Remuneration report.

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The following report by the Remuneration Committee has been approved by the Board for submission to the shareholders at the 2012 Annual General Meeting. Ernst & Young has audited the following items stipulated in law for their review:

The table of directors’ remuneration and associated footnotes
The tables of directors’ share options and share awards and associated footnotes.

Members of the Committee during the year are set out in the corporate governance statement. The Committee’s Terms of Reference are available from the Group’s website at www.aegisplc.com.

During the year, the Committee obtained ad-hoc advice on executive remuneration matters from independent remuneration consultants, Deloitte LLP. These services comprised the provision of market data benchmarks in relation to specific executive roles, updates on current market practice and trends and review of this report. In 2011 the Company’s auditors were changed from Deloitte to Ernst & Young and as a result the potential conflict between remuneration and audit services in previous years has been removed. The Committee also received advice where appropriate from the director of group human resources and the company secretary. No individual is involved in decisions relating to their own remuneration.

Remuneration policy /

The Group aims to balance the need to attract, motivate and retain high calibre talent with the need to be cost effective, reward exceptional performance and create shareholder value. The Committee reviews remuneration strategies and policies to balance these factors whilst also taking into account general macro-economic conditions impacting the Group, changes in business strategy, investor expectations and the wider compensation context of employees across the Group.

In 2010 the design of the annual cash bonus scheme was significantly changed to incorporate more demanding annual and year-on-year performance measures; enhanced controls to ensure equitable incremental profit share between management and shareholders; greater transparency to incentivise performance; and linkage of the share schemes to the annual bonus arrangements for senior managers. The priority in 2011 was to consolidate the implementation of these schemes and enhance delivery of a high performance culture.

The Committee reviews base salaries in the context of total remuneration and determines remuneration levels to be aligned with relevant market practice plus the experience, performance and retention value of the individual. It also assesses the ratio of fixed and performance-based remuneration with a view to strengthening the link between remuneration and performance, the mix of short and long term reward and the level of challenge of financial targets so that the higher levels of reward are focused on the high performing individuals.

Elements of remuneration /

Details on remuneration for each of the Executive Directors are included below, with some commentary on the three principal remuneration elements described below.

Harold Mitchell’s remuneration arrangement is specific to his circumstances. It is confined to base salary only on a 2 year fixed contract ending on 17 November 2012. As agreed in his contract he does not participate in the Group’s short or long-term incentive schemes.

Base salary and benefits /

Base salary and benefits are reviewed annually with reference to relevant market trends, the Company’s financial performance and the individual’s skill, experience and performance in order to provide a market competitive reward.

In 2011 the annual review cycle for all employee salaries and benefits was changed from January to July. This will be maintained in 2012. It is intended that salary changes for Executive Directors and senior managers will continue to be determined with respect to the general salary considerations of the whole Group and be informed by market changes.

The Executive Directors’ salaries remained unchanged in 2011, with the exception of Nick Priday whose salary was increased as part of a staged progression to an externally benchmarked competitive level. The Group’s senior leaders received an average increase of 3.5% (excluding significant changes in responsibility), compared to a 3% increase (excluding significant changes in responsibility) for employees.

A summary of the benefits payable to executive directors in 2011 is given below. These mainly comprise company car benefits or related allowances, pension arrangements and medical insurance benefits, to which directors are entitled pursuant to the terms of their service agreements with the Company.

Short term annual cash bonus incentives /

Executive directors are provided with an annual cash bonus opportunity to incentivise and reward performance against financial growth targets. The bonus scheme continues to have a maximum opportunity of 100% of annual salary and will remain the same for 2012.

The design of the scheme was maintained in 2011 to ensure continuing alignment of management and shareholders’ interests. Key performance targets were determined on an individual basis to relate to absolute increases in operating profit growth and improvements in operating margins. The Group continues to undergo substantial strategic changes including acquisitions, above market rates of organic growth, major client wins and a focus on media activities with the sale of the Synovate research business. In this situation the Remuneration Committee considers that flexibility to tailor short-term bonus constructs is necessary to help maintain performance and improve shareholder alignment.

Long-term share-based incentives /

The Committee keeps the Group’s long term incentive plan under regular review to ensure it remains appropriate in fulfilling its objectives and that the performance conditions continue to represent the best way to drive the creation of shareholder value.

In 2011 the Group continued to use the 2003 Performance Share Plan (PSP). The PSP is designed to comply with the requirements of institutional guidelines and corporate governance best practice, as well as to reflect the Committee’s remuneration policy. In any financial year, an executive is eligible to receive a conditional award of shares with a face value of no more than two times basic salary in normal circumstances. The Remuneration Committee has the discretion to approve an award of three times salary in special circumstances.

The performance conditions that apply to the 2011 PSP awards continue to be determined in equal parts by reference to the Company’s Total Shareholder Return (“TSR”) performance relative to a group of similar businesses and by reference to the Company’s underlying EPS growth.

The TSR targets remained the same in 2011, as follows:

TSR performance relative to peer group Proportion of award vesting
Median or below Nil
1st or 2nd 50%
For intermediate performance Nil to 50%
  (pro rata on a straight-line basis)

The companies included in the peer group for calculation of TSR performance remained the same in 2011, as follows:

The EPS performance condition was amended in 2011, as reported last year, and is as follows:–

Average annual EPS growth Proportion of award vesting
3% or less Nil
3% to 15% Nil to 50% (pro rata on a straight-line basis)
15% 50%

The EPS growth measurement method continues on a reported Total Group basis for performance years 2009 and 2010, and has been amended to a Retained Group basis for 2011 in view of the sale of Synovate in October 2011.

The annual review for the 2012 long term incentive plan has continued the 50% EPS and 50% TSR split of the performance condition. However it was concluded that the TSR peer group should be revised to take account of the Group’s withdrawal from market research activities and its specific focus on media.

The TSR peer group for awards granted in 2012 will concentrate on the key competitor global integrated agencies of:

As this is a relatively small peer group, the TSR vesting schedule has been amended from a position-based ranked approach to a pro-rata vesting on a straight line basis, in order to prevent small changes in relative performance having a disproportionate effect on vesting levels. The TSR vesting schedule for 2012 will be as follows:

TSR performance relative to peer group Proportion of award vesting
Median or below Nil
Equal to or above the upper decile TSR performance 50%
For intermediate performance Nil to 50%
  (pro rata on a straight-line basis)

The PSP performance conditions are tested on the third anniversary of grant of the award. There is no provision for retesting. To the extent that the performance conditions are not satisfied, the awards lapse.

The Committee believes that using both EPS growth and TSR for awards under the PSP provides a balanced incentive between assessing the Group’s relative returns to shareholders and its underlying financial performance. The blend also provides a balanced long-term incentive for the Group’s executives.

No awards will be made under previously closed schemes, although awards granted in the past will continue to be exercisable in accordance with the rules of each respective scheme. The closed schemes are the 1995 Executive Share Option Scheme and the 2003 Executive Share Option Scheme. Details of these schemes are given below. Details of all share incentive awards outstanding for each executive director serving during 2011 are set out below.

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