Remuneration Report to Shareholders

Management Development and Remuneration Committee and its Terms of Reference
The Management Development and Remuneration Committee (the Committee) of the board comprises all the non-executive directors of the company as set out on pages 26 and 27. Mr Fitzgibbons retired from the Committee on 16th July 2002. Messrs Thomson and Walvis joined the Committee on 24th September 2002. During the year Mr Miles stood down as Chairman of the Committee and was succeeded by Mr Mackay.
The Committee’s terms of reference are to determine on behalf of the board competitive remuneration for the executive directors, which recognises their individual contributions to the company’s overall performance. The Committee believes strongly that remuneration policy should be completely aligned with shareholder interests. In addition the Committee assists the board in ensuring that the current and future management of the group are recruited, developed and remunerated in an appropriate fashion.
The remuneration of the non-executive directors is determined by the board, within the limits prescribed by the company’s Articles of Association.

Executive Remuneration Policy
The Committee recognises that, in order to maximise shareholder value, it is necessary to have a competitive pay and benefits structure. The Committee also recognises that there is a highly competitive market for successful executives and that the provision of appropriate rewards for superior performance is vital to the continued growth of the business. To assist with this the Committee receives advice from independent remuneration consultants on the pay and incentive arrangements prevailing in comparably sized industrial companies in each country in which Johnson Matthey has operations. During the year such advice was received from The Hay Group, which also provided advice on job evaluation, and the Monks Partnership. Watson Wyatt provided actuarial services and also gave advice on the acquisition of the Synetix division from ICI. The Committee also receives recommendations from the Chief Executive on the remuneration of those reporting to him as well as advice from the Director of Human Resources. Total potential rewards are earned through the achievement of demanding performance targets based on measures that represent the best interests of shareholders.
The remuneration policy was reviewed by the Committee in 2002. Salaries are based on median market rates with incentives providing the opportunity for upper quartile total remuneration, but only for achieving outstanding performance. Executive directors’ remuneration consists of basic salary, annual bonus, a long term incentive plan, share options and other benefits as detailed below:

Basic Salary – which is in line with the median market salary for each director’s responsibilities as determined by independent surveys. Basic salary is normally reviewed on 1st August each year and the Committee takes into account individual performance and promotion during the year. Where an internal promotion takes place, a competitive salary relative to the market would usually be reached over a period of a few years, which can give rise to higher than normal salary increases while this is being achieved.

Annual Bonus – which is paid as a percentage of basic salary under the terms of the company’s Executive Compensation Plan (which also applies to the group’s 150 or so most senior executives). The executive directors’ bonus award is based on consolidated profit before tax (PBT) compared with the annual budget. The board of directors rigorously reviews the annual budget to ensure that the budgeted PBT is sufficiently stretching. An annual bonus payment of 30% of basic salary (prevailing at 31st March) is paid if the group meets the annual budget. This bonus may rise to 50% of basic salary if the group achieves PBT of 107.5% of budget. There is a provision that a maximum 105% of basic salary may be paid to the Chief Executive and 85% to other executive directors if 125% of budgeted PBT is achieved. PBT must reach 95% of budget for a minimum bonus to be payable. The Committee has discretion to vary the awards made. The bonus awarded to executive directors in 2002/03 was 40.8% of salary at 31st March 2003.

Long Term Incentive Plan (LTIP) – which was introduced in August 1998, is designed to achieve above average performance and growth. Shares are allocated to directors and key executives subject to performance conditions. For shares allocated in the years 1998, 1999 and 2000 the number of shares released to the individual was and is dependent upon growth in Johnson Matthey’s relative total shareholder return (TSR) compared with the FTSE 250 over a three year performance period. 100% of the allocated shares will be released to the individual if the company’s relative TSR is in the 75th percentile or above. Between 35% and 100% of the allocated shares will be released pro rata between the 50th and the 75th percentiles. No shares will be released at or below 50th percentile performance. Earnings per share (EPS) is used as a second performance measure and requires an increase in EPS to be at least equal to the increase in UK RPI plus 2% p.a. over the performance period before any release is made.
In 2001 shareholder approval was obtained for certain changes to the LTIP. The LTIP will continue to provide for the release of half of the allocated shares based on the company’s relative TSR and EPS measures, as described above. The other half of the allocation will be released subject to the achievement of absolute TSR growth over a three year period. Under this test no shares will be released should the absolute TSR growth be less than 30%. 100% of the allocated shares will be released should the absolute TSR growth be 45% or more. Pro rata allocations will be made for absolute TSR growth between 30% and 45%.
In determining the precise number of shares to be released at the conclusion of the performance period, the LTIP trustee will also take into account the underlying financial performance of the company.
On 12th June 2002 Johnson Matthey moved into the FTSE 100, and as a consequence of this the Committee decided that a comparator group of those companies ranked 50 - 150 in the FTSE index would be more appropriate than the FTSE 250 previously used. Hence the August 2002 and subsequent allocations will be tested against this revised comparator group for that half of the allocation subject to the relative TSR test.

Share Options – option grants were not made to executive directors in the years 1998, 1999 and 2000. Previously, options were granted to executive directors under the 1985 scheme (under which the final grant was made in November 1994) and the 1995 schemes with the latter having a performance target of EPS growth of UK RPI plus 2% over a three year period. Options under all the schemes were granted in annual tranches, up to the maximum permitted of four times earnings.


Following the review by independent remuneration consultants, the Committee obtained shareholder approval in 2001 for the introduction of a new employee share option scheme, known as the Johnson Matthey 2001 Share Option Scheme. The executive directors and approximately 800 employees are awarded an annual grant of share options under the terms of this scheme. For executive directors the Committee will award options each year up to a maximum of basic annual salary. The options will only be exercisable upon the achievement of appropriate performance targets. The performance target is EPS growth of UK RPI plus 4% p.a. over any three year period. The Committee has discretion to alter the performance targets for future options, but not so as to make the targets less challenging, and would only do so after consultation with institutional investors.

Pensions – all the executive directors are members of the Johnson Matthey Employees Pension Scheme. Under the scheme, members are entitled to a pension based on their service and final pensionable salary subject to Inland Revenue limits. The scheme also provides life assurance cover of four times annual salary. The normal pension age for directors is 60. None of the non-executive directors are members of the scheme. Details of the individual arrangements for executive directors are given on page 34.

Other Benefits – available to the executive directors are private medical insurance, a company car and membership of the group’s employee share incentive plans which are open to all employees in the countries in which the group operates such schemes.

Service Contracts – Mr Clark, who was appointed to the board on 1st March 1990, Mr Sheldrick, who was appointed to the board on 1st September 1990 and Messrs Carson and Morgan, who were appointed to the board on 1st August 1999, are employed on contracts subject to one year’s notice at any time. On early termination of their contracts the directors would normally be entitled to 12 months’ salary and benefits.

Non-executive directors’ remuneration consists of fees which are set following advice taken from independent consultants. They are reviewed at three year intervals.

Remuneration

Directors’ Emoluments 2002/03

The annual bonus above is stated on an earned basis, i.e. in relation to performance in the year in question.
Benefits are shown as the assessment to tax for each director arising from the provision of a company car and, for the executive directors, private medical insurance plus the cost of company contributions to the Johnson Matthey Share Incentive Plan.
Executive directors may, with the consent of the board, normally accept one, and a maximum of two, external directorships and retain any related remuneration.

Pensions
Pensions and life assurance benefits for executive directors are provided through the company’s final salary occupational pension scheme for UK employees – the Johnson Matthey Employees Pension Scheme (JMEPS) – which is constituted under a separate Trust Deed. JMEPS is an exempt approved scheme under Chapter I of Part XIV of the Income & Corporation Taxes Act 1988 and its members are contracted out of the State Earnings Related Pension Scheme and the State Second Pension.
In previous years’ accounts, disclosure of directors’ pension benefits has been made under the requirement of the Financial Services Authority Listing Rules. These rules are still in place but it is now also necessary to make disclosures in accordance with the Directors’ Remuneration Report Regulations 2002. The information below sets out the disclosures under the two sets of requirements.

FURBS
contribution
for the
year(5)
£’000

The JMEPS’ benefits and contributions for Messrs Morgan and Sheldrick are restricted by reference to the ‘earnings cap’ imposed by the Finance Act No. 2, 1989. Contributions have therefore been paid to Funded Unapproved Retirement Benefits Schemes (FURBS) established by the company, independently of JMEPS, with effect from 1st April 2000. The purpose of each FURBS is to provide retirement and death benefits in relation to basic salary in excess of the earnings cap on the same basis as the JMEPS. Because FURBS are not exempt approved under Chapter I of Part XIV of the Income & Corporation Taxes Act 1988, payments have been made to meet the tax liabilities in respect of these contributions.

With the agreement of the scheme actuary, the company paid contributions of 10% of basic salaries to JMEPS during the year.

* No shares were held at date of appointment.
The directors are also deemed to be interested in the shares held by two employee benefit trusts (see note 17 on page 59).

These figures do not include the gains made by Mr Titcombe, details of which appear on page 37.

Directors’ interests at 31st May 2003 were unchanged from those listed above with the following exceptions:
The Trustees of the Johnson Matthey Share Incentive Plan have purchased on behalf of Messrs Clark, Carson, Morgan and Sheldrick a further 90 ordinary shares each.

Total
excluding
pension
£’000

Notes:
Mr Titcombe’s annual bonus for the year 2002/03 is pro-rated for the period up to 30th September 2002. He will continue to receive private medical insurance cover for life at a cost of £1,639 p.a., in accordance with the terms of his contract. He has been engaged as a self-employed consultant since his retirement. His fee in the period from his retirement to 31st March 2003 was £50,000.

Share Options
Between 1st April 2002 and 31st March 2003 Mr Titcombe made a gain of £428,138 on the exercise of share options as follows:

Mr Titcombe did not receive share options in the 2002 grant in accordance with the Committee’s policy on option grants within two years of retirement. Similarly, options granted on 18th July 2001 (27,424 options at 1083.00 pence) were forfeited since they had not been held for two years at retirement.

LTIP
The number of allocated shares held by Mr Titcombe was as follows:

Share price
when released
(pence)

Pension
Mr Titcombe retired on 24th September 2002. His pension was calculated in accordance with the Trust Deed and Rules of JMEPS. The total pension payable from 24th September 2002 is £214,000 p.a. and this will increase annually in line with the UK RPI up to a maximum of 5% p.a.
The increase in Mr Titcombe’s annual pension between 31st March 2002 and the date of retirement was £11,000 and the value of that increase, calculated in accordance with Actuarial Guidance Note 11, based on market conditions at 31st March 2003 and less his own contribution of £5,000, was £193,000.
The transfer values of the pension accrued at the start of the year and the retirement pension at 24th September 2002 (but based on market conditions at 31st March 2003), calculated in accordance with Actuarial Guidance Note 11 and less his own contributions, were £3.366 million and £3.852 million respectively. This is an increase over the year of £481,000 which takes account of market movements.

Total Shareholder Return
The following graph charts total cumulative shareholder return of the company for the five year period to 31st March 2003 against the FTSE 100 and the FTSE 250, as the most appropriate comparator groups, with each rebased to 100 at 1st April 1998.
Johnson Matthey joined the FTSE 100 on 12th June 2002. For the LTIP allocations in 1998, 1999 and 2000, the number of shares released was and is dependent on Johnson Matthey’s relative TSR compared with the FTSE 250 over a three year performance period. Both indices are therefore included as comparators.