Directors’ remuneration report

Base salary and benefits

We review salaries annually and make adjustments to reflect movements in the employment market, the general economic environment and individual performance. In line with competitive practice, executive directors receive additional benefits that include a car or cash alternative, private health cover, pension and life insurance. Only their base salary is pensionable.

Annual bonus

Executive directors are eligible for an annual bonus. The remuneration committee sets targets by reference to Board-approved budgets. Bonuses for 2008/09 will comprise a payment of 25% of bonus opportunity for achieving an agreed benchmark profit before tax (PBT) figure for the relevant year, equating to 37.5% of base salary and a maximum of 100% of bonus opportunity, equating to 150% of base salary, for substantially exceeding targets.

In the period under review, 2007/08, the bonus achieved was 77% of opportunity for executive directors.

Co-investment plan

Executive directors can choose to defer receipt of part or all of their annual bonus and invest it instead in shares (‘invested shares’) under the terms of the co-investment plan, which is designed to reward sustained business performance. Additional shares (‘matching shares’) are granted (on a maximum 2:1 basis) subject to the satisfaction of performance measures (detailed below). In addition, the matching shares are subject to the retention of the invested shares and continued employment.

During the period under review, performance measures were set which were aligned to our three-year business plan. The two performance measures are earnings per share (EPS) as to 50% of the matching shares and return on invested capital (ROIC) as to the other 50%, both of which are calculated over a three-year period. If total EPS growth of 10% or above is achieved, matching shares vest as to one half of the 50% that is subject to EPS, which increases to full vesting of that 50% when EPS growth reaches 25% or more for the period. The ROIC measure is based on an increase over the performance period which, if achieved, matching shares vest as to one half of the 50% that is subject to ROIC, increasing to full vesting of that 50% at the maximum.

Performance share plan

The performance share plan gives executive directors the right to receive shares in the Company subject to the satisfaction of certain conditions and their continued employment. This plan underpins our longer-term incentive structure by providing a share-based reward which vests only when we outperform our peer group.

We use the measure of total shareholder return (TSR) to assess our performance against the following peer group of companies over a three-year period. The peer group is weighted to attach greater importance to companies that are closer comparators to Home Retail Group.

No awards vest if TSR is below the median return for the peer group. Once median performance is achieved, 25% of the award will vest, with 100% of the award vesting for performance at the 80th percentile, subject to rounding to take account of the weighting.

The maximum grant normally available to executive directors is 100% of base salary, converted to shares at the price prevailing at the time the awards are made. Grants were made at this level in 2007. In exceptional circumstances, the remuneration committee may choose to grant a higher amount.

The awards vest to the extent that the performance test is achieved over a three-year period. TSR calculations are made by external advisers using the average share price over the three months before the start and end of the performance period.