Directors' remuneration report

Overview

This remuneration report sets out the company’s policy on the remuneration of executive and non-executive directors, together with details of directors’ pay, employment agreements, letters of appointment and interests in shares. The remuneration committee aims to comply with best practice guidelines, including guidance produced by the Association of British Insurers and the National Association of Pension Funds, in producing this report. All information disclosed in the directors’ remuneration report is unaudited save where it is stated that the information is audited. An ordinary resolution to approve the directors’ remuneration report will be put to the annual general meeting on Wednesday 11 May 2011.

The committee, its advisers and terms of reference

The members of the committee are Peter Long (chairman), Richard Burrows and Alan Giles, all of whom are independent non-executive directors. The committee's membership has not changed during the year.

The duties of the committee cover the following key areas:

• establishing the framework of broad policy for the remuneration of the chairman, the executive directors, the divisional managing directors and the functional heads reporting to the chief executive;
• setting the targets for performance-related pay schemes for executive directors and senior executives;
• determining the policy and scope of pension arrangements for each executive director and other direct reports of the chief executive;
• approving the contractual terms for departing executive directors and senior executives and ensuring that payments made are fair to the individual and the company and that failure is not rewarded and that any duty to mitigate loss is fully recognised;
• setting the total remuneration package of each executive director including, where appropriate, benefits, the structure and payment of bonuses and share incentive awards; and
• approving material changes in reward structures across the group.

The terms of reference of the committee were reviewed during the year and the board approved a number of relatively minor adjustments. A copy of the committee's terms of reference is available on the company's website or on application from the company secretary.

The committee met six times in 2010 and in addition was consulted on various remuneration issues between formal meetings. The company secretary is secretary to the committee and the group HR director is invited to attend meetings of the committee to provide advice on remuneration matters. The chairman, chief executive and chief financial officer attend by invitation when appropriate. No individual is present during any discussion relating to their own remuneration.

Deloitte LLP has been retained by the committee to provide advice on executive remuneration and on the company's long-term incentive plan (the Performance Share Plan approved by shareholders in 2006) and on incentive arrangements relating to John McAdam, Alan Brown and Andy Ransom, approved by shareholders in May 2008. Details of incentive arrangements in place in respect of both schemes are provided in this report. During the year, Deloitte have provided the company with a limited level of advice over non-remuneration matters such as taxation, although they are not the company's main source of advice in such areas. Deloitte also provided a limited level of resource to support the internal audit function. Towers Watson advised the company on its UK pension matters.

During the year the committee considered the following matters:

• assessment of performance in relation to the 2009 bonus outcomes;
• determination of 2010 salaries for executive directors and senior executives;
• the company's remuneration report for the financial year 2009;
• awards under the performance share plan and related policy issues concerning the level of participation in the scheme;
• bonus arrangements for 2010 and target setting for bonus purposes in respect of executive directors and senior executives;
• contractual and remuneration/incentive arrangements relating to the resignation of Michael Murray as chief financial officer and to the appointment of Jeremy Townsend as his successor;
• arrangements in connection with the appointment or departure of a number of individual senior executives;
• review of the likely impact of the economic and financial environment on salary inflation in directors and senior executive remuneration; and
• a preliminary review of alternative structures for performance criteria to apply to awards to be made under the performance share plan in 2011.

Committee evaluation

The committee conducted a review of its performance during the year with the assistance of an external facilitator. The review concluded that the committee continued to operate effectively and that individual directors serving on the committee continued to have access to appropriate advice and information.

Remuneration policy

A new remuneration structure/framework was established in 2008 which:

• enables the company to attract and retain the leadership talent necessary to reinvigorate and grow the business;
• rewards individual contributions for improving financial performance and implementing the organisational and process changes identified in the 2008 strategic review; and
• fully aligns each executive's interests with those of the shareholders.

This policy is reflected in the PSP awards made during 2008, 2009 and 2010 which are subject to performance conditions relating to both financial performance and shareholder value creation (described further below). The committee regularly reviews the effectiveness and competitiveness of the total remuneration and benefits packages of executive directors and senior executives, with assistance from Deloitte and respected market surveys prepared by Towers Watson.

The following summarises the company's current policy in relation to the main elements of the executive remuneration package.

The table below shows the approximate mix between fixed and variable pay for executive directors based on the achievement of "on-target" and "maximum" performance. The company's policy is that a significant proportion of total remuneration should be performance related.

This illustrates the current remuneration and incentive policy and therefore does not take into account the one-off awards which were made in 2008 under the 2008 Share Incentive Plan to facilitate the appointment of Alan Brown and Andy Ransom (further details relating to these awards are provided below).

Base salaries

Executive directors and senior management salaries are reviewed with effect from 1 January each year. The committee takes into account company performance, experience and the contribution of individuals. Deloitte provides the committee with market analysis using data for companies of comparable size, complexity and market sector. When setting compensation arrangements the committee also derives base salary and other data for senior executives from relevant survey data compiled by Towers Watson.

Based upon advice from the group HR director the committee has accepted the proposal that in the context of the general economic environment, and taking into account pay and conditions within the Group, there should be no increase in base salaries for executive directors and members of the company executive board for 2011 (as was also the case in 2009 and 2010), although it was acknowledged that below that level consideration would be given by group businesses to providing some recognition of cost inflation.

The company has completed the implementation of a global grading programme to deliver a simple, understandable and consistent framework across all businesses providing a clear and transparent structure for conducting HR processes.

Annual cash incentive

At the start of a year the committee sets the performance measures and targets that must be met if a bonus is to be paid under the Senior Executives' Bonus Scheme ("the Scheme"). For 2010 as was the case in 2009, the chief executive and other executive directors have a potential cash bonus opportunity of 100% base salary, subject to the application of a personal performance modifier (based on the outcome of the company's performance development review process) that could increase or decrease the bonus outcome subject to an overall maximum payment of 110% of salary for executive directors and 120% for the chief executive. The performance measures for executive directors are focused on group profit, cash flow and revenue and other performance targets necessary to turn around the financial and operational performance of the group businesses and are designed to focus on business priorities and fully align directors' interests with those of shareholders.

In addition to executive directors, over 500 senior executives also participate in the Scheme. The performance measures for 2010 (as in 2009) related to group, divisional and business revenue, profit and cash performance as well as non-financial personal objectives. Bonuses are typically awarded in March following the end of the financial year to which they relate and specific information on 2010 bonus outcomes for executive directors are set out below.

In 2011 participants in the Scheme will be measured against revenue, profit, cash and meeting strategic operational targets and personal performance measures. The weighting given to financial measures will vary by individual and will be between 60% and 100% of the total bonus opportunity. For 2011, the personal performance modifier has been adjusted to provide the committee with greater flexibility to differentiate bonus outcomes to reflect individual performance and contributions. The bonus modifier will therefore operate within a range of 85%-120% for all individuals in the senior management population, and accordingly the maximum bonus will be 120% for executive directors, and will remain at this level for the chief executive.

Long-term share incentive plans

In 2008 shareholders approved a new share scheme under which one-off share awards were made to the new senior leadership team. Details of the awards are set out below.

The performance share plan introduced during 2006 was developed in keeping with the remuneration policy as applied at that time. Awards were made to some 500 senior managers in over 40 countries around the world in 2006 and 2007. In 2008, the committee refocused participation in the plan, and the performance conditions that apply. In 2010 approximately 270 participants, in senior management roles across the Group received awards under the plan. These awards are subject to a total shareholder return performance condition, and subject to an underpin based on individual contribution to business financial performance.

The 2008 Share Incentive Plan

The Rentokil Initial 2008 Share Incentive Plan ("the 2008 Plan") approved by shareholders in 2008 was designed to facilitate the appointment of John McAdam, chairman, Alan Brown, chief executive, and Andy Ransom, executive director, and to motivate them over a sufficient period to deliver a turnaround in corporate performance. The key features of the 2008 Plan are as follows:

• an award to each of John McAdam, Alan Brown and Andy Ransom of 7.5 million shares, with vesting of the awards based on absolute share price performance targets;
• until a minimum share price of £1.20 has been met over a sustained period, no shares will be earned. At £1.20, 20% of the award would be earned, rising on a straight-line basis to full vesting at a share price of £1.80;
• for achieving growth in market value between a share price of £1.80 and £2.80 further shares may be earned on a straight-line basis up to a maximum of a further 50% of the original award;
• the performance condition will only be satisfied if the share price target is achieved over a sustained period, measured on the basis of an average share price over any 60 consecutive dealing days during the performance measurement period; demonstrating realisable value creation for shareholders;
• up to one-third of the award may vest following the end of the third year, two-thirds following the end of the fourth year and the final third following the end of the fifth year, based on the extent to which performance targets have been achieved; and
• any unvested portion of the award following the end of the fifth year will lapse.

During the first half of 2010 the company's share price achieved a 60 day highest average price of 130.82 pence and therefore under the terms of the plan it is expected that 34.43% of the award will vest with participants being entitled to receive a third of the award from May 2011, a second third a year later and the balance in May 2013. Additional amounts can be earned based on share price appreciation beyond the 130.82 pence level during the remaining life of the scheme. No further awards may be made under this plan.

The Performance Share Plan ("the PSP plan")

In 2006 shareholders approved the PSP plan which was designed to enable participants selected on a discretionary basis to earn shares in the company based on achieving stretching performance targets. The principal features of the plan are as follows:

• awards are made over shares with a face value set by reference to a multiple of base salary, which vest subject to the achievement of performance conditions over a three-year period;
• under normal circumstances, awards will be granted annually with a maximum face value of awards ranging between 25% and 200% of base salary depending on seniority. In exceptional circumstances, a grant of up to 250% of base salary may be made to a participant in any year;
• following the appointment of the company's new leadership early in 2008, the committee considered that for 2008 only it would be appropriate to align the performance criteria for awards under the Performance Share Plan with the share price appreciation targets contained in the 2008 Plan described in the previous section, as well as the achievement of budget related financial performance conditions used to manage the business. The performance condition for the 2008 award is described in more detail below;
• awards made in 2009 and 2010 reverted to a relative TSR measure (replacing absolute share price targets), to reflect market practice and shareholder preferences. The financial performance underpin introduced in 2008 continues to operate as the committee considers this to be helpful in aligning the plan with shareholders' wider interests; and
• the committee considers that this combination of performance conditions continues to be an effective basis for incentivising the senior management group on an on-going basis, and the committee currently intends to maintain this approach for awards made in 2011.

PSP Plan performance conditions are summarised as follows:

• Awards made under the PSP in 2006 and 2007 failed to meet the TSR or EPS performance condition on their maturity in 2009 and 2010, respectively and awards made under it have lapsed.
• Share price growth (2008 awards) – For 2008 only, the committee considered that it was appropriate to use a share price target performance condition which mirrored the share price targets contained within the 2008 plan for the senior leadership team appointed in 2008. These targets are based on the highest average share price achieved over any 60 consecutive dealing days during the period from 1 April 2008 to 61 dealing days following the announcement of the company's results for the financial year ended 31 December 2010. The table below shows the percentage of an award that could be released based on different levels of absolute share price performance:

• The committee believes that delivering strong and consistent financial and operational performance on a year-by-year basis is key to creating long-term shareholder value. For this reason, an individual performance modifier (based on annual bonus outcomes), has been introduced to provide additional motivation for every individual who participates in the PSP to work towards delivering the business plan.
• The effect of the individual performance modifier would be to reduce the level of award that would otherwise vest to zero if an individual fails to reach threshold performance under the annual bonus in each of the three years following grant. If "target" bonus outcomes are achieved in each year, there will be no impact on the vesting of the PSP award. If an individual's performance is such that they achieve maximum levels of award under the bonus plan in each of the three years, the level of vesting based on the share price appreciation targets above would be doubled. This modifier also has the benefit across the group of ensuring that exceptional performance in individual cases is rewarded, while individuals who have not made an equitable contribution to the overall performance of the group do not benefit disproportionately.
• The performance multiplier will be based on achievement of annual bonus targets reflecting individual contribution to business financial performance in respect of each financial year, as set out in the following table.

• During the first half of 2010 the company's share price achieved a 60 day highest average share price of 130.82 pence and therefore under the rules of the scheme 34.43% of the awards to participants will vest, provided that each individual achieved 'on target' annual bonus performance in 2008, 2009 and 2010. Awards will be scaled according to each participant's individual performance multiplier, which is based on their average annual bonus outcome in respect of financial performance conditions over the 2008–2010 period.
• TSR (2009 and 2010 awards) – awards made in 2009 and 2010 are subject to a relative TSR measure, reflecting market practice and shareholder preferences. TSR performance will be measured relative to the constituents of the FTSE 350 index, excluding financial services and primary resources sectors. The FTSE 350 is recognised as a broad index, and was considered to be an appropriate benchmark for measuring performance given the company's membership of the FTSE 250, the scope and scale of the company's international operations, and the diverse nature of companies in the business services sector.
• The performance modifier introduced in respect of 2008 awards will continue to operate as the committee considers this to be helpful in aligning the plan with shareholders' wider interests. Accordingly, there is the possibility that awards could vest at two times the target number of shares, if the business achieves upper quartile TSR performance over the performance period and financial performance that leads to maximum bonus outcomes in each of the three consecutive financial years for the relevant business unit. The committee considers this to be an appropriately ambitious goal that will not be easily achieved. The performance modifier challenges the executive group, and all participants in the PSP, to deliver strong and consistent financial performance in each year. If bonus targets are not met, awards under this plan will be proportionately scaled back; and awards will lapse completely if a threshold financial performance level is not achieved.
• Forward looking policy (2011 onwards) – the committee considered that the level of awards and nature of the performance conditions for the awards in 2010 continues to be an effective basis for incentivising the senior management population.

Chairman and non-executive directors

The chairman, John McAdam, has a letter of appointment setting out his responsibilities for the management of the board under which he receives fees of £350,000 per annum. He received an award on appointment under the 2008 plan, approved by shareholders, details of which are described above and in the schedule of interests in shares shown below. He is not eligible to participate in the company's annual cash bonus plan or in the company's other incentive arrangements. His appointment is for an initial three-year term, terminable by 12 months' notice (company) and six months' notice (chairman) and is subject to appropriate post termination restrictive covenants.

The appointment policy for non-executive directors is that they should be appointed for an initial period of three years, which would be extended for two further periods of three years by mutual consent. Non-executive directors do not have service contracts and they do not participate in any of the company's incentive schemes, nor are they eligible to join the company's pension scheme. There are no provisions for notice periods or compensation in the event of termination of the appointment of a non-executive director and no element of their remuneration is performance related. No non-executive director has any personal interest (other than as a shareholder) in the matters under consideration, or any conflicts of interest arising from other directorships which would impinge upon their independence or objectivity or any day-to-day involvement in running the business. No director plays a part in any discussion about his own remuneration. Expenses reasonably incurred in the performance of their duties are reimbursed.

In addition to the arrangements concerning the chairman described above, all other non-executive directors have specific terms of engagement and their remuneration is determined by the board on the recommendation of the non-executive directors' fees committee of the board (comprising the chairman, the chief executive and the chief financial officer) within the limits set by the articles of association and based on independent surveys of fees paid to non-executive directors of similar companies. The levels of fees for non-executive directors were reviewed by the non-executive directors' fees committee in 2009 based on external market data at which time they were set at £55,000 per annum. The chairmen of the remuneration and audit committees are each paid an additional £15,000 per annum and the senior independent director receives a further £5,000 per annum for acting in that capacity. These amounts are included in the remuneration table below which has been audited.

Executive directors’ contracts

It is the company's policy that executive directors should have rolling contracts subject to one year's notice by the company. The current executive directors have rolling contracts which are subject to one year's notice by the company and six months' notice by the director. Alan Brown's and Andy Ransom's service agreements are dated 7 October 2008.

Michael Murray resigned as a director with effect from 31 March 2010 and received only amounts to which he was contractually entitled details of which are shown in the table below.

Jeremy Townsend was appointed a director and chief financial officer on 31 August 2010. He has a service agreement dated 4 March 2010. On appointment he became entitled to an award under the company’s performance share plan for 2010 at the rate of 100% of basic salary and was granted compensatory awards of shares which will vest 113,273 in September 2011 and 90,618 in September 2012. The remuneration committee considered that these awards adequately compensated him for the value of equity awards given up on leaving his previous employer.

The company’s policy in respect of the notice periods for the termination of executive directors’ contracts conforms to the Code. The committee is fully aware that under the Code, and acting within the contractual framework, it should take a robust line over payments to departing directors. On termination without notice, executive directors are entitled to a payment equal only to base pay and the value of benefits for the duration of the notice period.

External appointments

Executive directors are entitled, subject to board approval of the specific appointment, to accept one non-executive directorship or similar appointment outside the company and to retain the fees in connection with such appointment. No executive director held any external appointments during the year or at the date of this report. The chief executive, Alan Brown, will join the board of Intertek Group plc on 15 April 2011 as a non-executive director. Jeremy Townsend is a director of a business run by a member of his family for which he received no remuneration.

Executive shareholding requirements

Recognising investors’ preferences for executive shareholding requirements, the company introduced shareholding guidelines in 2006. Executive directors will be expected to build (if necessary, over a period of up to five years from appointment) and subsequently maintain a holding of company shares with a market value equivalent to their annual salary. The committee may take into account directors’ compliance with the shareholding guidelines (acknowledging any special circumstances that might apply) when considering future long-term incentive awards.

Pensions

Executive directors participate in defined contribution pension arrangements or receive additional gross salary in lieu of pension contributions from the company at the rate of up to 25% of base salary. Alan Brown and Andy Ransom received a cash supplement in lieu of a pension contribution in 2010, Jeremy Townsend participated in the company’s defined contribution pension scheme for approximately 50% of the 15% of salary employer contribution to which he is entitled under current group policy and received a cash supplement for the balance. A cash supplement in lieu of pension scheme contribution is not counted as salary for bonus purposes.

Bonus

In respect of Alan Brown and Andy Ransom and, on his appointment, Jeremy Townsend, the committee approved a bonus plan for 2010 under which they could each earn 100% of salary (before the application of the modifier – see below) with the following features: for the chief executive, 30% of the bonus opportunity related to revenue growth, a further 20% related to cash conversion and 50% related to the achievement of profit performance for the group. For other executive directors the percentages and measures varied depending on specific operational priorities. The plan provided that any earned bonus is subject to a modifier which is based on personal performance achievements which at an exceptional level would increase the bonus payment by up to a further 10% for executive directors and by up to 20% for the chief executive.

The committee reviewed the 2010 bonus plan outcome for the group’s senior management population based on the targets set at the start of the financial year. No bonus was awarded to the chief executive, Alan Brown as the group profit threshold was not met. Andy Ransom’s bonus shown in the table below related to the performance of the Pest Control division for which he is responsible and no element relates to group performance. The bonus paid to Jeremy Townsend was an agreed minimum bonus for 2010 approved on appointment and was compensatory for value forfeited on leaving his previous employer.

For 2011 the committee has approved a bonus plan for executive directors and the group’s senior management, which is similar in structure to the 2010 bonus plan. Some adjustments were approved to the modifier factors and threshold levels to better incentivise higher performing businesses in the group and to better reward higher individual achievement, and penalise under achievement.

Interests in shares

The interests of directors, who were directors on 31 December 2010, in the shares of the company are set out in the directors’ report.

TSR performance graph

This report is required to include a graph showing total shareholder return (TSR) over a five-year period reflecting a holding of the company’s shares, plotted against the movement of a broad equity market index. The following graph shows the company’s total shareholder return (TSR) performance relative to the FTSE 100 Index and FTSE 250 Index, on a consistent basis with the graph shown last year, and is compliant with these requirements. The company has been a constituent of both these indices over the five-year period that is shown. The FTSE 350 index is also shown, on the basis that the constituents of the comparator group for LTI purposes are drawn from this index (although the comparator group excludes financial services and primary resources companies). The basis of assessment of relative TSR performance in respect of awards made under the company’s PSP differs from the basis on which the chart is prepared, and is described above.

This chart has been prepared by Deloitte LLP for Rentokil Initial plc, for inclusion in the annual report for the year ended 31 December 2010. This is based on data sourced from ThomsonReuters DataStream, and uses spot Return Index data.

Rentokil Initial versus the FTSE 100, 250 and 350 indices

Status of report

The schedule of total pay and benefits for directors and details of share incentive awards are set out on the table below and form part of this report.

The directors’ remuneration report has been prepared in accordance with Schedule 8 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (“the Regulations”) and to comply with the provisions of the UK corporate governance regime applicable to these accounts. The company’s auditors, KPMG Audit Plc, are required to report to the company’s members on the matters set out in the Regulations, and the elements of the report which have been audited are highlighted.

On behalf of the board,

Total pay and benefits for directors

The table below sets out the pay and benefits of directors. The following table has been audited:

Share incentive awards

Share incentive awards to directors as follows – the table has been audited: