Report on remuneration

Introduction

This report has been prepared in accordance with the Accounting Regulations of the Companies Act 2006 (the "Act") and complies with the Combined Code on Corporate Governance. The report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the principles relating to Directors' remuneration under the Directors' Remuneration Report Regulations 2002. As required by the Act, a resolution to approve this report will be proposed at the Annual General Meeting of the Group at which the financial statements will be approved.

The Act requires the auditors to report to the Group's members on certain parts of the Report on remuneration and state whether in their opinion those parts of the report have been properly prepared in accordance with the Companies Act 2006. The report has, therefore, been divided into separate sections for unaudited and audited information.

Unaudited information

Remuneration Committee

The Remuneration Committee (the "Committee") consists entirely of NEDs and is constituted in accordance with the recommendations of the Combined Code. The Committee is formally constituted with written terms of reference and its main responsibilities are detailed below. Its members for the year ended 31 March 2010 were Dr Foden (Chair), Dr Brown, Mr Cashman and Dr Richards.

The Committee is responsible for:

  • setting a remuneration strategy that ensures that talented executives are recruited, retained and motivated to deliver results;
  • ensuring that the remuneration for the Executive Directors and other senior executives reflects both their individual performance and their contribution to the overall Company results;
  • determining the terms of employment and remuneration for the Executive Directors and senior executives including recruitment and retention terms;
  • approving the design and targets for any annual incentive schemes that include the Executive Directors and senior executives;
  • agreeing the design and targets, where applicable, of all share incentive plans requiring shareholder approval;
  • assessing the appropriateness and subsequent achievement of the performance targets related to any share incentive plans;
  • recommending to the Board the fees paid to the Chairman. The Chairman is excluded from this process; and
  • the selection and appointment of the external advisors to the Committee to provide independent remuneration advice where necessary.

The Committee members have no personal financial interests other than as shareholders in matters to be decided, no potential conflicts of interests arising from cross directorships and no day-to-day involvement in running the business. No Director plays a part in any discussion about his or her own remuneration.

The fees of the Non-Executive Directors are determined by the Board on the joint recommendation of the Chairman and the Chief Executive.

The Committee met formally four times during the year ended 31 March 2010. A summary of the matters considered at each of those meetings is set out in the panel below.

Current approach to remuneration policy

When determining the structure and level of the Executive Directors' remuneration, the Committee has regard to compensation packages in the UK pharmaceutical and biotech sectors.

In determining the Group's current policy, and in constructing the remuneration arrangements of each Executive Director and senior employee, the Board, advised by the Committee, aims to provide remuneration packages that are competitive and designed to attract, retain and motivate Executive Directors and senior employees of the highest calibre. To achieve this objective, the Committee takes account of information from both internal and independent sources including Hay Group.

The total remuneration of each individual Executive Director and senior employee is benchmarked against the relevant sector. Vectura's policy is to provide remuneration generally at levels that are broadly aligned with the mid-points for equivalent roles in comparable companies in the UK.

Meeting

Standing agenda items

Other agenda items

May

• review and agree vesting of 2006 LTIP awards

• update on governance and

 

• approval of 2009 LTIP awards including setting performance targets regulatory developments

 

 

• approval of the 2008/09 Report on remuneration

 

July

review of Remuneration Committee effectiveness

 

November

• review of executive compensation packages for the two proposed employees of the US operations

 

February

• review the overall structure of remuneration for all employees in the Group to be applied from 1 April 2010

• consideration of the impact of the Finance Act 2009 on senior employees' remuneration

 

• review of executive compensation packages in the UK pharmaceutical and biotech sectors including specialist studies on executive remuneration

 

 

• review of Executive Directors' basic salary and benefits against comparator group

 

 

• agree increase in basic salary and changes to benefits

 

 

• agree performance against targets for the 2009/10 annual bonus

 

 

• review and agree corporate goals and performance targets for the 2010/11 annual bonus

 

The Group's policy is that a substantial proportion of the remuneration of Executive Directors and senior employees should be performance-related. Performance measures are balanced between internal measures and sector-comparative measures to achieve maximum alignment between executive and shareholder objectives. Base salaries are supplemented by bonuses based on the achievement of corporate goals set at the start of each year.

The table below shows the components of the remuneration package as a percentage of total remuneration. 58% of the Executive Directors' total remuneration is performance related.

[PIE CHARTS from page 33]

Components of the current remuneration package

The principal components of remuneration packages are base salary, short and long-term incentives and pension benefits. The policy in relation to each of these components, and key terms of the various incentive and benefit programmes, is explained further below.

Basic salary

Basic salaries are reviewed annually, taking into account recommendations on individual performance against objectives and levels of responsibility, together with salary levels in comparable companies and other indicators as described above. The Committee also took into consideration pay and conditions throughout the Company in setting salary levels.

Each Executive Director's base salary was broadly aligned with the mid-points of the chosen UK pharmaceutical sector comparator group (see below) and adjusted to reflect company size and complexity. Based on this data, for the year ended 31 March 2010 the Committee considered that Dr Blackwell and Ms Hyland could receive basic salary increases (2008/09 nil and nil). However, given the Company's share price performance over the year to 31 March 2010, the Committee together with the Executive Directors agreed not to implement any increases to their salaries for the current year.

Performance-related cash bonuses

All employees are eligible for an annual discretionary cash bonus, whereby performance objectives are established at the beginning of the financial year by reference to suitably challenging corporate goals. Goals typically include revenue generation, development pipeline progress and control of cash expenditure, and are weighted towards goals with the highest corporate significance. Performance related payments may be paid annually, dependent upon achievements measured against corporate goals. Bonus payments are not pensionable. The scheme is offered to all staff below board level with bonus award entitlements ranging between 10% and 50% of salary depending on grade. Cash bonuses are limited to a maximum of 100% of basic salary for each Executive Director.

For the year ended 31 March 2010 the performance objectives against which bonus payments were calculated were as follows:

Performance
Metric

Weighting
as % of
maximum
bonus
potential

Level of bonus
awarded as %
of metric
(% of salary)

Commentary (full
disclosure has been
restricted due to
commercial sensitivity)

Revenue generation

25%

0% (0%)

Revenues in the year ended 31 March 2010 grew 29% to £40.1m. However this was below the target set by the Committee at the start of the financial year and no bonus was awarded for revenue generation.

Development & technology

55%

67% (37%)

Targeted products entered the pipeline and two phase II pipeline programmes proceeded progress during the year. New formulation and device patents were filed and device designs were finalised to allow for commercial scale-up.
The Committee determined that this level of performance equated to an award of 67% against this metric.

Control of cash expenditure & generation of new partnerships

20%

50% (10%)

Cash outflow from operating activities showed a significant improvement on the target. The Committee determined that this level of performance equated to an award of 50% against this metric.

TOTAL BONUS PAYMENT AS % OF SALARY

47%

The Committee also assessed that a bonus in the order of 47% of saary was appropriate when judged by the achievement of the above metrics and when looking at a broader picture of the Company's corporate performance over the period.

Given the number of shares acquired for cash by the Executive Directors during the year ended 31 March 2010, the Remuneration Committee has not required any of the bonus payment for this year to be deferred into shares.

Long-Term Incentive Plan

Annually, Executive Directors and certain senior executives are granted an award in the form of nil-cost options under the Vectura Group plc 2005 Long-Term Incentive Plan ("LTIP"). Under the LTIP, each participating executive is granted an annual award of shares, dependent on the achievement of a rigorous, pre-determined set of performance conditions.

Performance conditions

At the end of a three-year performance period, a percentage of the shares so awarded is made available to the participating executives, dependent upon the Group's Total Shareholder Return ("TSR") as compared to those of a comparator group of similar quoted UK pharmaceutical and biotechnology companies. Awards are released in accordance with the following table:

* Linear vesting between points

In addition, the Committee is required to ensure that the underlying financial performance of the Group is consistent with its TSR performance, by considering the Group's performance against a range of objective financial measures. These measures include revenue and cash generation. If the Committee believes that the underlying corporate financial performance is not consistent with its TSR performance, then no LTIP awards will be released.

PricewaterhouseCoopers report to the Committee annually on the TSR performance measurement.

These performance conditions have been selected for the following reasons:

  • the Committee is keen that Executives are encouraged to focus on ensuring that the Company's return to shareholders is competitive compared to comparable companies;
  • participants will be rewarded only if the Company's comparative performance is better than its competitors even if the absolute value of the Company increases over the measurement period; and
  • comparative total shareholder return is a measure operated in conjunction with the majority of LTIP schemes.

For grants issued after 31 March 2009, the comparator group of companies to which the performance of Vectura Group plc is compared is as follows:

Allergy Therapeutics plc
Antisoma plc
Ark Therapeutics plc
Axis-Shield plc
Biocompatibles International plc
BTG plc

GW Pharmaceutical plc
Oxford BioMedica plc
ProStrakan Group plc
Sinclair Pharma plc
SkyePharma plc
Vernalis Group plc

During the year ended 31 March 2010, shares were awarded to Dr Blackwell and Ms Hyland under the LTIP scheme, as further detailed in this report, below. Awards to each Executive Director are up to a maximum of 200% of salary with effect from May 2009 (previous maximum 100%) as approved by shareholders at the September 2008 AGM. The market price of the shares on the date of the 2009 award was 68.50p.

When determining the vesting of the above award (and any future awards) the Committee is likely to apply an underlying share price target in addition to the financial measures referred to above. The LTIP awards will only vest if the Committee is satisfied that there has been a significant improvement in the share price in the relevant period. For the 2009 awards, the LTIP awards will not vest if the average price of the Company's shares over the three-month period before the date of vesting is less than £1. Such an approach will ensure that even if the comparative TSR measure has been achieved, the Executive Directors will only benefit from the LTIP award if share price performance is strong. The Committee will also review the required vesting criteria for the 2010 award and this will be disclosed to shareholders as part of the Notice for the September 2010 AGM. The 2010 award will be the last award under the current scheme which expires in September 2010.

For the three-year performance period ended in the year ended 31 March 2010, 83.3% of LTIP shares awarded in November 2006 were released. In addition, 63.0% of LTIP shares awarded in May 2007 were released in May 2010.

In addition to the comparative TSR measures for these periods, the Committee also considered the underlying financial performance of the Group in its determination of the vesting of these LTIP awards. These included the 59% increase in revenues in the three years to 31 March 2010, and the fact that the Group increased its investment in its development activities whilst generating net cash inflow before financing activities in the same period.

Value Realisation Plan

On 31 October 2008, the shareholders approved the Vectura Group plc Value Realisation Plan ("VRP"). The VRP runs in parallel to the LTIP and provides participants with a share of a pre-determined percentage of the total consideration paid for the Group in the event of a change in control. In this event, under the VRP members of the Executive Committee of the Group will be granted a one-off entitlement in the form of units, which convert into ordinary shares in Vectura Group plc, the actual number of shares that convert being linked to the offer price per share achieved. The VRP is triggered upon achievement of a minimum bid price of £1.27 per share, with a maximum number of shares available to participants if the bid price reaches or exceeds £1.77 per share.

Share Incentive Plan

The Vectura Group plc Share Incentive Plan ("SIP") is available to all employees, including Executive Directors, for the purpose of encouraging employees to become shareholders of the Group and to retain their shares over the medium to long term. It introduces share ownership to the employee in three ways: free shares, partnership shares, and matching shares. Vectura Group plc may award free shares annually, employees may buy partnership shares out of pre-tax salary, and Vectura Group plc may match any partnership shares purchased in a year with the award of additional matching shares on a one-for-one basis. The SIP is an HMRC approved scheme through which benefits are provided in a tax efficient manner.

Sharesave Share Option Scheme

Vectura Group plc also operates a Sharesave ("SAYE") Share Option Scheme for both employees and Executive Directors. Under this Scheme all eligible employees and Executive Directors are invited to subscribe for options, which may be granted at a discount of up to 20% of market value. The Sharesave Share Option Scheme is an all-employee plan where shares must be held for a minimum of three years, and to which performance conditions do not apply.

Approved and Unapproved Share Option Plans and the EMI Plan

Executive Directors hold options under the Approved and Unapproved Share Option Plans and under Enterprise Management Incentive arrangements (the "EMI Plan").

Historically, before it was listed, Vectura Group plc granted NEDs share options as part of their remuneration package. At the early stage of the Group's development this was considered to be essential to secure the recruitment and retention of high-calibre NEDs with the appropriate experience. This policy of granting share options to NEDs has not applied since the Group was publicly listed, and no further share option awards will be made to NEDs. In this connection, reference should also be made to the Corporate governance statement. The options held by the NEDs have vested and are exercisable at any time. The Board does not believe that the retention of these fully vested options in any way compromises the independence of the NEDs concerned.

Historically, no performance conditions have been attached to the options granted under the above schemes. The exercise price is equal to the market value of Vectura Group plc's shares at the time the options are granted.

Pension arrangements

All employees, including Executive Directors, are invited to participate in the Group Personal Pension Plan, which is money-purchase in nature. The only pensionable element of remuneration is basic salary. During the year, the Group contributed 20% of basic salary to the Group Personal Pension Plan in the name of the Executive Directors.

Future remuneration policy

The compensation packages in the UK pharmaceutical and biotechnology sector vary considerably as a result of the companies in those sectors themselves varying in terms of size and stage of development. There are also very few listed companies in the sector and fewer still that are of a comparable size to the Company. However, the Committee recognises the views of some shareholders and analysts that levels of fixed and variable remuneration in the sector may be exceptionally high in some cases relative to the value created for shareholders. This, together with the Company's desire to ensure best use of funds, has prompted the Committee to undertake a review of remuneration policy and this is now underway.

Through this review the Committee will ensure that the remuneration structure supports the Company's strategic aims in terms of becoming a sustainably cash-generative business over the medium term, and that there is a stronger alignment between the equity interests of shareholders and those of the executives than in previous years.

Performance graph

The following graph shows Vectura Group plc's performance since its initial listing in July 2004, measured by TSR, compared with the performance of the current comparator group of companies in the sector, as described above.

Other information

Directors' service contracts

It is the Group's policy that Executive Directors should have contracts with an indefinite term which provides for a maximum period of 12 months' notice. This applies to the contracts of Dr Blackwell and Ms Hyland, which were effective from 25 June 2004. All Executive Directors are subject to re-election at an AGM at intervals of no more than three years.

Dr Blackwell is also a Non-Executive Director of AGI Therapeutics plc for which he received a salary of €7,500 in the year to 31 March 2010 (2009: €30,000).

Non-Executive Directors

All NEDs have specific terms of engagement which are terminable on three months' notice by either party, and their remuneration is determined by the Board within the limits set by the Articles of Association and based on a review of fees paid to NEDs of similar companies. NEDs are not eligible to join the Group's pension scheme, nor do they receive other benefits. All NEDs are subject to re-election at an AGM at intervals of no more than three years.

The dates of appointment of each of the NEDs serving at 31 March 2010 are summarised in the table below:

All of the NEDs are considered independent, including those with service greater than nine years. This is due to the major change in the operating activities of the Group that occurred with effect from July 2004 when the Company completed its Initial Public Offering.

Directors' interests

The Directors who held office at 31 March 2010 and their interests in the share capital of Vectura Group plc at 31 March 2009 and 31 March 2010 were as follows:

(1) The holdings of C P Blackwell and A P Hyland include 25,716 ordinary shares of 0.025p each, which are held in the Vectura Group plc
     Employee Benefit Trust (Share Incentive Plan).

(2) The holding of J R Brown includes 8,929 ordinary shares of 0.025p each, which are held through nominees.

There was no change in the Directors' interests between 31 March 2010 and 6 June 2010, the date of this report.

Audited information

Directors' remuneration

The remuneration of the individual Directors who served during the year was as follows:

* Included within the NEDs' fees are the fees for chairing committees. Dr Brown received £15,000 for chairing the Audit and Nomination Committees. Dr Foden received £7,500 for chairing the Remuneration Committee.

Also included in the above are fees for consultancy services of £6,000 (2009: £7,000) paid to Dr Foden, for the provision of specialist advice on intellectual property matters.

Benefits represent payments for medical insurance.

Directors' pension entitlements

The money-purchase pension contributions paid by the Group for Executive Directors were as follows:

Options

Directors holding office at 31 March 2010 with options outstanding over ordinary shares of 0.025p are as follows:

All options were granted for nil consideration.

  1. Vesting in three equal annual instalments from date first exercisable.
  2. On 18 and 19 March 2010, C P Blackwell and A P Hyland each acquired a total of 83,000 ordinary shares at an exercise price of 36p through the exercise of Unapproved options granted on 29 April 2004. On the dates of exercise, the market value of the Company's shares was 50p and 46p per share respectively. The total cost of these exercises was £35,059, including taxation, and the total nominal gain was £10,640 in each case.
  3. On 22 March 2010, J R Brown acquired a total of 172,224 ordinary shares at an exercise price of 36p through the exercise of Unapproved options granted on 29 April 2004. On the date of exercise, the market value of the Company's shares was 44.75p per share. The total cost of this exercise was £69,337, including taxation, and the total nominal gain was £15,070.
  4. On 19 March 2010, A J M Richards acquired a total of 200,000 ordinary shares at an exercise price of 36p through the exercise of Unapproved options granted on 29 April 2004. On the date of exercise, the market value of the Company's shares was 44.75p per share. The total cost of this exercise was £80,519, including taxation, and the total nominal gain was £17,500.

The total gain for all Directors was £43,210.

Directors' LTIP awards

Under the LTIP scheme, the grants made to Directors at 31 March 2010 were as shown in the table below:

The number of shares released to the Directors at the end of the three-year performance period is dependent upon the performance TSR of the Group during that period in comparison to that of a comparator group of companies as described in the LTIP section of this Report on remuneration.

  1. The award made on 12 September 2005 reached the end of its holding period on 12 September 2008. The TSR of the Group during this period compared with that of the comparator group was in the upper quartile. Accordingly, 100% of the shares awarded were released. The nil-cost options relating to this award lapse on 11 September 2015.
  2. The award made on 22 November 2006 reached the end of its holding period on 22 November 2009. The TSR of the Group during this period compared with that of the comparator group equates to 83.32% of the shares awarded being released. The nil-cost options relating to this award lapse on 21 November 2016.
  3. The award made on 25 May 2007 reached the end of its holding period on 25 May 2010. The TSR of the Group during this period compared with that of the comparator group equates to 62.964% of the shares awarded being released. The nil-cost options relating to this award lapse on 25 May 2017.

On behalf of the Board

Dr S E Foden
Chair of the Remuneration Committee

6 June 2010

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