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

10.3.6 Free Share Plan

The free share plan is available to most Group colleagues.

The plan awards colleagues free shares on an annual basis. At the end of three years, shares are transferable to colleagues, subject to the participants still being in the Group’s employment at that time or earlier if they are a qualifying leaver. Shares must be held in trust for five years to qualify for full tax and National Insurance benefits. There are no performance conditions.

All Executive Directors have taken up membership of the plan and the projected number of shares which they would be entitled to at the end of the relevant period is set out below:

Table 9

Notes to Table 9

Note 1:

Shares were awarded at £9.10 and £9.74 in August 2005 and August 2006, respectively, the middle market prices of the Group’s ordinary shares on the days immediately preceding the dates of the awards.

Note 2:

Participants in this plan have an interest in dividends on the free shares (in the form of dividend shares) as and when they become due. Dividends were paid on 15 May 2006 and 9 October 2006 and were reinvested in shares. The closing market price of the Group’s ordinary shares on these dates were £9.45 and £10.83, respectively. Dividend reinvestment shares are required to be held for three years from the dates of payment.

Note 3:

On 21 February 2006, 333 shares were released from the trust on behalf of George Mitchell, who retired as an Executive Director on 31 December 2005. The closing market price of the Group’s ordinary shares on the date of release was £10.36. He has no remaining shares under the plan.

Note 4:

On 29 December 2006, 342 shares were released from the trust on behalf of Sir James Crosby, who retired as an Executive Director on 31 July 2006. The closing market price of the Group’s ordinary shares on the date of release was £11.32. He has no remaining shares under the plan.

Note 5:

Details of the market price of the Group’s ordinary shares during 2006 are given in Section 10.3.8.

10.3.7 Interest in Shares under Trusts

Certain Executive Directors, together with certain other colleagues, are deemed to have or have had an interest or a potential interest as potential discretionary beneficiaries under:

• the Group’s Employee Share Ownership Trusts. As such, they were each treated as at 31 December 2006 as being interested in the 5,405,010 ordinary shares (31 December 2005 – 276,879 ordinary shares) held by the trustees of these Trusts. The shares held in the Trusts will be used to satisfy share awards under short term and long term incentive plans. The relevant Executive Directors’ specific individual interests are shown in Tables 5a, 5b, 6a and 6b;
• the Group’s Qualifying Employee Share Ownership Trust. As such, they were each treated as at 31 December 2006 as being interested in the 1,697,350 ordinary shares (31 December 2005 – 3,167,458 ordinary shares) held by the trustee of this Trust. The shares held in the Trust will be used to satisfy entitlements of colleagues arising on the exercise of options under the Sharesave Plan. The relevant Executive Directors’ specific individual interests are shown in Table 8; and
• the Group’s Share Incentive Plan Trust. As such, they were each treated as at 31 December 2006 as being interested in the 12,964,303 ordinary shares (31 December 2005 – 7,129,501) held by the trustees of this Trust. The shares held in the Trust will be used to satisfy share awards under the Free Share Plan. The relevant Executive Directors’ specific individual interests are shown in Table 9.

All of the Group’s share plans empower new issue shares to be allotted to satisfy share requirements. The Group’s past practice has generally been to purchase shares in the market in relation to the plans described in Sections 10.3.2, 10.3.3 and 10.3.6 and to issue new shares in relation to the plans described in Sections 10.3.4 and 10.3.5 and the Group’s all-employee share option plan. This practice was reviewed in 2006, and as a consequence, purchased shares were also used to a large extent to satisfy awards in relation to the plan described in Section 10.3.5 and the Group’s all-employee share option plan. New issue shares were used to satisfy awards made under the plan described in Section 10.3.6. The method by which share plan requirements are satisfied will again be reviewed in 2007 and any changes to the 2006 practice will be set out in the Annual Report and Accounts 2007.

10.3.8 General

The closing market price of the Group’s ordinary shares at 31 December 2006 was £11.32. The closing market price of the Group’s ordinary shares at 31 December 2005 was £9.93. The range during the year was £8.95 to £11.37.

Save as disclosed in Section 10.3.5 of this Report, there has been no change in the Directors’ interests in shares or options granted by the Group between the end of the financial year and 27 February 2007, the date of approval of this Annual Report and Accounts.

10.3.9 Statutory Performance Graph

The following graph illustrates the Group’s TSR performance compared to that of a “broad equity market index” over 2002-2006. As HBOS has been a constituent of the FTSE 100 since inception and as performance against sector companies is illustrated in Chart 2, the Group believes that the FTSE 100 is a suitable comparator index to use for the purposes of this graph to satisfy regulatory requirements.

Signed on behalf of the Board of Directors

Sir Brian Ivory

Chair, Remuneration Committee
27 February 2007

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