Directors’ Remuneration Report

Chairman’s statement

I am pleased to present the first Home Retail Group report on directors’ remuneration.

The last year has been both exciting and challenging with Home Retail Group being created from the GUS demerger in October 2006. Prior to this date, the demerger remuneration arrangements and a remuneration policy for the future were approved by GUS shareholders.

This policy for the newly formed company is competitive and has a significant proportion of the reward package based on performance-related elements along with appropriate and stretching performance conditions.

In writing this report the remuneration committee has adopted the principles of good governance relating to directors’ remuneration as set out in the Combined Code. The report complies with the Companies Act 1985, amended by the Directors’ Remuneration Report Regulations 2002 and the Listing Rules of the Financial Services Authority. The report has been prepared by the remuneration committee on behalf of the Board.

Committee details

Role and membership

The remuneration committee is a committee of the Board. The members of the committee are:

Andy Hornby (Chairman)
John Coombe
Oliver Stocken (from 14 November 2006)
Penny Hughes (from 11 December 2006)

Andy Hornby and John Coombe were appointed to the remuneration committee on 5 July 2006, the date they were appointed to the Home Retail Group Board.

The remuneration committee is responsible for making recommendations to the Board on the Group’s policy on the remuneration of the Operating Board and specific remuneration packages for each of the executive directors and the members of the Operating Board, including pension rights and any compensation payments.

The remuneration of the non-executive directors and the chairman is reserved for consideration by the Board as a whole. No director is involved in any discussions about his or her own remuneration.

The committee met on five occasions during the year. Attendance at these meetings is set out in the Corporate Governance statement.

Advisers

At the invitation of the chairman of the committee, the chief executive, Terry Duddy, attended meetings to give background information on remuneration matters.

During the year, the committee was advised by Linklaters on legal matters and Towers Perrin on matters relating to performance conditions for long term incentive plans, executive remuneration issues and to provide salary survey data. Towers Perrin did not provide Home Retail Group with any other services. Linklaters also provide corporate legal advice to Home Retail Group.

In addition, Watson Wyatt provided information on retirement benefits.

The committee was also advised by Mike Sibbald, group human resources director, and the secretary to the committee was Gordon Bentley, company secretary.

The terms of reference of the committee can be found on the Company website www.homeretailgroup.com.

Company policy statement

The current remuneration policy was determined in advance of the demerger from GUS and was disclosed in the shareholder circular dated 26 July 2006.

The objective of Home Retail Group is to perform consistently in the upper quartile of the general retail sector. The purpose of the remuneration strategy is to support this corporate objective through a structure which reflects not only the progress of the Home Retail Group share price but also its relative performance against other retailers.

Home Retail Group operates in a competitive environment which continues to be influenced by private equity funds (which have been particularly active in the retail sector) offering significant investment and employment opportunities. Home Retail Group has therefore adopted an incentive structure of:

• setting base salary at median
  
  
• supporting upper quartile performance through annual participation in performance share plans and the opportunity for voluntary deferral of annual bonus to participate in a co-investment plan
  
  
• increasing the proportion of variable pay with seniority

The reward strategy will continue to be reviewed to enable Home Retail Group to recruit, retain and motivate employees. In addition, employees will be encouraged to participate in Home Retail Group as shareholders through all-employee share plans.

Elements of remuneration

The remuneration package is weighted toward the performance-related variable elements with more than 50% of the total potential proportion of pay (excluding pensions and benefits) being performance-related.

The elements of the executive remuneration package are detailed below, each supporting the overall objectives of the remuneration policy.

External consultants will be used to calculate whether and the extent to which such performance conditions have been met. The methodology for this will be disclosed at the appropriate time.

Base salary and benefits

Salaries are reviewed annually and adjustments are made to reflect external market movements and individual performance. A benchmarking process is undertaken using external consultants to provide data about market salary levels. In addition, executive directors receive other benefits including a car or car cash alternative, private health cover, pension and life insurance. All are offered in line with competitive practice. The only element of the package that is pensionable is base pay.

Annual bonus

To reward annual performance, executive directors are eligible for an annual incentive with a nil payment at the agreed target for the relevant year and a maximum of 150% of base salary for substantially exceeding the target. The remuneration committee sets annual bonus targets by reference to the Board-approved budget and external expectations of financial results. Bonuses for the financial year 2007/08 are based on growth in benchmark profit before tax.

Co-investment plan

Executive directors are given the opportunity to defer receipt of their bonus and invest it in shares under the co-investment plan to reward sustained business performance. As previously disclosed, in respect of the bonus awarded for the period to 3 March 2007, the rules of the GUS co-investment plan will apply; thereafter the rules of the Home Retail Group co-investment plan (detailed below) will apply.

The receipt of matching shares is subject to the satisfaction of a performance condition measured over a three-year period, the retention of invested shares and continued employment.

The performance condition and matching ratio will be set by the remuneration committee in early 2008 at a time when the three year business plan for the period over which the Home Retail Group co-investment plan will first operate has been agreed by the Board and will be sufficiently stretching to drive sustained Company performance.

The number of shares acquired on behalf of the executive director is matched on a sliding scale and will vary from a ratio of zero to one (0:1), to a maximum ratio of two to one (2:1) where targets are substantially exceeded.

Dividend equivalent payments will be made on matching awards at the time of vesting. If an executive director resigns during the three-year period, they will forfeit the right to the matching shares and any associated dividends. If an executive director leaves due to redundancy or retirement during the three-year period, the matching shares are subject to the performance condition at the end of the measurement period being met and are time pro-rated.

Performance share plan

The performance share plan gives executive directors the right to acquire shares after a three-year vesting period at no cost, subject to the satisfaction of certain conditions and continued employment. It underpins the longer term incentive structure by providing a share-based reward which vests only when Home Retail Group outperforms its peers. Under the current remuneration policy, performance under this plan is assessed in terms of three year weighted total shareholder return (TSR) in relation to the following peer group of companies who operate in the general retail sector.

None of the awards vest if the Home Retail Group’s total shareholder return is below the median return for the comparator group. Once Home Retail Group achieves median performance, 25% of the award may vest, while 100% of the award may be earned for a return at the 81st percentile or better.

The maximum grant normally available to executive directors is 100% of salary, converted to shares at the price prevailing at the time the awards are made. In exceptional circumstances the remuneration committee has discretion to grant a higher amount. The awards vest, to the extent that the performance tests are met, after three years. Dividend equivalent payments will be made after vesting in respect of the relevant three-year period. If an executive director resigns during the three-year period, the award lapses at the date of termination. If an executive director is made redundant or retires during the three-year period the award is subject to the performance condition being met at the end of the measurement period and is then time pro-rated.

All-employee share plans

Home Retail Group encourages all employees to become shareholders through the operation of all-employee plans. In 2006, as part of the demerger, all employees, including executive directors were offered £200 worth of shares in a one-off free share grant under an HMRC approved Share Incentive Plan, with some 30,000 employess taking up the share grant.

During 2007 Home Retail Group will also invite employees, including executive directors, to participate in a Sharesave plan approved by HMRC. Employees will be invited to apply for options to acquire Home Retail Group shares. The number of shares over which the option is granted is determined by the amount which the employee commits to save under a savings contract. The option price will be 80% of the market value of a Home Retail Group share calculated as the average price over the three previous business days before the date of invitation. Employees can elect for a savings contract to run over a period of three or five-years with a maximum saving of £250 per month. Options will be exercisable during six months after the end of a savings contract.

Non-executive directors

The Home Retail Group policy on non-executive directors remuneration is as follows:

• remuneration should be in line with recognised best practice and sufficient to attract and retain high calibre non-executive directors
  
  
• remuneration should be set by reference to the responsibilities undertaken by the non-executive director, taking into account that each director is expected to be a member of the audit, remuneration and nomination committees
  
  
• remuneration should be a combination of cash fees paid monthly and Home Retail Group shares, issued twice each year
  
  
• non-executive directors are obliged to retain shares awarded until retirement from the Board. Any tax liability connected to these arrangements is the responsibility of the individual director
  
  
• non-executive directors should not participate in share plans operated by Home Retail Group
  
  
• non-executive directors should not receive any benefits in kind

The fees of non-executive directors are reviewed every two years, with the next review in 2009. The review is based on market practice of FTSE 100 companies, anticipated number of days worked and responsibilities. The remuneration with effect from 1 April 2007 is as follows:

Demerger background

Until 11 October 2006, Home Retail Group (formerly ARG) was part of the GUS Group. At that time, GUS demerged its two businesses, ARG (now Home Retail Group) and Experian.

As a result of the demerger, a number of outstanding options and awards granted under the GUS share plans either vested early or rolled over into equivalent options and awards over Home Retail Group shares (either on a voluntary or compulsory basis).

The impact of the demerger on outstanding options and awards over GUS shares was detailed in the shareholder circular dated 26 July 2006, and is summarised below:

Share options

GUS operated executive share option schemes (“ESOS”). Non-approved options granted under the GUS ESOS in 2005 and 2006 were subject to compulsory rollover at the time of the demerger. All options granted in 2004 and approved options granted in 2005 were eligible for voluntary rollover at that time. Where options were subject to performance conditions, the rolled over options are subject to equivalent performance conditions. All options granted prior to 2004 vested as normal prior to the demerger.

Co-investment plan

Under the GUS co-investment plan, the executive directors had the opportunity to invest some or all of their annual bonus in GUS shares (“invested shares”), which were held on their behalf by a trustee. At the same time, they were granted a matching nil-cost share option (“matching share option”) over an additional number of GUS shares. In normal circumstances, matching share options became exercisable after three years subject to continued employment and retention of the invested shares, and the right to the matching shares was forfeited if a director resigned.

In accordance with the rules of the GUS co-investment plan, the executive directors had been invited to participate in the GUS co-investment plan in respect of bonuses payable for the period to 3 March 2007. Awards will be made in June 2007 and will be over Home Retail Group shares, but will otherwise be on the terms of the GUS co-investment plan.

Matching share options granted in 2006 were subject to compulsory rollover at the time of the demerger. Awards made to the executive directors in 2004 and 2005 were eligible for reinvestment in a one-off Home Retail Group re-investment plan, which is described further below.

Performance share plan

Awards under the GUS performance share plan were made in the form of a conditional right to acquire shares after a three-year vesting period, at no cost to the participant. Awards granted in 2005 and 2006 were subject to compulsory rollover at the time of demerger and will vest in accordance with the GUS performance share plan rules. The performance condition for awards granted in 2005 is based on the TSR of GUS against a comparator group for the period from date of grant to the demerger, and the TSR of Home Retail Group against a comparator group from the demerger to the normal vesting date. The performance condition for awards granted in 2006 is based on the TSR of Home Retail Group against its comparator group from the date of demerger to the normal vesting date, a slightly shortened period.

Savings-related share option scheme ("SAYE")

All unvested GUS SAYE options vested early at the time of the demerger.

Rollover

Where options/awards were subject to rollover, the formula below was used:

Where:

x = the volume-weighted average price of a GUS share on 6 October 2006 (995.118p)
y = the average mid-market closing price of a Home Retail Group share on 11-13 October 2006 (417.17p)
A = the number of GUS shares under option
B = the exercise price per share of an option over GUS shares

Summary

The table below summarises the impact of the demerger on each of the GUS share plans:

Performance graph

The graph below compares the total shareholder return for Home Retail Group against the FTSE 100 Index for the period from demerger to the period ended 3 March 2007. The directors feel that the FTSE 100 Index is the most appropriate index against which TSR should be measured as it is a widely used and understood index of leading UK companies. The graph has been prepared in accordance with the assumptions contained in the relevant legislation.

The following sections are audited – directors’ remuneration, share options, long term incentive plans and retirement benefits

Directors' remuneration

The remuneration of the directors is for the 11 month period 1 April 2006 to 3 March 2007 and therefore includes the period before Home Retail Group was listed. From 11 October 2006 (the date of demerger) the annual salary of Terry Duddy was £800,000 and that of Richard Ashton was £390,000.

Share Options

GUS share options

The following options over GUS shares, granted under the GUS executive option scheme, were exercised during the year.

Home Retail Group share options

Following the demerger, Home Retail Group granted the following rolled over options over its shares, which are governed by the rules of the GUS executive share option scheme.

GUS SAYE

The following SAYE options over GUS shares, granted under the GUS savings-related share option scheme, vested during the period ended 3 March 2007.

Note 1 – Due to the demerger, all unvested SAYE options vested early on the date of court sanction, 4 October 2006 with an expiry date of 3 January 2007.
Note 2 – Due to the demerger, Richard Ashton’s SAYE vested early to the extent of his savings at the date of exercise and as a result 569 options lapsed.
Note 3 – Oliver Stocken has not participated in any share plans since the 2001 SAYE.

Details of the market price of Home Retail Group shares from the date of the demerger to 3 March 2007 are shown in the table below.

Details of the market price of GUS shares from 1 April 2006 to the date of demerger are shown in the table below.

Long term incentive plans

Performance share plan

Awards to current directors under the plans are as follows:

GUS performance share plan

The following awards over GUS shares, granted under the GUS performance share plan, vested during the period ended 3 March 2007.

Note 1 – Includes normal vesting of 2003 awards and early vesting of 2004 awards due to the court sanction of the demerger on 4 October 2006.

Home Retail Group performance share plan

Following the demerger, Home Retail Group granted rolled over awards over its shares, which are governed by the rules of the GUS performance share plan, and also granted awards under the Home Retail Group performance share plan. All of these awards are included in the table below.

Note 1 – The rollover formula is detailed in the demerger background section.

Co-investment plan and reinvestment plan

Home Retail Group shares held on behalf of participants under the GUS co-investment plan and reinvested shares granted under the Home Retail Group reinvestment plan are included in the tables below and in the table of directors’ interests.

GUS co-investment plan

The effect of the demerger on outstanding invested shares and matching share options is explained in the demerger section. The following awards, granted under the GUS co-investment plan, vested during the year.

Note 1 – These matching share options remained exercisable until 4 April 2007.

Home Retail Group co-investment plan

For the year ending 31 March 2006 Terry Duddy participated in the GUS annual bonus scheme and received a bonus of £305,000 and he chose to invest the whole of this bonus. Richard Ashton participated in the ARG annual bonus scheme and did not receive a bonus and therefore did not participate in the plan.

Following the demerger, Home Retail Group granted rolled over awards over its shares, which are governed by the rules of the GUS co-investment plan.

Note 1 – the 2006 awards were subject to compulsory rollover and the share price on date of award is the rollover share price.

For the period ended 3 March 2007 Terry Duddy will receive a bonus of £744,000 and Richard Ashton will receive a bonus of £362,700. If invested in Home Retail Group shares, a corresponding matching award will be granted under the GUS co-investment plan as explained above. The bonus payment for the period ended 3 March 2007 is 93% of salary based on a shortened 11-month period due to the change of year-end, which is equivalent to a payment of 100% for a full 12 month year. The matching ratio will therefore be applied on the basis of 2:1.

Home Retail Group re-investment plan

A one-off plan was offered to executive directors at the time of demerger where 2004 and 2005 invested and matching shares were re-invested into a new plan.

The receipt of the matching award is subject to the satisfaction of performance conditions, the retention of reinvested awards and continued employment. This one-off plan granted a matching award of Home Retail Group shares if participants agreed to re-invest the invested shares and/or matching awards from the 2004 and 2005 operation of the GUS co-investment plan. The matching award is calculated on the basis of two Home Retail Group shares for each Home Retail Group share reinvestment by the participant.

The first 50% of a matching award will vest subject to satisfaction of performance conditions. Half of this part of the matching award will vest according to the performance of Home Retail Group’s total shareholder return relative to a group of comparator companies. None of this part of the award will vest if Home Retail Group’s TSR is below median for the comparator group, 25% will vest at median rising on a straight line basis to 100% of this part of the award vesting for performance at the 81st percentile or better. The other half of this part of the matching award will be subject to a return on invested capital measure. This first 50% of the matching award will vest in two equal tranches on the fourth and fifth anniversaries of the grant.

The remaining 50% of the matching award is time-based and will vest on the third anniversary of the grant.

Retirement Benefits

Terry Duddy

Prior to 1 April 2006, Terry Duddy was a member of the pension scheme which will provide him on retirement at age 60 with a pension in line with pre–6 April 2006 HM Revenue & Customs limits, with pensionable salary limited to the pension earnings cap. Terry Duddy previously elected to have paid to him a cash sum for investment at his own discretion, which ceased from April 2006. The amount paid in 2006 was £278,024.

From April 2006, Terry Duddy has elected to join the Home Retail Group secured unfunded retirement benefits scheme and will receive on retirement at age 60 a pension of one–thirtieth of full pensionable salary for each year of service. The pension figures in the table below reflect both his funded and unfunded entitlements.

Richard Ashton

Richard Ashton is a member of the pension scheme which will provide him on retirement at age 60 with a pension of up to two thirds of the pension earnings cap subject to HM Revenue & Customs limits. In addition, to provide benefits in excess of the pensions earnings cap, Richard Ashton elected to have paid to him a cash sum for investment at his own discretion, which ceased from April 2006. The amount paid in 2006 was £305,469.

From April 2006, Richard Ashton remains a member of the pension scheme with pensionable salary limited to the pension earnings cap. For benefits in excess of the pension earnings cap, he has joined the Home Retail Group secured unfunded retirement benefit scheme from April 2006. The pension figures below reflect both his funded and unfunded entitlements

The table set out below provides the disclosure of directors’ pension entitlements in respect of benefits from tax-exempt schemes and unfunded arrangements:

Service Contracts

Both Terry Duddy and Richard Ashton were appointed as executive directors on 5 July 2006.

Terry Duddy

Terry Duddy has a service contract dated 27 July 1999, which provides for twelve months notice on the part of the Group and six months by the executive. The contract ends automatically when Mr Duddy reaches the normal retirement age of 60.

Under the terms of the contract, the Group reserves the option, in its absolute discretion, to terminate the executive’s employment by paying in lieu of notice.

Richard Ashton

Richard Ashton has a service contract dated 1 March 2005, which provides for twelve months notice on the part of the Group and six months by the executive. The contract ends automatically when Mr Ashton reaches the normal retirement age of 60.

No directors’ service contracts provide for extended notice periods or compensation in the event of a change of control.

Chairman and non-executive directors

The agreements for the non-executive directors can be terminated without compensation and with one months notice other than the chairman who has a notice period of three months. Non-executive directors are appointed for a specific term of three years and the appointment reviewed at the end of the three-year term.

By order of the Board
Andy Hornby
Chairman – Remuneration Committee

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