This report has been prepared in accordance with Schedule 7A to the Companies Act 1985 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 the report will be proposed at the Annual General Meeting of the Company at which the financial statements will be approved. The Act requires the auditors to report to the Company's members on certain parts of the Director's remuneration report and to state whether in their opinion these parts of the report have been properly prepared in accordance with the Companies Act 1985. The report has therefore been divided into separate sections for audited and unaudited information.
During the year ended December 31, 2005 the Remuneration Committee continued its work, on behalf of the Board, on Directors' remuneration.
During the past two years, the Company has implemented a business strategy and model focused on identifying, developing and marketing pharmaceuticals in targeted therapeutic areas for diseases treated by specialist physicians. Moving to this model has required the sale of non-core businesses and site consolidation, as well as a major internal reorganization to fully integrate and align key functions and staff on a global, therapy area and market basis. As part of the reorganization, the Company has established a new US headquarters office in Wayne, Pennsylvania where the majority of our senior executives are based. In addition, the Company has recently completed the acquisition of TKT, which is based in Cambridge, Massachusetts.
The Company operates in a competitive multinational environment. In 2005, approximately 90% of the Company's revenues were generated and 80% of its employees were based outside the UK. Indeed most of the Company's revenues are generated in the US and the majority of its employees and most of its senior executives are based in the US.
The importance of our US business to the continuing growth of your Company, coupled with the fact that most of our senior executives are based in the US, presents the Committee with particular challenges. Key elements of our remuneration package, including long-term incentive arrangements, have been in place for five years or more and, over this time, the Company has grown and changed significantly.
As a result of both the growth and development of the Company and the competitive operating environment, the Committee reviewed senior executive remuneration during 2005 and conducted a competitive benchmarking study. On the basis of, and consistent with, data from the study, the Committee modified the remuneration policy and proposed a number of changes to remuneration including the introduction of a new share plan to replace Shire's existing plans and amendments to the annual incentive plan. The Committee conducted a consultation process with major shareholders regarding the proposed programs and made changes to its proposals consistent with shareholder feedback. These are described within this report.
The Remuneration Committee is committed to a continuing dialogue with shareholders and we take account of your views. We hope that this report provides helpful context and explanation about the policies and practical considerations that influence our decisions.
Dr Barry Price
The Remuneration Committee
The Remuneration Committee is responsible for all elements of the executive Directors' remuneration, as well as their performance management.
The constitution of the Committee was reviewed in 2004 and changes were made to ensure compliance with the Combined Code. The Company considers all members of the Committee to be independent.
The Chief Executive Officer and the Chief Financial Officer attend meetings of the Committee at its invitation, but neither is involved in any decisions relating to their own remuneration.
The members of the Remuneration Committee during 2005 were:
Details of the number of Committee meetings in 2005 and the attendance at those meetings is set out in the section headed Corporate Governance Statements.
The Remuneration Committee was materially assisted in 2005 by Mrs Anita Graham, EVP Global Human Resources. The following external advisers were appointed by and materially assisted the Committee:
Executive remuneration policy
The Remuneration Committee considers that an effective remuneration policy, aligned to the Company's business needs, is important to the Company's success. It directly impacts the Company's ability to recruit, retain and motivate high caliber executives who deliver sustained value to shareholders and build the Company for long-term success.
The Remuneration Committee is responsible for developing, reviewing and overseeing the implementation of the Company's compensation and benefits policy. The Remuneration Committee regularly monitors the effectiveness of the policy and reviews this policy based on independent analysis and advice, an understanding of the business drivers and competitive environment in which the Company operates and ongoing dialogue with shareholders.
The Company's executive compensation and benefits policy is based on the following principles:
The remuneration package
The main elements of the remuneration package for executive Directors and senior management are:
1 Base salary
2 Annual Incentive Plan
3 Long-term Incentives
4 Pension and other benefits
*The share component under the Annual Incentive Plan, and the Portfolio Share Plan, were introduced as a result of the remuneration
The Remuneration Committee reviews salaries annually. In late 2004 and early 2005 the Committee undertook a competitive review of the Company's executive remuneration programs and practices, including base salary benchmarks and levels. Based on the competitive analysis the Committee determined that the correct comparator group is a blend of US and UK companies with sector, size, complexity and international characteristics similar to those of the Company. Where appropriate, the competitive review included a detailed analysis to align these characteristics to best represent the Company's operating position.
As part of its normal annual salary review process, the Committee conducts a review of a range of factors such as competitive market data provided by independent external consultants, US and UK market conditions, performance-related pay increases across the Company and individual skills, performance and results achieved. The Remuneration Committee's policy is for salary to be targeted at or around the median of the blend of US/UK comparators, with appropriate differentiation based upon skills and experience as well as individual performance. Based on this review, salaries for the Chief Executive Officer and Chief Financial Officer were increased 5% and 4% effective January 1, 2006, respectively, to $1,103,017 (denominated in $) and £372,120 ($677,630 equivalent based on the average exchange rates prevailing in 2005). These increases are in line with increases provided to the Company's employees.
2 Annual Incentive Plan
Shire operates an Annual Incentive Plan which rewards executive Director performance dependent on achievement of pre-defined Board approved corporate objectives and Committee approved individual objectives. The Company implemented the Balanced Scorecard to set corporate objectives in 2005. The Scorecard organizes corporate objectives into all areas that drive the success of the business: financial, products and markets, people and capabilities, and operational effectiveness.
At the start of the year corporate objectives are set by the Board for each area of the Scorecard. These objectives apply to all employees participating in the Company's Annual Incentive Plan and include a description of the objective and key performance indicators (KPI), including targets and deadlines. Awards under the Plan are made only when exacting levels of performance specified by the KPI have been achieved. Objectives measured by the Company's financial performance are assessed on the Company's results, as reported in the Company's Form 10-K under US GAAP.
The detailed objectives and performance standards contain commercially sensitive information and therefore are not detailed here. However, some of the objectives are summarized below according to the four Scorecard areas for 2005:
3 People and capabilities
4 Operational effectiveness
Personal objectives are also set at the beginning of the year and are aligned with individual accountabilities for the development and execution of plans to achieve corporate objectives in the current year and build for the future success of the Company.
The Remuneration Committee assesses performance against objectives in the first quarter of the following year. Through 2005, the annual incentive is payable in cash and is not pensionable. The target incentive is paid where executive Directors have fully achieved their individual objectives and the corporate objectives have been met in full. The maximum incentive is paid when the Remuneration Committee determines that individual and/or corporate performance has been exceptional. Maximum incentive payments for 2005 were capped at 115% of salary for the Chief Executive Officer and 100% of salary for the Chief Financial Officer.
The incentive payments awarded to each executive Director for 2005 reflect the corporate and individual achievements and amounted to 115% of salary for Mr Emmens and 70% of salary for Mr Russell.
These incentive awards are consistent with the overall performance of the Company in 2005, which included:
Changes to the Annual Incentive Plan for 2006 following the remuneration review and subsequent consultation with shareholders
As described in last year's remuneration report, in 2005, the Company ceased the matching share portion of the Plan (by discontinuing the Deferred Bonus Plan). For the financial year 2006, a restricted share element has been added to the Plan, so the Plan effectively has two components: a cash component and a share component.
The target cash incentive for the Chief Executive Officer and the Chief Financial Officer remain respectively at the 2005 levels of 65% and 55% of salary and the maximum cash incentive amounts remain respectively 115% and 100% of salary.
The new restricted share element will be set as follows: for the Chief Executive Officer, the target restricted share element is 20% and the maximum restricted share element is 65%. For the Chief Financial Officer, the target restricted share element is 15% and the maximum restricted share element is 55%. Awards of restricted shares will be made in the same manner as awards of cash under the Plan, utilizing the same operational objectives and measures (per Company's Balanced Scorecard and individual objectives). The levels of target and maximum restricted shares have been set to be competitive in both the UK and US and to enable Shire to operate a common framework for the senior executive team irrespective of location. The restricted share element is earned at the same time as the cash portion of the incentive, but is deferred for three years. As discussed with the Company's major shareholders and investor bodies, this restricted share element is taken into account for the purposes of determining competitive levels of share-based and total compensation. The table below compares the previous and the new Annual Incentive Plan structure.
3 Long-term Incentives
(a) Share options
The earnings per share based measure was introduced in 2002 following consultation with major institutional shareholders and, during the course of the consultation process, the performance test for executive Directors' options was toughened compared to that for other employees.
The minimum performance required in order for executive Directors' options to vest is that Shire's EPS grows by 15% in excess of the Retail Price Index (RPI) (or 5% on average a year) in the three years following the date of grant. In the case of an annual grant of options worth three times salary, Shire's EPS must grow by 21% in excess of RPI (or on average 7% a year) in the three years following the date of grant for all the options to vest.
The 2000 Executive Share Option Scheme, which was approved by shareholders in 2000, contained an unlimited retesting feature from the date of grant. The Remuneration Committee decided, after consultation with some of the Company's major institutional shareholders in 2003, that for options granted under the scheme from 2004 onwards, the performance condition should be retested once only, five years after the grant and then only where Shire's EPS growth has not met the minimum level of performance over the first three years. The level of EPS growth over the five-year period needs to be commensurately higher to meet the retest.
The new Portfolio Share Plan does not allow re-testing.
The table below sets out the share options that were granted to executive Directors during 2005.
Details of the Company's share option schemes are set out in Note 31 to the consolidated financial statements. Performance conditions attaching to previous executive option grants are detailed in the audited section of this Report.
*The Portfolio Share Plan has replaced both the 2000 Executive Share Option Scheme and the Long-term Incentive Plan
(b) Long-term Incentive Plan
The performance condition attached to the vesting of awards under the LTIP is Shire's Total Shareholder Return (TSR) relative to the FTSE 100 Index over a three-year period. The Committee considers that this measure is a reliable and appropriate measure of the Company's performance and that the FTSE 100 is an appropriate benchmark given that the Company is a member of the Index.
Under the LTIP:
The Remuneration Committee determines whether and to what extent the performance condition has been met on the basis of data provided by an independent third party. To date, all awards made under the LTIP have been made as a 'conditional allocation', thereby allowing, at the Remuneration Committee's discretion, for a cash equivalent to be paid on maturity of the award. Whilst the performance period is measured over three years, an award is normally transferred after the fourth anniversary of grant, to the extent the performance condition has been met.
Directors were granted awards under the LTIP in 2005 as a 'conditional allocation' (as defined in the LTIP), as follows:
(i) Translated from £ into $ at the average exchange rate during May 2005.
(c) The New Portfolio Share Plan
The purpose of the Plan is to enable the Company to motivate and reward its workforce by reference to share price performance, and to link the interests of participants with those of our shareholders. The Plan is designed to align the interests of selected employees of the Company with long-term value creation for shareholders. Participation in the Plan is discretionary. Under the Plan, awards granted to executive Directors will be subject to a performance target, which must, in normal circumstances, be met before the award vests. Performance targets will normally be measured over a period of not less than three years. Special rules apply in the event of the participant's employment terminating early or on a change of control of the Company.
The Plan is split into two parts, which can be operated separately.
Under Part A of the Plan, Stock Appreciation Right (SAR) Awards can be granted. A SAR Award is the right to receive shares (or ADSs) in the Company linked to the increase in value of a specified number of shares over a period between three and five years from the date of grant and, in the case of executive Directors, subject to the satisfaction of performance targets. SAR Awards will normally vest three years after the date of grant, subject to the satisfaction of performance targets in the case of executive Directors, and can be exercised up until the fifth anniversary of the date of grant.
Under Part B of the Plan, Performance Share (PSP) Awards can be granted. A PSP Award is the right to receive a specified number of shares (or ADSs) three years from the date of grant. In the case of executive Directors, performance targets must be satisfied before a PSP Award vests. Upon vesting of the PSP Award, shares will be released to the participant automatically without any action on the part of the participant.
The Plan contains individual grant limits set at six times base salary for SAR awards in any one year and four times base salary for PSP awards in any one year. It is the Company's intention for awards granted under the Plan to executive Directors to be comprised of either or both a SAR Award and a PSP Award. For 2006, it is the Company's intention to provide grants to the Chief Executive Officer and Chief Financial Officer with face values (calculated by reference to the average share price over the prior 12-month calendar period) as follows:
Awards under the Plan will normally vest on the third anniversary of the date of grant. In the case of executive Directors, awards will only vest if the Committee determines that the performance conditions have been satisfied and that, in the opinion of the Committee, the underlying performance of the Company is sufficient to justify the vesting of the award.
Performance criteria will be based on relative Total Shareholder Return (TSR) measured against two comparator groups. Vesting of one-third of an Award will depend upon the Company's performance relative to the TSR performance of FTSE 100 constituents, excluding financial institutions. The vesting of the remaining two-thirds of an Award will depend upon the Company's performance relative to the TSR performance of a group of international companies from the pharmaceutical sector (see below). Vesting will be as follows:
The comparator group of international companies from the pharmaceutical sector will initially include the following companies:
Allergan, Altana, Biovail, Cephalon, Forest Labs, King, Kos, Lundbeck, Medicis, Novo Nordisk, Schering AG, Sepracor, Serono, UCB, Valeant, Watson.
The Committee has the discretion to amend this group of companies to ensure that the group stays both relevant and representative; however, the change must not have the effect of making the performance criteria either materially easier or materially more difficult to achieve, in the opinion of the Committee, than it was or they were immediately before the circumstance in question.
TSR performance will be measured using an averaging period of three months. In addition, the Committee will have regard to the same calculation using an averaging period of six months as part of a fairness review to ensure that vesting properly reflects underlying performance.
If the performance conditions are not met, awards will lapse.
(d) The implementation of share ownership guidelines The Remuneration Committee believes that executive Directors and certain other members of senior management should be encouraged to own shares in the Company in order to ensure the alignment of their interests with those of the Company's shareholders. The Committee discussed this matter with shareholders during its consultation process in 2005, and has developed share ownership guidelines which came into effect in 2006.
The Executive Share Ownership Guidelines are administered by the Remuneration Committee and are based on the following principles:
Executives are encouraged, within a five-year period following the later of either the initiation of these guidelines, or their appointment or election, to attain and hold an investment position no less than the multiples of base salary set forth below.
The following are the guideline share ownership levels for the executive Directors:
All shares beneficially owned by an executive (excluding unexercised vested Stock Options or SARs) count towards achieving these guidelines.
The Remuneration Committee will review share ownership levels for each executive on an annual basis. The Committee will discuss with each executive Director their plans for share ownership on a regular basis; the Chief Executive Officer will discuss with each of the remaining executives their plans for share ownership on a regular basis.
4 Pension and other benefits
The Company's policy is to ensure that pension benefits are competitive in the markets in which Shire operates. Shire contributes 30% of the Chief Executive Officer's annual salary to a Supplemental Employee Retirement Plan (SERP) and 401(k) Plan in the US. The SERP is an unfunded defined benefit scheme; the benefits are payable to certain senior US employees as lump sums on leaving the Group's employment or earlier due to death, disability or termination. The amount of benefit is based on the value of notional contributions adjusted for 'earned' investment returns as if they were invested in investments of the employees' choice.
In the UK, Shire operates a defined contribution scheme. The Company contributes 25% of salary for the Chief Financial Officer to pension benefits. The implications of the forthcoming UK pension tax reforms, which become effective in 2006, will be considered during the course of the year and the Committee will agree any policy changes necessary in respect of the pension arrangements of the Chief Financial Officer and other UK executives.
In addition to salary, the executive Directors receive certain benefits in kind, principally a car or car allowance, life insurance, private medical insurance and dental cover. These benefits are not pensionable.
The Remuneration Committee continues to believe that executive Directors' service contracts should be for a rolling term and, for UK contracts, incorporate notice periods of 12 months. The Committee also believes that the Company should retain the right to make a payment in lieu of notice to a Director. The contracts contain obligations on the executive Directors in respect of intellectual property, together with post-termination restrictions. The Committee's view is that, in the event of early termination, executive Directors should be treated fairly but paid no more than is necessary. Moreover, there should be no element of reward for failure.
The executive Directors' contracts of employment, which were revised following consultation with some of the Company's major shareholders in 2003, are dated March 10, 2004 in the case of Mr Russell and March 12, 2004 in the case of Mr Emmens. Both agreements were revised on November 21, 2005 to provide for Shire plc being established as the new holding company for the Shire Group. Mr Russell's contract requires him to give the Company 12 months' notice and expires on him reaching 65. Mr Emmens' contract requires him to give the Company six months' notice and no age is specified for retirement. The Company is required to give Mr Russell 12 months' notice of termination, other than if termination is for cause, whereas it is not obliged to give Mr Emmens any notice. If Mr Emmens' contract is terminated without cause the Company is required to pay him one year's salary and the cash equivalent of one year's pension, car and other contractual benefits.
In the event of termination of employment within twelve months of a change of control, the amount payable in respect of each of Mr Emmens and Mr Russell is one year's salary and the cash equivalent of one year's pension, car and other contractual benefits. Any incentive payable is at the discretion of the Remuneration Committee and is capped at the contractual maximum incentive.
The amount of incentive payable upon termination of employment in any other circumstances, other than for cause, is at the discretion of the Remuneration Committee and is capped at the contractual target incentive.
Non-executive Directors and the Chairman
Each Non-executive Director is paid a fee for serving as a Director and additional fees are paid for membership or chairmanship of the Audit, Remuneration and Nomination Committees. The Chairman of the Company receives an inclusive fee. Fees are determined by the Board, with the exception of the Chairman's fee which is determined by the Remuneration Committee and confirmed by the Board. Fees are benchmarked against Non-executive Director fees of comparable companies. The fees paid to Non-executive Directors are not performance-related. Details of fees paid to the Chairman and Non-executive Directors in 2005 are set out below.
The Non-executive Directors are not eligible to join the Company's pension scheme.
Non-executive Directors do not participate in any of the Company share schemes or other employee benefit schemes and no options have been granted to Non-executive Directors in their capacity as Non-executive Directors of Shire. On the merger of Shire with BioChem Pharma Inc. in 2001, options were granted to The Hon James Grant in replacement for Mr Grant's BioChem Pharma options. The grant of these replacement options and the original BioChem Pharma option grant were made on the same terms as applied to other employees at the time, including that these options are not subject to any performance conditions.
Non-executive Directors are appointed ordinarily for a term of two years, subject to shareholder approval. Non-executive Directors who have served on the Board for nine years or more are appointed for one year terms and, in accordance with the Combined Code on Corporate Governance, are subject to annual re-election by shareholders. Re-appointment of Non-executive Directors following the expiry of their term of appointment is subject to Board approval.
Details of the unexpired terms of the letters of appointment and notice periods are as follows:
The fee policy structure for Non-executive Directors, effective January 1, 2006, is presented in the table below.
(i) Denominated in £ sterling and translated into $ at the average exchange rate prevailing in 2005.
Related party transactions
Details of transactions relating to Dr James Cavanaugh, The Hon James Grant, who is a partner of a Canadian law firm with which the Company incurred professional fees during the year and with Dr Francesco Bellini, a former Non-executive Director, are given in the Directors' report in the Downloads section.
The graphs below set out the Total Shareholder Return (TSR) for the three and five years ending December 31, 2005. The graphs compare the performance of a hypothetical £100 holding of the Company's shares with that of a holding of shares in the FTSE 100 index (excluding financial institutions) and with a holding in a group comprised of the following pharma companies: Novo Nordisk, Schering AG, Serono, Altana, UCB, Lundbeck, Forest Labs, Allergan, Sepracor, Cephalon, Watson, Biovail, King, Valeant, Medicis and Kos. This comparator group is a blend of US and UK companies with sector, size, complexity and international characteristics similar to those of the Company. These comparisons will also be used to determine achievement of performance conditions relating to the Annual Incentive Plan and Portfolio Share Plan.
The three-year graph tracks the TSR performance since the Company started to implement its new strategic plan under new management.
Three-year historical TSR performance. Change in value of a hypothetical £100 holding over three years.
Five-year historical TSR performance. Change in value of a hypothetical £100 holding over five years.
The Company believes there are benefits to executive Directors' participation at the Board level at other companies, including crossindustry and cross-company exposure and the added perspective of outside views. It is therefore the Company's policy to allow executive Directors to take up Non-executive positions at other companies and retain associated earnings as long as such appointments are expressly permitted by the Board of Directors. Mr Emmens was appointed as a Non-executive Director of Vertex Pharmaceuticals Inc during 2004. In this capacity he was paid $37,917 in 2005, which he will retain.
Mr Russell is a Non-executive Director of The City of London Investment Trust plc (and its associated companies, The City of London European Trust Limited, The City of London Investments Limited and The City of London Finance Company Limited). In this capacity, he was paid £17,500 ($31,868 equivalent) in 2005, which he will retain.
Aggregate Directors' remuneration
The total amounts for Directors' remuneration were as follows:
(i) Paid in $.
(ii) Salary and benefits in kind paid in £ Sterling and translated into $ at the average exchange rates for the year.
(iii) Fees paid in £ Sterling and translated into $ at the average exchange rates for the year.
(iv) Paid in Euros and translated into $ at the average exchange rate for the service period.
(v) The Company underwent a major internal reorganization in 2004, which resulted in the Company selecting Philadelphia
(vi) Dr Totten stepped down as a Director of the Company on May 25, 2004.
(vii) Mr Langlois was appointed a Non-executive Director on November 11, 2005.
Cash benefits in kind represent expense allowances (including dental costs). Non-cash benefits in kind consist of private medical insurance.
Details of the exercise of share options are disclosed on below. Non-executive Director remuneration is to/from the date of resignation/appointment.
Directors' pension entitlements
The following Directors are members of money purchase schemes. Contributions made by the Company (not included in emoluments above) in respect of 2005 were as follows:
(i) At Mr Russell's request the Company deferred $59,000 of pension contributions earned in 2005, to be paid in 2006.
Directors who held office at the end of the year had interests in the share capital of the Company as follows (all interests are beneficial):
Directors' share options
Aggregate emoluments disclosed above do not include any amounts for the value of options to acquire ordinary shares in the Company granted to or held by the Directors.
Directors and employees have been granted options over ordinary shares under the Shire Pharmaceuticals Group plc 2000 Executive Share Option Scheme (Parts A and B) (2000 Executive Scheme), the Shire Holdings Limited Share Option Scheme (SHL Scheme), the Pharmavene 1991 Stock Option Plan (SLI Plan), the Shire Pharmaceuticals Executive Share Option Scheme (Parts A and B) (Executive Scheme), the Shire Pharmaceuticals Sharesave Scheme (Sharesave Scheme), the Shire Pharmaceuticals Group plc Employee Stock Purchase Plan (Stock Purchase Plan), the Roberts Stock Option Plan (Roberts Plan) and the BioChem Stock Option Plan (BioChem Plan).
Details of options exercised during the year (with prior-year comparatives) are as follows:
Details of options exercised after ceasing to be a Director are as follows:
(i) On November 23, 2005 a gross payment of $482,103 (paid in £ Sterling and translated into $ at the average exchange rate in November
Details of the options of Directors who served during the year are as follows:
For those options which remained unexercised during the year, no payment was made by any Director in consideration of the grant award. Following the implementation of the Scheme of Arrangement, on November 25, 2005, all existing options to acquire ordinary shares in Shire Pharmaceuticals Group plc (Old Options) were swapped for new equivalent options to acquire ordinary shares in Shire plc (New Options). Any performance conditions attached to the Old Options continue to apply to the New Options.
(i) Options granted under this scheme are subject to performance criteria and cannot be exercised in full, unless Shire's ordinary share
On February 28, 2000, the Remuneration Committee of the Board exercised its powers to amend the terms of the Executive Share
(ii) Options granted under the Sharesave Scheme are granted with an exercise price equal to 80% of the mid-market price on the day
(iii) Options granted under the 2000 Executive Scheme are exercisable subject to certain performance criteria. In respect of any option
(iv) Following the acquisition of BioChem Pharma Inc. on May 11, 2001, the BioChem Stock Option Plan was amended such that options
(v) Under the Stock Purchase Plan, options are granted with an exercise price equal to 85% of the fair market value of a share on the
The market price of the ordinary shares at December 31, 2005 was £7.44 and the range during the year was £5.39 to £7.53.
Long-term Incentive Plan (LTIP)
The following award, granted under the Long-term Incentive Plan lapsed during the year 2005 and no payment was made under it as the performance criteria was not met at the maturity date:
(i) The performance criteria attaching to awards made under the Long-term Incentive Plan are detailed on above.
Details of current and outstanding awards under the Long-term Incentive Plan for Directors who served during the year are as follows:
The above awards made during the year were all at the price