Remuneration Report
Information not Subject to Audit
Remuneration Committee
The Remuneration Committee is chaired by Willy Strothotte and its other members are David Rough and Paul Hazen, all of whom are non-executive directors. The Board recognises that Willy Strothotte is not an independent non-executive director as defined by the Combined Code, but regards his membership as critical to the workings of the Committee due to his extensive knowledge and experience of the global mining resources sector.
The Remuneration Committee reviews the structure of remuneration for executive directors on an ongoing basis and has responsibility for the determination, within agreed terms of reference, of specific remuneration packages for executive directors and other members of the Executive Committee, including salaries, pension rights, bonuses, long-term incentives, benefits in kind and any compensation payments. The Committee is also aware of the level and structure of remuneration for senior management and advises on any major changes in employee remuneration and benefit structures throughout the Group, including the continuous review of incentive schemes to ensure that they remain appropriate for the Group. The Remuneration Committee commits to bringing independent thought and scrutiny to the development and review process of the Group with regards to remuneration.
The Committee met three times during 2005. The Chairman continues to ensure that the Group maintains contact, as necessary, with its principal shareholders about remuneration. The purpose and function of the Committee in the future will not differ materially from this year and its terms of reference can be found on the Group's website (www.xstrata.com).
The remuneration of non-executive directors, other than the Chairman, is considered by the Chairman and the Chief Executive and is not considered by the Remuneration Committee. The Chairman's remuneration is determined by the Remuneration Committee while the Chairman is absent.
The Chief Executive attends the Remuneration Committee meetings by invitation and assists the Remuneration Committee in its considerations, except when issues relating to his own remuneration are discussed. The Remuneration Committee is provided with national and international pay data collected from external survey providers.
During the year, the Hay Group provided independent advice to the Remuneration Committee on executive remuneration. The Hay Group provided no other services to the Group during 2005.
Remuneration policy
Xstrata's remuneration policy is designed to attract, retain and motivate the highly talented individuals needed to deliver the business strategy and to maximise shareholder wealth creation.
The policy for 2005 and, so far as practicable, for subsequent years, will be framed around the following principles for the Executive Committee:
- Remuneration arrangements will be designed to support the business strategy and to align with the interests of Xstrata's shareholders;
- Total reward levels will be set at appropriate levels to reflect the competitive global market in which Xstrata operates with the intention of positioning within the top quartile for outstanding performance when measured against a peer group of global mining companies and the FTSE100;
- A high proportion of the remuneration should be "at risk" with performance related remuneration making up at least 50% of the total potential remuneration for Executive Committee members; and
- Performance-related payments will be subject to the satisfaction of demanding and stretching performance targets over the short and long-term. These performance targets will be set in the context of the prospects of the Group, the prevailing economic environment in which it operates, and the relative performance of comparator companies.
The Remuneration Committee considers that a successful remuneration policy needs to be sufficiently flexible to take account of future changes in the business environment and in remuneration practices. Consequently, the remuneration policy and the Remuneration Committee's terms of reference for subsequent years will be reviewed annually in the light of matters such as changes to corporate governance best practice or changes to accounting, legislation or business practices among peer group mining companies. This will help to ensure that the policy continues to provide Xstrata with a competitive reward strategy. In doing so the Committee will take into account the UK Listing Rules, the provisions of the Combined Code and associated guidance attached to it, as well as the guidance provided by a number of institutional investor representative bodies on the design of performance-related remuneration. Policies will be sensitive to pay and employment conditions elsewhere in the Group.
The Remuneration Committee is satisfied that Xstrata's pay and employment conditions for non-Board employees around the world are appropriate to the various markets in which it operates. The Remuneration Committee does not consider a ratio comparison between executive directors and non-Board employees to be a useful way of assessing the fairness and equitability of Xstrata's remuneration practices. The vastly different costs of living in the countries where Xstrata has operations and fluctuations in exchange rates mean any trend analysis or comparisons with competitors would be meaningless.
Elements of remuneration
The total remuneration package for executive directors comprises the following principal elements:
- base salary;
- annual bonus plan including deferred element;
- participation in long-term incentive arrangements;
- subsisting rights under the Xstrata AG shares schemes and individual arrangements (as detailed below);
- pension; and
- other benefits including housing allowance (where essential for the performance of the duties), permanent health, life and private medical insurance.
Base salary
The base salary of the executive directors is subject to annual review by the Remuneration Committee. The Remuneration Committee reviews external pay data to ensure that the levels of remuneration remain competitive and appropriate in the light of the Group's policy. The Remuneration Committee is also responsible for ensuring that the positioning of the Group's remuneration relative to its peers does not result in increases in remuneration without a corresponding increase in performance or responsibilities. When setting base salaries, the Committee also considers the impact on pension contributions and associated costs. Base salary increases for Mick Davis, Trevor Reid and Santiago Zaldumbide during 2005, were 5.5%, 7% and 5.5% respectively. Base salaries effective 1st January 2006 will be £1,000,000, £470,693 and €829,450, representing increases of 5.3%, 6% and 6% respectively.
Santiago Zaldumbide has a professional services agreement with Asturiana (dated 29 January 1998) to act as Chairman and Chief Executive of Asturiana. The agreement is in force until 28 February 2007 and continues thereafter indefinitely unless terminated by Asturiana giving six months notice to that effect, provided that such notice may not be given to result in his employment terminating before 28 February 2007. Up until 31 December 2002, Santiago Zaldumbide was entitled to a total fee for the term of his agreement of €3,005,060 payable at a rate of €601,012 per annum less any fees received from certain specified external directorships. This fixed contract predates the acquisition of Asturiana. With effect from January 2003, the Remuneration Committee concluded and agreed with Santiago Zaldumbide that his annual fee should be subject to review in line with the other executive directors. On termination of the agreement, other than on his voluntary termination or termination for gross negligence, Santiago Zaldumbide is entitled to receive a sum from the redemption of an insurance policy (acquired by Asturiana for a premium of €3,005,060), including any with profits bonus payable under the policy less the compensation received by him during the term of the agreement. This part of the agreement is not affected by the review.
On termination of the agreement by expiry of the fixed term, Santiago Zaldumbide is entitled to receive the capital redemption value of the policy, including the with profit bonus element, minus the aforementioned amount of EUR3,005,060 which he will already have received. Santiago Zaldumbide's entitlements under the insurance policy are in lieu of his receiving pension benefits.
Santiago Zaldumbide's appointment as a director of Xstrata is on an indefinite basis subject to the existence of the agreement between Santiago Zaldumbide and Asturiana. Santiago Zaldumbide will receive no additional remuneration for his position as director of Xstrata Plc but is eligible to participate in the Bonus Plan and the Long Term Incentive Plan.
Bonus plan
Executive directors and the other members of the Executive Committee are eligible to participate in the Bonus Plan. The Bonus Plan focuses on the achievement of annual objectives, which align the short-term financial performance of the Group with the creation of shareholder value.
The bonus is based on Xstrata's operational performance as measured by return on equity and net profit. Specific targets for return on equity and the proportion of net profits that make up the bonus pool are determined each year by the Remuneration Committee. Before the pool is finalised the Remuneration Committee actively considers whether the pool is appropriate in light of the other key financial and non-financial drivers of future shareholder value. The Remuneration Committee retains the discretion to vary the size of the bonus pool if warranted by special circumstances.
The payment of any bonus under the Bonus Plan is subject to a hurdle rate (for the financial years ending 31 December 2005 and 2006 it will be set such that the Group's return on equity will be at least equal to the Group's average cost of borrowing). If this hurdle is not reached, the bonus pool will be zero. The Remuneration Committee has the discretion to vary the basis of calculation and the performance targets for subsequent years.
The amount of the bonus pool that is distributed in any one year, and the relative proportions payable to each participant (or, at the discretion of the Remuneration Committee, to a trust for his/her benefit) will be at the discretion of the Remuneration Committee. Individual performance criteria have been agreed with each participant, which will be evaluated by the Committee in determining individual allocations from the bonus pool.
The maximum bonus payable under the Bonus Plan for executive directors is 300% of salary. The highest level of bonus will only be available for truly outstanding performance. Bonuses will be payable in up to three tranches, as follows:
- the maximum bonus, which any one participant is eligible to receive in cash, will be limited to 100% of the individual's base salary;
- any additional bonus up to a further 100% of base salary will be deferred for a period of one year;
- any remaining bonus will be deferred for a period of two years.
The deferred elements will take the form of awards of Xstrata shares conditional on the participant remaining in employment throughout the deferral period. The number of shares awarded will be determined by reference to the market value of the shares at the date the bonus payment is determined.
There is no intention to use newly-issued ordinary shares for the Bonus Plan and any shares required for the satisfaction of deferred bonuses will be acquired by market purchase.
Long-Term Incentive Arrangements
Added Value Plan
The Added Value Plan (the "AVP") was approved at the Annual General Meeting in 2005. The AVP is designed to incentivise the Chief Executive by providing a share of the long-term value he creates for shareholders over and above the value created by Xstrata's peer companies and to create alignment with shareholders by means of share ownership. The Remuneration Committee believes that the Chief Executive has a unique role in delivering value to shareholders through the efficient utilisation of Xstrata's assets and by making value enhancing acquisitions and divestments. For this reason, it is intended that membership of the AVP will be restricted to the current Chief Executive and any future successor in that role.
The Chief Executive's participation in the AVP is contingent on his building up and maintaining a holding of at least 350,000 ordinary Xstrata shares. The holding may be met through shares held beneficially and, subject to the agreement of the Remuneration Committee, fully vested share options that have not yet been exercised and which have exercise prices materially below the market share price at the commencement of the relevant plan cycle.
The Chief Executive will no longer be eligible for awards under the Xstrata plc Long Term Incentive Plan (the "LTIP") in any year when an AVP cycle commences. The LTIP will continue in force for other Executive Directors and other employees at the discretion of the Remuneration Committee.
Payments under the AVP will be based upon the growth in total shareholder return ("TSR") over a three-year performance period relative to an index of global mining companies, which will form the Xstrata TSR Index. At the end of each performance period an Excess Return figure will be calculated, which will quantify the difference in TSR between the Xstrata TSR Index and Xstrata. Once the Excess Return figure has been calculated it will be applied to the market capitalisation of Xstrata at the start of the performance period to measure the "Added Value" added relative to the movement in the market. The Added Value will be limited to 50% of the initial market capitalisation. If the Added value is negative (i.e. Xstrata has underperformed the index) there will be no payments from the AVP. If this figure is positive, it will be multiplied by a Participation Percentage (which is 0.5% of the Added Value for the first Plan Cycle) to calculate the "Base Reward". The maximum aggregate Participation Percentage for Plan Cycles commencing in any three-year period shall not exceed 1.1%.
The Remuneration Committee recognises that the absolute value received by shareholders is higher when outperforming a rising market than outperforming a market which is static or falling. The Base Reward will be increased or decreased in line with the Xstrata share price index. This will ensure that higher payments are delivered for higher levels of absolute performance, as is the case with an orthodox share option or performance share plan. The adjustment is in line with index performance rather then Xstrata's to avoid double counting Xstrata's outperformance of the index. A reduction will then be made for lower levels of absolute performance, by applying a multiplier to the indexed Base Reward to calculate the Final Reward, as follows:
| Xstrata absolute TSR over 3 years | Multiplier |
|---|---|
| +25% or above | 1x |
| 0% | 0.5x |
| -25% or below | 0.0x |
| Straight-line interpolation will apply between these points for example, if absolute TSR over three years were minus 10%, a multiplier of 0.3 would be applied | |
Provided Xstrata's TSR is at least equal to that of the Xstrata TSR Index, the Final Reward under each plan cycle will be at least US$1,000,000.
The Xstrata TSR and Share Price Indices will be weighted by market capitalisation. The group will, initially, comprise of 19 global mining firms consisting of Xstrata's key competitors for both financial and human capital: Alcoa Inc, Alcan Inc, Anglo American plc, Arch Coal Inc, BHP Billiton plc, Coal & Allied Industries Ltd. Elkem ASA, Eramet SA, Grupo Mexico SA de CV, Inco Ltd, Korea Zinc Inc, Lonmin plc, Falconbridge Ltd (previously Noranda Inc), Norddeutsche Affinerie AG, Peabody Energy Corp, Phelps Dodge Corp, Rio Tinto plc, Teck Cominco Ltd and Umicore SA.
In the event of one or more constituents undergoing a take-over, merger, dissolution, verification in capital or any other event that will materially affect calculation of the index, the Remuneration Committee shall determine how this should be reflected in the index calculation. The Remuneration Committee may add other relevant competitors to the index if required.
At the end of the three-year performance period, 50% of the Final Reward will vest immediately. The vesting of the remainder will be deferred in equal tranches for a further one and two years. Payments under the Added Value Plan may be settled in cash or shares as determined by the Remuneration Committee at the date of payment.
As at 31 December 2005, Xstrata's TSR was just below that of the Xstrata TSR Index. If this is the outcome at the end of the three-year performance period the award will not vest.
Long Term Incentive Plan
Executive directors are eligible to participate in the Long Term Incentive Plan, (The "LTIP"). The LTIP aims to focus management's attention on continuous and sustainable improvements in the underlying financial performance of the Group and on the delivery of superior long-term returns to Xstrata's shareholders by providing executives with the opportunity to earn superior levels of reward for outstanding performance. In addition, the LTIP further aligns the interests of shareholders and management by encouraging executives to build a shareholding in the Group.
The LTIP provides for the grant of both contingent awards of free shares ("Free Share Awards") and share options on the same occasion to the same individual. The two elements are complementary and ensure that the cyclical nature of the industry does not have an excessively adverse effect on employee remuneration in circumstances where the performance of the Group has otherwise been good, relative to that of competitors.
The Free Share Awards will ensure that where the Group has performed well over a specified performance period, participants will be rewarded even if there is no substantial share price growth due to external factors, such as commodity prices or general economic conditions. The option element will only allow participants to benefit provided shareholders also benefit from future share price growth. The options will also be subject to stretching performance targets to ensure that windfall growth in the share price as a result of external factors does not deliver rewards which are not justified by the performance of the Group relative to its peer group. The policy regarding performance targets is discussed in more detail below.
The number of ordinary shares over which options will be granted will be calculated using a Black Scholes valuation of the option (or a similar approach) which the Remuneration Committee considers represents both the cost to Xstrata of providing the benefit and the value of the option itself as a component of the total remuneration package. The option value at grant will not be less than 25% of the value of the underlying shares. In determining the value of Free Share Awards the value of the underlying shares will be used.
Using the method above, the value ratio of Free Share Awards to share options for awards made during 2005 was in general 1:1, based on the value at the time of grant. The Remuneration Committee may change the ratio for future awards if it is thought appropriate.
The Remuneration Committee has determined that annual awards will be made under the LTIP to minimise the impact of share price volatility and to reflect existing best practice. The rules of the LTIP provide that the aggregate value of options and Free Share Awards made to an individual in any one year may not exceed an amount equal to two times base salary in normal circumstances (although in exceptional circumstances the limit may be up to, but not exceed, four times base salary).
Summary of performance conditions
2004 and 2005 LTIP awards
During 2004 and 2005, executive directors were granted market value options and Free Share Awards under the LTIP. The vesting of both the options and Free Share Awards is subject to the satisfaction of stretching performance conditions over a three-year performance period. Half of the options and Free Share Awards are conditional on Total Shareholder Return ("TSR") relative to a peer group and half are conditional on the Group's real cost savings relative to targets set on a stretching scale over the three-year period, as follows.
For the awards conditional on TSR, 25% of the combined award will vest if TSR growth is at the median of the specified peer group, the full 50% of the combined award will vest for performance at or above the second decile with straight line vesting between these points. No vesting will occur for TSR growth below median performance.
For the remaining award, vesting is conditional on the Group's real cost savings relative to targets set on a stretching scale: 5% of the combined award will vest for 1% cost savings, 35% for 2% cost savings and 50% for 3% or more cost savings, with straight line vesting between these points. No vesting will occur for cost savings that are less than 1%. Real cost savings will be measured in relation to operating costs after adjusting for the effects of inflation, excluding depreciation, commodity price linked costs, effects of currencies on translation of local currency costs and planned life of mine adjustments.
Since the Group's share price and that of its peers are significantly influenced by the cycle in commodity prices, the Remuneration Committee considers TSR relative to a peer group to be an appropriate performance measure as it rewards relative success in growing shareholder value through the development and execution of the corporate strategy. The Remuneration Committee is also satisfied that TSR will be a genuine reflection of the Group's underlying financial performance. The use of the second measure, Group real cost savings relative to targets, reflects the Group's strategic initiative to add shareholder value through productivity and cost efficiencies. Furthermore, the use of a financial performance measure alongside a relative TSR measure is aligned with current corporate governance best practice.
The performance targets are not capable of being retested at the end of the performance period, so that any proportion of a Free Share Award or option which does not vest after three years will lapse, although vested options will remain exercisable for a maximum of seven years or such shorter period as the Remuneration Committee may specify (after which they will lapse).
The peer group of global mining companies used to determine the vesting of the options and Free Share Awards that are conditional on TSR in the 2004 and 2005 LTIPs comprises the same companies used to form the Xstrata Share Indices for the CEO's Added Value Plan detailed above, plus WMC Resources Ltd. It is envisaged that this peer group will be used to determine the vesting of any options and Free Share Awards that are granted in 2006, although the Remuneration Committee may, at its absolute discretion, vary, add, remove or alter the companies making up the peer group where events happen which cause the Remuneration Committee to consider that such a change is appropriate to ensure that the performance condition continues to represent a fair measure of performance. This is provided that the Remuneration Committee reasonably considers such a varied or amended performance condition is not materially easier or more difficult to satisfy.
In calculating the TSR, the share price of a notional parcel of shares of the Group and the companies in the specified peer group will be averaged over a period preceding both the start and end of the relevant performance period. The Remuneration Committee has resolved that averaging over a three month period eliminates the volatility in spot share prices that could otherwise distort the assessment of whether the target has been met.
The TSR of the Group and each member of the peer group over any performance period is calculated by taking the growth between the closing value and the base value of 100 shares expressed as a percentage of the base value, on the assumption that any net dividend per share paid by any company during the relevant performance period is reinvested in shares on the last day of the month during which the relevant shares go ex-dividend. This calculation is subject to such adjustments to closing value and base value as the Remuneration Committee considers appropriate to reflect any variation of share capital or any merger, take-over, reconstruction, demerger or change in listing status by any member of the peer group or upon any other events which the Remuneration Committee considers may materially distort the calculation.
At 31 December 2005, the Group was ranked 6th out of the peer group of 21 companies in terms of TSR for the 2004 award. If this is the outcome at the end of the three-year performance period then 88% percent of each executive director's 2004 award linked to TSR will vest.
At 31 December 2005, the Group was ranked 11th out of the peer group of 21 companies in terms of TSR for the 2005 award. If this is the outcome at the end of the three-year performance period then 50 percent of each executive director's 2005 award linked to TSR will vest.
It should be noted that these amounts are based on the Group's results at this provisional stage and do not necessarily reflect the eventual outcome.
2003 LTIP award vesting in 2006
Awards of market value options and Free Share Awards granted under the LTIP to executive directors in 2003 were subject to a TSR performance condition only. Both the options and Free Share Awards vest in full at the expiry of a three-year performance period to the extent that the Group's TSR ranks at or above the second decile of the peer group specified above, and 50% will vest if it ranks at the median of the peer group. In between these two points straight line vesting will apply. No options or Free Share Awards will vest for below median performance.
At 10 February 2006, the Group was ranked 5th out of the peer group of 21 companies in terms of TSR. As a result, 95% of each executive director's 2003 award vested.
Subsisting rights under Xstrata AG share schemes
Subsisting options held by Mick Davis and Trevor Reid pursuant to terms on which they were recruited and the subsisting options of Santiago Zaldumbide under certain share schemes previously operated by Xstrata AG were converted into equivalent options over ordinary shares in the Group at the time of the listing of the Group's shares on the London Stock Exchange ("the Listing") but otherwise continue to be subject to the terms and conditions of the relevant Xstrata AG share schemes. It is intended that the replacement options will as far as possible be satisfied by the transfer of ordinary shares in the Group held by the trustees of the Xstrata Employee Share Ownership Trust and the Xstrata Employee and Directors Share Ownership Trust. Whilst subsisting options continue to vest under these schemes, no future grants will be made. Subsisting options are not subject to performance conditions because they were originally granted under arrangements (which did not provide for awards to be subject to performance) which related to Xstrata AG prior to the Group becoming a UK listed company.
Similarly, subsisting options, which had been previously granted to Mick Davis over shares in Xstrata AG owned by Glencore International, were also converted into equivalent options over ordinary shares in the Group on the Listing but otherwise continued to be subject to the same terms and conditions as applied originally. On 19th September 2005, the option over these Xstrata shares was discharged in full and Mick Davis received from Glencore International a consideration equating to the current value of the option (CHF26.3 million, representing 1.334 million shares at CHF19.70 per share, being the difference between Xstrata's closing price of CHF33.30 per share on Monday 19th September 2005 and the exercise price of CHF13.60 per share). As a consequence, Mick Davis no longer has an option over these 1.334 million Xstrata shares.
Performance Graph
The performance graph set out above shows the TSR for a holding of shares of the Group for the year ended 31 December 2005 compared with the TSR for a hypothetical holding of shares of the same kinds and number as those by reference to which the FTSE100 index is calculated. The Board considers that the FTSE 100 currently represents the most appropriate of the published indices for these purposes.
TSR has been calculated on a spot basis with effect from 20 March 2002, the date conditional dealings in the shares commenced on the London Stock Exchange, assuming that an equivalent sum was invested on that day in shares of the Group and in the FTSE 100 index.
Dividends are invested in additional shares and benefits receivable in the form of shares are also added to the relevant holding.
The TSR calculation also assumes that immediately before any liability to the Group in respect of the shares is due to be satisfied sufficient shares are sold from the holding to raise funds to meet the liability; for example, in the case of a rights issue sufficient rights are deemed to be sold to enable the proceeds to be invested in taking up as many rights as possible without injecting fresh funds. In the case of Xstrata, the 2003 rights issue was recalculated as per the date of listing.
Pensions
Mick Davis and Trevor Reid have participated in money purchase retirement plans from their respective dates of joining the Group. The plans are designed having regard to the taxation and employment status of each executive.
Group contributions are re-assessed at regular intervals and are based on actuarial advice with the objective of accumulating sufficient funds over the working lifetime of each executive to provide an overall target pension which is currently intended to be equivalent to approximately 60% of final salary at normal retirement age for executives who begin participating in the plans at the age of 40. The actual benefits payable will, however, be based on the amount which has accumulated in that member's money purchase account.
Such contributions are inclusive of any contributions from the relevant individuals. No employee contributions are currently payable for Mick Davis and Trevor Reid.
As noted above, Santiago Zaldumbide receives no pension benefits under the terms of his fixed cost remuneration arrangement.
Directors' service contracts
It is the Group's general policy that the period of notice required should not exceed 12 months. If it became necessary to offer a longer notice period to a new director, such period would reduce after the initial period. Where specific terms apply to individual executive directors, these are set out in the section of this report headed Entitlements under Service Contracts see below.
External appointments
Executive directors are not permitted to hold external directorships or offices without the approval of the Board. Santiago Zaldumbide, having gained the approval of the Board, held directorships with the following companies during the year: Asturiana de Zinc SA; Carburos Metalicos SA; Fertiberia SA and ThyssenKrupp SA. In total the remuneration received by Santiago Zaldumbide amounted to €36,500.
Non-Executive Directors
The level of fees for non-executive directors will be set at the level considered necessary to obtain the services of individuals with the relevant skills and experience to bring added depth and breadth to the composition of the Board.
Non-executive directors' fees are reviewed annually by the Chairman and the Chief Executive in the light of fees payable to non-executive directors of comparable companies and the importance attached to the retention and attraction of high calibre individuals as non-executive directors.
Non-executive directors are eligible to forgo all or part of their directors' fees to acquire shares in the Group, after deduction of applicable income tax and social security contributions.
The non-executive directors do not, and will not in the future, participate in the Bonus Plan or LTIP or any other performance-related incentive arrangements which may be introduced from time to time.
Entitlements under service contracts
Executive Directors
Mick Davis and Trevor Reid have employment agreements with Xstrata Services (UK) Limited ("XSL") effective from 1 February 2002 which are for fixed terms of one year. However, their services as Chief Executive and Chief Financial Officer respectively are provided to the Group under a secondment agreement entered into between the Group and XSL on 19 March 2002. Each of Mick Davis and Trevor Reid is seconded to the Group for a fixed term of two years thereafter renewable by either party for further periods of two years.
The employment of Mick Davis and Trevor Reid may be terminated by not less than 12 months' notice by XSL or the director concerned or by a payment in lieu of notice by XSL. Mr Davis and Mr Reid have agreed to alter their contracts so that on termination of employment by XSL in breach, or if Mr Davis or Mr Reid resigns in circumstances where they cannot in good faith be expected to continue in employment, each director is entitled to be paid a sum equal to 100% (instead of the original 150%) of his annual salary and his previous year's bonus (plus any accrued basic salary and expenses) and to have all entitlements under his retirement benefit plans paid in accordance with the plan rules. As both Mr Davis and Mr Reid participate in defined contribution arrangements it is not expected that any significant additional liability would arise in respect of retirement plan entitlements beyond that already accrued in the accounts. For the purposes of calculating termination payments, annual bonus will be capped at 300% of annual salary.
In addition, each of the executive directors is eligible to participate in the Bonus Plan which provides that deferred amounts up to an aggregate ceiling of 100% of salary remain payable notwithstanding cessation of employment after the date a bonus is awarded other than in the event of dismissal for cause. In the case of termination by reason of death, injury, ill health or disability before the date the bonus is awarded for a financial year, or if the Remuneration Committee in its discretion so resolves, a proportion of the annual bonus pool may still be awarded subject to the normal discretion of the Remuneration Committee.
On termination of the agreement under which Santiago Zaldumbide receives a fixed fee for acting as Chairman of Asturiana, other than on his voluntary termination or termination for gross negligence, Santiago Zaldumbide is entitled to receive a sum from the redemption of an insurance policy acquired by Asturiana as described above. Santiago Zaldumbide is engaged as a director of Xstrata Plc on the terms of a letter of appointment dated 18 March 2002. The appointment is on an indefinite basis subject to the existence of the agreement between Santiago Zaldumbide and Asturiana, the terms and conditions of which are detailed above. Santiago Zaldumbide will receive no additional remuneration for his position as director of Xstrata Plc and is not entitled to any compensation in respect of the termination of his office as a director of Xstrata Plc.
Non-Executive Directors
Willy Strothotte is engaged by the Group as a non-executive director and Chairman on the terms of a letter of appointment. The appointment is for an initial fixed term of 36 months commencing on 25 February 2002 and terminable thereafter by six months notice by Willy Strothotte. The Group may terminate Willy Strothotte's appointment at any time and on such termination Willy Strothotte will not be entitled to any compensation for loss of office. The term may be renewed by the Board.
David Rough is engaged by the Group as the senior independent non-executive director and Deputy Chairman on the terms of a letter of appointment. The appointment is for an initial fixed term of 36 months commencing on 1 April 2002 and terminable thereafter by six months notice by David Rough. The Group may terminate David Rough's appointment at any time and on such termination David Rough will not be entitled to any compensation for loss of office. The term may be renewed by the Board.
David Issroff, Ivan Glasenberg, Paul Hazen, Robert MacDonnell, Frederik Roux, Sir Steve Robson and Ian Strachan are each engaged by the Group as a non-executive director on the terms of a letter of appointment. Each appointment is for an initial fixed term of 36 months commencing on 25 February 2002 (or on 8 May 2003 in the case of Ian Strachan) and terminable thereafter by six months notice by the non-executive director. The Group may terminate each non-executive director's appointment at any time and on such termination the non-executive director will not be entitled to any compensation for loss of office. Each term may be renewed by the Board.
There is no arrangement under which a director has agreed to waive future emoluments nor have there been any such waivers during the financial year.
There are no outstanding loans or guarantees granted or provided by any member of the Group to or for the benefit of any of the Directors.
No significant awards have been made in the financial year to any past Directors.
Information Subject to Audit
Emoluments and compensation
The emoluments and compensation in respect of qualifying services of each person who served as director during the year were as follows:
| Director | Salary and fees1 US$ | Bonus US$ | Deferred Bonus US$ | Housing allowances US$ | Health life and private medical insurance US$ | Other benefits US$ | Total US$ | Year ended 31 December 2004 Total US$ |
|---|---|---|---|---|---|---|---|---|
| Executives | ||||||||
| Mick Davis | 1,729,0002 | 1,663,4505a | 2,961,0845a* | 183,0006a | 141,6227 | 6,678,156 | 8,689,844 | |
| Trevor Reid | 808,1712 | 777,5325a | 990,7765a* | 141,6606b | 72,0858 | 2,790,224 | 3,502,923 | |
| Santiago Zaldumbide | 974,2133 | 932,7405b | 1,174,6855b* | 12,6783 | 3,094,316 | 2,706,097 | ||
| Non-executives | ||||||||
| Willy Strothotte | 327,6004 | 327,600 | 330,012 | |||||
| Paul Hazen | 118,3004 | 118,300 | 119,171 | |||||
| David Issroff | 100,1004 | 100,100 | 100,837 | |||||
| Robert MacDonnell | 118,3004 | 118,300 | 119,171 | |||||
| Dr. Frederik Roux | 136,5004 | 136,500 | 119,171 | |||||
| Ivan Glasenberg | 118,3004 | 118,300 | 119,171 | |||||
| Sir Steve Robson CB | 145,6004 | 145,600 | 146,672 | |||||
| David Rough | 227,5004 | 227,500 | 192,507 | |||||
| Ian Strachan | 145,6004 | 145,600 | 119,171 | |||||
| 4,949,184 | 3,373,722 | 5,126,545 | 324,660 | 226,385 | 0 | 14,000,496 | 16,264,747 | |
| Notes | ||||||||
| 1 Salary and fees includes non-executive directors’ fees which may be paid in shares. | ||||||||
| 2 In 2005, Mick Davis’ and Trevor Reid’s salaries were set and paid in UK pounds sterling. The salary figures above have been converted to US dollars based on the average pound/dollar exchange rate for the year of 1.820 (2004: 1.833) and therefore reflect the impact of the exchange rate fluctuations during the year. | ||||||||
| 3 In 2005, Santiago Zaldumbide’s basic salary and benefits were set and paid in Euros. The figures above have been converted to US dollars based on the average euro/dollar exchange rate for the year of 1.245 (2004: 1.244) and therefore reflect the impact of the exchange rate fluctuations during the year. | ||||||||
| 4 With the exception of Ian Strachan whose fees were set in pounds and paid in US dollars, all non-executive director fees were set and paid in UK pounds sterling. The figures above have been converted to US dollars based on the average pound/dollar exchange rate for the year of 1.820 (2004: 1.833) and therefore reflect the impact of the exchange rate fluctuations during the year. | ||||||||
| 5.a Bonuses were awarded and paid in UK pounds sterling and converted at a rate 1.751, the exchange rate prevailing on the date of the award. | ||||||||
| 5.b Bonuses were awarded and paid in Euros and converted at a rate of 1.192, the exchange rate prevailing on the date of the award. | ||||||||
| 6.a In 2005, Mick Davis’ housing allowance was awarded and paid in US dollars. | ||||||||
| 6.b In 2005, Trevor Reid’s housing allowance was awarded in US dollars and paid in UK pounds sterling. | ||||||||
| 7 In 2005, Mick Davis’ benefits were set and paid in both UK pounds sterling and Swiss Francs. The benefits been converted to US dollars based on the average pound/dollar exchange rate for the year of 1.820 (2004: 1.833) and the average Swiss franc/dollar exchange rate for the year of 0.802 (2004: 0.805) and therefore reflects the impact of the exchange rate fluctuations during the year. | ||||||||
| 8 In 2005, Trevor Reid’s benefits were set and paid in UK pounds sterling. The benefits have been converted to US dollars based on the average pound/dollar exchange rate for the year of 1.820 (2004: 1.833) and therefore reflects the impact of the exchange rate fluctuations during the year. | ||||||||
| 9 No consideration has been paid to or is receivable by third parties for making available the qualifying services of any directors during the year or in connection with the management affairs of Xstrata. | ||||||||
| *Deferred bonus payable in shares. The number of shares awarded will be determined by reference to the market value of the shares at the date the bonus payment was determined. Amount also includes $50,046.58, $17,307.69 and $12,805.56 in respect of dividend equivalents awarded during the year in respect of prior years’ deferred bonus awards which will vest on the date of the underlying award for Mick Davis, Trevor Reid and Santiago Zaldumbide respectively. | ||||||||
Share options
Details of share options of those directors who served during the year are as follows:
| Director | At 1 Jan 2005 | Awarded | Exercised/ Discharged | Expired unexercised | At 31 Dec 2005 | Exercise price | Earliest date of exercise | Expiry date |
|---|---|---|---|---|---|---|---|---|
| Mick Davis | ||||||||
| Service Contract Arrangements | 444,860 | 444,860 | £4.29 | 01‑Oct‑05 | 01‑Oct‑12 | |||
| Service Contract Arrangements | 444,860 | 444,860 | £4.72 | 01‑Oct‑06 | 01‑Oct‑13 | |||
| Glencore Option | 1,334,669 | 1,334,669 | 0 | CHF13.60 | 19‑Sep‑04 | 19‑Sep‑11 | ||
| LTIP Options | 352,872 | 352,872 | £3.60 | 10‑Feb‑06 | 10‑Feb‑13 | |||
| LTIP Options | 689,655 | 689,655 | £7.35 | 05‑Mar‑07 | 08‑Mar‑14 | |||
| Trevor Reid | ||||||||
| Service Contract Arrangements | 444,860 | 444,860 | 0 | CHF12.53 | 31‑Dec‑04 | 31‑Dec‑11 | ||
| Service Contract Arrangements | 222,430 | 222,430 | £4.12 | 15‑Jan‑06 | 15‑Jan‑13 | |||
| Service Contract Arrangements | 222,430 | 222,430 | £6.35 | 15‑Jan‑07 | 15‑Jan‑14 | |||
| LTIP Options | 111,794 | 111,794 | £3.60 | 10‑Feb‑06 | 10‑Feb‑13 | |||
| LTIP Options | 293,103 | 293,103 | £7.35 | 05‑Mar‑07 | 08‑Mar‑14 | |||
| LTIP Options | 192,130 | 192,130 | £10.60 | 11‑Mar‑08 | 11‑Mar‑15 | |||
| Santiago Zaldumbide | ||||||||
| Xstrata AG Management and | ||||||||
| Employee Incentive Scheme | 120,640 | 120,640 | 0 | CHF14.98 | 31‑Jan‑04 | 31‑Jan‑07 | ||
| LTIP Options | 107,085 | 107,085 | £3.60 | 10‑Feb‑06 | 10‑Feb‑13 | |||
| LTIP Options | 268,966 | 268,966 | £7.35 | 05‑Mar‑07 | 08‑Mar‑14 | |||
| LTIP Options | 221,189 | 221,189 | £10.60 | 11‑Mar‑08 | 11‑Mar‑15 | |||
| 5,058,224 | 413,319 | 1,900,169 | 0 | 3,571,374 | ||||
| Notes | ||||||||
| 1. No options, other than the LTIP options, are subject to performance conditions as explained above. Details of the LTIP performance conditions are described above. | ||||||||
| 2. During the year, no options were subject to a variation of terms and conditions. | ||||||||
| 3. Mick Davis’ and Trevor Reid’s LTIP options may be settled in cash at the discretion of the Remuneration Committee. | ||||||||
| 4. The highest and lowest prices of the company's shares during the year were GBP14.90 and GBP8.69 respectively (2004 GBP9.50 and GBP6.22 respectively). The price at the year end was GBP13.60 (2004 GBP9.31). | ||||||||
| 5. On 19th September 2005, Mick Davis exercised his option over 1,334,669 shares. The market value of an Xstrata share on the date of exercise was CHF33.30. | ||||||||
| 6. On 3rd March 2005, Trevor Reid exercised his option over 444,860 shares. The market value of an Xstrata share on the date of exercise was £10.44. | ||||||||
| 7. On 3rd March 2005, Santiago Zaldumbide exercised his option over 120,640 shares. The market value of an Xstrata share on the date of exercise was £10.44. | ||||||||
| 8. The aggregate gains on the exercise of the options during 2005 was US$25,810,548 (2004 US$16,636), having been converted in US dollars at the average exchange rate for the year of 1.2463 (2004: 1.2421). | ||||||||
| 9. The gain on the exercise of the Glencore option does not represent an obligation of Xstrata plc, as they were awarded by Glencore AG, and were over shares held by Glencore AG. | ||||||||
Shares
Details of the Company's ordinary shares over which those directors who served during the year have rights under the deferred bonus scheme, and conditional rights under the LTIP are as follows:
| Director | Scheme interest at 1 Jan 2005 | Awarded | End of the period for qualifying conditions to be fulfilled | Vested | At 31 Dec 2005 |
|---|---|---|---|---|---|
| Mick Davis | |||||
| LTIP | 113,880 | 10-Feb-06 | 0 | 113,880 | |
| LTIP | 206,897 | 05-Mar-07 | 0 | 206,897 | |
| Added Value Plan | * | ||||
| Deferred Bonus | 169,811 | 23-Feb-07 | 0 | 169,811 | |
| Trevor Reid | |||||
| LTIP | 36,080 | 10-Feb-06 | 0 | 36,080 | |
| LTIP | 87,931 | 05-Mar-07 | 0 | 87,931 | |
| LTIP | 57,639 | 11-Mar-08 | 0 | 57,639 | |
| Deferred Bonus | 58,726 | 23-Feb-06 | 0 | 58,726 | |
| Santiago Zaldumbide | |||||
| LTIP | 34,560 | 10-Feb-06 | 0 | 34,560 | |
| LTIP | 80,690 | 05-Mar-07 | 0 | 80,690 | |
| LTIP | 66,357 | 11-Mar-08 | 0 | 66,357 | |
| Deferred Bonus | 43,450 | 23-Feb-06 | 0 | 43,450 | |
| 560,038 | 395,983 | 0 | 956,021 | ||
| Notes | |||||
| 1. No shares have become receivable in respect of a scheme interest. | |||||
| 2. Details of performance conditions are described above. | |||||
| 3. The market value of a share on the date of award under the LTIP and the Deferred Bonus was GBP10.60. | |||||
| *During the year, Mick Davis was made an award under the Added Value Plan as described above. The participation percentage was 0.5% and the market capitalisation at the date of award was £6,026,084,544. | |||||
| No amount of shares awarded has been disclosed in the table above, as this award is not over a fixed number of shares, but is a plan which calculates a monetary award at the end of the performance period, which may then be settled in cash or by the award of shares with a value equal to that of the award. No awards will be made to Mr Davis under the LTIP in any year in which any award is made to him under the AVP. | |||||
Pensions
Mick Davis and Trevor Reid have participated in defined contribution retirement benefit plans. During the year pension related payments were made as follows:
| 2005 Mick Davis US$ | 2004 Mick Davis US$ | 2005 Trevor Reid US$ | 2004 Trevor Reid US$ | 2005 Total US$ | 2004 Total US$ | |
|---|---|---|---|---|---|---|
| Pension related payments | 1,961,746 | 629,025 | 1,282,445 | 271,602 | 3,244,191 | 900,627 |
| Notes | ||||||
| 1. Further details of the pension arrangements are explained above. | ||||||
| 2. Santiago Zaldumbide received no pension benefits under the terms of his fixed cost remuneration arrangement which is detailed above. | ||||||
| 3. Based on the average UK pound/US dollar exchange rate for the year of 1.820 (2004: 1.833). Payments to Mick Davis and Trevor Reid in both years were made in UK pounds sterling. | ||||||
Approved by the Board and signed on its behalf by
Trevor Reid
Director and Chief Financial Officer
10 March 2006
Enquiries
If you would like further information on Xstrata please contact:
Corporate
Claire Divver
+44 20 7968 2871
Brigitte Mattenberger
+41 41 726 6071
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