Report of the Directors

Remuneration Report

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Terms of Reference and Constitution of the Management Development and Remuneration Committee (MDRC)

The Management Development and Remuneration Committee is a committee of the board and comprises all the independent non-executive directors of the company as set out in the Board of Directors section and the group Chairman. The Chairman of the Committee was Robert Walvis until his retirement on 19th July 2011, after which Michael Roney took over the role.

The Committee’s terms of reference include determination on behalf of the board of fair remuneration for the Chief Executive, the other executive directors and the group Chairman (in which case the group Chairman does not participate).

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 regular intervals.

In addition, the Committee assists the board in ensuring that the company has well developed plans for management succession, including the recruitment and development of senior management, along with appropriate remuneration policies to ensure that management are retained and motivated.

The Group Director, Human Resources and Environment, Health and Safety (HR and EHS) acts as secretary to the Committee. The full terms of reference of the Committee are available on the company’s website in the Investor Relations / Corporate Governance section.

Activities of the MDRC

The Committee meets at least three times per year. The principal activities are set out in the terms of reference and the timetable for specific reviews and approval processes is set out below. In 2011/12 the committee met on four occasions.

Table of Remuneration Committee Activities

Meeting Annual agenda items Other agenda items
May Review of CEC and senior managers’ salary increases
Review of executive directors’ salary and bonus
Review of pay within the group
Approval of the Remuneration Report
May or July Approval of executive directors’ salary and bonus
Approval of LTIP allocation
Approval of LTIP vesting
Review of other senior managers’ salary increases and bonus payments
Chairman’s fees
(every three years)
November Management development and succession planning
Review of the share incentive plan
Update on remuneration issues
Review of remuneration policy
March Approval of bonus scheme rules
Review of the share incentive plan
Major review of structure of executive remuneration (every three years)

Johnson Matthey – Executive Remuneration Policy

Key Goals of Policy and Balance Between Fixed and Variable Remuneration

The key goal of the remuneration policy remains to obtain the best value for shareholders. This requires that the pay and benefits structure is competitive within the sector, whilst simultaneously providing stretching targets that require significant outperformance to maximise incentive payments.

Basic salaries are the primary element of remuneration and the general policy is to set basic salaries at the level required to retain and motivate, taking into account individual performance, the complexity and scale of the director’s duties, length of time in post and taking due cognisance of market levels in the appropriate sector. The Committee recognises that there is a competitive market for successful executives and therefore benchmark data are regarded as relevant background information. However, it is not the policy of the Committee to set salaries directly in line with that data, or in line with benchmarks mathematically derived from that data.

With regard to variable pay, the Committee believes that the provision of appropriate rewards for superior performance is vital to the continued growth of the business.

Further incentives in variable pay are therefore to be structured in a way that provides the incentives for effective short and long term management and creates the opportunity for enhanced remuneration but only for outstanding performance. The details of the structures devised for short term bonuses and long term incentives are described in the subsequent section of this Remuneration Report.

The Committee further considers the balance between fixed elements of remuneration, such as basic salaries, and the performance related aspects of the remuneration package and seeks to ensure that any earnings beyond basic salaries are fully reflected in increased shareholder value through higher profit and earnings per share.

It is also an element of the policy that executive directors are encouraged to build up over time, and hold, a shareholding in the company equal to at least their basic salary with a view to ensuring that their interests remain fully aligned with those of the shareholders. Details of directors’ shareholdings are set out below.

Global Pay and Employment Policies Across the Group

The remuneration policy of the group remains consistent in all countries and at all levels of the company with the overriding consideration being to pay competitive salaries in line with the appropriate country and sector and to provide opportunities to increase earnings to higher levels through superior performance. Almost all Johnson Matthey employees are able to earn bonuses based on business performance and around 900 employees are able to earn bonuses based on individual, team and business performance. Around 900 employees globally are eligible to participate in the Johnson Matthey Long Term Incentive Plan (LTIP).

Executive Pay in the Context of General Earnings Across the Group

In setting executive directors’ basic salaries, annual bonus awards and LTIP allocations, the Committee is made aware of comparative data relating to the pay and benefits of other group employees. International data provided by the Hay Group is also utilised in considering and determining local settlements.

Policy with Regard to Remuneration Advisers

In determining the remuneration structure, 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 PricewaterhouseCoopers LLP. PricewaterhouseCoopers LLP also provided expatriate tax advice and other tax advice, tax audit work, completion of overseas tax returns, advice on set up of new overseas operations, some overseas payroll services and a review of some financial controls.

A statement regarding the use of remuneration consultants for the year ended 31st March 2012 is available on the company’s website in the Investor Relations / Corporate Governance section.

The Committee also receives recommendations from the Chief Executive on the remuneration of those reporting to him as well as advice from the Group Director, HR and EHS.

This is the general remuneration policy of the Committee and the details of the exact remuneration structure are given in the subsequent section of this report.

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