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 original Combined Code. As in previous years, 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 2004.

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 are given below. All members served on the Committee throughout the year, with the exception of Dr Bond, who was appointed to the Committee on 30 October 2003. Mr Brown is, and was throughout the year, the Chairman of the Committee.

Committee members
E G F Brown (Chairman)
Dr K Bond
K F Payne
R T Scholes

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 report, the board considers Mr Brown, Dr Bond, 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.

In January 2003, New Bridge Street Consultants LLP (NBSC) were appointed by the board to advise on long-term incentive arrangements, which are discussed further below. They have not provided any other services to the Group.

Remuneration policy and arrangements
The objective of the remuneration policy is to ensure that members of the executive management of the Group 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. Less than 20% of the total workforce is based in the United Kingdom and remuneration packages of the Group’s executive management reflect local market conditions.

Directors are assessed individually so that their remuneration is directly related to their performance over time and so that a significant proportion of their remuneration package is performance related.

The Committee has agreed the principle that basic 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. The Committee has agreed, and in 2004 will continue to apply, the principle that basic 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 for executive directors are set by the Committee and are subject to stretching targets linked to financial performance in the year and to individual performance against objectives set by the Committee. The performance related bonus is not pensionable. Bonus is capped at 50% of basic salary.

The 2004 bonus targets for Mr Atkinson and Mr Hind are linked to the achievement of Group EPS, PBT and net debt targets and personal, task-based objectives. The 2004 bonus targets for Mr Rubright and Dr Sondermann are linked to the achievement of divisional operating profit and net debt targets, Group EPS and PBT targets and personal, task-based objectives.

Actual financial performance targets for 2004 are considered
to be commercially sensitive and are not, therefore, disclosed in this report.

(iii) Long term incentive arrangements
The Company’s long term incentive arrangements are intended to encourage executive directors and other senior managers to focus on long term, strategic corporate objectives and to further align the interests of management and shareholders.

Current share option arrangements
Since 2001, the Group has operated an Inland Revenue approved executive share option plan and an unapproved executive share option plan (the 2001 Plans). The 2001 Plans, and associated performance criteria, were approved by shareholders at the 2001 Annual General Meeting. Under the 2001 Plans, options may be, and have been, granted annually, subject to the market value of shares over which options are granted in any 12-month period not exceeding the value of the executive’s annual basic salary. Options granted under the 2001 Plans may be exercised subject to the Company achieving real EPS growth over any three-year period of not less than 4%.

During 2003, the Committee carried out a review of long-term incentive arrangements for senior managers and concluded that the current share option arrangements should be replaced with a Performance Share Plan. The Committee considers that granting conditional awards of shares (Performance Share Awards), which vest after three years subject to the achievement of stretching performance conditions, will provide a better link between performance and reward. It is the Committee’s current intention that no further share options will be granted if the proposed new Performance Share Plan is approved.

Proposed new Performance Share Plan
Summarised below are the key features of the proposed new Performance Share Plan, for which shareholder approval will be sought at the forthcoming Annual General Meeting. It is anticipated that, subject to shareholder approval, Performance Share Awards will be granted to senior executives immediately following the Annual General Meeting.
 

The Committee has determined that initial awards under the plan will be over shares with a value of no more than 50% of an eligible employee’s annual basic salary.

Performance Share Awards will be released to executives after three years, subject to demanding performance conditions being met. The Committee has considered the most effective measure of performance for this purpose and has concluded that, for grants in 2004, 50% of a Performance Share Award should be conditional on targets based on growth in earnings per share before amortisation of goodwill and exceptional items (EPS) and the remaining 50% should be based on relative total shareholder return (TSR), against a comparator group of similar businesses. Under this approach, in order for awards to be released in full, there must be strong financial performance as well as stock market outperformance.

Initially, the following EPS growth targets will apply:

For half of the shares subject
to a Performance Share Award		 Proportion of shares that vest
   
EPS Growth (average over 3 years)  
Less than RPI + 4% p.a. 0%
RPI + 4% p.a. 40%
RPI + 9% p.a. 100%
Between RPI + 4% p.a. and between 40% and 100%
RPI + 9% p.a. on a straight line basis
   
TSR performance will be compared to the companies comprising the FTSE All-Share Construction and Building Materials Sector at the date of grant, on the following basis:
   
For the other half of shares subject to a Performance Share Award Proportion of shares that vest
   
Relative TSR (after 3 years)  
Below median ranking 0%
Median ranking 40%
Top decile ranking 100%
Between median and top between 40% and 100%
decile ranking on a straight line basis

Performance will be measured over a single three-year period. To the extent that the targets are not achieved, the award will lapse. TSR calculations will be independently performed for the Committee by NBSC.

Further details of the plan, and the reasons why it is recommended by the Committee, are given in the chairman’s letter to shareholders dated 11 March 2004.

(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. Mr Atkinson, who has a normal retirement age of 62, 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. Dr West retired in 1997 and is currently receiving a pension under the Scheme.

Dr Sondermann is a member of the defined benefit pension arrangements established by Keller Grundbau GmbH under which, at age 65, he will be eligible for a single lump-sum payment of €75,000 and a pension of €8,000 per annum.

Mr Dobson, Mr Hind and Mr Rubright are members of defined contribution schemes.

(v) Other benefits
Other benefits for executive directors comprise a car and payment of its operating expenses and fuel, or car allowance; private health care; long term disability insurance; 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.

Service contracts between the Company (or other companies
in the Group*) and individuals who served as executive directors at any time during the year are summarised below:
 
Director Date of service contract Notice period
J R Atkinson 11 October 1999 12 months
T Dobson 10 April 1995 12 months
R J T Ewen 6 March 2003 12 months
J W G Hind 16 May 2003 12 months
R M Rubright 8 August 1977 (modified by a memorandum of employment
dated 12 May 2003)		 12 months
Dr W Sonderman 12 February 1998 (modified by a memorandum of employment
dated 5 March 2004) 		12 months
* Mr Rubright’s service contract is with Hayward Baker Inc.
Dr Sondermann’s service contract is with Keller Grundbau GmbH.


In the event of early termination, the directors’ contracts provide for compensation up to a maximum of basic annual 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. All directors offer themselves for re-election at least every three years.

Director Date of engagement letter
Dr K Bond 24 November 2003
E G F Brown 18 January 2002
P J Lopez Jimenez 21 January 2003
K F Payne 11 June 1999
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 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 short or 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 2003
 
      Basic
salary
2003
£000		 Fees
2003
£000 		Benefits
2003
£000 		Annual
bonus
2003
£000 		Total
emoluments
2003
£000 		Total
emoluments
2002
£000
Executive                
J R Atkinson     216 - 15 22 253 209
T Dobson     248 - 51 - 299 362
R J T Ewen     128 - 9 - 137 -
J W G Hind     76 - 5 8 89 -
R M Rubright     168 - 9 54 231 -
Dr W Sondermann     11 - 1 64 76 -
Non-executive                
Dr K Bond     - 4 - - 4 8
E G F Brown     - 24 - - 24 23
P Lopez Jimenez     - 23 - - 23 -
K F Payne     - 24 - - 24 23
H Peipers     - - - - - 8
R T Scholes     - 24 - - 24 21
Dr J M West     - 70 16 - 86 82
      847 169 106 148 1,270 736
 
Included in the above were fees amounting to £24,000 paid to G. Brown Associates Limited in respect of services provided by Mr Brown and fees amounting to £23,000 paid to Fapindus, S.L. in respect of services provided by Mr Lopez Jimenez.

The emoluments shown above for Mr Ewen relate to the period from 6 March 2003, his date of appointment as a director, to 28 November 2003, when he stood down from the board. On 12 December 2003 notice of termination was served under Mr Ewen’s service contract. Mr Ewen will continue to receive a monthly salary as an employee until the expiry of his 12 months’ notice period.

Apart from bonuses, the emoluments for Mr Hind, Dr Bond and Dr Sondermann relate to the periods from their dates of appointment as directors to 31 December 2003. The bonuses for Mr Rubright and Dr Sondermann, who were employed by the Group prior to their appointments as directors, relate to the full year.

A maximum annual cash bonus of 50% of basic annual salary was set for the year ended 31 December 2003. The 2003 bonus targets for Mr Atkinson and Mr Dobson were linked to the achievement of Group EPS and PBT targets and personal, task-based objectives. The 2003 bonus targets for Mr Rubright and Mr Ewen were linked to the achievement of Group EPS and PBT targets, a divisional operating profit target and personal, task-based objectives. The 2003 bonus target for Dr Sondermann was linked to the achievement of a divisional operating profit target and personal, task-based objectives. The bonus awarded to Mr Hind reflects his achievement against personal objectives in the period since his appointment on 15 July 2003.

The baselines for the 2003 Group financial performance targets, at which no bonus was payable, were set at PBT of £30.0m and EPS of 31.0p. The financial performance targets attracting maximum bonus are considered commercially sensitive and are not, therefore, disclosed. No bonuses were awarded in respect of the Group financial performance targets.
 
Directors’ shareholdings
The directors’ interests in the issued ordinary share capital of the Company were:
Director At
31 December
2003
Ordinary
shares 		At
31 December
2002
Ordinary
shares
J R Atkinson 42,608 28,315
T Dobson 939,031 919,571
P Lopez Jimenez* 4,959,000 -
K Payne 10,739 8,588
R M Rubright 40,000 -
R T Scholes 5,000 -
Dr W Sondermann 18,525 -
Dr J M West 1,968,000 1,948,000
* Shares are registered in the name of Terratest Tecnicas Espéciales SA (Terratest), a connected person of Mr Lopez Jimenez. During the period from the end of the financial year to 11 March 2004, Terratest has increased its shareholding to 5,209,000 shares. There have been no other changes in directors’ shareholdings between the end of the financial year and 11 March 2004.

Any ordinary shares required to fulfil entitlements under the Deferred Annual Bonus Scheme (DAB 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 2003, amounted to 98,878 ordinary shares.
     
Directors’ pension rights
In 2003, a pension of £138,000 was paid to Dr West, who retired in 1997, under the Keller Group Pension Scheme.

Company pension contributions for directors to defined contribution schemes were as follows:
Director             2003
£000 		2002
£000
T Dobson             10 7
R J T Ewen             8 -
J W G Hind             8 -
R M Rubright             8 -
                 
The changes during the year in the accrued pension entitlements of Mr Atkinson under the Keller Group Pension Scheme and Dr Sondermann under the pension arrangements operated by Keller Grundbau GmbH are shown in the table below:
Director   Transfer value of accrued benefit at beginning 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 the 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 contributions
£000
J R Atkinson   155 229 72 44 8 7 36
Dr W Sondermann   29 37 8 3 0.4 0.3 5
The accrued pension at the end of the year 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
                 
Share options
 
Director Options
held at
1 January 2003		 Options
granted
during
the year		 Options
exercised
during
the year		 Options
lapsed
during
the year		 Options
held at
31 December 2003		 Exercise price Dates
from which
exercisable 		Expiry date
J R Atkinson                
1994 Scheme* 8,700 - 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
     13 March 2003 - 2,479 - - 2,479 251.0p 13/03/06 12/03/13
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
R J T Ewen                
Unapproved Plan                
     7 May 2002 41,549 - - - 41,549 355.0p 07/05/05 10/12/05
     13 March 2003 - 45,000 - - 45,000 251.0p 13/03/06 12/09/06
Approved Plan                
     7 May 2002 8,451 - - - 8,451 355.0p 07/05/05 10/12/05
J W G Hind                
Unapproved Plan                
     29 August 2003 - 37,756 - - 37,756 245.0p 29/08/06 28/08/13
Approved Plan                
     29 August 2003 - 12,244 - - 12,244 245.0p 29/08/06 28/08/13
R M Rubright                
Unapproved Plan                
     14 May 2001 20,000 - - - 20,000 231.5p 14/05/04 13/05/11
     13 March 2002 50,000 - - - 50,000 332.0p 13/03/05 12/13/12
     13 March 2003 - 50,000 - - 50,000 251.0p 13/03/06 12/13/13
Dr W Sondermann                
Unapproved Plan                
     14 May 2001 15,000 - - - 15,000 231.5p 14/05/04 13/05/11
     13 March 2002 20,000 - - - 20,000 332.0p 13/03/05 12/13/12
     13 March 2003 - 25,000 - - 25,000 251.0p 13/03/06 12/13/13
* All share options granted under the 1994 Scheme were granted on 26 April 1995.


The market value of the shares at 31 December 2003 was 218.5p and the range during the year was 203.5p to 293.0p. The market value of the shares on 6 June 2003, when Mr Atkinson exercised his option, was 285.0p, producing a gain on exercise of £15,921. The market value of the shares on 14 May 2003, when Mr Dobson exercised his option, was 281.5p, producing a gain on exercise of £143,600.

There have been no variations to the terms and conditions or performance criteria for share options during the financial year.
                 
DAB Scheme                
The DAB scheme was a bonus-related long-term incentive scheme which the Company operated for the last time in respect of the 1998 annual bonus. The table below shows awards associated with the scheme:
Director     Interests in Deferred
Shares as at
1 January 2003		 Matched share awards granted during the year Market value of shares when bonus deferred Awards vested during the year Market value of shares when award vested Interests as at 31 December 2003
J R Atkinson     5,923 1,481 253.0p 7,404 250.0p nil
T Dobson     13,053 3,263 253.0p 16,316 250.0p nil
R M Rubright     10,969 2,742 253.0p 13,711 250.0p nil
Dr W Sondermann     6,781 1,695 253.0p 8,476 250.0p nil
                 
Under the DAB Scheme, participants were required to defer 50% of their performance related annual bonus in the form of shares in the Company (“Deferred Shares”) for a period of three years. At the end of the period, matched shares were awarded up to a maximum of two matched shares for every one share deferred, depending on performance against a combination of EPS growth and relative TSR measures. Over the three year period ended 31 December 2001, performance was such that on 9 March 2003, one matched share was awarded for every four Deferred Shares.

Once the shares have unconditionally vested, participants have the option of selling their deferred and matched shares or earning additional matched shares at the rate of one for every five shares that are retained for a further two-year period. Potential additional matched shares vesting in March 2004 are: Mr Atkinson 1,408 shares, Mr Dobson 4,314 shares and Dr Sondermann 2,009 shares and in March 2005 are: Mr Atkinson 1,480 shares, Mr Dobson 3,263 shares and Dr Sondermann 1,695 shares.

On behalf of the board

Gerry Brown
Chairman
Remuneration Committee
11 March 2004