10.4 Long Term Incentive Plans
Participants are granted conditional shares shortly after the start of the financial year equal to the number of shares secured by a percentage of the participant’s salary and based on the price of the Group’s shares, using the average market price in the last ten business days of the previous financial year. For awards in 2005, grant levels will be as follows:

Category	Conditional share grant as a % of salary
Executive Directors	100
HBOS Executive	66.67
Level 8	66.67

The number of shares ultimately released to participants under the plan is dependent on the Group’s annualised Total Shareholder Return (‘TSR’) (defined as the gross overall return on ordinary shares of HBOS after all adjustments for capital actions and re-investment of dividends or other income) over three year periods, compared to the annualised weighted average TSR of a basket of comparator companies: Alliance & Leicester, Aviva, Barclays, Bradford & Bingley, Legal & General, Lloyds TSB, Northern Rock, Prudential, Royal Bank of Scotland and Royal & Sun Alliance, over equivalent periods.

For awards in 2005, any releases early in 2008 will be as follows:

Group’s relative TSR performance	Amount released as a % of share grant
0% p.a. (or below)	0
+3% p.a.	100
+6% p.a. (or above)	200

Intermediate positions will be determined by interpolation.

If the relative TSR performance does not exceed 0% p.a. after three years, the conditional share grant lapses. There is no retest in this or any other circumstance.

The Committee believes that TSR is an appropriate performance measure because it is a robust and transparent measure of the creation of shareholder value; that a relative measure is more motivational and competitively appropriate than an absolute one; and that a weighted average group made up of the biggest domestic banking and insurance companies is the most valid comparator and gives a more effective performance test than a traditional ranking-based league table.

Calculations of TSR performance are performed independently of the Group by New Bridge Street Consultants LLP for the purposes of determining outcomes under the plan.

If the weighted average TSR of the comparator companies is at least 0% p.a., HBOS shareholders will enjoy additional return equivalent to at least £6.36bn over 2005-2007 for share grant participants in 2005 to enjoy maximum releases early in 2008. The estimated face value of conditional share grants for 2005 is about £17.1m in respect of about 200 participants. Maximum releases would amount to about £34.2m plus share growth plus dividends.

The Executive Directors and colleagues who are in the HBOS Executive or Level 8 have never been granted share options with HBOS and will not be granted share options in 2005. There are no plans to grant share options to these individuals in future years. The Executive Directors and other senior colleagues will, however, participate in the free share scheme to be introduced for all eligible UK colleagues in 2005, under the Share Incentive Plan legislation. That legislation, in broad terms, requires all such employees to be included in the scheme, up to the free share limit of £3,000 p.a.

The Executive Directors and other senior colleagues may participate in the sharesave plan. This is a standard tax-approved scheme available to all colleagues, with no performance conditions.

These overall incentive levels are broadly the same as those which applied in 2004.

In relation to 2002-2004, the outcome for TSR was 7.44% p.a. ahead of that of the comparator group and long term incentive outcomes will, therefore, be at maximum levels.

10.5 Benefits
Each senior colleague is provided with benefits, which principally comprise a company car (or cash in lieu), pension arrangements, paid leave, healthcare cover and preferential terms for some Group products.

Individuals are generally included in membership of tax-approved final salary pension arrangements and, for certain individuals who joined the Group after 1989, for membership of separate final salary pension arrangements. These arrangements, taken together, provide a personal pension benefit based on salary only, with a maximum pension of two thirds of final salary (in broad terms, the last 12 months’ salary) at normal retirement age (age 60), subject to the necessary pensionable service. The arrangements also provide a lump sum life assurance benefit of four times salary and pension benefits for spouses/dependants and qualifying children.

Recent recruits have been, and future recruits will be, included in tax-approved money purchase pension arrangements or separate arrangements of equivalent value. These arrangements also provide a lump sum life assurance benefit of four times salary.

All tax-approved benefits are subject to Inland Revenue limits. Pension entitlement is based on salary only.

During 2005, the Committee will review pension policy in the light of the legislative changes which are being introduced from April 2006.

11. Remuneration policy for the Chairman
The remuneration policy for the Chairman recognises that, whilst the Chairman was independent of the organisation when he joined it, he is not now regarded as independent. The Chairman plays a key role in influencing the strategic direction of the Group and ensuring performance delivery. It is therefore appropriate that the Chairman’s reward arrangements are based on a mixture of guaranteed pay and performance-related long term incentive.

The base fee of the Chairman after the most recent review with effect from 1 July 2004, and at 31 December 2004, was £550,000.

In addition, as has been the case in HBOS since 2002, the Chairman is included in a long term incentive plan equivalent to that described in Section 10.4 and therefore receives an annual conditional grant based on 100% of his fee and subject to the same performance conditions as apply to Executive Directors.

The Committee established the long term incentive plan for the Chairman through a separately constituted scheme, for two reasons. Firstly, so that shareholders could vote on this scheme quite separately from any vote on the scheme applying to Executive Directors. Secondly, for legal reasons, because the Chairman is not an employee of the Group and cannot therefore be included in the share-based long term incentive plan described in Section 10.4 as that plan is available to employees only. In practice, however, the scheme which applies for the Chairman is a mirror image of the scheme applying to Executive Directors.

There is no short term incentive plan and there are no benefits (car, pension, paid leave, healthcare) for the Chairman. The Chairman is reimbursed for a proportion of his office expenses.

The Chairman’s overall remuneration is about 40% of that of the Chief Executive, with a slightly lower proportion of such remuneration dependent on performance. The Committee does not slavishly cross-reference reward to a particular time commitment: in practice the Chairman has always been available as required by the Group and, in broad terms, spends about half his working time on HBOS business.

12. Remuneration policy for Non-executive Directors
Remuneration for Non-executive Directors consists solely of fees. There are no short term incentive plans or long term incentive plans or benefits (car, pension, paid leave, healthcare) for Non-executive Directors.

The current base Board membership fee for each Non-executive Director after the most recent review, effective from 1 May 2004, is £45,000. In addition, fees are paid for services on committees and for directorships of subsidiaries and joint ventures.

Fees are set based on comparisons with other non-executive director fees and time commitments in comparable companies.