| Remuneration report Rolls-Royce operates in a highly competitive, international market. Its business is complex, technologically advanced and has long time horizons. The improvement in performance to which the Group is committed depends crucially on the individual contributions made by the executive team and by employees at all levels. It is for this reason that the Board strongly believes that an effective remuneration strategy will continue to play a crucial part in the future success of the Group by providing keen incentives and creating a close identity of interest with shareholders. This report also describes how the principles identified by the Combined Code in relation to executive directors’ remuneration are applied by the Company. The remuneration committee
In line with the requirements of the Combined Code, the remuneration committee (the committee), which operates within agreed terms of reference, has responsibility for making recommendations to the Board on the Group’s general policy towards executive remuneration. The committee determines, on the Board’s behalf, the specific remuneration packages of the executive directors and a number of senior executives. The membership of the committee consists exclusively of independent non-executive directors. The members are Sir Robin Nicholson (Chairman), Mr P J Byrom, Lord Moore of Lower Marsh, Mr C G Symon and Sir John Weston. The committee meets regularly and has access to professional advice from inside and outside the Company. The Chairman of the Company, Sir Ralph Robins, and the Chief Executive, Mr J E V Rose, generally attend meetings by invitation but are not present during any discussion of their own emoluments. Compliance
The Board confirms that the Company has complied throughout the year with the provisions of the Combined Code relating to directors’ remuneration. The framework of remuneration
The Board has adopted, on the recommendation of the committee, a remuneration policy reflecting the following broad principles: i) The remuneration of executive directors and other senior executives should directly reflect their responsibilities and contain incentives to deliver the Group’s performance objectives; ii) A significant proportion of total remuneration should be based on Group and individual performance, both in the short and long term; and iii) The system of remuneration should encourage a close identity of interest between senior management and shareholders. Within this framework of remuneration, the committee keeps under regular review the competitiveness of the Group’s remuneration structure. The main components of remuneration
The emoluments of executive directors and senior executives currently comprise the following elements: a base salary, an annual performance related award, long-term incentive arrangements, pension contributions and other benefits. The policy takes into account pay levels elsewhere in the Group. Base salary
The committee believes that in order to attract and retain executive directors of the right calibre and to provide them with adequate incentives to deliver the Group’s objectives, the Group should pursue a policy of offering median-level base salaries for its executive directors and senior executives, and through the performance-related schemes, the opportunity of upper quartile earnings for upper quartile performance. Annual performance related award scheme
Executive directors and senior executives participate in an annual performance related award scheme. The scheme enables a maximum performance award of up to 60 per cent of salary to be paid to executive directors and a small number of senior executives for exceptional performance against pre-determined targets based upon return on capital employed, with a tapered and reducing scale of maximum percentages for other senior executives. The targets are set by the committee based upon the Group’s annual operating plans. Such payments do not form part of pensionable earnings. One third of any awards made are paid in Rolls-Royce shares which are held in trust for two years, with release normally being conditional on the individual remaining in the Group’s employment until the end of the period. The required shares are purchased on the open market. This arrangement provides a strong link between performance and remuneration and helps to promote a culture of share ownership amongst the Group’s senior management. The first Rolls-Royce shares delivered under the deferred share arrangements were purchased in the market on behalf of participants and put into trust in March 2000. Long-term incentives
The Company has operated a long-term incentive plan (LTIP) since January 1, 1997. Following a review by the committee of long-term incentive arrangements, it introduced with shareholder approval a new executive share option plan in 1999. The committee made clear at the time that no director or senior executive would receive a grant under both schemes in the same year. The committee is aware that the nature of long-term incentives offered is subject to change. It will therefore continue to review market practice and develop plans which provide competitive rewards for performance, align executive and shareholder interests and reflect the nature and requirements of the business. Executive share option plan
Depending on performance, executives are eligible to receive options on an annual basis. Options are granted at the mid-market price on the day before the day of issue and normally have to be held for a minimum of three years before they are capable of exercise. They expire after ten years. In line with the committee’s view that an increasing proportion of remuneration should be performance related, the exercise of options is subject to a performance condition that the Group’s growth in earnings per share (EPS) must exceed the UK retail price index by three per cent per annum, over a three-year period. The committee wishes to retain flexibility in the use of existing or new issue shares to fund the scheme, but has a general preference in favour of existing shares. The first grants of options to UK executives under the new executive share option plan were made in March 2000. A further grant was made to a small number of newly recruited executives in September 2000. (See note 24 on page 60). 1 2 3 | 
