Remuneration committee

The remuneration committee has responsibility for determining and agreeing with the board, within agreed terms of reference, the Group’s policy for the remuneration of the executive directors and the individual remuneration packages for each executive director. This includes basic salary, annual bonus, the level and terms of conditional awards under the Long Term Incentive Plan and the terms of performance conditions that apply to such benefits, pension rights and any compensation payments. Where the remuneration committee considers it appropriate, the committee will make recommendations in relation to the remuneration of senior management. The committee also liaises with the board in relation to the preparation of the board’s annual report to shareholders on the Group’s policy on the remuneration of executive directors and in particular the directors’ remuneration report, as required by the Companies Act 1985, the Combined Code and the Listing Rules of the Financial Services Authority. The committee’s terms of reference are published on the company’s website at www.arm.com.

The committee is chaired by Jeremy Scudamore and the other members are Kathleen O’Donovan and Young Sohn, who was appointed in place of Peter Cawdron on 15 May 2007. The committee met four times during 2007. Given their diverse experience, these three independent non-executive directors are able to offer a balanced view and international expertise in relation to remuneration issues for the Group. The committee has access to professional advice from external advisers (generally appointed by the Executive Vice President, Human Resources) in the furtherance of its duties and makes use of such advice. During 2007, KPMG provided general advice on remuneration and benefits, Linklaters provided legal services, Deloitte and Monks both provided salary survey data, Kepler Associates provided independent verification of TSR calculations for the Long Term Incentive Plan and the Executive Vice President, Human Resources, also provided advice to the committee and to the Group. Monks is an associate of the Group’s external auditor and these services were approved by the audit committee as in accordance with the procedure described in the corporate governance report. The Chief Executive Officer and the Executive Vice President, Human Resources, normally attend for part of remuneration committee meetings. No director is involved in deciding his or her own remuneration.

The Deferred Annual Bonus Plan for executive directors and senior managers and the Employee Equity Plan for all other employees were approved by shareholders at the 2006 AGM. These plans brought the Group’s remuneration structure more closely in line with UK market norms, increased alignment between remuneration and financial performance and strengthened the retention aspect of the deferred bonus. Cessation of option grants to executive directors (other than in exceptional circumstances) and the reduction from three plans to two for executive directors and senior managers, together with the move away from options to shares for all employees, reduces potential dilution and simplifies remuneration arrangements.

Remuneration policy

The remuneration committee, in its deliberations on the remuneration policy for the Group’s executive directors, seeks to give full consideration to the principles set out in the Combined Code. The committee is able to consider corporate performance on environmental, social and corporate governance issues when setting the remuneration of executive directors. The committee also monitors developments in accounting for equity-based remuneration on an ongoing basis.

The Group operates a remuneration policy and framework for executive directors designed to ensure that it attracts and retains the high quality management skills necessary to achieve a high level of corporate performance, in line with the best interests of shareholders. This policy seeks to provide rewards and incentives for the remuneration of executive directors that reflect their performance and align with the objectives of the Group. These comprise a mix of performance-related and non-performance-related remuneration. The committee believes that a director’s total remuneration should seek to recognise his worth in the external market and, to this end, operates a policy of paying base salaries which are in line with the market median, as part of a total remuneration package which is upper quartile. The committee believes that this is justified, recognising that more than 50% of total potential remuneration is performance-related. The committee obtains information about the external market from various independently published remuneration surveys and is committed to benchmarking the total remuneration package.

The nature of the Group’s development has meant that there has been a good deal of focus on the attainment of short- term objectives with a high level of variable remuneration. From 2007 onwards, variable remuneration consists of two performance-related elements: annual bonus and a conditional award under the Long Term Incentive Plan. A shareholding guideline is in place for executive directors and certain senior managers who are required to build up a holding of shares in the Company over a period of five years. The shareholdings may be built up of shares received through earlier grants under the Company’s share option schemes and/or the Long Term Incentive Plan and/or the Deferred Annual Bonus Plan and, in the case of executive directors, the required holding is 100% of basic salary.

Incentive arrangements

The remuneration committee aims to ensure that individuals are fairly rewarded for their contribution to the success of the Group. The various incentive schemes that comprise the remuneration packages of executive directors and senior managers are described later in this report:

Deferred Annual Bonus Plan

There is a strong variable element to executive directors’ remuneration and a bonus of up to 125% of base salary (after application of a personal performance multiplier which flexes the payment by 0.75 to 1.25) can be earned through the Deferred Annual Bonus Plan (DAB) if all targets are met. The personal performance multiplier depends on the achievement of pre-determined objectives which are reviewed and approved by the committee each year. These include key strategic objectives related to each director’s role and responsibilities including compliance with the Management Charter which is designed to foster employee development, understanding of the overall vision and strategy of the Group and good governance.

There is compulsory deferral into shares of 50% of the bonus earned and an opportunity to earn an equity match of up to 2:1, subject to achievement of an EPS performance condition. Deferred shares and any matching shares earned will normally be transferred three years from the date of award. Payment of bonus for 2007 was subject to the achievement of US dollar revenue and EPS targets set by the remuneration committee, which were directly related to the Group’s financial results. The bonuses payable to executive directors in respect of performance during 2007 are shown in the table on page 46 and are in the range 37.0% to 38.6% of base salary, 50% of which was compulsorily deferred into shares. At EPS growth equal to the increase in the Consumer Prices Index (CPI) plus 4% per annum, the deferred shares will be matched on a 0.3:1 basis, rising to 2:1 when EPS growth is in excess of CPI plus 12% per annum. The deferred shares can be forfeited in the event of gross misconduct and the matching shares are subject to forfeiture for “bad leavers”.

For 2008, 50% of bonus is dependent on achieving a US dollar revenue target and 50% on achieving a normalised operating profit target, which the committee believes have been set at challenging but motivational levels. These targets are directly related to the Group’s financial results and encourage achievement of the Group’s short-term financial goals, while the deferral and matching elements encourage a longer term view of the success of the Group. Maximum bonus is 125% of base salary depending on the personal performance multiplier described above.

Existing option schemes

The grant of options under the existing share option schemes ceased in 2006 when the DAB and the Employee Equity Plan were approved by shareholders. The Employee Equity Plan has the facility for option grants to be made, but this will be done only in exceptional circumstances. The existing option grants to executive directors remain available for exercise and vesting in accordance with the rules of the relevant schemes. In line with practice among the Group’s peers in the technology sector, there are generally no performance conditions attached to the issue or exercise of discretionary options under the existing schemes, except for those issued to executive directors where performance conditions based on real EPS growth apply. Share options issued to executive directors prior to their appointment to the board of the Group do not have performance conditions attached to them. However, discretionary options issued to executive directors after their appointment to the board of the Group do have performance conditions attached to them. These discretionary options will vest after seven years, but may vest after three years from grant to the extent that the performance conditions are satisfied.

The performance conditions applicable to the Long Term Incentive Plan are described in more detail below and are based on TSR rather than EPS, providing the link to performance against an appropriate peer group.

These performance conditions were selected having regard to the position of the Group within its sector and the nature of the companies against which it competes to attract and retain high calibre employees. The committee believes that the performance conditions represent the correct balance between being motivational and challenging.

Pensions

The Group does not operate its own pension scheme but makes payments into a Group personal pension plan, which is a money purchase scheme. For executive directors, the rate of Group contribution is 10% of the executive’s basic salary.

Service agreements

Executive directors have “rolling” service contracts that may be terminated by either party on one year’s notice. These agreements provide for each of the directors to provide services to the Group on a full-time basis and contain restrictive covenants for periods of three to six months following termination of employment relating to non-competition, non- solicitation of the Group’s customers, non-dealing with customers and non-solicitation of the Group’s suppliers and employees. In addition, each service contract contains an express obligation of confidentiality in respect of the Group’s trade secrets and confidential information and provides for the Group to own any intellectual property rights created by the directors in the course of their employment.

The dates of the service contracts of each person who served as an executive director during the financial year are as follows:

Where notice is served to terminate the appointment, whether by the Group or the executive director, the Group in its absolute discretion is entitled to terminate the appointment by paying to the executive director his salary in lieu of any required period of notice.

Non-executive directors

During 2007, the Chairmen of the audit and remuneration committees and the senior independent director each received a total fee of £41,000 per annum and the other non-executive directors each received a total fee of £36,000 per annum. These fees were arrived at by reference to fees paid by other companies of similar size and complexity, and reflected the amount of time non-executive directors were expected to devote to the Group’s activities during the year, which is between 10 and 15 working days a year. The remuneration of the non-executive directors is set by the executive directors and the term of appointment is three years. Fees paid to non-executive directors are reviewed annually.

Non-executive directors do not have service contracts, are not eligible to participate in bonus or share incentive arrangements and their service does not qualify for pension purposes or other benefits. No element of their fees is performance-related. Share options held by Lucio Lanza were granted prior to the Group’s acquisition of Artisan.

Performance graphs

A performance graph showing the Company’s total shareholder return (TSR) together with the TSR for the FTSE All-World Technology Index from 31 December 2002 is shown below. The TSR has been calculated in accordance with the Directors’ Remuneration Report Regulations 2002.

The TSR for the Company’s shares was 167% over this period compared with 68% for the FTSE All-World Technology Index for the same period.

ARM total shareholder return performance from 31 December 2002 to 31 December 2007

The directors consider the FTSE All-World Technology Index to be an appropriate choice as the Index contains companies from the US, Asia and Europe and therefore reflects the global environment in which the Group operates. In addition, the Index includes many companies that are currently the Group’s customers, as well as companies which use ARM technology in their end products.

Directors’ shareholdings in the Company

The directors’ beneficial interests in the Company’s ordinary shares of 0.05 pence, which excludes interests under its share option schemes, Long Term Incentive Plan and Deferred Annual Bonus Plan, are set out below.

* At date of appointment, retirement or resignation.

In addition to the interests disclosed above, all the executive directors (together with all the employees of the Group) are potential beneficiaries of the ARM Holdings plc Employee Share Ownership Plan. They are, therefore, treated as interested in all the shares held by this trust, being 1,201,434 ordinary shares at 31 December 2007 (and 1,201,434 ordinary shares at 31 December 2006). The executive directors also have interests in dividend shares that could be awarded under the Long Term Incentive Plan, the amount of which will depend on the extent to which the performance criteria are satisfied and the dividends declared during the performance period. Changes in directors’ interests in the Company’s shares that have taken place in the period from 31 December 2007 to the date of approval of the remuneration report are shown above.

Auditable information

The following information has been audited by the Group’s auditors, PricewaterhouseCoopers LLP, as required by Schedule 7A to the Companies Act 1985.

Interests in share options

Details of discretionary options beneficially held by directors are set out below:

* Denotes share options issued under the Group’s Approved Share Option Scheme.
** Denotes share options issued under the Group’s Unapproved Share Option Scheme.
*** Denotes share options issued under the Group’s Unapproved Share Option Scheme with performance conditions attached.
† Denotes share options issued under the Group’s Unapproved Share Option Scheme which are exercisable as follows: 25% maximum from first anniversary, 50% maximum from second anniversary, 75% maximum from third anniversary, 100% maximum on fourth anniversary.

For options granted before January 2003, the performance condition is that the Group must achieve average real EPS growth of at least 33.1% (i.e. 33.1% greater than the percentage over a performance period of three years from the start of the financial year in which the options were granted (the “performance period”)).

For options granted in 2003 and 2004 the performance conditions requiring average real EPS growth of at least 33.1% were satisfied and 100% of the options vested on 1 February 2006 and 8 February 2007 respectively. For options granted in 2005 the performance conditions were satisfied to the extent that 89.44% of the options vested on 8 February 2008 and the balance will vest seven years from the date of grant.

For options granted in 2006 under the performance condition, 50% of the shares under option will vest after three years if the Group achieves average real EPS growth of 12.5% over the performance period. If average real EPS growth of at least 33.1% is achieved over the performance period, 100% of the shares under option will vest after three years. Where the average real EPS growth over the performance period is between 12.5% and 33.1%, the number of shares which vest after three years increases on a straight-line basis.

Details of options held by directors under the Group’s Save As You Earn option schemes are set out below:

Options issued under this scheme were issued at a 15% discount to market value for grants made in 2006 and before and at a 20% discount for those granted in 2007.

Details of options exercised by directors during the year are as follows:

Long Term Incentive Plan

A Long Term Incentive Plan was approved by shareholders at the 2003 Annual General Meeting. Conditional share awards held by directors are as follows:

* The performance conditions applicable to the 2004 conditional awards were not satisfied and these awards lapsed in January 2007.
** The performance conditions applicable to the 2005 conditional awards were satisfied to the extent of 55% plus dividend shares as detailed below.

Annual grants to executive directors are normally made at a level equivalent to base salary. Conditional awards vest to the extent that the performance criteria are satisfied over a three-year performance period from 1 January of the year of award and no re-testing thereafter is possible. The performance conditions are based on the Company’s TSR when measured against that of two comparator groups (each testing half of the shares comprised in the award). The first index comprises UK companies across all sectors (FTSE 350) and the second comprises predominantly US companies within the Hi Tech sector (FTSE Global Technology Index). For each comparator group, the number of shares that may vest may be up to a maximum of 200% of relevant half of the shares comprised in the conditional award if the Company’s TSR ranks in the upper decile, 50% will vest in the event of median performance and between median and upper decile performance vesting will increase on a straight-line basis. Additional shares may vest to cover dividends paid by the Company during the performance period. No shares will be received for below-median performance. In addition, no shares will vest unless the committee is satisfied that there has been a sustained improvement in the underlying financial performance of the Company.

The performance conditions applicable to the conditional awards granted on 20 July 2005 were satisfied to the extent of 55% plus dividend shares which vested on 8 February 2008, as follows:

The following conditional awards over ordinary shares were made under the LTIP on 8 February 2008: Warren East 446,237; Tim Score 387,097; Tudor Brown 306,452; Mike Inglis 268,817; Mike Muller 263,441 and Simon Segars 268,817. The mid-market closing price of an ordinary share on the date of these conditional awards was 95 pence.

Deferred annual bonus plan

As described above, there is a compulsory deferral of 50% of the annual bonus earned by executive directors in the year. The emoluments detailed below include the full bonus earned, although only half has been settled in cash and the deferred elements will be settled in shares after three years. The following share awards were made on 8 February 2008 in respect of the deferred proportion of the 2007 bonus: Warren East 82,043; Tim Score 69,581; Tudor Brown 54,739; Mike Inglis 48,810; Mike Muller 48,810 and Simon Segars 47,772.

Except as described above, there have been no changes in directors’ interests under the Group’s share option schemes since the end of the 2007 financial year up to the date of approval of the remuneration report.

The Company’s register of directors’ interests contains full details of directors’ shareholdings and options to subscribe and conditional awards under the LTIP.

Share prices

The market value of the shares of the Company as at 31 December 2007 was 124 pence. The closing mid-price ranged from 119.25 pence to 157.5 pence during the year.

Directors’ emoluments

The emoluments of the executive directors of the Group in respect of services to the Group were paid through its wholly-owned subsidiary, ARM Limited, as were the non-executive directors with the exception of Lucio Lanza and Young Sohn who were paid through ARM Inc., and were as follows:

* Sir Robin Saxby ceased to be a Chairman and a director on 1 October 2006. He was appointed as Chairman Emeritus for the year from 1 October 2006 to 1 October 2007 and in this capacity received a fee of £37,000.
** Mark Templeton’s fees are for the period up to his date of resignation on 25 July 2006. Peter Cawdron’s fees are for the period up to his date of resignation on 15 May 2007. Kathleen O’Donovan’s fees are for the period from her appointment on 7 December 2006. Young Sohn’s fees are for the period from his appointment on 2 April 2007.
*** All the executive directors receive family healthcare and annual travel insurance as part of their benefits in kind. In addition, Tim Score has the use of a company car and Warren East, Tudor Brown, Mike Inglis, Mike Muller and Simon Segars receive a car and petrol allowance. Simon Segars also has £31,587 of disturbance payments resulting from his relocation to the US.
† The bonus payments above represent the full bonus earned during 2007. According to the terms of the deferred annual bonus, 50% of this bonus is not paid in cash, but is deferred and becomes payable in shares after three years. Details of the awards made in February 2008 in respect of these deferrals are detailed above.

It is the Company’s policy to allow executive directors to hold non-executive positions at other companies and to receive remuneration for their services. The board believes that experience of the operations of other companies and their boards and committees is valuable to the development of the executive directors. Details of executive directors’ roles within other companies and their remuneration are as follows:

Warren East is a non-executive director of Reciva Limited and of De La Rue plc. The Group holds 1.4% of the issued share capital of Reciva Limited and more details about this investment are included in note 14 on page 76. In relation to Reciva Limited he was awarded options on 17 February 2006 which vested monthly in equal instalments as to 1,620 shares at an option price of £25.00 between January and October 2007 and as to 450 shares at an option price of £20.00 between November and December 2007 and received no other remuneration. In relation to De La Rue plc he received remuneration totalling £36,247 up to 31 December 2007, following his appointment in January 2007.

Tudor Brown is a non-executive director of ANT plc. In this capacity he received remuneration totalling £26,250 up to 31 December 2007 (2006: £30,000). Mike Inglis was a non-executive director of Superscape Group plc until March 2008. During 2007 the Group held 8.1% of the issued share capital of Superscape Group plc and more details about this investment are included in note 14 on page 75. In this capacity, Mike Inglis received remuneration totalling £22,000 up to 31 December 2007 (2006: £17,019). He also holds vested options over 13,333 shares in Superscape Group plc at an option price of 33 pence per share which will be cancelled following its acquisition by Glu Mobile, Inc. Tim Score is a non-executive director of National Express Group plc. In this capacity he received remuneration totalling £48,000 up to 31 December 2007 (2006: £45,000). Simon Segars is a non-executive director of Plastic Logic Limited and in this capacity he received remuneration totalling £15,000 up to 31 December 2007 (2006: £15,000).

All the executive directors are accruing benefits under a money purchase pension scheme as a result of their services to the Group, contributions for which were all paid during the year.

Jeremy Scudamore
Chairman of the Remuneration Committee