Appendix 2
Remuneration in HBOS generally
Principal features

This section outlines the structure of remuneration in HBOS for the vast majority of colleagues. Each role in HBOS is positioned in one of ten Levels, 1-8, the HBOS Executive and the Executive Directors. The level of a role is determined by the knowledge required to do it, the challenge of delivering the required job outputs and the accountability which the role carries. The level then, in broad terms, determines the salary range which can apply for the role; the short term and long term incentive structures; and the range of benefit and product offerings available.

Details of the remuneration arrangements which apply to those in Level 8, to the HBOS Executive and to Executive Directors are given in the main body of the report.

The table below sets out the number of colleagues and full-time equivalents (‘FTE’) in other levels and the typical inter-quartile full-time equivalent salary range applying to colleagues in each such level. Different ranges apply to different groups of colleagues depending on role specialism and geographic location.

Level	Number of colleagues	Number of FTE colleagues	FTE salary range (£’000)
1	39,500	34,000	11.8-15.2
2	13,000	12,250	18.0-22.5
3	10,250	10,000	24.8-32.0
4	5,500	5,500	34.3-44.0
5	2,000	2,000	48.5-62.5
6	670	670	66.3-89.8
7	150	150	105.0-147.5

This data includes international colleagues but excludes joint venture company colleagues.

Remuneration is, for all colleagues, generally made up of four elements, namely salary, short term incentives, long term incentives and benefits. HBOS is increasingly seeking to adopt a “total reward” approach so that colleagues appreciate the totality, the flexibility and the performance drivers of their reward package.

Salary
HBOS salary policy is to manage salaries in aggregate, by Level, around the appropriate medians. Whilst finance sector generic medians establish baseline positions, businesses benchmark according to role specialism and to geographic location. The alignment of practice with policy is one we aspire to deliver by matching average salaries with the market median position, whilst managing actual salaries generally within an 80%-120% window of the median, reflecting personal skills, experience, performance and business vulnerability.

Short term Incentives
HBOS has annual incentives which are operating plan aligned, generally team based and built around line of sight issues. Participants know that these incentives give a real chance of a zero outcome and, equally, a real chance of a maximum outcome which, in cash terms, may be equivalent to 20% of salary, or more.

The cash incentive levels for 2005 are generally as follows:-

Level	Minimum	Incentive as percentage of salary Target	Maximum
1-4	0%	10%-12%	20%-30%
5	0%	17.5%	35%
6	0%	25%	50%
7	0%	32.5%	48.75%

Long term Incentives
Almost every colleague in HBOS enjoys three (for one Level, four) long term incentive propositions, each share-based.

Firstly, sharekicker. Colleagues who choose to buy shares with their net cash incentive get 50% more shares after three years provided they remain in the service of the Group or rank as a qualifying leaver.

Secondly, sharesave. Colleagues who choose to save up to £250 per month are given the option, at the end of three, five or seven years, to buy shares based on the share price at the start of the savings period, discounted by up to 20%.

Thirdly, share options/free shares. In 2002, 2003 and 2004, colleagues were given share options over 20% of salary; and these can be crystallised after a minimum of three and a maximum of six years. In 2005, share options will be replaced by free shares based on 5% of salary (maximum £3,000 p.a.); and these will crystallise after a minimum of three years.

Fourthly, share grants. Colleagues in Level 7 were given share grants over 33.33% of salary in 2002, 2003 and 2004. The same arrangements will apply in 2005. The level of grant released is conditional on relative TSR performance against a weighted finance sector basket, generally over a three year period with no grant released for performance which matches (or is worse than) the average and with twice the grant released for outperformance of 6% p.a. or more (intermediate positions being determined by interpolation).

Benefits
Our key benefits are pensions, holidays, cars, healthcare and mortgage arrangements. We increasingly seek to package them as an overall flexible benefits proposition and a comprehensive product offering.

Many existing colleagues have defined benefit pension arrangements. All new colleagues are eligible for defined contribution pension arrangements. Both include death and ill health benefits.