2010 Annual report

This report explains the roles, responsibilities and activities of the Remuneration committee and includes detailed disclosures on director and executive remuneration. It outlines how Rio Tinto ensures that its people are appropriately focused on driving continuous, sustainable improvements in performance to maximise total shareholder return by sustainably finding, developing, mining and processing natural resources in order to achieve our vision of becoming the sector leading global mining and metals company.

Following the outcome of the shareholder vote on the Remuneration report at the 2010 annual general meetings, the chairman led a consultation process with a range of shareholders to more fully understand any concerns that they have with the Group’s executive remuneration policy and practice and to discuss the Committee’s review of the Group’s long term incentive plans (LTIPs). The feedback provided was discussed by the Committee and has been taken into account in further developing the executive remuneration policy. During 2010, the Committee conducted a detailed review of its competitive benchmarking policy for members of the Executive committee. The conclusions are set out below, and have informed the remuneration decisions made by the Committee for the Executive committee. The Committee is proposing to review the LTIPs and commence a further round of consultation with shareholders on the form of any new plans before the plans expire in 2014.

Based upon the support expressed by shareholders during the earlier consultation exercise, the Committee is recommending to shareholders for approval at the 2011 annual general meetings amendments to the LTIPs to mitigate any unintended consequences from recent legislative changes in Australia. To ensure that Australian participants are not adversely impacted by the change in tax treatment of share options in Australia, the Committee has concluded that certain amendments are required to the rules of the Group’s Performance Share Plan (PSP), formerly the Mining Companies Comparative Plan (MCCP). The proposed changes mean that participants in the Performance Share Plan and Share Option Plan will be given the opportunity to express their preference as to whether they receive their entire award in the form of Performance Shares as opposed to the current mix of Performance Shares and Performance Options. In order to implement these changes, a resolution to amend the rules of the PSP is being submitted to shareholders for approval at the 2011 annual general meetings. The notices of meeting for the 2011 annual general meetings contain further detailed information.

This report has been drawn up in accordance with applicable legislation and corporate governance guidance in the UK and Australia, which are the UK Combined Code on Corporate Governance, Schedule 8 of the Large and Medium sized Companies and Groups (Accounts and Reports) Regulations 2008, the UK Listing Authority Listing Rules, the Australian Corporations Act 2001 and Principle 8 of the revised Australian Securities Exchange Corporate Governance Principles and Recommendations 2nd edition (the ASX Principles).

Australian legislation requires disclosures in respect of “key management personnel”, being those persons having authority and responsibility for planning, directing and controlling the activities of the Group, including the directors. For the purposes of this report, the Committee has determined that the key management personnel are, in addition to the directors, members of the Executive committee. The Executive committee comprises the executive directors, product group chief executive officers (PGCEOs) and Group executives. Throughout this report, the members of the Executive committee, including the executive directors, are collectively referred to as “executives”. The executives are listed together with the positions held during the year and dates of appointment.

Australian legislation further requires disclosures in respect of the five highest paid executives below board level selected from the senior managers who make, or participate in making, decisions that affect the whole, or a substantial part, of the business of the Group, or have the capacity to significantly affect the Group’s financial standing. The Committee has determined that below board level, only members of the Executive committee constitute the group of senior managers that make decisions that affect the whole, or a substantial part, of the business of the Group.

In addition to executive remuneration, this report covers the chairman’s and the non executive directors’ remuneration.

Remuneration committee responsibilities

The Committee’s role is to ensure that remuneration policy and practices reward employees fairly and responsibly with a clear link to corporate and individual performance, and are aligned with shareholders’ interests in maximising shareholder return. The Committee’s responsibilities are set out in its terms of reference which are available in the corporate governance section of the Rio Tinto website.

These responsibilities include:

• monitoring the effectiveness and appropriateness of executive remuneration policy and practice;
• reviewing and determining the terms of service, including remuneration and any termination arrangements, for the chairman, executive directors, PGCEOs, Group executives and the company secretary of Rio Tinto plc;
• reviewing and confirming the remuneration framework and policies for other senior managers; and
• approving the use of share and cash based short and long term incentive plans for the Group, taking into account their alignment with the Group strategy.

The Committee considers the level of pay and conditions throughout the Group when determining executive remuneration and ensures the same principles are used when designing the broader employee remuneration policies. The Committee takes into account aggregate remuneration levels and the mix between the executives and professional staff. This ensures the comparative ratios are reasonable given differences in scope and responsibilities. The Committee is committed to ensuring that remuneration policy and practices reward people fairly and responsibly with a clear link to corporate and individual performance and reflecting, to the extent practicable, global corporate governance guidance on executive remuneration.

During 2010, the Committee met three times. The membership and meeting attendances are detailed on the Board committees page in the corporate governance section. The Committee reviewed its terms of reference in 2010 and concluded that its responsibilities had been met and that its terms of reference remain appropriate. The Committee also undertook its annual performance evaluation and reported the results to the board.

The chairman and chief executive participated in meetings at the invitation of the Committee during 2010. The members of the Committee are all independent and free of any relationship that would affect their impartiality in carrying out their responsibilities. The Committee is supported by members of senior management who regularly attend meetings to provide information as requested by the Committee. These included Hugo Bague (Group executive, People & Organisation), Jane Craighead (Global practice leader, Total Rewards) and Ben Mathews (company secretary, Rio Tinto plc). None of the attendees mentioned above were present when matters associated with their own remuneration were considered.

Remuneration committee advisers

The independent advisers engaged by and reporting to the Committee during 2010 were Deloitte LLP. In addition to specialist remuneration advice, Deloitte LLP provided unrelated taxation advice and advisory services to Rio Tinto. Deloitte LLP did not provide advice on executive remuneration matters other than to the Committee. The Committee has also drawn on the services and publications of a range of external service providers and remuneration consultants such as Towers Watson, Hay Group and Mercer in relation to market data and external validation of total shareholder return (TSR) performance.

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