Remuneration Report

In 2009, the Remuneration Committee (the Committee) reviewed the remuneration arrangements for Executive Directors. The proposed changes for 2010 are summarised in the letter to shareholders shown on this page.

Letter to shareholders

Introduction to the Report

The Remuneration Committee

Executive Directors’ remuneration policy and framework

The total remuneration package

Non-Executive Directors

Other matters in 2009

Other matters in 2008

Statutory disclosures

Audit requirements

The Remuneration Report up to this statement has not been audited. From this point until the end of the Report, the disclosures, with the exception of the Total return indices graphs below, have been audited by the Company’s auditors, PricewaterhouseCoopers LLP.

Directors’ emoluments

    Base
salary/fees
£000
Annual Incentive Scheme (AIS)
£000(i)
Cash payments
in lieu of pension
£000
Benefits and
other cash
£000(ii) (iii)
Total
emoluments
2009
£000(iv)
Total
emoluments
2008
£000(iv)

Notes on information shown in the table

  1. Of the AIS bonus agreed by the Committee in respect of Sam Laidlaw and the other Executive Directors, 60% and 70% respectively is paid in cash and is included above. 40% of the agreed bonus for Sam Laidlaw (£605,364) and 30% of the agreed bonus for each Executive Director (range between £59,445 and £255,496) is deferred automatically will be invested as deferred shares in DMSS. Chris Weston was appointed to the Board on 1 July 2009 and his AIS above is in respect of the period from his date of appointment, subject to the 30% deferral for investment as deferred shares, as outlined above.
  2. Benefits and other cash include a payment to Mark Hanafin and benefits and expenses for Chris Weston made in respect of relocation.
  3. Executive Directors (with the exception of Phil Bentley) received a taxable interest payment in August 2009 at the rate of 1.75% in respect of the notional interest accrued on the delayed voluntary investment element of the DMSS. The purchase of deferred shares and the conditional award of matching shares was made on 3 April 2009. The purchase of investment shares and the conditional award of matching shares was made on 26 May 2009.
  4. The following are excluded from the table above
    • £242,500 was paid directly by the Company in 2009 into a personal pension plan for Sam Laidlaw and is disclosed under the total remuneration package section above.
    • Pensions – see Directors’ pensions below.
    • Share options – the aggregate gains made by Executive Directors on the exercise of Sharesave options during 2009 was £2,004. The price of a Centrica share at the date of exercise was 257.30 pence. No Executive Director exercised executive or Sharesave share options during 2008.
    • LTIS and SLTIS – the aggregate value of shares vested to Executive Directors under LTIS and SLTIS was £2,000,486 (2008: £587,332).
  5. The 2008 total emoluments figure in respect of Mark Hanafin is for the period from 14 July 2008 (being his date of appointment to the Board) to 31 December 2008.
  6. The 2009 total emoluments figure in respect of Chris Weston is for the period from 1 July 2009 (being his date of appointment to the Board) to 31 December 2009.
Executive Directors Date of appointment            
Phil Bentley 13 September 2000 608 596 45 1,249 1,089
Mark Hanafin(v) 14 July 2008 530 487 212 65 1,294 788
Sam Laidlaw 1 July 2006 915 908 124 64 2,011 1,730
Nick Luff 1 March 2007 560 520 168 19 1,267 1,196
Chris Weston(vi) 1 July 2009 250 139 200 589
Past Director Date of leaving the Board            
Jake Ulrich 12 May 2008 352
    2,863 2,650 504 393 6,410 5,155
Chairman Date of appointment            
Roger Carr 1 January 2001 450 450 450
Non-Executive Directors Date of appointment            
Helen Alexander 1 January 2003 72 72 72
Mary Francis 22 June 2004 92 92 92
Andrew Mackenzie 1 September 2005 60 60 60
Paul Rayner 23 September 2004 78 78 78
Past Director Date of leaving the Board            
Paul Walsh 11 May 2009 22 22 60
    774 774 812
Total emoluments   3,637 2,650 504 393 7,184 5,967

Directors’ interests in shares (number of shares)

The following table and the tables below show the interests of the Directors who held office at the end of the year in the ordinary shares of the Company and, for the Executive Directors who served during the year, their interests in the Company’s share schemes:

Directors as at 31 December 2009 Shareholdings
as at
31 December
2009
Shareholdings
as at 1 January
2009 or on later appointment (i)
DMSS total matching shares as at 31 December 2009 DMSS total matching shares as at 1 January 2009 or on later appointment (i) LTIS and SLTIS total allocations of shares as at 31 December 2009 LTIS and SLTIS total allocations of shares as at 1 January 2009 or on later appointment (i)

Notes on information shown in the table

  1. Chris Weston was appointed to the Board on 1 July 2009.
  2. Executive Directors’ shareholdings shown above include those held in the Share Incentive Plan and the deferred and investment shares held in the DMSS. Matching shares held in the DMSS, and shares held in the LTIS and SLTIS, are provided separately in the table above and in more detail in their respective tables below.
Executive Directors            
Phil Bentley(ii) 1,279,084 1,004,410 482,190 309,992 1,310,632 1,081,655
Mark Hanafin(ii) 150,909 332,245 933,780 560,642
Sam Laidlaw (ii) 1,210,438 647,817 1,459,334 757,695 2,002,611 1,680,993
Nick Luff(ii) 509,604 368,298 774,139 417,352 1,220,397 726,679
Chris Weston(ii) 421,680 416,902 470,692 470,692 828,338 730,338
Chairman            
Roger Carr 26,441 26,441
Non-Executive Directors            
Helen Alexander 3,465 3,465
Mary Francis 3,500 3,500
Andrew Mackenzie 28,875 28,875
Paul Rayner 26,875 6,875

From 1 January 2009 to 24 February 2010, none of the Directors had any interests in the securities of the Company’s subsidiary or associated undertakings.

Changes since 1 January 2010

During the period from 1 January 2010 to 24 February 2010, there were no changes to the Directors’ interests in shares apart from the shareholdings of Phil Bentley, Sam Laidlaw, Nick Luff and Chris Weston which had each increased by 134 shares and by 133 shares for Mark Hanafin in respect of shares acquired through the Share Incentive Plan.

DMSS allocations for Executive Directors who served during the year (number of shares)

  Deferred and investment  shares held as at 1 January 2009 or on later appointment (i) Deferred and investment  shares acquired during the year Deferred and investment shares held as at 31 December 2009 Conditional matching shares held as at 1 January 2009 or on later appointment (i) (ii) Conditional matching shares awarded during the year (ii) Conditional matching shares held as at 31 December 2009 (ii)
Phil Bentley            
2007 71,334 71,334 204,133 204,133
2008 51,312 51,312 105,859 105,859
2009 - 86,099 86,099 - 172,198 172,198
  122,646 86,099 208,745 309,992 172,198 482,190
Mark Hanafin            
2009   113,519 113,519 332,245 332,245
Sam Laidlaw            
2007 115,980 115,980 306,021 306,021
2008 182,209 182,209 451,674 451,674
2009 - 282,574 282,574 - 701,639 701,639
  298,189 282,574 580,763 757,695 701,639 1,459,334
Nick Luff            
2007 68,904 68,904 190,816 190,816
2008 91,926 91,926 226,536 226,536
2009 - 140,352 140,352 - 356,787 356,787
  160,830 140,352 301,182 417,352 356,787 774,139
Chris Weston            
2007 34,192 34,192 70,541 70,541
2008 49,927 49,927 120,111 120,111
2009 109,241 109,241 280,040 280,040
  193,360 193,360 470,692 470,692

Dates of allocation, prices and performance periods for outstanding DMSS awards

  Date of allocation of deferred shares Market price at date of allocation of deferred shares (pence) Date of allocation of investment shares Market price at date of allocation of investment shares (pence) End of performance period

Notes on information shown in the DMSS tables

  1. Allocations for 2007 and 2008 were adjusted in 2008 to take account of the dilutive effect of the Rights Issue.
  2. At allocation the calculation of the conditional matching shares is made on a gross basis. For the calculation of the matching shares, investment shares are grossed up (to reflect the impact of income tax and employees’ National Insurance contributions) so that the deferred and investment shares are matched on the same basis. The number of matching shares that will be released following the satisfaction of the performance condition will be increased to reflect the dividends that would have been paid during the three-year performance period, as if they had been paid on the normal dividend payment dates. Dividends are paid on the deferred and investment shares to the participants on the normal dividend payment date.
  3. In 2008 the operation of DMSS was delayed due to the Executive Directors and other senior executives being subject to prolonged dealing restrictions under the Company’s Share Dealing Code. 20% of the AIS paid in April 2008 was deferred automatically. The investment in deferred and investment shares and the conditional award of matching shares were made on 13 October 2008, once the Company had ceased to be in a prohibited period.
  4. In 2009 40% of the AIS paid to Sam Laidlaw, and 30% for the other Executive Directors, was deferred automatically. The investment in deferred shares and the conditional award of matching shares were made on 3 April 2009. The voluntary element of the DMSS was delayed due to the Executive Directors and other senior executives being subject to dealing restrictions under the Company’s Share Dealing Code. The purchase of investment shares and the conditional award of matching shares were made on 26 May 2009, once the Company had ceased to be in a prohibited period.
2007 4 Apr 07 348.53 4 Apr 07 348.53 Apr 2010
2008(iii) 13 Oct 08 255.50 13 Oct 08 255.50 Apr 2011
2009 (iv) 3 Apr 09 221.75 26 May 09 248.25 Apr 2012

LTIS and SLTIS allocations for Executive Directors who served during the year (number of shares)

  Vested during 2009   In performance period
  3 April 2006
(i) (iii)
4 September
2006 (ii) (iii)
26 September
2008 (iv)
  4 April 2007 (v) 3 April 2008 (v) 1 September 2008 (v) 26 September 2008 (iv) 3 April 2009 (v) 9 September 2009 (v)
Notes on information shown in the table
  1. (LTIS awards made in April 2006 were subject to EPS and TSR performance conditions. As at 31 December 2008, the Company’s EPS growth had exceeded RPI by 25.1% and as a result 82.14% of the EPS shares allocated vested. At the end of the performance period to 2 April 2009, the Company ranked 19th against the FTSE 100 comparator group as constituted at the start of the performance period and as a result 100% of the TSR shares vested. Consequently, overall 91.07% of the original allocations were released to participants on 7 April 2009.
  2. LTIS awards made in September 2006 were subject to EPS and TSR performance conditions. As at 31 December 2008, the Company’s EPS growth had exceeded RPI by 25.1% and as a result 82.14% of the EPS shares allocated vested. At the end of the performance period to 3 September 2009, the Company ranked 34th against the FTSE 100 comparator group as constituted at the start of the performance period and as a result 65% of the TSR shares vested. Consequently, overall 73.57% of the original allocations were released to participants on 9 September 2009.
  3. Additional shares were released to reflect the value of the dividends that would have been paid over the respective three-year period. The total shares released were subject to income tax at the individual’s marginal rate and employees’ National Insurance contributions (NICs) at the rate of 1%, based on the market value of the shares at the date of vesting. The income tax and NICs liability was satisfied by the sale of sufficient shares and, accordingly, the Executive Directors only received the net number of shares following the sale, which, to the extent retained, is reflected in the shareholdings as at 31 December 2009
  4. 188,260 shares (made in two equal tranches) were awarded to Mark Hanafin under SLTIS as part of the terms of his appointment in 2008. In accordance with the rules of the SLTIS there are no performance conditions attaching to the award other than continued employment with the Company. In the event of a change of control the number of shares that vest will not be subject to time-apportionment. The first tranche of 94,130 shares were released on 2 March 2009 and were subject to the same income tax and NICs treatment as set out in note (iii) above, with the sale of sufficient shares to satisfy the liabilities. The remaining 94,130 shares will vest on 28 February 2010.
  5. At the end of each performance period the Company’s EPS and TSR performance will be assessed. If, and to the extent that the performance conditions are met, the relevant number of shares will be released to the Executive Directors, at the Trustee’s discretion, as soon as practicable thereafter.
Phil Bentley 317,542   332,329 436,095 542,208
Mark Hanafin 94,130   372,382 94,130 467,268
Sam Laidlaw 402,051   516,137 679,774 806,700
Nick Luff   310,643 416,036 493,718
Chris Weston   130,044 269,680 330,614 98,000
                     
Market price at allocation date (pence) 252.83 269.30 290.88   348.53 271.08 292.00 290.88 221.75 257.40
End of performance period 2 Apr 09 3 Sep 09 28 Feb 09   3 Apr 10 2 Apr 11 31 Aug 11 28 Feb 10 2 Apr 12 8 Sep 12
Market price at vesting date (pence) 227.50 251.90 270.50              

Performance graphs – TSR performance compared with comparator group used for each LTIS award

The following graphs, provided by Alithos Limited (an independent third party), shows the TSR performance of the Company and that of the relevant LTIS comparator group and relate to the 2006 LTIS allocations which vested in 2009. They have not been audited by the Company’s auditors, PricewaterhouseCoopers LLP.

Total return indices – Centrica and FTSE 100 companies at 3 April 2006
APRIL PERFORMANCE GRAPH IMAGE
  •  Centrica return index
  •  FTSE 100 at 3 April 2006 return index

Source: Alithos Limited
3 April 2006 = 100

Total return indices – Centrica and FTSE 100 companies at 4 September 2006
SEPTEMBER PERFORMANCE GRAPH IMAGE
  •  Centrica return index
  •  FTSE 100 at 4 September 2006 return index

Source: Alithos Limited
4 September 2006 = 100

Directors’ minimum shareholding policy

As stated in the Executive Directors' remuneration policy and framework, the Executive Directors are required to hold shares with a value based on a multiple of their base salary. Executive Directors have a period of five years in which to achieve their minimum shareholding requirement. The table below sets out the individual requirement and level of shareholding achieved for each Executive Director as at 31 December 2009.

  Base salary £000 (i) Value of shareholdings £000 (ii) Minimum shareholding requirement as % of base salary Actual shareholding as % of base salary Target to be achieved by or achieved
Notes on information shown in the table
  1. The base salary used to determine whether the shareholding requirement has been achieved is an Executive Director’s annual salary as at 31 December 2009.
  2. The value of shareholdings is based on the closing price of a Centrica ordinary share of 281.10 pence on the last trading day of 2009, which was 31 December 2009.
Phil Bentley 615 3,596 125 585 Achieved
Mark Hanafin 530 424 125 80 13 July 2013
Sam Laidlaw 915 3,403 200 372 Achieved
Nick Luff 560 1,432 125 256 Achieved
Chris Weston 500 1,185 125 237 Achieved

Directors’ interests in share options

Full details of the options over ordinary shares in the Company held by Executive Directors who served during the year, and any movements in those options in the year, are shown below.

  Options held as at 1 January 2009 or on later appointment (i) Options granted during the year Options exercised during the year Options lapsed during the year Options held as at 31 December 2009 Exercise price (adjusted where appropriate)(pence) Date from which exercisable Expiry date
Notes on information shown in the table of Directors’ interests in share options
  1. Executive Directors’ ESOS, SESOS and Sharesave grants and their respective option prices at the start of the year are shown as at 1 January 2009 or, in the case of Chris Weston, at 1 July 2009, his date of appointment to the Board.
Phil Bentley                
ESOS 346,277 346,277 213.70 Jun 2004 May 2011
ESOS 409,744 409,744 200.12 Apr 2005 Apr 2012
ESOS 628,312 628,312 130.50 Mar 2006 Mar 2013
ESOS 451,426 451,426 199.36 Mar 2007 Mar 2014
ESOS 496,187 496,187 203.55 Apr 2008 Mar 2015
ESOS 417,642 417,642 253.80 Apr 2009 Apr 2016
Sharesave 3,643 3,643 259.32 Jun 2010 Nov 2010
  2,753,231 2,753,231      
Mark Hanafin                
SESOS 336,012 336,012 255.94 Sep 2008 Sep 2018
Sharesave 4,727 4,727 193.54 Jun 2012 Nov 2012
  336,012 4,727 340,739      
Sam Laidlaw                
Sharesave 3,643 3,643 259.32 Jun 2010 Nov 2010
Nick Luff                
Sharesave 7,392 7,392 227.24 Jun 2013 Nov 2013
Chris Weston                
ESOS 112,330 112,330 130.50 Mar 2006 Mar 2013
ESOS 120,379 120,379 199.36 Mar 2007 Mar 2014
ESOS 130,187 130,187 203.55 Apr 2008 Mar 2015
ESOS 267,920 267,920 253.80 Apr 2009 Apr 2016
Sharesave 4,412 4,412 211.87 Jun 2009 Nov 2009
Sharesave 4,727 4,727 193.54 Jun 2012 Nov 2012
  639,955 4,412 635,543      

Executive Share Option Scheme (ESOS)

  • Options were granted to the Executive Directors under the terms of the ESOS on 31 May 2001, 2 April 2002, 24 March 2003, 18 March 2004, 1 April 2005 and 3 April 2006.
  • No options were granted in 2007, 2008 or 2009.
  • During 2009 the Committee considered whether the performance test had been met in respect of the grants made in 2006. Over the three-year performance period EPS growth was 25.1% in excess of RPI and the options granted in 2006 vested in full. The performance criteria have now been met in respect of all of the outstanding grants under ESOS, and the Executive Directors have a 10 year period from each date of grant during which they can exercise their options

Special Executive Share Option Scheme (SESOS)

  • Options were granted to Mark Hanafin under the terms of the SESOS on 26 September 2008. In accordance with the rules of the SESOS, the grant is not subject to any performance conditions and is exercisable and will normally remain so until the tenth anniversary of the grant date.

The closing price of a Centrica ordinary share on the last trading day of 2009, which was 31 December 2009, was 281.10 pence. The range during the year was 214.75 pence (low) and 285.75 pence (high).

Share Plan arrangements for Venture employees

Following the acquisition of Venture Production plc (Venture) in 2009, employees previously employed by Venture were awarded shares under the Centrica Share Award Scheme 2007 on 1 October 2009. Such awards will vest on 1 August 2010 and in accordance with the scheme rules there are no performance conditions other than continued employment within the Group. In addition, a new Centrica Deferred Bonus Plan was introduced for the same population of Venture employees under which they are given the opportunity to defer up to 100% of their actual bonus paid for the four month period ended on 31 December 2009, and receive an award of conditional shares. Such awards would vest after two years at which time they are eligible for matching shares on a 1.5 for 1 basis, subject to continued employment within the Group. No Executive Directors participated in these arrangements.

Past Directors

The Committee exercised its discretion, in accordance with the rules of the ESOS, to permit Jake Ulrich to exercise his options up to six months from the third anniversary of the date on which an option was last granted to him i.e. at any time before 3 October 2009. All of his options were exercised before this date. Under the Sharesave rules, his outstanding options were exercisable until 31 January 2009, and were exercised before this date.

Performance graph – TSR performance compared with FTSE 100 Index

Total shareholder return indices – Centrica and FTSE 100 Index for the five years ended 31 December 2009

TOTAL SHAREHOLDER RETURN INDICES IMAGE
  •  Centrica return index
  •  FTSE 100 return index

Source: Alithos Limited
31 December 2004 = 100

The graph above compares the Company’s TSR performance with that of the FTSE 100 Index for the five years ended 31 December 2009 as required by Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. A rolling definition of the FTSE 100 has been used. This is not the same as the definition used for the purposes of the LTIS.

Directors’ pensions

Of the five Executive Directors who served during 2009, Phil Bentley and Chris Weston are members of the Centrica Pension Plan (CPP) which was formerly known as the Centrica Management Pension Scheme (CMPS). Mark Hanafin, Sam Laidlaw and Nick Luff, who all joined the Company in recent years, are not members of any of Centrica’s pension schemes.

Centrica Pension Plan (CPP)

The CPP is a funded, HMRC-registered, final salary, contributory occupational pension scheme. Its rules have the following main features:

  • normal retirement at age 62;
  • right to an immediate, unreduced pension on leaving service after age 60 at own request with employer consent, or on leaving service at the Company’s request after age 55;
  • life assurance cover of four times pensionable earnings for death in service;
  • spouse’s pension on death in service payable at the rate of 50% of the member’s prospective pension and, on death after retirement, half of the accrued pension. Children’s pensions on death are also payable at 25% of the member’s prospective pension at normal retirement age;
  • members’ contributions payable at the rate of 6% of pensionable earnings. Contributions made by the Executive Directors who are also members of the Centrica Unapproved Pension Scheme (CUPS) are payable at the rate of 6% of their total pensionable earnings above the scheme earnings cap;
  • pension payable in the event of retirement due to ill health;
  • pensions in payment and in deferment guaranteed to increase in line with the increase in the RPI (a maximum of 6% applies to pension accrued after 6 April 2004); and
  • no discretionary practices are taken into account in calculating transfer values.

Centrica Unfunded Pension Scheme (CUPS)

All registered scheme benefits are subject to HMRC guidelines. As a result of the changes introduced by Centrica following the 2004 Finance Act, benefits at 6 April 2006 from the registered scheme, the CPP, could not exceed the Lifetime Allowance (£1.75 million for the 2009/10 tax year) after taking account of retained benefits from all other sources notified to Centrica at this time. The CUPS provides any additional benefits in excess of the maximum amount that could be provided through the CPP on the members’ uncapped pensionable earnings. The benefits that arise under CUPS are treated as being subject to the same rules as apply in respect of the registered portion of members’ benefits. No individuals will receive benefits from Centrica which, when added to their retained benefits elsewhere at 6 April 2006, exceed two-thirds of their final pensionable earnings. CUPS is unfunded but the benefits are secured by a charge over certain Centrica assets. An appropriate provision in respect of the accrued value of these benefits has been made in the Company’s Balance Sheet.

Pension benefits earned by Directors in the CPP and CUPS

  Accrued pension as at 31 December 2009
£
Accrued pension as at 31 December 2008
£
Increase in accrued pension less inflation
£
Transfer value as at 31 December 2009
£
Transfer value as at 31 December 2008
£
Contributions paid in 2009
£
Difference in transfer value less contributions
£
Transfer value of increase in accrued pension excluding inflation
£
Phil Bentley 168,800 146,000 22,800 2,246,800 1,309,300 36,480 901,020 256,000
                 
  Accrued pension as at 31 December 2009
£
Accrued pension as at 30 June 2009
£
Increase in accrued pension less inflation
£
Transfer value as at 31 December 2009
£
Transfer value as at 30 June 2009
£
Contributions paid since 1 July 2009
£
Difference in transfer value less contributions
£
Transfer value of increase in accrued pension excluding inflation
£
Notes on information shown in the table
  1. The accrued pension is that which would be paid annually on retirement at age 62, based on eligible service to, and pensionable earnings at, 31 December 2009. The pension accrual rates for 2009 for Phil Bentley and Chris Weston were 2.65% and 2.22% of final pensionable earnings respectively. For Chris Weston the increase in the accrued pension covers the period since his appointment to the Board on 1 July 2009.
  2. As at 31 December 2008 the accrued pension for Chris Weston as an employee of the Group was £68,700.
  3. The figures shown for the increase in the accrued pension excludes inflation as the annual rate to 30 September 2009 was below the minimum of 0.0%. This is consistent with the rate used for pension increases for the CPP and CUPS.
Chris Weston 87,300 77,000 10,300 876,600 562,200 15,000 299,400 59,600

This Report on remuneration has been approved by the Board of Directors and signed on its behalf by:

Grant Dawson
General Counsel & Company Secretary
25 February 2010