Directors' remuneration report

As required by Section 234B of the Companies Act 1985, the Directors present the Report on Directors’ Remuneration for the year ended 31 December 2007. In accordance with the requirements the report provides the disclosure in two parts: information that is not subject to audit and information that is subject to audit.

Information that is not subject to audit
The Capita Group Remuneration Committee (the Committee) is a sub-committee of the Group Board with terms of reference agreed with the Group Board. Its purpose is to determine the terms of employment and the remuneration of the Executive Directors. The terms of reference of the Committee are available on Capita’s website (http://www.capita.co.uk/) and on request.

The Committee was made up during the year of the following independent Non-Executive Directors: Martina King (Chairman), Peter Cawdron and Bill Grimsey. The Committee met three times during the year and all members attended each meeting.

The Committee consults the Chief Executive regarding proposals for remuneration of the Executive Directors and other senior executives, except when issues relating to his own remuneration are discussed. During the year, KPMG (UK) LLP (KPMG) acted as adviser to the Committee and they acted in this capacity until November 2007. KPMG has also provided tax advisory services to subsidiaries of the Company during the year under review. No other person or entity has provided material assistance to the Committee during the year. In November 2007, PricewaterhouseCoopers LLP (PwC) replaced KPMG as the Company’s remuneration adviser to provide independent advice on executive remuneration and the structure of share schemes.

The Company has complied with the provisions set out in Section B of the Combined Code annexed to the Listing Rules of the Financial Services Authority as relating  to Directors’ remuneration.

Directors’ remuneration
a) Overall policy
The Committee’s overall policy is to provide a remuneration structure with a strong performance-related element which it feels is justified by the nature of the Group’s activities, its growth and profit record and its developing characteristics.

The overall package is weighted towards share-based incentives which the Committee strongly believes links the interests of the Executive Directors with those of shareholders in respect of shareholder value. The Committee is satisfied that the remuneration policy is appropriate, particularly with regard to total executive remuneration and Group performance. The Committee plans to continue to pursue this approach in its future remuneration policy. Consistent with this principle, approximately half of an executive’s target total remuneration is performance-linked and weighted to the long term. This percentage would increase in the case of performance above target.

The Committee has engaged its independent advisers, PwC, to conduct a strategic review of current executive remuneration policy and package. The Committee is currently considering the findings of the review and will consult with the Company’s largest shareholders prior to making any changes to the current remuneration package.

The remuneration package for the Executive Directors consists of salary, annual bonus, long term incentives, pension and other benefits. The chart below shows the balance between the value of the fixed and variable compensation received by the Executive Directors for the period from 1 January 2007 to 31 December 2007.

The chart below compares the value of an investment of £100 in the Company’s shares with an investment of the same amount in the FTSE All Share Index and the FTSE 350 Support Services Index over the five years starting 1 January 2003 and ending 31December 2007 assuming that all dividend income is reinvested. The Committee is of the opinion that this comparison provides a clear picture of the performance of the Group relative to both a wide range of companies in the United Kingdom and also a specific group of companies within the same sector.

Comparison of total shareholder returns
Capita vs. FTSE All Share Index and FTSE 350 Support Services Index, Value of investment of £100 on 1 January 2003.  

A £100 investment in Capita shares on 1 January 2003 would be worth £305 at 31 December 2007 compared to £205 for an investment in the FTSE All Share Index and £163 for an investment in the FTSE 350 Support Services Index. 

b) Basic salary and benefits
The Committee regularly commissions independent reviews of the salaries and benefits of the Executive Directors. The policy adopted by the Committee requires that basic salaries and benefits be below those provided to comparable roles in comparable companies to enable the provision of a higher performance-related element of remuneration.

This low basic salary policy allows the Directors to provide a lead in terms of keeping fixed remuneration costs low across the Group as a whole and is reflective of the Group’s remuneration policy in general. The continued success of the Group has enabled it to provide the benefits of a highly geared reward structure which delivers a competitive total remuneration package. 

c) Annual Bonus Scheme
The value of the annual bonus is determined at the start of each financial year and payment triggered at a predetermined Group profit before tax target. The Committee takes the view that this performance condition is relevant, challenging and designed to drive business enhancement.

The maximum annual bonus potential for Executive Directors is 140% of salary. Half of the annual bonus entitlement will be paid in cash and the remainder will be compulsorily deferred on a gross-basis into Capita shares (Deferred Shares). This reflects the Committee’s policy of providing a significant proportion of performance-related remuneration whilst maintaining low basic salaries. The annual bonus is not pensionable.

For 2007 this resulted in a cash element payable of 70% of salary to all Executive Directors with the remainder of the performance related bonus being awarded in Deferred Shares. The number of shares awarded will be determined within 42 days of 29 February 2008, the date of the announcement of the Group’s results for 2007.

 d) Deferred Annual Bonus Plan (DAB)
The Deferred Annual Bonus Plan was approved and adopted at the AGM on 28 April 2005.TheDAB is comprised of Deferred Shares, which form part of The Annual Bonus Scheme, and Matching Shares. In February 2007, an aggregate of 112,271 Deferred Shares were awarded to Executive Directors at a price of £6.545, being the market price on the day.

The Deferred Annual Bonus Plan operates as follows:

The value of Deferred Shares is determined by the entitlement under the Annual Bonus Scheme: half of the bonus entitlement is paid in cash and the remainder is compulsorily deferred, on a gross basis, into Deferred Shares. The Deferred Shares are held for a period of three years from the date of award during which they will not be forfeitable, except in the case of dismissal for gross misconduct.

A conditional award of Matching Shares is made at the same time as the award of Deferred Shares. Participants are eligible to receive up to 1.5 Matching Shares for every Deferred Share. Matching Shares vest after the three year holding period to the extent to which performance criteria have been met. During the year an aggregate of 168,405 Matching Shares were awarded to Executive Directors, subject to the following performance conditions.

The Committee has decided that the performance condition that will apply to the Matching Shares is earnings per share (EPS) growth against the UK Retail Price Index (RPI). The Committee believes that long term EPS growth is the most appropriate performance condition for the Company as it is a key indicator of shareholder value creation. The EPS based performance conditions are as follows:

The performance condition attached to the awards made under the bonus scheme may be amended by the Committee from time to time, subject to the new performance condition being no less demanding than the original condition.

The Committee believes that this plan focuses participants on delivering strong year-on-year annual performance, which will in turn drive long term shareholder value creation. Executive Directors and Divisional Executive Directors are eligible to participate in the DAB. No further awards are made to participants under any other long term incentive plan. 

e) Long Term Indexed Share Appreciation Scheme (LTISAS)
The LTISAS was only open to the Executive Directors and the Divisional Executive Directors. Under the scheme, participants were provided with two equal tranches of 600,000 options. The criteria were the same for each of these grants and therefore both tranches had performance periods that ended on 31 December 2006. The exercise price of the option was adjusted in line with the movement in the FTSE All Share Index from the date of grant to 25 November 2007. The adjusted exercise prices were £3.48 for the 2002 award and £4.74 for the 2004 award. This feature ensured that participants only gained if the share price out-performed the index.

Options became exercisable, if over the performance period, the Company’s EPS exceeded certain targets as follows:

As growth in the Company’s EPS over the three year period to 31 December 2006 exceeded RPI growth by 17.6%, 100% of the options vested (representing 1,200,000 shares per participant) and became exercisable on 25 November 2007.

The last award under the LTISAS was made in November 2004 and vested in full on 31 December 2006 and no further awards will be made under this plan.

f) Share option schemes
The Group has two share option schemes: the 1997 Executive Share Option Scheme (including both HMRC approved and unapproved options) is a discretionary scheme for senior managers, in which the Executive Directors and Divisional Executive Directors no longer participate; and the Capita Sharesave Scheme which is open to all Capita’s employees.

Options granted under the 1997 Executive Share Option Scheme become exercisable if the growth in the Company’s EPS exceeds growth in RPI by 8% over the three year period from the date of grant. 

Following shareholder approval at the 2006 AGM, the 1997 Executive Share Option Scheme, due to expire early in 2007,was renewed for a period of 10 years.

g) Capita Share Ownership Plan (CSOP)
The CSOP is open to all employees of the Company under certain eligibility criteria, including Executive Directors. Under the plan, eligible employees may invest up to £125 per month in the Company’s shares and the Company matches these at a ratio of one Matching Share for every 10 Participant Shares.

h) Satisfaction of Options
When satisfying awards made under its share plans and long term incentive plans, the company will use newly issued, treasury shares or purchased shares as appropriate.

i) Non-Executive Directors
Non-Executive Directors’ fees reflect the time, commitment and responsibilities of the role. They are reviewed annually and determined by the Executive Directors.

j) Service contracts
The service contracts for Group Board Executive Directors are for an indefinite period and provide for a one year notice period. They do not include provisions for predetermined compensation on termination that exceed one year’s salary and benefits. There are no arrangements in place between the Company and its Directors that provide for compensation for loss of office following a takeover bid. All Directors are appointed for an indefinite period but are subject to re-election at the Annual General Meeting every three years.

Details of the contracts are set out below: