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Dear Shareholder, The remuneration committee's well-defined policy of relating pay to the performance of the company continues to be central in determining the remuneration of the executive directors. As is commented on in BP Annual Report and Accounts 2003, the company produced strong financial results in 2003 as well as excellent progress on the implementation of the company's strategic plans. The outcome of the committee's assessment for 2003 has therefore been an increase in the performance-related annual bonus and share element of the Executive Directors' Incentive Plan, compared with the reductions in 2002. Share option grants, made in February 2003, were maintained at the same level as 2002. Salaries, other than for promotions, were increased by up to 5% mid-year to maintain our competitive position. Further details on the above are set out in the committee's report. The independent process and advice the committee utilizes continue to give us confidence in our policy and its application. We also value our dialogue with major shareholders. During 2004, we will be conducting a comprehensive review of our plans and policies with an expectation of bringing new long-term plans to shareholders for approval in 2005 when our current Executive Directors' Incentive Plan expires. I am confident that our approach will continue to align executive directors' remuneration with the interests of shareholders as well as retain and engage the world-class team of individuals we have leading the company.  Sir Robin Nicholson Chairman, Remuneration Committee 9 February 2004 The remuneration committee Tasks The committee's tasks are set out in the board governance policies adopted by the board and include:
Constitution and operation The committee members are all non-executive directors. The membership throughout 2003 was: Sir Robin Nicholson (chairman), Mr Davis, Dr Julius, Mr Knight and Sir Ian Prosser. Currently, each member of the committee is subject to re-election every three years; however, annual re-election is proposed from 2005. The board considers all the members of the committee to be independent (see Related links). The committee met six times in 2003. There was a full attendance record, except that Sir Ian and Mr Davis were each unable to attend one meeting. Advice The committee receives independent advice from the company secretary's office, which is independent of executive management and reports to the non-executive chairman. Mr Aronson, an independent consultant within the company secretary's office, was appointed by the committee as its secretary and special adviser. The committee also appoints external independent professional advisers to provide additional specialist advice on particular matters. Policy on executive directors' remuneration Main principles The remuneration committee's reward policy reflects its aim to align executive directors' remuneration with shareholders' interests and to engage world-class executive talent for the benefit of the group. The main principles of the policy are:
The company's existing policy on executive directors' remuneration will remain in place for 2004. The committee is conducting a comprehensive review of its policies in the course of 2004 prior to the expiry of the current Executive Directors' Incentive Plan in April 2005. New policies will be described in the next remuneration report for shareholder approval and specific shareholder authorization will be sought for any new long-term share incentive plans. Elements of remuneration The executive directors' total remuneration consists of salary, annual bonus, long-term incentives, pensions and other benefits. This reward structure is regularly reviewed by the committee to ensure that it is achieving its objectives. In 2004, over three-quarters of executive directors' potential direct remuneration will again be performance-related (see illustrative chart below).  This chart reflects on-target values for annual bonus and share element, and a Black Scholes value for the share option element. Salary Each executive director receives a fixed sum payable monthly in cash. The committee expects to review salaries in 2004 in line with global markets. In doing so the committee considers appropriate comparator groups in both Europe and the US which are defined and analysed by external remuneration advisers engaged independently by the committee. Annual bonus Each executive director is eligible to participate in an annual performance-based bonus scheme. The remuneration committee reviews and sets bonus targets and levels of eligibility annually. The target level is 100% of base salary (except for Lord Browne, for whom, as group chief executive, it is considered appropriate to have a target of 110%). There is a stretch level of 150% of base salary for substantially exceeding targets. Outstanding performance may be recognized by bonus payments in excess of stretch level at the discretion of the remuneration committee. Executive directors' annual bonus awards for 2004 will be based on a mix of demanding financial targets relating to the company's annual plan and leadership objectives established at the beginning of the year. In addition to stretching milestones and long-run metrics to track the enactment of strategy, they include areas such as people, safety, environment and organization. Long-term incentives Long-term incentives are provided under the Executive Directors' Incentive Plan (EDIP). It has three elements: a share element, a share option element and a cash element. Each executive director participates in this plan. The committee's policy, subject to unforeseen circumstances, is that this should continue until the plan expires or is renewed in April 2005. The committee's policy that each executive director should hold shares equivalent in value to 5 x the directors' base salary is reflected in the terms of the plan. 1. Share element The share element permits the remuneration committee to grant 'performance units' to executive directors. These are notional units that give the directors the right to be considered for an award of shares (without payment by the directors) at the end of a three-year performance period if demanding performance conditions are met. The committee determines the number of units to be awarded each year. The maximum value that may be granted in any one year will not normally exceed twice the base salary. A maximum of two shares may be awarded for each unit. Shares awarded are then held in trust for three years before they are released to the individual. This gives the executive directors a six-year incentive structure. Shares will only be released at the end of the retention period if the company's minimum shareholding guidelines have been met.  The share element compares BP's performance against the oil and gas sector over three years on a rolling basis. This is assessed in terms of a three-year total shareholder return against the market (SHRAM), return on average capital employed (ROACE) and earnings per share growth, based on pro forma results adjusted for special items (EPS). The committee reviews and approves annually the performance measures and the comparator companies. 2. Share option element The share option element of the EDIP is designed to reflect BP's performance relative to a wider selection of global companies. It has a three-year pre-grant performance requirement. Options may be granted to executive directors at an exercise price no lower than the market value of a share at the date the option is granted. Options vest over three years after grant (one-third each after one, two and three years respectively). They have a life of seven years after grant. It is the committee's policy to continue to exercise its judgement in 2004 to decide the number of options to be granted to each executive director, taking into account BP's total shareholder return (TSR) compared with the TSR for the FTSE Global 100 group of companies over the three years preceding the grant. The committee will not grant options in any year unless the criteria for an award of shares under the share element have been met. 3. Cash element The cash element allows the remuneration committee to grant cash rather than share-based incentives in exceptional circumstances. This element was not used in 2003 and the committee has no present intention to use it in 2004. Pensions Executive directors are eligible to participate in the appropriate pension schemes applying in their home countries. UK directors UK directors are members of the BP Pension Scheme. The scheme offers Inland Revenue-approved retirement benefits based on final salary. In accordance with the company's long-standing practice for executive directors who retire from BP on or after age 55 having accrued at least 30 years' service, Mr Chase received from the company in 2003 an ex-gratia lump-sum superannuation payment equal to one year's base salary following his retirement. Lord Browne remains eligible for consideration for such a payment. No other executive director is eligible for consideration for a superannuation payment on retirement, as the committee decided in 1996 that appointees to the board after that time should cease to be eligible for consideration for such a payment. US director Dr Grote as a US director participates in the US BP Retirement Accumulation Plan (US Plan), which features a cash balance formula, and in the Supplemental Executive Retirement Benefit, which is a non-qualified top-up arrangement. Service contracts The committee's policy on executive directors' service contracts is for them to contain a maximum notice period of one year. This policy has now been fully implemented. Since January 2003, the committee has included a provision in new service contracts to allow for severance payments to be phased where appropriate to do so. It will also consider mitigation to reduce compensation to a departing director where appropriate to do so. A large proportion of each executive directors' total remuneration is linked to performance and therefore will not be payable to the extent that the relevant targets are not met. Information subject to audit Summary of 2003 Remuneration
Salary Base salaries for Lord Browne, Mr Olver and Dr Grote were increased by 5% per annum with effect from 1 July 2003 following a review of appropriate comparator groups. Apart from the 5% promotional increases for Mr Olver and Dr Grote on their appointments to deputy group chief executive and chief financial officer respectively, the three directors had received no salary increases since January 2002. Dr Allen, Dr Hayward and Mr Manzoni have received no salary increases since their appointments to the board in February 2003. Annual bonus The annual bonus awards for 2003 are based on a mix of financial targets and leadership objectives established at the beginning of the year. Assessment of all the results produced an award of around 85% of stretch level (stretch level is 150% of base salary). All calculations in relation to the annual bonus have been reviewed by the auditors. Share options Share option grants in 2003 as shown in the table above were maintained at the same level as in 2002. Share element of EDIP and Long Term Performance Plans (LTPPs) For the 2001-2003 share element of the EDIP and the LTPP, BP's performance was assessed in terms of SHRAM, ROACE and EPS growth – each relative to that of ExxonMobil, Shell, TotalFinaElf, ChevronTexaco, ENI and Repsol. BP's SHRAM came in at sixth place among the comparator group, fourth place on EPS growth and first place on ROACE. Based on a performance assessment of 85 points out of 200, the remuneration committee expects to make awards of shares to executive directors in 2004 as highlighted in the table above. Further details of share options and all long-term awards are set out in BP Annual Report and Accounts 2003. Past directors Following Dr Buchanan's retirement from the BP p.l.c. board on 21 November 2002, he remained as an employee until his normal retirement date of 8 June 2003. During that period he received a pro rata normal salary of £227,000 and a pro rata bonus of £289,425. Following Mr Chase's retirement in May 2003, he was engaged as a consultant to BP in relation to the TNK-BP transaction. Under this consultancy agreement, he receives $50,000 gross per month plus expenses. This consultancy will end in May 2004. On 21 July 2003, Mr Chase was appointed as a BP-nominated director of TNK-BP Limited, a joint-venture company owned 50% by BP. During 2003, he received emoluments of $120,000 from TNK-BP Limited. Long-term awards for both former directors are in accordance with scheme rules. Historical TSR performance This graph shows the growth in the value of a hypothetical £100 holding in BP p.l.c. ordinary shares over five years relative to the FTSE All World Oil & Gas Index, which is considered to be the most relevant broad equity market index for this purpose as it relates directly to BP's sector. The graph is included to meet a legislative requirement and is not directly relevant to the performance criteria approved by shareholders for the company's long-term incentive plans.  |
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