Directors’ remuneration report

Alan Giles (Chairman from 2012)
Richard Burrows
Peter Long (Chairman to 2011)
On appointment on 5 March 2012, Angela Seymour-Jackson will join the committee.

The committee has responsibility for making recommendatio to the board on the company’s remuneration policy for the executive directors and the senior management population. The committee also considers and determines specific remuneration packages for executive directors and senior executives reporting to the chief executive and considers and authorises incentive arrangements, payments on termination of employment and related benefits to those individuals. During the year, the committee’s terms of reference were amended to refer explicitly to the wider pay environment in the company when dealing with executive pay to ensure that decisions in relation to executive remuneration are reasonab in this context.

The chairman, the chief executive, the chief financial officer (when required), the group HR director, the company secretary, the committee’s independent advisers, Deloitte LLP. The reward director also periodically attended meetings. No individual is present during any discussion relating to their own remuneration.

I am pleased to present the directors’ remuneration report for the financial year ended 31 December 2011 for which we will be seekin approval from shareholders at the annual general meeting on 1 May 2012.

As set out in the chairman’s statement, 2011 has seen some progress in addressing the issues facing Rentokil Initial. We have a strong executive team in place and our remuneration policies and total reward approach ensure that the company is able to attract, retain and motivate the leadership talent needed to deliver the performance shareholders expect, now and in the future. The remuneration committee continues to review executive remuneration, ensuring that it supports long-term business direction, shareholder value creation and is aligned with our values of Service, Relationships and Teamwork.

The company’s remuneration policies are designed to support the delivery of the group’s strategic objectives, specifically to ensure that there is the maximum possible alignment between the interests of executive directors and senior colleagues with the creation of value for shareholders and the ambition of the company to succeed in the long-term. Success can only be achieved if the company can attract, retain and motivate high quality people to deliver the business performance shareholders expect. This requires levels and structures of remuneration that are appropriate to achieve these goals. In carrying out its duties the committee will take into consideration the pay environment for all colleagues in the business.

The committee will keep under review legislative developments in the UK over setting and reporting on executive pay.

Alan Giles
Chairman, Remuneration committee

This directors’ remuneration report sets out the company’s approach to the remuneration of directors and the principles that underpin it, together with details of the directors’ pay, employment agreements, letters of appointment and interests in shares. In producing this report, 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. 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 1 May 2012.

In accordance with its terms of reference, the committee, which reports its findings to the board, is authorised to:

• make recommendations to the board on the company’s policy on executive remuneration and its cost; including the remuneration of the chairman, the executive directors and the senior management population
• determine the remuneration and incentive packages of executive directors and senior executives reporting to the chief executive, to ensure that they are appropriately rewarded for their individual contributions to overall performance, giving full consideration to the matters set out in the Code
• formulate remuneration policy with regard to the strategic objectives and operational performance of the company
• formulate policy for the grant of awards/options to executive directors and senior executives to ensure that the appropriate level of incentives is consistent with directors’ remuneration policy
• approve awards to executive directors and senior executives, including the consideration of quantum and performance conditions vesting arrangements and determine, in conjunction with the company’s auditors, whether such performance targets have been satisfied
• ensure that contractual terms of termination affecting executive directors and senior executives, including the payments made, are fair to the individual and to the company ensuring that failure is not rewarded and recognise the duty to mitigate loss
• appoint consultants to provide external advice in respect of executive director remuneration and to take steps to ensure their independence and that no conflict of interests arises in relation to their appointment
• advise on any major changes in colleague benefit structures throughout the group

At its meetings during the year, the committee discharged its responsibilities as listed above and in particular it:

• reviewed the group’s executive remuneration policy including a review of the key trends in market practice and the market competitiveness of remuneration packages for executive directors and senior management. The committee also took into account remuneration across the group when setting executive pay
• approved the directors’ remuneration report contained within the 2010 annual report and accounts
• reviewed the findings of the performance evaluation of the committee’s effectiveness
• approved the recruitment terms for the appointment of a managing director for the City Link business
• approved the terms for the departure of the chief information officer, a role that reports to the chief executive, and for the appointment of his successor
• approved the outcomes of the 2010 annual bonus plan for executive directors and the senior management team and the structure and targets of the annual bonus plan for 2011
• approved the outcome of performance against targets set in respect of long-term incentive share awards to John McAdam, Alan Brown and Andy Ransom approved by shareholders in 2008 at the first vesting date. The level of vesting was disclosed to shareholders in the 2010 annual report
• authorised the vesting of a portion of awards made in 2008 under the performance share plan
• authorised performance share awards in 2011 to executive directors and senior management and set performance conditions for vesting, including in respect of executive directors
• authorised the lapse of options issued in 2001 under the previously operated executive share option scheme
• considered the guidance issued by corporate governance bodies and shareholders in relation to remuneration matters
• reviewed changes to legislation relating to retirement provisions affecting colleagues in the UK
• reviewed provisional arrangements for bonus and long-term incentives in 2012, including the use of appropriate clawback provisions

At a meeting following the year end but prior to the publication of this report the committee undertook the following:

• approved the outcomes of the 2011 annual bonus plan for executive directors and the senior management team and the structure of targets of the annual bonus plan for 2012
• approved this directors’ remuneration report contained within the 2011 annual report and accounts
• approved targets for 2012 long-term incentive awards

A copy of the committee’s terms of reference is available on the company’s website at www.rentokil-initial.com or from the company secretary.

The committee reviewed its terms of reference during the year and a number of provisions were added, the principal one requiring the committee formally to take into account the wider remuneration environment in the group when setting executive pay. The committee believes it is very important that executive pay is positioned appropriately in the context of pay for other colleagues in the group and therefore felt that it was necessary that this was formally incorporated into its terms of reference.

The committee met six times in 2011 and in addition was consulted on various remuneration issues between formal meetings. No individual was present during any discussion relating to their own remuneration.

Deloitte LLP has been retained by the committee to provide advice on executive remuneration matters and on the company’s long-term incentive plan (the Performance Share Plan, approved by shareholders in 2006) (‘PSP’) and on incentive arrangements relating to John McAdam, Alan Brown and Andy Ransom, under the 2008 Share Incentive Plan (‘2008 Plan’) 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 and due diligence on acquisitions, 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, no element of which represents a conflict of interest over their role as advisers to the committee. Towers Watson advised the company on its UK pension matters.

The committee reviews the total reward packages of the executive directors and senior executives regularly to ensure ongoing effectiveness and competitiveness. The committee takes advice from Deloitte with market surveys prepared by Towers Watson. The company’s remuneration policy for the executive directors and senior colleagues is designed to:

• attract and retain the leadership talent necessary to drive an deliver business growth, financial performance and other key strategic priorities
• recognise and reward individual contributions to delivering long-term, sustainable business performance
• ensure alignment of executives with the overall shareholder objective of long-term value creation through linking a substantial part of the remuneration package to long-term performance targets
• deliver a total reward package that is market aligned and provides upside for exceptional business performance whilst being affordable
• encourage executive behaviours consistent with Rentokil Initial’s business values

The remuneration policy is underpinned by a set of principles that are reflected in all elements of the executive total reward package, summarised below. Further detail is provided in this report.

On-target and maximum performance

The chart 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 to embed alignment with wider shareholder objectives.

This illustrates the current remuneration and incentive policy and therefore it 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. Base salaries reflect the role, individual experience, skills and contribution to overall business performance as well as external market conditions. When determining base salary increases the committee considers the above factors as well as market survey data from Towers Watson and the salary increases being awarded throughout the group.

On a review of the economic and market considerations in the UK as well as pay across the group, the committee has agreed that pay awards will not be made in 2012 for Alan Brown, the chief executive and Andy Ransom, the executive director and that the chief financial officer, Jeremy Townsend, will receive an award of 2%.

Similar considerations will apply when setting pay below board level and across the group, where levels of pay changes agreed locally will vary depending on economic and market conditions, statutory requirements and on individual business performance.

Annual bonus plans

The committee sets the performance measures and targets for the bonus scheme annually to ensure they continue to support the business’s short-term and long-term goals.

For the 2011 annual bonus the following performance measures were applied: for the chief executive, Alan Brown, 25% of the bonus opportunity related to revenue growth, a further 15% related to cash conversion, 10% related to the key performance indicator of customer care and 50% related to the achievement of profit performance for the group. For the executive director, Andy Ransom, who runs the Pest Control and Ambius businesses, the performance measures for his bonus opportunity were split between his group and his divisional commitments. 30% of his bonus opportunity related to revenue growth (10% group; 20% division); 20% related to cash conversion (5% group; 15% division) and 50% related to achievement of profit (10% group; 40% division). For the chief financial officer, Jeremy Townsend, 25% of the bonus opportunity related to revenue growth, 25% related to cash conversion and 50% related to the achievement of profit performance for the group. The committee believes that these measures support the delivery of long-term, sustained business growth and financial performance.

The cash bonus opportunity for the chief executive and other executive directors continues to be 100% of base salary (before the application of the modifier), subject to meeting the stretching performance targets described below. This can be increased or decreased by a personal performance modifier (85% to 120%), based on the outcome of the company’s performance development review process. The maximum payment is 120% for the executive directors.

2011 Bonus payouts

The committee reviewed the 2011 bonus plan outcome for the group’s senior management population based on the targets set at the start of the financial year. Despite stronger than expected performance in some business units and good progress in terms of strengthening the business foundations for future growth overall, group level performance targets were not met and no payments were made in respect of group performance. Mr Ransom received a bonus in relation to the financial performance of the Pest Control and Ambius businesses for which he is responsible which is shown in the total pay and benefits table below.

2012 Bonus targets

For 2012, the committee has approved a bonus plan for executive directors and the group’s senior management, which is broadly similar in structure to the 2011 bonus plan. In respect of the chief executive, Alan Brown, the proportions were agreed as profit (40%), cash (20%) revenue (20%) and key performance indicators (20%). For the executive director, Andy Ransom, who runs the Pest Control and Ambius businesses, the proportions agreed were as profit (group: 10%; division: 40%), cash (group: 5%; division 10%) and revenue (group: 5%; division 30%). In respect of the chief financial officer, Jeremy Townsend, the proportions were agreed as revenue (20%), profit (40%), cash (20%) and key performance indicators (20%). The committee believes that these metrics provide the right combination of incentivising executives to focus on top and bottom line financial performance while strengthening our cash position.

For senior management below board level, for 2012, an additional ‘customer care’ performance measure has been introduced to reward relative improvements in customer care (where applicable).

Any one of the four performance measures (other than profit) can be substituted with non-financial performance measures in individual cases. Payout for the achievement of revenue and customer care targets may only be made if profit thresholds are achieved.

In addition to executive directors, over 500 senior executives also participate in the annual bonus plan. The performance measures relate to group, divisional and business revenue, profit and cash performance as well as customer care and non-financial personal objectives where appropriate.

Long-term share incentive plans

There are two plans covering the executive and senior management team, the Performance Share Plan (‘PSP’) and the 2008 Share Incentive Plan (‘the 2008 Plan’). In 2011 approximately 270 senior managers across the group received awards under the PSP Plan. In 2008 one-off share awards were made to the new senior leadership team under the 2008 Plan. Details of both plans are set out below.

In the event of a change of control, outstanding awards may vest taking into account the time elapsed and performance to the date of the change of control.

The Performance Share Plan (‘the PSP’)

The PSP, approved by shareholders in 2006, enables participants, selected on a discretionary basis, to earn shares in the company based on achieving stretching performance targets.

Award values

• 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
• typical annual award to executive directors is 100% of base salary
• details of awards made to executive directors during the year are set out later in this report, along with their other interests in shares

Performance conditions

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 were 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:

Awards made in 2008 under the PSP partially met share price performance targets and 34.43% vested on 25 June 2011 details of which were reported in the 2010 annual report and are included in the table below.

In summary, during the first half of 2010 the company’s share price achieved a 60 day highest average price of 130.82p and therefore under the terms of the PSP 34.43% of the award vested provided that each individual achieved ‘on target’ annual bonus performance in 2008, 2009 and 2010. Awards were scaled according to each participant’s individual performance multiplier, which was based on their average annual bonus outcome in respec of financial performance conditions over the 2008–2010 period. None of the current executive directors received an award under the PSP in 2008.

Outstanding awards are subject to two performance measures described below. Executive directors have participated in the PSP from 2009.

Relative TSR: Outstanding awards are subjected to relative TSR performance; this reflects market practice and shareholder preferences. A relative TSR measure is used to ensure management are incentivised to outperform key peers and to ensure that the interests of management are aligned with shareholders. 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 is considered to be an appropriate benchmark for measuring performance given the company’s membership of the FTSE 250, th scope and scale of the company’s international operations, and the diverse nature of companies in the business services sector. 25% of the initial award will vest if Rentokil’s performance is positioned at median against this group with the full initial award vesting for upper quartile TSR performance.

Individual performance modifier: Achievement under the relative TSR performance measure is modified based on individual achievement of annual bonus targets, to further align plan participants with the need to deliver consistent, strong financial and operational performance on a year-by-year basis. This modifier also ensures that exceptional individual performance is rewarded, whilst those individuals whose contribution has not been as strong do not benefit disproportionately.

For executive directors, the effect of the individual performance modifier (in 2009 and 2010), as set out in the table below, is to reduce the level of award that would otherwise vest if an individual fails to reach threshold performance under the annual bonus in each of the three years of the performance period to zero, and increase vesting by a maximum of 200% if above target performance is achieved.

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 lead to maximum bonus outcomes in each of the three consecutive financial years for the relevant business unit.

The committee considered this to be an appropriately ambitious goal that would 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 of the performance period.

The rationale for including the Individual Performance Modifier is to provide a financial performance criteria based on the achievement of budget related financial performance conditions. The committee considers this to be helpful in aligning the plan with the shareholders’ overall objectives of maximising long-term value creation.

In 2011 the committee reviewed the application of the performance modifier introduced in 2008 on the first vesting and concluded that its application had tended to reduce the vested award to an extent that it might prejudice the incentive value in the scheme. It was therefore agreed that for all those, other than for executive directors, for 2011 the performance modifier would operate to reduce the award as calculated on TSR performance to a maximum of 50% of the vested amount (previously 0%) and to reduce the maximum uplift to 150% (previously 200%). The performance conditions related to the 2009 and 2010 awards would remain unaffected.

The performance modifier for awards to executive directors in 2011 and beyond will continue to be based on the original performance modifier (i.e. a range of application from 0% to 200%).

Vesting of the PSP awards

The outcome of the performance condition relating to awards made in 2009 will not be tested until April 2012.

Award values and performance measures – 2012 awards

The committee considers that the level of awards and nature of the performance conditions for the 2011 awards continues to be an effective basis for incentivising the senior management population and for supporting the delivery of the overall objective of creating long-term value for shareholders. As such, the committee currently intends to maintain this approach for awards made in 2012.

Clawback

For 2012 PSP awards a ‘clawback’ provision will be introduced to allow the committee to scale back awards in the event of a material misstatement of performance or in other circumstances where the committee considers that this treatment is appropriate.

The 2008 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 Plan were:

• an award to each participant 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.

Vesting of 2008 Plan awards

As discussed in last year’s report, during the first half of 2010 the company’s share price achieved a 60 day highest average price of 130.82p and therefore under the terms of the plan 34.43% of the award vested with participants being entitled to receive a third of the award (i.e. 11.5% of the initial award or 872,828 shares including accrued dividends) from May 2011. The second third will become capable of being released in May 2012 with the balance becoming capable of release in May 2013. If the share price over a 60 day average period exceeds 130.82p before the end of the performance period in May 2013, further shares may be earned under this plan. No further awards may be made under this plan.

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. Jeremy Townsend has a service agreement dated 4 March 2010.

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 (other than by reason of resignation or unacceptable performance or conduct), executive directors are entitled to a payment equal to base pay and the value of benefits only for the duration of the notice period, subject to mitigation.

The remuneration and contractual arrangements for the executive directors and senior management do not contain any matters that are required to be disclosed under The Takeovers Directive.

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 2011. Jeremy Townsend participated in the company’s defined contribution pension scheme on the basis of 75% 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.

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. The chief executive, Alan Brown, joined the board of Intertek Group plc on 15 April 2011 as a non-executive director and his earnings during the year in respect of the appointment were £32,000 which he has retained. Both Alan Brown and Jeremy Townsend are directors of businesses run by members of their family for which they receive no remuneration nor have any management involvement.

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.

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 bonus plan or in the company’s other incentive arrangements.

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 a further period of three years by mutual consent and thereafter reviewed annually, subject to acceptable tests of performance and independence. 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 which were updated during the year to reflect the requirement for directors to submit themselves for annual re-election in accordance with the provisions of the Code. 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 this committee in 2009 based on external market data at which time they were set at £55,000 per annum. The level of fees was reviewed during the year and considered to remain appropriate.

The chairmen of the remuneration and audit committees are each paid an additional £15,000 per annum and the senior independent director receives £5,000 per annum for acting in that capacity. These amounts are included in the remuneration table below which has been audited.

Copies of executive directors’ service contracts and non-executive directors’ letters of appointment are available for inspection by shareholders at the company’s registered office and at the annual general meeting.

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

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

The interests of the directors and their families in the share capita of the company on 1 January 2011 or their date of appointment if later, and at 31 December 2011, are set out below. No director has any beneficial interest in the shares of any of the company’s subsidiaries. Any changes in the interests of the directors and their families in the company and its subsidiary companies during the year and from the end of the year to 1 March 2012 are shown in this report.

The committee conducted a review of its performance during the year with the assistance of an external independent 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. The committee agreed upon a number of additions to its work programme for 2012.

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 2011. This is based on data sourced from Thomson Reuters DataStream, and uses spot Return Index data.

Status of 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 Regulation’s) 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,
Alan Giles
Chairman, Remuneration committee
1 March 2012