1. What this report covers
This report to shareholders:

• sets out our remuneration policy;
• explains the policy under which our Chairman, our Executive Directors, the next two most senior groups of colleagues and our Non-executive Directors were remunerated for the year ended 31 December 2004; and
• sets out tables of information showing details of the salary, incentive, share and pension interests of all the Directors for the year ended 31 December 2004.

 2. Compliance with regulations
This report has been approved by the Board. A resolution will be put to shareholders at the Annual General Meeting inviting them to consider and approve this report, as required by the Directors’ Remuneration Report Regulations 2002 (the “Regulations”) as now incorporated in the Companies Act 1985.

The report complies with the requirements of the Regulations.

As required by the Regulations, Section 13 of this report has been audited by KPMG Audit Plc, with the exception of Section 13.3.1 (Shares), Note 8 to Table 6 within Section 13.3.3 (TSR performance 2002-2004), Section 13.3.6 (Interest in Shares under Trusts) and Section 13.3.8 (Statutory Performance Graph), which do not fall to be audited.

 3. Role of the Remuneration Committee
The Remuneration Committee (the “Committee”) is a committee of the Board. Your Board believes that a properly constituted and effective Committee is key to ensuring that Executive Directors’ and other colleagues’ remuneration is aligned with shareholders’ interests and that it motivates Executive Directors and other colleagues to enhance the absolute performance and the relative competitiveness of the Group. The Committee’s terms of reference are summarised in Appendix 1.

 4. Membership of the Remuneration Committee
The members of the Committee during 2004 were all independent Non-executive Directors, as shown below:

Brian Ivory (Chairman)
Sir Ronald Garrick
Coline McConville
Philip Yea (until 30 June 2004)

At the invitation of the Chairman of the Committee, the Group’s Chairman and the Chief Executive attend Committee meetings to provide background and context on matters relating to the remuneration of the other Executive Directors and other colleagues in the Group, but do not attend when their own remuneration or contractual terms are discussed. No Director is involved in determining his or her own remuneration or contractual terms.

During 2004, the Committee met on seven occasions and the attendance of Committee members is as shown below:

Brian Ivory (Chairman) – seven meetings
Sir Ronald Garrick – seven meetings
Coline McConville – seven meetings
Philip Yea – four meetings (of a possible four meetings)

This frequency of meetings enables the Committee regularly to review, for Executive Directors and other senior colleagues, overall reward and the components thereof, in relation to the absolute performance and the relative competitiveness of the Group.

The performance of the Committee is evaluated as part of the overall evaluation of the performance of each Non-executive Director, as set out in the Corporate Governance Report on pages 56-58.

5. Advisors to the Remuneration Committee
During 2004, Ian Goodwin, an internal reward consultant, acted as Secretary to the Committee and provided advice to it. Harry Baines, the Company Secretary, also provided advice to the Committee. In addition, the Committee sought independent external advice on remuneration matters. The Committee does not retain advisors but uses organisations best suited to undertake specific projects from time to time. During 2004, the Committee took advice, directly or indirectly, from:

• Watson Wyatt LLP, in relation to pension issues; this organisation also advises the Group and the trustees of various Group pension plans on a range of pension issues;
• Hay Group, Towers Perrin and Watson Wyatt LLP, in relation to remuneration issues; these organisations also advise the Group on a range of remuneration issues;
• New Bridge Street Consultants LLP, in relation to various policy issues and in relation to the preparation of this report; this organisation also provides general advice to the Group on remuneration issues and independent performance measurement results for grants under the long term incentive plan which applies to most senior colleagues; and
• Linklaters, in relation to various policy issues and in relation to the preparation of this report; this organisation also provides legal advice to the Group on remuneration and other issues.

In the opinion of the Committee, there were no conflicts of interest during 2004 in relation to these organisations advising both the Group and the Committee.

6. Compliance with the Combined Code
Full details of the Group’s approach to Corporate Governance, including compliance with original and revised versions of the Combined Code, are included in the Corporate Governance Report on page 55.

The Board has followed and complied with both the original and the revised versions of the Combined Code as well as the Regulations in preparing this Report and in designing performance-related incentive plans for senior colleagues.

7. Service contracts
The arrangements relating to the provision of the services of the Chairman of the Group are covered by a contract which extends to 30 June 2005. If the contract is terminated by the Group prior to the expiry of the term, contractual compensation equivalent to the balance of the fees payable during the balance of the term (subject to a maximum compensation equivalent to one year’s fees) may, in certain circumstances, be payable. As announced on 28 February 2005, the Group has invited Dennis Stevenson to serve a further term as Chairman following the expiry of his current appointment on 30 June 2005. He has accepted that invitation and, subject to his re-election being approved by shareholders at the 2005 AGM, will therefore serve as Chairman for a further three years commencing on 1 July 2005.

All the Executive Directors have rolling service contracts which can be terminated by the Group on one year’s notice or by the Director on six months’ notice. If any contract is terminated by the Group prior to the expiry of the term, contractual compensation up to the equivalent of one year’s basic salary may, in certain circumstances, be payable. There is no contractual compensation entitlement for any of the Directors beyond this. Executive Directors are expected to make reasonable efforts to mitigate for any loss arising from early termination of their contracts.

It is the Committee’s policy to design service contracts for any newly recruited Executive Directors in a comparable form to the contracts of existing Executive Directors.

Non-executive Directors are appointed by letter for an initial term of three years with an expectation that in most cases, and subject to satisfactory performance, they will be invited to serve a second three-year term. In exceptional circumstances, where the Board is satisfied that it is in the interests of the Group and its shareholders, a Non-executive Director may be asked to serve a third three-year term. Notwithstanding these three yearly terms, appointments of Non-executive Directors can be terminated on one month’s written notice given either by the individual Director or by the Group.

8. External appointments
The Group recognises that Executive Directors may be invited to become non-executive directors of other companies and that such appointments can broaden their knowledge and experience, to the benefit of the Group. Provided that it does not impact materially on their executive duties, Executive Directors are generally encouraged to accept one such appointment. They may retain any resulting fee. In certain circumstances, two such appointments may be permitted. The fees payable in respect of any second appointments will be donated to charity.

9. Share ownership
The Group believes that share ownership by colleagues throughout the Group enhances their alignment with shareholders’ interests. Therefore colleagues in the Group are able to acquire shares as a result of:

• the sharesave plan;
• short term incentive plans. All colleagues can opt to take the whole or part of their annual incentive in shares rather than in cash. Those who take their annual incentive in shares, retain them for three years and remain with the Group for that period (or rank as qualifying leavers) receive a 50% enhancement of such shareholding (this facility is termed “sharekicker”);
• long term incentive plans. Share grants of varying percentages of salaries were made to senior colleagues (about 160 in all) effective from the start of 2004. Share options equivalent to 20% of salary were made to all Group colleagues, other than the most senior colleagues (about 50 in all), early in 2004; and
• personal purchase using the Group’s, or other, sharedealing facilities.

These arrangements assist colleagues throughout the Group to acquire shares. They form a key element of the Group’s commitment to creating a competitive, flexible and performance-oriented reward structure.

The Group requires all of its Directors (including the Chairman and the Non-executive Directors), together with other senior colleagues, to acquire and retain significant numbers of shares relative to base salaries or fees. In the case of each Director the value of the shareholding is required to be at least 100% of base salary or base fee within three years of appointment or, based on average personal shareholdings, by 2006, whichever is the later.