Report of the Board in relation to remuneration policy and practice
continued

10.3.3 Long Term Incentive Plan and Special Long Term Bonus Plan – HBOS Executive Directors and Chairman

Details of the shares which have been conditionally awarded to Executive Directors and the Chairman under the plans are set out below. The performance conditions relating to these conditional awards are set out in the notes below the table.

Table 6a

Notes to Table 6a

Note 1:

Note 2:

The first grant effective from January 2006 for Benny Higgins over 128,008 shares, was necessary to facilitate his recruitment in May 2006 and partially reflects value foregone from his previous employment. This special grant level was at 200% of his salary. The normal grant level would have been 66.67% of his salary. The grant is otherwise subject to the same performance conditions as apply to other Executive Directors.

The second grant effective from May 2006 for Benny Higgins over 30,425 shares having a value of £300,000 was necessary to facilitate his recruitment in May 2006 and partially reflects value foregone from his previous employment. This award will vest in May 2009, subject to his continued employment, and is not subject to any performance conditions.

Note 3:

Certain former Executive Directors retain interests under the plan. Details of these interests are set out below.

Table 6b

These remain subject to the same plan rules as apply to existing Executive Directors and the Notes apply in like manner.

Note 4:

Awards are not pensionable.

Note 5:

The performance period for the January 2003 grant ended on 31 December 2005. HBOS’s TSR over the performance period exceeded the weighted average of the comparator group by 5.49% p.a. so 183% of share grants were released to grant recipients. The shares granted in January 2003 vested on 3 March 2006. The closing market price of the Group’s ordinary shares on that date was £9.895. In addition, dividend reinvestment shares have been released to grant recipients as set out in the table and as provided for under the rules of the plans. The dividend reinvestment shares are the additional shares which would have accrued on the overall share grants actually released had dividends due during the performance period been reinvested in shares.

Note 6:

As explained in last year’s report, for the 2003 grants, all participants could choose to take any shares released after three years based on the three year performance outcome or could continue to participate in the plan for a further two years and take shares at that point based on the better of the three year and the five year performance outcomes. This design feature sought to motivate participants continually to sustain strong performance or to improve lesser performance for their benefit and the benefit of shareholders. This feature does not apply for the 2004 grants and does not apply for any grants in subsequent years, to reflect the preference on “retesting” expressed by most major institutional investors. With the exception of Peter Cummings, all Executive Directors chose to take their 2003 grants in 2006 based on the three year performance outcome.

Note 7:

Subject to performance, the shares granted under the long term plan effective from January 2004 will be released to most individuals shortly after the three year anniversary of the grant date, in March 2007.

Note 8:

In the case of the Chairman, it is not possible to include him in the standard Long Term Incentive Plan. Nor is it possible to include him in such an arrangement where the grant is denominated in shares. He is therefore included as the sole participant in the Special Long Term Bonus Plan where the grants are awards of notional shares. He will become entitled to the cash value of any notional shares on vesting but has agreed that this value will, subject to any withholdings for income tax or National Insurance, be applied in acquiring HBOS shares on his behalf.

Note 9:

The number of shares to be released to participants is dependent on the Group’s TSR over a three year period, compared to the annualised weighted average TSR of a basket of comparator companies over an equivalent period. For the grant effective from January 2003, a five year period could also apply. This basket of companies comprises:

• for the January 2003 and 2004 grants: Abbey National, Aviva, Barclays, Legal & General, Lloyds TSB, Prudential, Royal & Sun Alliance and Royal Bank of Scotland, but with Abbey National replaced by Alliance & Leicester, Bradford & Bingley and Northern Rock with effect from 1 July 2004. The Committee decided to remove Abbey National from the comparator group, in respect of the January 2003 and 2004 grants, effective from the end of June 2004 (immediately before bid activity started); and replace it with Alliance & Leicester, Bradford & Bingley and Northern Rock effective from the start of July 2004;
• for the January 2005 and subsequent grants: Alliance & Leicester, Aviva, Barclays, Bradford & Bingley, Legal & General, Lloyds TSB, Northern Rock, Prudential, Royal & Sun Alliance and Royal Bank of Scotland.

Intermediate positions are determined by interpolation.
* Shown as granted in Tables 6a and 6b.

Note 10:

The performance period for the January 2004 grant ended on 31 December 2006. HBOS’s TSR over the performance period exceeded the weighted average of the comparator group by 3.40% p.a., so 113.33% of share grants will be released to grant recipients in March 2007.

In addition, dividend reinvestment shares will be released to grant recipients as provided for under the rules of the plans. The dividend reinvestment shares are the additional shares which would have accrued on the overall share grants actually released had dividends due during the performance period been reinvested in shares.

Full details concerning these shares, which will be released to the Chairman and the Executive Directors in March 2007, will be set out in the 2007 Annual Report and Accounts.

The performance period for the January 2005 grants does not end until 31 December 2007. So far, HBOS’s TSR over the two year elapsed period exceeds the weighted average of the comparator group by 6.26%.

The performance period for the January 2006 grants does not end until 31 December 2008. So far, HBOS’s TSR over the one year elapsed period falls short of the weighted average of the comparator group by 3.17%.

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