Governance
Remuneration components
Base salary
Base salaries are reviewed annually against a global comparator group for the most senior executives and adjusted as appropriate, taking into account the nature of the individual executive's role, external market trends and business and personal performance. The committee uses a range of international companies of a similar size, global reach and complexity to make this comparison. As stated above, the committee has agreed that for 2009 there would be no increase in the base salaries of the executive directors and product group chief executives with minimal increases below this level.
Executive remuneration is explicitly related to business performance through the following long and short term arrangements:
Short term incentive plan (STIP)
STIP is an annual bonus plan, designed to support overall remuneration policy by:
- focusing participants on achieving calendar year performance goals which contribute to sustainable shareholder value; and
- providing significant bonus differential based on performance against challenging personal, business, and other targets, including safety.
The committee reviews and approves the individual performance of executives against relevant targets and objectives at the end of each year. STIP payments to executive directors, the Group executive Business Resources, the global head of Human Resources, and the global head of Legal are linked to three performance criteria: Group financial performance, Group safety performance and personal performance. In the case of Dick Evans, the applicable criteria are product group financial performance, Group and product group safety performance as well as personal performance. STIP payments for the other product group chief executives and the Group executive of Technology and Innovation are linked to Group and product or business support group financial and safety performance, as appropriate, as well as personal performance.
The target level of annual bonus for executive directors, product group chief executives and group executives for 2009 is 60 per cent of salary, the same as 2008. The targets for the global head of Human Resources and the global head of Legal are 50 per cent and 55 per cent respectively in 2008. Executives may receive up to twice their target (eg up to 120 per cent of base salary in the case of the executive directors and product group executives) for outstanding performance against all criteria. Rio Tinto applies the following guidelines in the calibration of threshold (90 per cent probability of achievement), target (70 per cent probability of achievement) and outstanding (20 per cent probability of achievement).
Details relating to STIP awards for 2008 are available in Remuneration paid in 2008.
Long term incentives
Shareholders approved two long term incentive plans at the annual general meetings in 2004, the Share Option Plan and the Mining Companies Comparative Plan. These plans are intended to provide the committee with a means of linking executives' rewards to Group performance. Total shareholder return (TSR) was, at the time of their introduction, considered the most appropriate measure of company performance and continues to be used for 2008. Long term incentives are not pensionable.
Share Option Plan (SOP)
Each year, the committee considers whether a grant of options should be made under the SOP and, if so, at what level. In arriving at a decision, the committee takes into consideration the personal performance of each executive as well as competitive benchmarking. The maximum face value grant under the SOP is three times the base salary of the executive. Under the SOP, options are granted to purchase shares at an exercise price based on the share price at time of grant. No options are granted at a discount and no amount is paid or payable by the recipient upon grant of the options. Grants made to executives are set out in Table 5.
No options will become exercisable unless the Group has met stretching TSR performance conditions. In addition, before approving any vesting and regardless of performance against the respective performance conditions, the committee retains discretion to satisfy itself that the TSR performance is a genuine reflection of the value available to shareholders.
Under the SOP, vesting is subject to Rio Tinto's TSR equalling or outperforming the HSBC Global Mining Index over a three year performance period. Rio Tinto's TSR is calculated as a weighted average of the TSR of Rio Tinto plc and Rio Tinto Limited. If TSR performance equals the index, the higher of one third of the actual grant or 20,000 options may vest. The full grant may vest if the TSR performance is equal to or greater than the HSBC Global Mining Index plus five per cent per annum. Between these points, options may vest on a sliding scale, with no options becoming exercisable for a three year TSR performance below the index.
Options granted under the 2004 SOP before 31 December 2006 are subject to a single fixed base re-test five years after grant if they do not vest after the initial three year performance period. Options granted after 31 December 2006 are not subject to any re-test and will lapse if they do not vest at the conclusion of the initial three year performance period. There are no outstanding options that are subject to a retest of performance.
Prior to any options vesting (subject to the committee's discretion described above), the Group's TSR performance against the criteria relevant to the SOP is calculated independently by Watson Wyatt.
If Rio Tinto were subject to a change of control or a company restructuring, options would vest subject to the satisfaction of the performance condition at the time of the change of control or restructuring.
Depending on the circumstances, the committee has the discretion to adjust the performance condition to ensure a fair measure of performance and to consider the impact of a potentially truncated performance period or other factors on the validity of the original performance condition. The committee may at its discretion, and with the agreement of participants, determine that options will be replaced by equivalent new options over shares of the acquiring company. If a performance period is deemed to end during the first 12 months after the conditional award is made, that award will be reduced pro-rata.
Options may, upon exercise, be satisfied by treasury shares, the issue of new shares or the purchase of shares in the market. Currently it is Rio Tinto plc's intention to satisfy exercises by issuing new shares and Rio Tinto Limited's intention to satisfy exercises by way of the transfer of existing shares purchased on the open market.
Mining Companies Comparative Plan (MCCP)
Rio Tinto's performance share plan, the MCCP, provides participants with a conditional right to receive shares. The maximum face value conditional award under the MCCP is two times the base salary of individual participants. Awards made to executives are set out in Table 4.
The conditional awards will only vest if the performance condition set by the committee is satisfied. Prior to the vesting of conditional awards, the Group's TSR performance against the performance condition contained in the MCCP is calculated independently by Watson Wyatt. In addition, the committee retains discretion to satisfy itself that performance is a genuine reflection of the value available to shareholders and adjust vesting levels accordingly.
In the event of a change of control or a company restructure, the awards would only vest subject to the satisfaction of the performance condition measured at the time of the change of control or restructure. Depending on the circumstances, the committee has the discretion to adjust the performance condition to ensure a fair measure of performance and to consider the impact of a potentially truncated performance period or other factors on the validity of the original performance condition. If a performance period is deemed to end during the first 12 months after the conditional award is made, the award will be reduced pro-rata.
The performance condition compares Rio Tinto's TSR with the TSR of a comparator group of other international mining companies over the same four year period. The composition of this comparator group is reviewed regularly by the committee to ensure that it continues to be relevant in a consolidating sector. The comparator group for the 2005 conditional award (which vests in 2009) contains ten companies: Alcoa, Anglo American, Barrick Gold, BHP Billiton, Freeport-McMoRan Copper & Gold, Grupo Mexico, Newmont, Rio Tinto, Teck Cominco and Xstrata. The size and nature of the comparator group is largely the same for the 2006, 2007, 2008 and 2009 awards.
The following table shows the percentage of each conditional award made in 2005 which will be received by those participants who were in executive director and product group chief executive roles at the date of grant. The vesting is based on Rio Tinto's four year TSR performance relative to the comparator group for conditional awards made in 2005:
| 1st | 2nd | 3rd | 4th | 5th | 6th-10th | |
|---|---|---|---|---|---|---|
| Percentage vesting | 150 | 121.3 | 92.5 | 63.8 | 35 | 0 |
The historical ranking of Rio Tinto in relation to the relevant comparator group for each four year period (based on the calendar year) is reflected in the table below.
The members of the comparator group for each conditional award are determined by the committee prior to making the conditional award. Comparator companies for the 2008 conditional award at time of grant were: Alcoa, Anglo American, Barrick Gold, BHP Billiton, Freeport-McMoRan Copper & Gold, Newmont, Rio Tinto, Vale and Xstrata.
Awards are released to participants as either Rio Tinto plc or Rio Tinto Limited shares or as an equivalent amount in cash. In addition, for conditional awards made after 1 January 2004, a cash payment equivalent to the dividends that would have accrued on the vested number of shares over the four year period is made to those participants who were in executive director and product group chief executive roles at the date of grant.
| Period | Ranking |
|---|---|
| 1994 - 97 | 4 out of 16 |
| 1995 - 98 | 4 out of 16 |
| 1996 - 99 | 2 out of 16 |
| 1997 - 00 | 2 out of 16 |
| 1998 - 01 | 2 out of 16 |
| 1999 - 02 | 3 out of 16 |
| 2000 - 03 | 7 out of 16 |
| 2001 - 04 | 11 out of 16 |
| 2002 - 05 | 10 out of 16 |
| 2003 - 06 | 10 out of 16 |
| 2004 - 07 | 5 out of 10 |
| 2005 - 08 | 3 out of 10 |
Awards may, upon vesting, be satisfied by treasury shares, the issue of new shares or the purchase of shares in the market. Currently it is Rio Tinto plc's intention to satisfy exercises by issuing new shares and Rio Tinto Limited's intention to satisfy exercises by way of the transfer of existing shares purchased on the open market.
Management Share Plan (MSP)
The Company also has the Management Share Plan, which was created in 2007. Directors are not eligible to participate in the MSP. This plan is designed to support the Group's ability to attract and retain key staff in an increasingly tight and competitive labour market. Under the MSP, certain senior management may receive a conditional award of shares which is subject to service-based and/or performance-based vesting condition(s) depending upon the nature of the award. Shares to satisfy the awards are purchased in the market and no new shares will be issued to satisfy awards under this plan. Where applicable, participants are allocated shares to approximate the cash amount of dividends that would have been received had the recipient owned the shares between the grant date and the vesting date.
In the case of a change of control, awards vest on the date of the change of control but, in the case of an award which is subject to a performance condition, only to the extent that the performance condition has been satisfied. Depending on the circumstances, the committee has the discretion to adjust the performance condition to ensure a fair measure of performance and to consider the impact of a potentially truncated performance period or other factors on the validity of the original performance condition. The directors may decide that the award is reduced pro rata to reflect the acceleration of vesting. Awards made to executives are set out in Table 4.
Post employment benefits - executive directors
Executives may participate in post employment benefit arrangements offered by the Group. No post employment benefits are provided to non executive directors. Guy Elliott and Tom Albanese participate in the UK non contributory Rio Tinto Pension Fund (the "Fund"), a funded occupational pension plan approved by HM Revenue & Customs. The Fund provides both defined benefit and defined contribution benefits. In April 2005, the defined benefit section of the Fund was closed to new participants.
Members of the defined benefit section of the Fund who retire early may draw a pension reduced by approximately four per cent a year for each year of early payment. Executives can take their pension benefits unreduced for early payment from the age of 60. Spouse and dependants' pensions are also provided. Pensions paid from this section are guaranteed to increase annually in line with increases in the UK Retail Price Index subject to a maximum of ten per cent per annum. Increases above this level are discretionary.
During 2008, there was no requirement for company cash contributions to be paid into the Rio Tinto Pension Fund, although cash contributions are required if the Company wishes to enhance the benefits for any individual member. Company contributions to the Rio Tinto Pension Fund will recommence from 1 January 2009.
Rio Tinto reviewed its pension policy in light of the legislative changes introduced from April 2006. The Rio Tinto Pension Fund was amended to incorporate a fund specific limit to pensionable salary equivalent to the statutory earnings cap for all members previously affected; unfunded benefits continue to be provided, where already promised, on pensionable salary above the fund specific limit.
Guy Elliott is accruing a pension of 2.3 per cent of basic salary for each year of service with the Company to age 60. The unfunded arrangements described above will be utilised to deliver this promise to the extent not provided by the Fund.
Tom Albanese is accruing a pension payable from normal retirement age of 60 of two thirds of basic salary, subject to completion of 20 years' service with the Group, inclusive of benefits accrued under the US pension arrangements. Proportionally lower benefits are payable for shorter service or, if having attained 20 years' service, retirement is taken prior to the age of 60. His benefits under the Rio Tinto Pension Fund are restricted to the fund specific limit, with the balance provided through unfunded arrangements.
Dick Evans was offered membership in the Rio Tinto International Pension Fund, a funded occupational pension plan based in the UK. His membership was to be effective from the commencement of his employment on 25 October 2007. Subsequent to this offer, and prior to Dick Evans joining the Fund, it was identified that the proposed arrangement would not comply with the requirements of US Internal Revenue Code. As a result, the same retirement benefit was delivered at no additional expense to the Company in the form of an annuity to be purchased with an external third party at the time of his retirement. As a result, no contributions were paid to the Rio Tinto International Pension Fund in Dick Evans' respect.
Dick Evans also participates in the Alcan Employee Savings Plan (Canada). This Plan comprises two types of plans: the Registered Retirement Savings Plan, a tax sheltered arrangement up to prescribed legal limits, and the Employee Profit Sharing Plan. The Company pays a contribution of 50 per cent, 60 per cent or 70 per cent, determined by credited service with the Company, of any regular contribution of up to four per cent of basic salary paid by the employee. The Company percentage in respect of Dick Evans is 60 per cent. The Company's contribution is paid into the Employee Profit Sharing Plan and vests immediately. Employees may request lump sum withdrawals in cash at any time. On termination of employment or retirement employees may request one or more of a lump sum payment in cash, a transfer of tax sheltered amounts to another registered plan or the purchase of a qualified annuity with the tax sheltered amounts.
Details of executive directors' pension entitlements are set out in Table 2.Performance and non performance related remuneration
Total remuneration is a combination of fixed and performance related elements, each of which is described in this report. In addition, some executives have specific arrangements for remuneration outside these core elements and which are detailed in the service contracts table. The total remuneration for executives shown in Table 1 includes these non performance related items, which are specific to the circumstances of each executive, as well as one-time special bonuses or awards, such as engagement awards.
The performance related, or variable, elements are the short and long term incentive plans which are linked to achievement of business and personal performance goals and are, therefore, "at risk". The rest of the elements of the package are "fixed" and are not at risk. Excluding post employment benefits, non-monetary benefits and other cash-based benefits, the proportion of total direct remuneration provided by way of variable components, assuming target levels of performance is set out in the table on the next page. Fixed pay is represented by base salary and the values of the share based awards not related to company performance including the Management Share Plan (MSP). Variable components comprise the Short Term Incentive Plan, the Share Option Plan and the Mining Companies Comparative Plan (STIP, SOP, and MCCP respectively). One time awards have been excluded from the estimation of remuneration mix to provide a better representation of the balance between fixed and variable in the regular remuneration package. The next table demonstrates the significant emphasis that is placed on at-risk versus fixed remuneration as a percentage of total direct remuneration.
| Executive | Fixed as % of 2008 total | At-risk as % of 2008 total | Options as % of total |
|---|---|---|---|
| Tom Albanese | 32 | 68 | 16 |
| Guy Elliott | 37 | 63 | 13 |
| Dick Evans | 32 | 68 | 16 |
| Hugo Bague | 52 | 48 | 0 |
| Preston Chiaro | 32 | 68 | 16 |
| Bret Clayton | 32 | 68 | 16 |
| Keith Johnson | 37 | 63 | 13 |
| Grant Thorne | 48 | 52 | 0 |
| Debra Valentine | 50 | 50 | 0 |
| Sam Walsh | 37 | 63 | 13 |
Share based remuneration not dependent on performance
In 2008, the Company made use of the MSP (in conjunction with the MCCP) as a component of the annual grant for all executives below the product group chief executive level. Grants of conditional shares vest based on service on 31 December 2010 and subject to the committee approving the vesting. These grants for the relevant executives are disclosed in Table 1 and their holdings in Table 4.
In August 2007, Hugo Bague received a one time grant of 20,000 Rio Tinto plc shares as part of the terms of his engagement and related to remuneration that was forfeited at resignation from his previous employer. The first half of these shares vested, based on service, 12 months after his commencement date. The second half will vest, also based on service, 24 months after the commencement date. In January 2008, Debra Valentine received a one time grant of 10,000 Rio Tinto plc shares as a part of the terms of her engagement and to establish retention during a period of high uncertainty due to the unsolicited pre-conditional bid from BHP Billiton. Half of the shares vest on the third anniversary of her employment and the remainder vest on the fourth anniversary.
Executives may participate in share and share option plans that are available to all employees at particular locations and for which neither grant nor vesting is subject to the satisfaction of a performance condition. These plans are consistent with standard remuneration practice whereby employees are offered participation in such plans as part of their employment to encourage alignment with the long term performance of the Company.
Executives employed in the Rio Tinto plc part of the Group may participate in the Rio Tinto plc Share Savings Plan, a savingsrelated share option plan which is open to employees in the UK and elsewhere. Under the plan, participants can save up to £250 per month, or equivalent in local currency, for a maximum of five years. At the end of the savings period participants may exercise an option over shares granted at a discount of up to 20 per cent to the market value at the time of grant. The number of options to which participants are entitled is determined by the option price, the savings amount and the length of the savings contract. No consideration is paid or payable by the participant on receipt of the options. The UK section of this plan is approved by HM Revenue & Customs (HMRC). Grants made to executives are set out in Table 5.
Eligible UK employees, including some of the executives, may also participate in the Rio Tinto Share Ownership Plan, an HMRC approved share incentive plan which was introduced in 2002. Under this plan, eligible employees may receive an annual award of shares up to a maximum of five per cent of their salary, subject to a cap of £3,000. For the 2008 awards to be settled in 2009, in recognition of the challenging economic environment, the Company has reduced the annual award of shares up to a maximum of two and a half per cent of salary, subject to a cap of £1,500. In addition, participating employees can save up to £125 per month, which the plan administrator invests in Rio Tinto plc shares. The Company matches these purchases on a one for one basis. The Rio Tinto Share Ownership Plan includes restrictions on transfer of shares while the shares are subject to the plan.
Executives employed in the Rio Tinto Limited part of the Group may elect to participate in the Rio Tinto Limited Share Savings Plan, introduced in 2001, which is similar to the Rio Tinto plc Share Savings Plan. Grants made to executives are set out in Table 5.
Executives, other than executive directors, may be eligible to participate in the MSP as described above. The terms of each award are set by the committee at the time of grant. Awards may be service based and/or performance based depending on the nature of the award. Specific non performance based awards are described above.
Where, under an employee share plan operated by the Company, participants are the beneficial owners of the shares, but not the registered owner, the voting rights are normally exercised by the registered owner at the direction of the participant.
Performance evaluation
Rio Tinto conducts an annual performance management, development and evaluation process for all of its senior executives. In the case of members of the executive committee, the chief executive conducts the review. In the case of the chief executive, the chairman of the committee conducts the review in conjunction with the chairman of the board. The key objectives of the performance process are to:
- Improve organisational effectiveness by creating alignment between the executives' objectives and Rio Tinto's business strategy.
- Provide a consistent, transparent and balanced approach to measure, recognise and reward executive performance.
- Engage executives through regular two way communication on their performance.
- Build further capability through aligning development decisions with business and employee needs.
There is a three-step annual cycle conducted according to the following schedule:
- Set annual performance objectives as part of the annual planning process at the end and into the beginning of the new calendar year;
- Interim review - completed by end of August; and
- Annual performance review - completed during early January of the following year.
All executives were evaluated according to this process in 2008. The results related to individual and business performance are detailed in Chairman and non executive director remuneration.
