directors’ interests in long term incentive plans.

(iv) Pension arrangements
Mr Atkinson and Dr West are both members of the Keller Group Pension Scheme. This scheme provides a lump sum death in service benefit and pensions for dependants on death in service or following retirement. On retirement at age 62, Mr Atkinson will be eligible for a pension based upon a percentage of final salary. This percentage will increase with pensionable service to a maximum of two-thirds, subject to Inland Revenue limits. Mr Dobson is a member of a defined contribution scheme operated in the US. His normal retirement age is 65.

(v) Other benefits
Other benefits for executive directors comprise a car and payment of its operating expenses and fuel, entitlement to a private health care scheme and pensions as detailed above. In addition, the Company pays the accommodation costs in the UK for Mr Dobson, whose main home is in the US.

Service contracts
In accordance with general market practice, it is the Company’s policy that executive directors should have contracts with an indefinite term providing for a maximum of one year’s notice. However, it may be necessary occasionally to offer longer initial notice periods to attract new directors, provided that the notice period shall reduce to one year after the initial period.

Mr Dobson has a service agreement dated 10 April 1995, which is terminable on one year’s notice by either party. Mr Atkinson has a service agreement dated 11 October 1999, which is terminable on one year’s notice by either party. In the event of early termination, the directors’ contracts provide for compensation up to a maximum of basic salary plus the fair value of benefits to which the directors are contractually entitled for the unexpired portion of the notice period. The Company seeks to apply the principle of mitigation in the payment of compensation on the termination of the service agreement of any executive director.

During the year, £35,000 was paid to Mr K Kirsch and £30,000 was paid to Mr M W C Martin, both former directors of the Company, for consultancy services provided to Group companies.

The board may allow executive directors to accept external appointments, provided that the Company retains any related remuneration.

Non-executive directors
All non-executive directors have specific terms of engagement, the dates of which are set out below, with an initial appointment period of 12 months and thereafter subject to three months’ notice by either party. There are no provisions for compensation payable in the event of early termination.


Director	Date of engagement letter

Dr K Bond (retired 9 May 2002)	11 June 1999
E G F Brown	18 January 2002
P J Lopez Jimenez	21 January 2003
K F Payne	11 June 1999
Dr H Peipers (retired 9 May 2002)	21 March 1995
R T Scholes	8 February 2002
Dr J M West	8 June 1998

The determination of the non-executive directors’ remuneration has been delegated by the board to the executive directors, within the limits set by the Articles of Association and based on independent surveys of fees paid to non-executive directors of similar companies. The fees paid to non-executive directors in the year, shown below, are inclusive of the additional work performed for the Company in respect of membership of the board committees. Non-executive directors cannot participate in any of the Company’s long term incentive arrangements.

Relative performance The following graph shows the Company’s performance, measured by TSR, compared with the performance of the FTSE All-Share Index. This index has been selected because it reflects the Company’s international nature better than the UK Construction & Building Materials index, the constituents of which operate predominantly in the UK, and because it reflects the Company’s size better than the FTSE 100 or the FTSE 250 indices.



Audited information

Directors’ emoluments for the year ended 31 December 2002

			Basic salary 2002 £000	Fees 2001 £000	Benefits 2002 £000	Annual bonus 2002 £000	Total emoluments 2002 £000	Total emoluments 2001 £000

Executive
J R Atkinson			150	-	14	45	209	180
T Dobson			240	-	50	72	362	375
Non-executive
Dr K Bond			-	8	-	-	8	20
E G F Brown			-	23	-	-	23	-
K F Payne			-	23	-	-	23	20
H Peipers			-	8	-	-	8	20
R T Scholes			-	21	-	-	21	-
Dr J M West			-	67	15	-	82	81

			390	150	79	117	736	696


Included in the above were fees amounting to £23,000 paid to G. Brown Associates Limited in respect of services provided by Mr Brown. A maximum annual cash bonus of 40% of basic annual salary was set for the year ended 31 December 2002, of which up to 25% of salary related to the achievement of profit related targets, split equally between profit before tax (PBT) and EPS, and up to 15% related to the achievement of individual objectives. The baselines for the 2002 operating performance targets, below which no bonus was payable, were set at PBT of £25m and EPS of 25p. The performance targets attracting maximum bonus are considered commercially sensitive and are not, therefore, disclosed.

Directors’ shareholdings The directors’ beneficial interests in the issued ordinary share capital of the Company were:

							At 31 December 2002 Ordinary shares	At 31 December 2001 Ordinary shares

J R Atkinson							28,315	24,134
T Dobson							919,571	898,000
K Payne							8,588	3,808
Dr J M West							1,948,000	1,948,000


There have been no changes in the directors’ beneficial interests during the period from the end of the financial year to 6 March 2003. Any ordinary shares required to fulfil entitlements under the DABS Scheme are provided by the Keller Group plc Employee Benefit Trust (the Trust). As beneficiaries under the Trust, the directors are deemed to be interested in the shares held by the Trust which, at 31 December 2002, amounted to 195,044 ordinary shares.

Directors’ pension rights Dr West, having retired in 1997, received a pension of £134,000 in 2002. Company pension contributions in 2002 to the US defined contribution scheme in respect of Mr Dobson were £7,200 (2001: £12,200). The change during the year in the accrued pension entitlement of Mr Atkinson under the Keller Group Pension Scheme is shown in the table below:

Director		Transfer value of accrued benefit at begining of year £000	Transfer value of accrued benefit at end of year £000	Increase in transfer value during the year less member contributions £000	Accrued pension at end of year £000	Increase in accrued pension including inflation £000	Increase in accrued pension excluding inflation £000	Transfer value of increase in accrued pension excluding inflation less member contribution £000

J R Atkinson		150	155	4	36	11	10	43


The total accrued pension entitlement shown is that which would be paid annually on retirement, based on service to the end of the year.

Directors’ interests in long term incentive plans The directors’ interests in the Deferred Annual Bonus Scheme are given in the table below:

Name of Director			Interests as at 1 January 2002	Awards granted during the year	Market value of shares when award granted	Awards lapsed or crystallised during the year	Increased as at 31 December 2002	Crystallising dates of outstanding awards

J R Atkinson			11,557	1,409	333.5p	7,043	5,923	09/03/03
T Dobson			30,310	4,314	333.5p	21,571	13,053	09/03/03


The following table provides further information in relation to the awards previously granted under the Deferred Annual Bonus Scheme that were subject to the performance conditions described above and which crystallised during the year:

Name of Director					Date of award	Number of shares vesting	Market price of shares when award granted	Market price of shares on vesting

J R Atkinson					11/03/99	5,634	238.5p	333.5p
T Dobson					11/03/99	17,258	238.5p	333.5p


As mentioned above, the Deferred Annual Bonus Scheme was terminated on 21 June 2000. No awards of deferred shares were therefore made in relation to the year ended 31 December 2002. The performance conditions applying to all of the above awards are described more fully above.

Share options

Name of Director	Options held at 1 January 2002	Options granted during the year	Options exercised during the year	Options lapsed during the year	Options held at 31 December 2002	Exercise price	Dates from which exercisable	Expiry date

J R Atkinson
1994 Scheme*	14,800	-	6,100	-	8,700	102.0p	26/04/98	25/04/05
Unapproved Plan
14 May 2001	25,000	-	-	-	25,000	231.5p	14/05/04	13/05/11
13 March 2002	-	45,511	-	-	45,511	332.0p	13/03/05	12/03/12
Approved Plan
13 March 2002	-	4,489	-	-	4,489	332.0p	13/03/05	12/03/12

T Dobson
1994 Scheme*	80,000	-	-	-	80,000	102.0p	26/04/98	25/04/05
Unapproved Plan
14 May 2001	50,000	-	-	-	50,000	231.5p	14/05/04	13/05/11
13 March 2002	-	75,000	-	-	75,000	332.0p	13/03/05	12/03/12

	169,800	125,000	6,100	-	288,700


*All share options granted under the 1994 Scheme were granted on 26 April 1995. The market value of the shares at 31 December 2002 was 250p and the range during the year was 228.5p to 367p. The market value of the shares on 25 April 2002, when Mr Atkinson exercised his option, was 360p, producing a gain on exercise of £15,738. The performance conditions applying to the above options are described more fully above. There have been no variations to the terms and conditions or performance criteria for share options during the financial year. On behalf of the board E G F Brown Chairman, Remuneration Committee 6 March 2003