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Changes to how the executive directors will be paid in the 2009 financial year

The following section sets out the changes made as part of the 2008 review together with further details of the long term incentive plan.

  2008/09 performance measure(s) Change and rationale Grant policy
Base salary
2008/09
  • No changes
  • No changes
  • Set annually on 1 July
Annual bonus
2008/09 Group Short Term Incentive Plan
  • Adjusted operating profit (25%)
  • Free cash flow (25%)
  • Total service revenue (25%)
  • Total communications revenue (10%)
  • Customer delight (15%)
  • Rebalancing of the performance measures – free cash flow weighting increased by 5%, operating profit weighting reduced by 5%
  • The existing measures are felt to cover the key short term measurable elements of the strategy
  • Target bonus is 100% of salary earned over the financial year, with 200% maximum available for exceptional performance
  • The Remuneration Committee reviews and sets the GSTIP performance targets on an annual basis
Long term incentives
All long term arrangements
  • Three year cumulative adjusted free cash flow
  • Relative TSR out-performance over three years against the peer group
  • No share option awards or Deferred Share Bonus awards will be made in the 2009 financial year
  • There will be a GLTI base award, delivered in shares after three years subject to free cash flow and TSR performance measures
  • There will be the opportunity to co-invest in order to receive an award of shares, which will mirror the conditions of the GLTI base award
  • Annual awards made in July
  • The base award for the Chief Executive will have a maximum face value of 550%
  • The matching award will depend on the level of co-investment

2009 financial year GLTI performance shares

The long term incentive will be delivered in performance shares. Vesting will be subject to a combination of two performance conditions – adjusted free cash flow and relative total shareholder return.

Award and co-investment

The vesting percentages are applied to the face values awarded under the base and matching awards. The base award for the Chief Executive will have a face value of 137.5% of base salary. This base award can vest up to a maximum of 550% of base salary (i.e. 137.5% multiplied by maximum vesting of 400%) (see the combined vesting matrix below).

In addition, participants will have the opportunity to co-invest their own money in order to receive a matching award (subject to performance – consistent with base award). Participants will be able to co-invest up to two times net salary. The co-investment will receive a matching award with a face value of 50% of the grossed-up investment. The matching award will vest in the same way as the base award (see the combined vesting matrix below).

The co-investment element is designed to further increase shareholder alignment, by encouraging executive directors to attain their stretching share ownership guidelines earlier.

Underlying operational performance – adjusted free cash flow

The free cash flow performance is based on a three year cumulative adjusted free cash flow figure. The target and range are set out in the table below:

Performance £bn Vesting percentage
Threshold 15.5 50%
Target 17.5 100%
Superior 18.5 150%
Maximum 19.5 200%

The target free cash flow level is set by reference to the Company’s three year plan and market expectations. The Remuneration Committee consider the target to be a stretching one.

TSR out-performance of a peer group median

The out-performance of a peer group median is felt to be the most appropriate TSR measure. The rationale for this is that Vodafone has a limited number of peers, therefore using a smaller group makes operating a ranking system more complicated.

The peer group for the TSR out-performance measure for the awards to be made in the 2009 financial year is as follows:

  • BT Group
  • Deutsche Telekom
  • France Telecom
  • Telecom Italia
  • Telefonica
  • Emerging market composite – made up of the average TSR performance of three companies: Bharti, MTN and Turkcell.

The TSR performance will act as a multiplier on the percentage vesting under the operational performance. There will be no increase in vesting until TSR performance exceeds median, at which point the multiplier will increase up to two times on a linear basis to upper quintile performance, as set out in the vesting table below:

Performance Out-performance
of peer group median		 Increase
Median 0.0% p.a. No increase
65th percentile 4.5% p.a. 1.5 times
80th percentile (upper quintile) 9.0% p.a. 2.0 times

The performance measure has been calibrated using statistical techniques.

Combined vesting matrix

The combination of the performance measures gives a final vesting matrix as follows:

Free cash flow performance   TSR performance
  Up to Median 65th 80th
Threshold 50% 75% 100%
Target 100% 150% 200%
Superior 150% 225% 300%
Maximum 200% 300% 400%
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