Compass Group Annual Review 2006

Summary director’s remuneration report

This report summarises the Remuneration Committee’s policy on executive remuneration given in the Annual Report for the year ended 30 September 2006. A copy of the full report can be accessed at www.compass-group.com.

The Committee determines the remuneration and benefits of the Chairman, executive directors, Executive Committee members and certain other senior executives of the Group. Its key responsibilities are:

• to design specific remuneration packages which include salaries, bonuses, incentive payments, pension rights and benefits;
• to review executive directors’ service agreements;
• to ensure that failure is not rewarded and that steps are always taken to mitigate loss on termination, within contractual obligations;
• to review remuneration trends across the Group; and
• to approve the terms of and recommend grants under the Group’s incentive plans.

Policy

The aims of the remuneration policy are that:

• the components of the Company’s remuneration package continue to be aligned to the business strategy;
• there is a proper balance between the fixed and variable, and long-term and short-term components of the remuneration package;
• the various targets for determining performance-related compensation are linked to the Company’s key business drivers and objectives, and are easily measurable and regularly reviewed;
• the incentives are easily understood and accepted by shareholders and senior executives; and
• the Company’s remuneration policy and its various components are in line with best practice in the market.

In determining the overall remuneration framework, the Committee maintains an active dialogue with shareholder representatives and continually monitors developments in best practice.

Components of executive directors’ remuneration

The total reward package is structured into short-term and long-term incentives, and into a division of fixed remuneration and performance-related elements.

Base salary

Base salaries are rigorously benchmarked, and reflect role, job size, individual performance and effectiveness. They are subject to annual review each December with any increases taking effect on 1 January.

Annual performance-related award

Payment of an annual bonus is based on the achievement of performance targets set by the Committee. The level of bonus is designed to encourage performance in a manner that the Committee considers most contributes to increasing shareholder value and meeting corporate objectives.

The bonus award is made up of basic and enhanced elements:

• an annual opportunity of up to 75% of base salary based on the attainment of results against set targets (‘par performance’);
• a further opportunity of up to a maximum of 75% of base salary for overachievement of targets (‘maximum performance’).

Performance targets are determined at the start of each financial year. For the year ended 30 September 2006, the bonus opportunity was based on the following key Group measures:

• profit before interest and tax (PBIT) (50%);
• free cash flow (as determined in Consolidated cash flow statement) (FCF) (30%); and
• revenue growth (20%).

A supplementary condition was imposed whereby no bonus would be payable unless the Group’s minimum PBIT target was achieved.

The Remuneration Committee determined that the results of the SSP business would be excluded from the bonus calculations following its sale on 15 June 2006.

The amount of bonus paid to each director is shown in the table below, reflecting the maximum achievement of targets for FCF and revenue growth, and achievement between par and maximum for PBIT.

The bonus opportunity for executive directors for the year ending 30 September 2007 will be based on the following targets:

• profit before interest and tax (PBIT) (60%);
• free cash flow (FCF) (20%); and
• personal target (PT) (20%).

A supplementary condition has been imposed whereby the amount of FCF and PT bonus payable will be halved unless the Group’s minimum PBIT target is achieved.

Long-Term Incentive Plan (LTIP)

Following consultation with and approval by shareholders, the LTIP has been the primary form of equity-based incentive for the year ended 30 September 2006 and this will continue to be our policy in the year ending 30 September 2007. As executive directors will not normally be granted share options (see below), the potential reward under the LTIP was increased during 2006.

Under the LTIP, executive directors may receive a conditional award of shares which may vest after a three-year performance period, based on performance conditions being met. With effect from 2006, awards are normally granted at an annual maximum of 150% of base salary, with 200% being reserved for exceptional circumstances. 50% of any LTIP award is based on the Group’s FCF and 50% of any award on the Group’s Total Shareholder Return performance (TSR). The FCF element focuses executives on the free cash flow objective of business strategy and the TSR element on share price and dividend growth.

FCF portion

50% of any award is based on the Group’s FCF over a three-year performance period. The precise FCF target for each award is linked to the Group’s wider business targets, and is stretching and set by the Remuneration Committee at the time of award based on Group projections and market expectations. No shares are released unless the Group achieves threshold performance. 25% of the portion of the award vests on the achievement of threshold performance. Awards vest on a straight-line basis between 25% and 100% where FCF is between threshold performance and the outperformance target.

For awards made in the year ended 30 September 2006, the threshold and outperformance targets were £825 million and £900 million respectively. For awards to be made in the year ending 30 September 2007, the Committee has determined that threshold performance will be £950 million and outperformance will be £1,050 million.

TSR portion

The remaining 50% of any award will depend upon growth in the Group’s TSR relative to the FTSE 100 companies (determined at the outset) over a three-year performance period. TSR is the aggregate of share price growth and dividends paid (assuming reinvestment of those dividends in Compass Group shares during the three-year period). 100% of the award will vest if TSR performance is in the top quartile and 25% of the award will vest if performance is at the median.

Where performance is between the median and top quartile, awards will vest on a straight-line basis between the 25% and 100% applicable to median and top quartile performances. No shares will be released if the Group’s performance is below the median.

For awards made since 2004, there is no retesting facility. In addition, for awards made in the year ended 30 September 2006 and subsequent years, any vesting of an award at the end of the performance period is conditional on the Remuneration Committee being satisfied that the underlying financial performance of the Group justifies such vesting.

The Committee considers FCF and TSR to be appropriate measures for awards under the LTIP. FCF focuses on a key business target for the Group, while the use of TSR aligns the interests of executives with those of shareholders. TSR calculations are periodically undertaken by an external party, Alithos Ltd, and FCF measurements are subject to independent audit.

Other share plans
Matching Shares Plan (MSP)

Under the bonus matching shares plan, directors are permitted to invest up to 50% of any pre-tax performance related basic and enhanced bonus in Compass Group shares. If the shares are held for three years and the director continues to be employed by the Group, the director may receive a proportion of Matching Shares based on the Group achieving underlying EPS average growth over the period. For the year ended 30 September 2006, executive directors elected not to take up the opportunity to invest part of their bonus entitlement in the MSP. For the year ending 30 September 2007, the Committee has decided not to make the MSP available to directors and executives.

Share Option Plan (SOP)

In the year ended 30 September 2006, no executive directors were granted options under the SOP in light of the Committee’s policy of using the LTIP as the primary long-term equity related incentive. It is not intended to make future grants of options to executive directors, other than in exceptional circumstances (which would be fully explained to shareholders at the time).

Management Share Option Plan (MSOP)

For executives below executive director level, the Company currently operates the MSOP. Options are granted at no lower than the market price on the day prior to grant. They may normally be exercised between the third and tenth anniversaries of the date of grant after which they will lapse.

A performance target geared to the Company’s key business measure was introduced into the MSOP during the year with the approval of shareholders so that options may only be exercisable subject to meeting a FCF target, determined by the Committee at the time of grant. For options granted in the year ended 30 September 2006, the target was the achievement of a FCF target of £825 million in the three-year period from 1 October 2005 to 30 September 2008. There is no retesting facility. In the year ended 30 September 2006, approximately 700 employees received option grants.

Savings-related share option scheme

Executive directors may participate in the Company’s all-employee share plans on the same basis as other employees. No grants were made during the year ended 30 September 2006.

Shareholding policy

In order that their interests are aligned with those of shareholders, executive directors are expected to build up and maintain a personal shareholding in the Company of at least 100% of base salary. New directors will undertake to build up their shareholding within four years of their appointment.

Retirement benefits

The Group’s policy is not to offer defined benefit arrangements to new employees at any level. Incoming executive directors are invited either to join the Company’s contracted-in money purchase arrangement or to take a fixed salary supplement.

At 30 September 2006, there are no executive directors participating in any Compass Group defined benefit pension arrangements. Richard Cousins elected to receive a 35% salary supplement in lieu of pension.

In the light of the A Day pension legislation, Andrew Martin also took up the 35% salary supplement election with effect from 6 April 2006. He gave up all rights to his final salary pension, money purchase pension and unfunded unapproved pension with effect from 15 March 2004 and ceased to accrue any pension in relation to his employment from this date (save for that which he had built up during his earlier employment with Forte plc, Granada Group plc and Compass Group PLC between June 1994 and September 2001). In connection with these revised arrangements, he received a payment of £338,895 in respect of his accrued pension scheme and unfunded pension benefits in relation to the period from 15 March 2004 to 31 March 2006, and a payment of £168,450 in respect of his accrued money purchase pension for such period.

Andrew Martin’s pension promises, built up in respect of his earlier period of service with Granada and Forte on both a funded and unfunded basis, are deferred pensions payable from age 60 which, revalued at 30 September 2006, amount to £25,694 per annum and £27,523 per annum respectively.

Sir Francis Mackay retired as a director on 30 June 2006, but (as indicated in the 2005 Directors’ remuneration report) ceased to accrue pension benefits from 1 October 2005.

Michael Bailey retired as a director on 31 May 2006, and became entitled to accrued pension benefits (comprising an unfunded pension promise to provide for a level of benefits broadly similar to that applying to UK executive directors in the Executive Section of the UK Pension Plan). The capital value of these pension benefits was £15,053,000 (equalling the transfer value of his accrued pension benefits as at 30 September 2005). He was entitled to these pension benefits in lump sum form on retirement. Of this total amount, £1,991,302 has been paid to him in respect of the US element of this pension. The balance of £13,061,698 accrues a market rate of interest pending payment to him.

Chairman

The fee for the Chairman is set by the Committee. The Chairman is not eligible for pension scheme membership, bonus or incentive arrangements. He is entitled to the provision of life and medical insurance for himself and his spouse, financial planning assistance and a fully expensed car.

Non-executive directors

The fee for the non-executive directors during the year ended 30 September 2006 was £50,000 per annum, adjusted where directors held additional responsibilities. Details of the fees paid to the non-executive directors for the year ended 30 September 2006 are set out below. The base fee has been thoroughly reviewed and benchmarked by the executive members of the Board and increased to £60,000 per annum with effect from 1 October 2006.

Non-executive directors are not eligible for pension scheme membership, bonus, share options or other incentive arrangements.

Non-executive directors have letters of engagement. They are appointed for an initial period of three years, after which the appointment is renewable at three-year intervals by mutual consent. Details of their appointments, which are terminable without compensation, are set out in the table.

Non-executive director	Original date of appointment	Letter of engagement	Total length of service at September 2006
Sir Roy Gardner	1 October 05	15 September 2005	1 year
Peter Cawdron	3 November 1993	27 October 1993 (rev. 31 March 2004)	12 yrs, 10 mths
Peter Blackburn	10 April 2002	16 May 2002 (rev. 31 March 2004)	4 yrs, 5 mths
Val Gooding	4 January 2000	1 January 2000 (rev. 31 March 2004)	6 yrs, 8 mths
Sven Kado	10 April 2002	10 April 2002 (rev. 31 March 2004)	4 yrs, 5 mths
Steve Lucas	7 July 2004	17 June 2004	2 yrs, 2 mths

Service contracts

Richard Cousins is employed under a service contract dated 23 March 2006 and Andrew Martin under a contract dated 4 May 2005. They have rolling service contracts with the Company. Richard Cousins’ contract is terminable by him giving one year’s written notice or by the Company giving 24 months’ written notice, reducing to 12 months’ notice on 1 May 2007, being 12 months following his appointment, and that of Andrew Martin is terminable by him giving six months’ written notice or by the Company giving one year’s written notice.

In the event of termination by the Company, legally appropriate mitigation factors would be taken into account in determining any compensation which may be payable.

Both contracts will terminate automatically at age 65 or such other age as may be determined as the retirement age for executive directors. On early termination of their contracts, both executives would normally be entitled to an amount equal to pay in lieu of any period of notice, being basic salary, salary supplement in lieu of pension, benefits or, at the Company’s discretion, an amount of 10% of salary; and a bonus equivalent to 75% of salary. Richard Cousins would be entitled to such payment by way of a lump sum.

With the Board’s agreement, executive directors may take up one non-executive directorship and may retain any fees.

Payment to certain former directors
Andrew Lynch

Andrew Lynch resigned as a director on 28 September 2005 and left the Group in June 2006 with the sale of Select Service Partner. Under the arrangements described in the 2005 Directors’ remuneration report, he received a sale-related payment of £200,000 on 31 March 2006 and £525,500 at the time of sale, such amount determined by the level of sale proceeds which surpassed expectations.

Alain Dupuis

Alain Dupuis resigned as a director on 1 October 2005. He received a termination payment of £430,000 and entered into a three year fixed term service contract at a reduced salary of £200,000 per annum, with no change to his annual bonus opportunity and benefits during the period, and a one-off pension contribution of £335,000 paid at the start of the period. These arrangements also included a long-term bonus scheme attributable to the performance of the countries for which he had executive responsibility. The long-term bonus was subject to a ceiling of £4 million. In the period to 31 July 2006, he earned £167,000 and £250,000 by way of salary and annual bonus respectively. Following a restructure, his service contract was terminated on 31 July 2006 (26 months before its contractual termination date) and under a compromise agreement he received £1,100,000 in settlement of all claims, with two further payments of £250,000 on 31 January 2007 and 31 July 2007 respectively, subject to him not having entered into certain categories of employment at the payment dates.

Dilution limits

All the Company’s equity based incentive plans incorporate the 2005 ABI Guidelines on headroom which provide that overall dilution under all schemes should not exceed 10% over a 10-year period in relation to the Company’s issued share capital (or reissue of treasury shares), with the further limitation of 5% in any 10-year period on executive plans.

The Committee monitors every six months, and prior to the making of any award, the effect of potential vesting of options or share awards to ensure that the Company remains within these limits. Any awards which are required to be satisfied by market purchased shares are excluded from such calculations.

No treasury shares were utilised in the year ended 30 September 2006.

As at 30 September 2006, the Company’s headroom position was as below:

IFRS

Since the year ended 30 September 2005, Compass Group has prepared its financial statements under IFRS. In order to achieve consistency between UK GAAP and IFRS, EPS and other accounting measures used as performance targets for earlier years under equity based incentive plans have been adjusted.

Compass Group PLC share prices

The mid-market prices of the Company’s ordinary shares on 30 September 2005 and 30 September 2006 were 206.25 pence and 268.25 pence respectively. During the period between these two dates, the market price of the Company’s ordinary shares ranged between 175 pence and 276.25 pence (21 October 2005 and 26 September 2006).

Total shareholder return

The performance graph below shows the TSR for Compass Group over the last five financial years. The graph shows the value of £100 invested in the FTSE 100 Index. The Committee considers this to be the most appropriate comparator group for this purpose as the FTSE 100 index is widely used and recognised, and Compass Group has been a constituent member throughout the period.

Directors’ emoluments
The aggregate remuneration of the individual directors of Compass Group PLC for the year ended 30 September 2006 was as follows:
Name of director	Salary/fee £000	Salary supplement1 £000	Benefits £000	Annual performance- related bonus £000	Termination payments £000	2006 £000	2005 £000
Directors in service at 30 September 2006
Executive
Richard Cousins (appointed 1 May 2006)	313	109	11	398	–	831	–
Andrew Martin	461	83	79	606	–	1,229	472
Non-executive
Sir Roy Gardner (appointed 1 Oct 2005)	163	–	25	–	–	188	–
Peter Blackburn	50	–	–	–	–	50	50
Peter Cawdron	90	–	–	–	–	90	90
Val Gooding	50	–	–	–	–	50	50
Sven Kado2	53	–	–	–	–	53	53
Steve Lucas	65	–	–	–	–	65	59
Directors who left during the year
Michael Bailey (retired 31 May 2006)3	651	–	110	830	–	1,591	1,098
Alain Dupuis (resigned 1 Oct 2005)4	–	–	–	–	430	430	462
Sir Francis Mackay (retired 30 Jun 2006)5	225	–	36	–	–	261	546
Directors who left during the previous year	–	–	–	–	–	–	1,703
Total	2,121	192	261	1,834	430	4,838	4,583

1	Supplement of 35% of salary paid in monthly instalments in lieu of pension participation.
2	The figure shown for Sven Kado for each of 2005 and 2006 includes a fee of €4,000 in respect of his non-executive directorship of Compass Group Deutschland GmbH.
3	Highest paid director. Michael Bailey was paid no compensation on cessation of his employment. He was permitted to receive his bonus for the year ended 30 September 2006 pro-rated to his period of employment during the year.
4	Alain Dupuis resigned from the Board on 1 October 2005 and left the Group on 31 July 2006 (see above).
5	Sir Francis Mackay was paid no compensation on cessation of his employment. The directors who left during the year ended 30 September 2005 were Andrew Lynch, Clive Grundy and Denis Cassidy (see above for details of payments made to Andrew Lynch during 2006).

Beneficial share interests of directors
Name of director	Ordinary shares Number	Options Number	Long-Term Incentive Plan Number	30 Sept 2006 total Number	30 Sept 2005 total Number
Directors in service at 30 September 2006
Richard Cousins	100,000	–	727,272	827,272	–
Andrew Martin	110,027	1,018,532	603,055	1,731,614	1,191,008
Sir Roy Gardner	100,000	–	–	100,000	–
Peter Blackburn	5,000	–	–	5,000	5,000
Peter Cawdron	24,200	–	–	24,200	24,200
Val Gooding	5,502	–	–	5,502	5,001
Sven Kado	12,500	–	–	12,500	12,500
Steve Lucas	–	–	–	–	–
There were no incentive plan gains for the year ended 30 September 2006.