Long-term incentive plan
The LTIP involves the grant of awards which can be realised in the form of shares in the Company and cash if demanding performance targets are met. The maximum value of an award is 60 per cent of salary at the time of grant.

The percentage of the award which is realisable depends upon the Company’s total shareholder return (TSR) over a three-year period, compared to that of a group of comparator companies comprising other leading engineering and industrial companies. In addition, no award can be realised unless the average growth in the Group’s EPS over the three-year period is at least two per cent per annum greater than the average increase in the UK retail price index over the same period.

If a company drops out of the comparator group (eg as a result of a take-over), it is not replaced. An adjustment is then made to the rankings which determine the extent to which any awards can be realised.

There are currently 15 companies in the group. 100 per cent of the award is realisable for a first or second ranking, within the comparator group. 40 per cent of an award is realisable for a seventh place ranking. The percentage of an award realisable for rankings between second and seventh place is calculated on a sliding scale. No award is payable if the company’s TSR ranking is eighth or below.

The performance period for the 1998 LTIP grant ended on December 31, 2000 and no awards were realised.

In line with the committee’s stated policy, no grants under the LTIP were made in 2000.

All employee incentives
The committee believes that share based schemes, described in more detail on page 60, make a significant contribution to the close involvement and interest of all employees in the Group’s performance. The Company introduced an approved profit sharing share scheme for UK employees in 1999. The first shares delivered under this scheme were purchased in the market and put into trust in April 2000, with 22 per cent of UK employees electing to participate.

The Finance Act 2000 enabled companies to introduce more tax effective All Employee Share Ownership Plans (AESOP). In common with many other companies, Rolls-Royce is seeking a general authority from shareholders at the 2001 Annual General Meeting to enable it to introduce an AESOP. At the same time, approved profit sharing share schemes, such as the current scheme operated by the Company, are to be discontinued.

Pensions
Mr J M Guyette participates in pension plans sponsored by Rolls-Royce North America Inc.

All other executive directors under their normal retirement age are members of the Group’s UK pension schemes. These schemes are funded and approved final salary pension schemes providing, at retirement, a pension of up to two thirds of final remuneration, subject to Inland Revenue limits.

The Company also operates the Rolls-Royce 1994 Senior Executive Retirement Scheme (SERS). The purpose of the SERS is to fund pension provision above the pensionable earnings cap which was imposed on approved pension schemes under the 1989 Finance Act. Membership of the scheme is restricted to executive directors and to a limited number of senior executives. The scheme is administered by three trustees, under the Chairmanship of Lord Moore of Lower Marsh, none of whom has a beneficial interest in the scheme. The members of the scheme include Mr P Heiden and Mr R T Turner. They joined the Group after the introduction of the earnings cap and their terms and conditions on joining the Group included a commitment to provide pension and life cover based on total salary, in line with other directors and senior executives. The committee believes that for these executive directors, a funded arrangement is in the best interests of shareholders and avoids the build up of unfunded liabilities for the future.

During the year, special bonus payments were made to Mr P Heiden and Mr R T Turner to cover the income tax liability incurred by them on the contribution payments made by the Company into the SERS. These payments amounted to £29,415 (1999 £11,500) in the case of Mr P Heiden and £41,018 (1999 £37,000) in the case of Mr R T Turner.

The Company does not make any pension contributions in respect of Sir Ralph Robins, who reached normal retirement age in June 1994.

Details of the pension benefits, which accrued over the year in the Group’s approved UK pension schemes are given below^1,4.

Details of the retirement benefits, which accrued over the year in the SERS and the plans sponsored by Rolls-Royce North America Inc., are given below⁵.

Notes

¹ The pension entitlement shown is that which would be paid annually on retirement, based on service to the end of the year.

² The transfer value stated represents liabilities of the Rolls-Royce sponsored pension schemes and not sums paid to the individuals. The transfer value has been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11, less the director’s contributions. Actuarial Guidance Note GN11 covers individual transfer calculations and the above figures have been calculated using assumptions certified by the Actuaries as being consistent with GN11.

³ Benefits are translated at US$1.52  = £1.00.

⁴ Members of the schemes have the option to pay Additional Voluntary Contributions. Neither the contributions nor the resulting benefits are included in the above table.

⁵ The lump sum entitlement shown is that which would be paid on retirement based on service to the end of the year.

⁶ The transfer values have been calculated on the basis of actuarial advice.

⁷ Mr J M Guyette is a member of two defined benefit plans in the USA, one qualified and one non-qualified. Mr J M Guyette is also a member of an unfunded non-qualified plan in the USA. He accrues a retirement lump sum benefit in all three plans. The aggregate value of the three plans is shown in the second table. In addition, Mr Guyette is a member of two 401(K) Savings Plans in the USA, one qualified and one non-qualified, to which his employer, Rolls-Royce North America Inc., contributes. During 2000 the employer’s contributions amounted to £19,136.

Service contracts
Sir Ralph Robins has a one-year rolling contract, which provides for 12 months’ notice in event of termination by the Company. He works for the Company at the equivalent rate of three days a week.

Mr J M Guyette has a contract with Rolls-Royce North America Inc., drawn up under the laws of the State of Virginia. It is for an indefinite term and provides that on termination without cause he is entitled to one year’s severance pay without mitigation.

In the light of the Combined Code, the committee has reviewed its previous policy of offering UK executive directors two-year rolling contracts. It has concluded that new appointees to the Board will be offered notice periods of one year. The committee recognises that in the case of appointments to the Board from outside the Company, it may be necessary to offer a longer initial notice period, which would subsequently reduce to twelve months after that initial period.

Mr J E V Rose, Mr C H Green, Mr P Heiden, Mr P C Ruffles
and Mr R T Turner have two-year rolling contracts which provide for 24 months notice in the event of termination of employment by the Company. These contracts were entered into before the change in the policy described above.

The non-executive directors do not have service contracts.

Compensation and mitigation
The committee has a defined policy on compensation and mitigation to be applied in the event of a UK director’s contract being prematurely terminated. In these circumstances, steps are taken to ensure that poor performance is not rewarded. When calculating termination payments, the committee takes into account a range of factors such as age, years of service and the director’s obligation to mitigate his own loss.

Non-executive directors
The fees paid to non-executive directors are determined by the executive directors who are informed by independent market surveys. Each non-executive director receives an annual fee of £25,000. In addition, fees of £5,000 per annum are paid in respect of membership of the audit and remuneration committees and £7,500 per annum to the chairmen of these committees. (Membership of the committees is reported on pages 27 and 30).

Lord Moore of Lower Marsh is Chairman of the Trustees of the Rolls-Royce Pension Fund and receives an annual fee of £10,000 for performing this role.

Sir Robin Nicholson was appointed Chairman of the Company’s Environmental Advisory Board in February 2000. During the year he received £1,250 for performing this role.

Non-executive directors do not participate in any of the Company’s share schemes, performance pay arrangements or pension schemes.

Individual directors’ emoluments
The individual directors’ emoluments are analysed as follows:

					2000	1999
	Basic salaries £000	Board and committee fees £000	Taxable benefits £000	Rolls-Royce plc Annual performance related award scheme1 £000	Aggregate emoluments excluding penions contributions2 £000	Aggregate emoluments excluding pensions contributions £000
Sir Ralph Robins 3	345	—	23	89	457	430
Mr J E V Rose	539	—	18	132	689	604
Mr C H Green	314	—	23	76	413	408
Mr J M Guyette4	355	—	37	89	481	453
Mr P Heiden	322	—	15	82	419	354
Mr P C Ruffles	299	—	16	76	391	330
Mr R T Turner	247	—	17	62	326	310
Mr P J Byrom	—	37	—	—	37	37
Lord Moore of Lower Marsh	—	45	—	—	45	45
Sir Robin Nicholson	—	39	—	—	39	37
Mr C G Symon	—	30	—	—	30	18
Sir John Weston	—	30	—	—	30	30
Sir Gordon Higginson 5	—	—	—	—	—	12
Mr M Townsend 6	—	—	—	—	—	907
	2,421	181	149	606	3,357	3,975

¹ One-third of the award was paid in Rolls-Royce shares (see page 30).

² Details of the directors’ pensions are set out on pages 31 and 32.

³ 40% of Sir Ralph Robins’ taxable benefits for 2000 was reimbursed by Cable & Wireless plc, in respect of his position as non-executive Chairman of that Company.

⁴ Mr J M Guyette was paid in US dollars translated at $1.52 = £1.

⁵ Sir Gordon Higginson retired as a director with effect from May 27, 1999.

⁶ Mr M Townsend retired as a director with effect from December 31, 1999.

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