Directors’ remuneration report

LTIP

Under the LTIP, executive directors and senior managers may receive, at the discretion of the Remuneration Committee, annual conditional awards of shares in the Company worth up to 100% of annual salary at grant, although only the executive directors participate at this level. All awards have three year pre-vesting performance conditions. These are described in detail below but, in summary, the current policy is for half of an award to be subject to relative total shareholder return (TSR) performance against the FTSE 250 (excluding investment trusts) and the other half to be subject to a relative return on capital target as monitored by Ofwat.

The Committee, with advice from HNBS, has reviewed the LTIP and is still of the view that it remains the most appropriate equity incentive plan, particularly in the light of the Company’s dividend policy.

TSR remains an appropriate performance measure because it ensures that executives are rewarded fairly for value created for the Company’s investors. Relative return on capital employed was chosen as a complementary measure because:

• it directly compares NWL’s financial performance against that of its peers;
• it is objectively measured and verified by a third party (Ofwat);
• there is no subjectivity in determining what level of return would be a good and excellent result (it being a relative measure to which quartile analysis is applied); and
• the comparative approach should be able to deal with the five year pricing reviews without the Remuneration Committee having to reset targets.

On 15 December 2008, the Remuneration Committee granted the following LTIP awards:

	Number of conditional awards granted	Face value of awards granted as a % of salary†
John Cuthbert	103,100	88%
Chris Green	78,650	88%

† Based on a closing share price on 15 December 2008 of 251.5 pence.

For the awards set out above, the three years to be reviewed are 2008/09, 2009/10 and 2010/11. Over the three year performance period, the return on capital employed will be calculated on a compounded annualised return basis.

In addition, awards will only vest if the Committee is satisfied that the Company’s TSR performance is consistent with the underlying business performance of the Company. An independent firm is engaged by the Committee to calculate the TSRs and to assess the extent to which the performance conditions have been met, so that the process is rigorous and transparent.

In the event of a change of control, the Committee would determine the extent to which the performance conditions had been met and the proportion of the performance period that had elapsed in deciding whether or not any vesting of awards would take place.

The LTIP award, granted on 9 December 2005, became available to vest on 9 December 2008. The Committee instructed PricewaterhouseCoopers (PwC) to assess the level of vesting of this award. PwC reported that 29.7% of the award was available to vest (being 99% of the award relating to the Company’s TSR performance against the FTSE 250 Index and 0% of the award relating to the Company’s TSR performance against the other listed water companies). Prior to vesting, the Committee satisfied itself that the recorded TSR performance was a genuine reflection of the Company’s underlying performance. Details of the number of awards which lapsed and those which were exercised by the directors of the Company are shown in Table 3.

Full details of award levels and performance conditions are shown in Table 2.

Responsible investment

The Committee is aware of Guideline 3.2 of the ABI Guidelines on Responsible Investment Disclosure and is satisfied that neither the executive directors’ annual bonus targets nor the LTIP performance conditions are likely, inadvertently, to motivate irresponsible behaviour.