Directors’ remuneration report

Remuneration policy

The Committee considers the principles and provisions of the Combined Code when setting its policy and believes it is fully compliant. The policy of the Company, which applied throughout 2008/09 and applies for 2009/10 and subsequent financial years, is to provide remuneration that is sufficient to attract, retain and motivate directors of the quality required to run the Company successfully, while paying fairly. Although HNBS provides the Committee with detailed comparative data on other companies in the sector, the Committee is aware of, and avoids the risk of, remuneration being ratcheted up as a result of benchmarking exercises.

Consistent with its fair pay policy, when considering the remuneration packages of senior executives and directors, the Committee takes into account pay awards to other employees in the Group. The Committee also considers environmental, social, risk management and governance issues when setting remuneration terms.

The remuneration policy of the Committee is:

• that the setting of base salaries is largely influenced by individual contributions and internal relativities rather than external comparators (although for 2009/10 the Committee has been influenced by general economic conditions);
• that the annual bonus plan recognises the interests of all of the Company’s stakeholders (shareholders, customers and employees) rather than being focused solely on profit; and
• that management shares in the longer term value created for the Company’s investors, but equity incentive schemes should only reward if there is clear outperformance of the market and other relevant companies.

Elements of remuneration

The remuneration of the executive directors comprises:

• basic salary;
• benefits (including pension and participation in the Company’s SIP);
• a performance related annual bonus; and
• annual LTIP awards.

In addition to reviewing each constituent element, the Committee reviews the remuneration packages as a whole to ensure that they remain appropriate in terms of structure, gearing and quantum. The chart below shows the composition of the Managing Director’s remuneration (as a percentage of basic salary) both at ‘target’ and ‘maximum’ levels of performance. Maximum performance assumes the achievement of maximum bonus and full vesting of LTIP awards.

Basic salary and benefits

Basic salary is reviewed annually based on individual contributions and internal relativities. The Committee also has regard to market practice in other quoted water companies and similar sized companies more generally.

Current basic salaries, together with the previous year’s salaries, are set out below:

The basic salaries of the executive directors have not been increased for 2009/10 in recognition of the fact that RPI at the date of the review was zero. All other employees have been awarded a 3% increase (in line with the November 2008 RPI) in basic pay for 2009/10.

Benefits provided to the executive directors comprise membership of a defined benefit pension scheme, car allowance and healthcare.