Remuneration Report to Shareholders

Management Development and Remuneration Committee and its Terms of Reference
The Management Development and Remuneration Committee of the board comprises all the independent non-executive directors of the company as set out in the Board of Directors section. The group Chairman is not a member of the Committee.

The Committee’s terms of reference include determination on behalf of the board of fair remuneration for the executive directors and the group Chairman, 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 senior management of the group are recruited, developed and remunerated in an appropriate fashion. The Director of Human Resources, Mr I F Stephenson, acts as secretary to the Committee. The full terms of reference of the Committee are available on the company’s website at www.matthey.com.

Non-executive directors’ remuneration is determined by the board, within the limits prescribed by the company’s Articles of Association. The remuneration consists of fees, which are set following advice taken from independent consultants and are reviewed at three year intervals.

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 appoints and 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. 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 is reviewed by the Committee annually. Remuneration consists of basic salary, annual bonus, a long term incentive plan, share options and other benefits. Salaries are based on median market rates with incentives providing the opportunity for upper quartile total remuneration, but only for achieving outstanding performance. Following a comprehensive review by the Committee in 2004, which included advice from independent consultants, and after extensive consultation with the company’s major institutional investors, shareholder approval was obtained for changes to the long term incentive plan and the share option scheme.

Executive directors’ remuneration consists of the following:

  
     
 
• 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, the median 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 160 or so most senior executives). The executive directors’ bonus award is based on consolidated profit before tax, exceptional items and goodwill amortisation (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 65% of basic salary if the group achieves PBT of 107.5% of budget. There is a provision that a maximum 100% of basic salary may be paid to the Chief Executive and other executive directors if 115% of budgeted PBT is achieved. PBT must reach 95% of budget for a minimum bonus of 15% to be payable. The Committee has discretion to vary the awards made. The bonus awarded to executive directors in 2004/05 was 64.5% of salary at 31st March 2005.
   
• Long Term Incentive Plan (LTIP) – which was established in 1998 and is designed to achieve above average performance and growth. It allows share allocations of up to a maximum of 125% of basic annual salary each year to directors and executives. The allocation in 2004 was 100% of basic annual salary for executive directors and 125% for the Chief Executive. The release of the share allocation is subject to the achievement of certain stretching performance targets measured over the three year period from the date of allocation.

Share allocations made prior to 2004 – Share allocations made prior to 2004 are subject to the achievement of performance targets which contain two components – relative total shareholder return (TSR) and absolute TSR.

The first component (50% of the allocation) compares the company’s TSR over the three year performance period with that of a comparator group. The comparator group comprises those companies placed 51-150 in the FTSE Index. For share allocations made in 2001 the comparator group comprised those companies placed in the FTSE 250 Index. All of the shares are released if the company ranks in the 75th percentile or above. Between 35% and 100% of the allocated shares are released on a straight line basis if the company ranks between the 50th and 75th percentile. None of the shares are released if the company ranks in the 50th percentile or below. In addition, the company’s earnings per share (EPS) must be at least equal to the increase in UK RPI plus 2% per annum over the three year performance period before any release is made.

The second component (50% of the allocation) measures absolute TSR. All of the shares are released if the absolute TSR growth over the three year performance period is 45% or more. Pro rata allocations on a straight line basis of between 50% and 100% are released if absolute TSR growth is between 30% and 45%. Half of the allocated shares are released if TSR growth is 30%. No shares are released for TSR growth of less than 30%.

Share allocations made from 2004 onwards – In 2004 shareholder approval was obtained to change the LTIP performance target. The change followed recommendations made by the Committee resulting from its review of the company’s executive remuneration undertaken with the help of the Hay Group. The change was one of a number of changes made to executive incentives, effective for the 2004/05 financial year, as a means of recruiting and retaining key employees and of providing an incentive and focus for further improving the company’s performance over the coming years. The effect of the change was that, for allocations made in 2004 onwards, the release of shares is subject entirely to a relative TSR performance target. This compares the company’s TSR over the three year performance period with that of a comparator group which comprises those companies placed 51-150 in the FTSE Index. All of the allocated shares are released if the company ranks in the 75th percentile or above. Between 35% and 100% of the shares are released on a straight line basis if the company ranks between the 50th and 75th percentile. None of the shares are released if the company ranks in the 50th percentile or below. In addition, the company’s EPS must be at least equal to the increase in UK RPI plus 2% per annum over the three year performance period before any release is made.
   
• Share Options – Since 2001 options have been granted under the Johnson Matthey 2001 Share Option Scheme (the 2001 Scheme). Options are granted at the market value of the company’s shares at the time of grant and are subject to performance targets over a three year period. Options may be exercised upon satisfaction of the relevant performance targets. Approximately 800 employees are granted options under the 2001 Scheme each year.

Options granted prior to 2004 – Prior to 2004, options granted to the executive directors under the 2001 Scheme were up to a maximum of 100% of basic annual salary each year. Such options can only be exercised if the company’s normalised EPS has grown by at least UK RPI plus 4% per annum over any three consecutive years during the life of the option. These options are subject to annual retesting until they lapse on the tenth anniversary of grant.

There are also options outstanding under the Johnson Matthey 1995 UK and Overseas Executive Share Option Scheme. The last option grant under this scheme was made in 2000. All options were granted in annual tranches up to the maximum permitted of four times earnings and were subject to a performance target of EPS growth of UK RPI plus 2% over the three year performance period. Option grants were not made to executive directors in the years 1998, 1999 and 2000.

Options granted from 2004 onwards – In 2004 shareholder approval was obtained for certain changes to the 2001 Scheme. The changes followed the review of the company’s executive remuneration by the Committee, as referred to above. As a result of the changes, grants made in 2004 onwards are no longer eligible for retesting and are subject to a three year performance target of EPS growth of UK RPI plus 3% per annum from the date of grant. If the performance target is not met at the end of the three year performance period, the options will lapse. In addition, to reduce the cost calculated under the International Financial Reporting Standard IFRS 2 – ‘Share-based Payment’, gains are capped at 100% of the grant price.

Additional changes introduced in 2004 provide a further incentive to executive directors to deliver growth. The Committee now has the discretion to award grants greater than 100% of basic annual salary. Grants above this threshold are, however, subject to increasingly stretching performance targets. Grants between 100% and 125% of basic annual salary are subject to EPS growth of UK RPI plus 4% per annum and grants between 125% and 150% of basic annual salary are subject to EPS growth of UK RPI plus 5% per annum. In 2004 the executive directors were granted options equal to 150% of salary.
   
• Pensions – all the executive directors are members of the Johnson Matthey Employees Pension Scheme in the UK, with the exception of Mr Pentz who is a member of the Johnson Matthey Inc. Salaried Employees Pension Plan in the US. Under the UK 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 schemes. Details of the individual arrangements for executive directors are given below.
   
• 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 – The executive directors 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.
 
     
  Directors’ Emoluments 2004/05  
 
  Date of
service
agreement		 Date of
appointment		 Salary
£’000		 Annual
bonus
£’000

 

Benefits
£’000

 Total
excluding
pension
£’000		 Total prior
year
excluding
pension
£’000
 
Executive              
N A P Carson (1) 1.8.99 1.8.99 400 290 24 714 434
P N Hawker 1.8.03 1.8.03 209 141 16 366 191(5)
D W Morgan 1.8.99 1.8.99 256 170 31 457 360
L C Pentz (2) 24.2.91 1.8.03 295 125 120 540 251(5)
J N Sheldrick (3) 24.11.97 3.9.90 342 226 13 581 467
     
Total Continuing Directors     1,502 952 204 2,658 1,703
C R N Clark(4) 24.11.97 1.3.90 207 133 14 354 897
     
Total     1,709 1,085 218 3,012 2,600
     
  Date of
letter of
appointment		 Date of
appointment		 Fees
£’000

Benefits
£’000

 Total
excluding
pension
£’000

Total prior
year
excluding
pension
£’000
 
Non-Executive(6)            
H M P Miles (Chairman) 26.2.90 1.3.90 220 8(7) 228 200
M B Dearden 5.1.99 1.4.99 40 - 40 33
C D Mackay 5.1.99 27.1.99 45(8) - 45 37
I C Strachan 10.12.01 23.1.02 40 - 40 33
A M Thomson 1.8.02 24.9.02 45(9) - 45 36
R J W Walvis 1.8.02 24.9.02 40 - 40 33
H R Jenkins(10)     - - - 12
     
Total     430 8 438 384
     
Notes            
 
     
 
(1) Mr Carson was a non-executive director of Avon Rubber plc until 20th January 2005. His annual fee was £25,000. This amount is excluded from the table above and retained by him.
   
(2) Mr Pentz’s emoluments are based on US basic salary adjusted for the cost of living differential in the UK including UK taxation. The company has agreed to provide him, for two years only from 1st January 2004, with an expatriation package commensurate with the company’s policy on international assignments, including accommodation costs, education expenses and relocation expenses.
   
(3) Mr Sheldrick was appointed a non-executive director of GKN plc on 20th December 2004. His annual fee is £40,000. This amount is excluded from the table above and retained by him.
   
(4) Mr Clark retired as a director of the company on 20th July 2004. Mr Clark was a non-executive director of Rexam PLC and FKI plc. His annual fees were £90,000 from Rexam PLC and £37,000 from FKI plc. These amounts are excluded from the table above and were retained by him.
   
(5) Appointed August 2003.
   
(6) Non-executive fees were last reviewed on 1st April 2004 for the Chairman and all non-executives.
   
(7) Mr Miles received a benefit related to the use of a company car for part of the year.
   
(8) Includes £5,000 per annum for chairmanship of the Management Development and Remuneration Committee.
   
(9) Includes £5,000 per annum for chairmanship of the Audit Committee.
   
(10) Mr Jenkins retired in July 2003.
 
     
  Directors’ Interests
The interests of the directors as at 31st March 2005 in the shares of the company according to the register required to be kept by section 325(1) of the Companies Act 1985 were:

1. Ordinary Shares		  
     
 
  31st March
2005

31st March
2004
 
N A P Carson 50,484 44,959
M B Dearden 2,000 2,000
P N Hawker 7,544 7,034
C D Mackay 12,500 12,500
H M P Miles 562 562
D W Morgan 35,873 35,396
L C Pentz 10,614 9,442
J N Sheldrick 52,907 52,355
I C Strachan 1,000 1,000
A M Thomson 2,116 2,056
R J W Walvis 1,000 1,000
 
 
 

All of the above interests were beneficial. The executive directors are also deemed to be interested in shares held by two employee share ownership trusts (see note 27).

Directors’ interests as at 27th May 2005 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 Carson, Hawker, Morgan and Sheldrick a further 78 ordinary shares each.

The Trustees of the Johnson Matthey Salaried Employees Savings Investment Plan (US) have purchased a further 304 ordinary shares on behalf of Mr Pentz.

  
 

 

  
  2. Share Options

As at 31st March 2005, individual holdings under the company’s executive share option schemes were as set out below. Options are not granted to non-executive directors.		  
     
 
  Date of
grant

Ordinary
shares under
option

Exercise
price
(pence)

 Date from
which
exercisable

Expiry
date

Total number
of ordinary shares
under option
 
N A P Carson 14.7.98 15,964 524.00 14.7.01 14.7.08  
  22.7.99 18,035 585.50 22.7.02 22.7.09  
  18.7.01 19,391 1083.00 18.7.04 18.7.11  
  17.7.02 28,901 865.00 17.7.05 17.7.12  
  17.7.03 33,407 898.00 17.7.06 17.7.13  
  21.7.04 75,678 892.00 21.7.07 21.7.14 191,376
            (2004 115,698)
 
C R N Clark 18.7.01 48,938 1083.00 18.7.04 17.1.06  
  17.7.02 65,895 865.00 1.8.04 17.1.06 114,833 (1)
            (2004 114,833)
 
P N Hawker 19.7.00 6,130 942.00 19.7.03 19.7.10  
  18.7.01 10,253 1083.00 18.7.04 18.7.11  
  17.7.02 15,606 865.00 17.7.05 17.7.12  
  17.7.03 21,158 898.00 17.7.06 17.7.13  
  21.7.04 36,746 892.00 21.7.07 21.7.14 89,893
            (2004 53,147)
 
D W Morgan 14.7.98 15,835 524.00 14.7.01 14.7.08  
  22.7.99 17,472 585.50 22.7.02 22.7.09  
  18.7.01 18,098 1083.00 18.7.04 18.7.11  
  17.7.02 25,433 865.00 17.7.05 17.7.12
  
  17.7.03 26,726 898.00 17.7.06 17.7.13  
  21.7.04 44,397 892.00 21.7.07 21.7.14 147,961
            (2004 103,564)
 
L C Pentz 14.7.98 12,981 524.00 14.7.01 14.7.08  
  22.7.99 12,158 585.50 22.7.02 22.7.09  
  19.7.00 8,224 942.00 19.7.03 19.7.10  
  18.7.01 12,952 1083.00 18.7.04 18.7.11  
  17.7.02 17,730 865.00 17.7.05 17.7.12  
  17.7.03 22,185 898.00 17.7.06 17.7.13  
  21.7.04 34,857 892.00 21.7.07 21.7.14 121,087
            (2004 86,230)
 
J N Sheldrick 27.11.97 35,488 553.00 27.11.00 27.11.07  
  18.7.01 25,854 1083.00 18.7.04 18.7.11  
  17.7.02 34,682 865.00 17.7.05 17.7.12  
  17.7.03 36,191 898.00 17.7.06 17.7.13  
  21.7.04 58,861 892.00 21.7.07 21.7.14 191,076
            (2004 132,215)
 
 
  Notes
(1) At date of retirement as a director (20th July 2004). In accordance with the rules of the 2001 Scheme, Mr Clark’s options became exercisable upon the cessation of his employment and will lapse on 17th January 2006. These options can be exercised subject to the relevant performance conditions being met.


There were no share option exercises during the year.

The closing market price of the company’s shares at 31st March 2005 was 989 pence and the range during 2004/05 was 841.5 pence to 1058 pence.

The terms and conditions of the above options are summarised earlier in this section.		  
     
  3. LTIP Allocations
Number of allocated shares:		  
 
 

As at
31st March
2004

Allocations
during
the year

Market price
at date
of allocation
(pence)

 Shares
released
during
the year		 Allocations
lapsed
during
the year (1)		 As at
31st March
2005
 
N A P Carson 78,459 63,273 889 - 20,251 121,481
C R N Clark 133,061 - - - - 133,061(2)
P N Hawker 42,661 24,578 889 - 9,518 57,721
D W Morgan 67,409 29,696 889 - 18,901 78,204
L C Pentz 47,795 23,314 889 - 12,023 59,086
J N Sheldrick 92,891 39,370 889 - 27,001 105,260
 
 
 
  Notes  
 
(1) Shares allocated in 2001 reached their three year maturity on 1st August 2004. As the relevant performance conditions were not met all of the shares lapsed.
   
(2) At date of retirement as a director (20th July 2004). On 1st August 2004, Mr Clark’s 2001 allocation of 63,886 shares lapsed (see note (1) above).
 
     
 

Pensions
Pensions and life assurance benefits for four of the 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 Second Pension. With the agreement of the scheme actuary, the company paid contributions to JMEPS of 15% of basic salaries during the year. Pension and life assurance benefits for Mr Pentz are provided through the Johnson Matthey Inc. Salaried Employees Pension Plan for employees in the United States.

Disclosure of directors’ pension benefits has been made under the requirements of the United Kingdom Listing Authority Listing Rules and in accordance with the Directors’ Remuneration Report Regulations 2002. The information below sets out the disclosures under the two sets of requirements.

a. United Kingdom Listing Authority Listing Rules

  
 
  Age
as at
31st March
2005		 Years of
service
at 31st March
2005

Director's
contributions
to JMEPS
in the
year(1)
£'000

Increase in accrued
pension
during
the year
(net of
inflation)(2)
£’000 pa

Total
accrued
pension
as at
31st March
2005(3)
£’000 pa

 Total
accrued
pension
as at
31st March
2004
£’000 pa

Estimated
transfer
value of
increase
(less director’s
contributions)(4)
£’000

 FURBS
contribution
in the year(5)
£’000		 FURBS
related tax
payments(5)
£’000
 
N A P Carson 47 24 16 70 203 129 682 - -
C R N Clark (6) 63 41 - 20 453 433 342 - -
P N Hawker 51 19 8 15 98 80 168 - -
D W Morgan 47 16 4 3 36 32 21 61 40
J N Sheldrick 55 14 4 3 41 38 37 82 55
L C Pentz (7) 49 20 - 1 36 35 11 - -
 
 
     
  b. Directors’ Remuneration Report Regulations 2002  
 
 

Director's
contributions
to JMEPS
in the
year(1)
£'000

 Increase in
accrued
pension
during the
year
£'000 pa

Total accrued
pension as at
31st March
2005(3)
£’000 pa

Estimated
transfer
value of
accrued
pension
as at
31st March
2005(4)
£’000

 Transfer
value of
accrued
pension at
31st March
2004(4)
£’000

Estimated
increase in
transfer
value
(net of
director’s
contribution)
£’000

 FURBS
contribution
in the year(5)
£’000		 FURBS
related tax
payments(5)
£’000
 
N A P Carson 16 74 203 2,038 1,065 957 - -
C R N Clark (6) - 20 453 7,912 7,625 287 - -
P N Hawker 8 18 98 1,185 810 367 - -
D W Morgan 4 4 36 345 252 89 61 40
J N Sheldrick 4 3 41 606 475 127 82 55
L C Pentz (7) - 1 36 141 118 23 - -
 
 
  Notes  
 
(1) Members’ contributions are at the general scheme rate of 4% of pensionable pay, i.e. basic salary excluding bonuses. In accordance with the JMEPS’ rules, Mr Clark ceased contributing to the scheme on attaining his normal retirement age of 60.
   
(2) The increase in accrued pension during the year excludes any increase for inflation since 31st March 2004.
   
(3) The entitlement shown under ‘Total accrued pension at 31st March 2005’ is the pension which would be paid annually on retirement, based on pensionable service to 31st March 2005. The pension would, however, be subject to an actuarial reduction of 0.3% per month for each month that retirement precedes age 60.
   
(4) The transfer values have been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note 11, less directors’ contributions. No allowance has been made in the transfer values for any discretionary benefits that have been or may be awarded under JMEPS. The transfer values in the Directors’ Remuneration Report Regulations 2002 have been calculated at the start and the end of the year and, therefore, take account of market movements. During the course of the year the actuarial basis used within the JMEPS for the purpose of determining transfer values in accordance with Actuarial Guidance Note 11 was amended, resulting in an increase in transfer value amounts. The transfer values quoted have been calculated using the actuarial bases which applied at each reporting date. Therefore part of the increase in the transfer values will be due to the change in basis.
   
(5) 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 Benefit 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. 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.
   
(6) Mr Clark retired from employment on 31st July 2004, aged 62 years. The data shown in the tables above cover the period from 1st April to 31st July 2004.
   
(7) Mr Pentz is a US citizen and is not a member of the UK pension scheme. Instead he is a member of the US salaried pension plan, which is a non-contributory defined benefit arrangement. The entitlements shown in the tables are those arising out of his membership of this arrangement converted into sterling by reference to the exchange rates on 31st March 2004 and 31st March 2005. Mr Pentz is also a member of a savings plan (401k), to which the company contributed $10,000 during the year. This is not included in the tables above, but is included in his benefits in the table shown earlier in this section.
 
     
  Johnson Matthey Total Shareholder Return, FTSE 100 and FTSE 250 rebased to 100
The following graph charts total cumulative shareholder return of the company for the five year period from 31st March 2000 to 31st March 2005 against the FTSE 100 and the FTSE 250, as the most appropriate comparator groups, with each rebased to 100 at 1st April 2000. Johnson Matthey joined the FTSE 100 on 12th June 2002.		  
     
   
     
  The Remuneration Report was approved by the Board of Directors on 31st May 2005 and signed on its behalf by:


C D Mackay
Chairman of the Management Development and Remuneration Committee

 
     
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