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Reward and recognition

Remuneration is a key element of employee engagement. There are two elements to remuneration within financial institutions; an annual salary and a performance-related element. We regard performance as more than just achieving financial objectives. As a bank that prides itself on our unique culture and values, we believe that how each individual employee demonstrates these in their working lives is a key aspect of their performance. Every employee receives a values rating, which is a reflection of how well they live our values and culture, which influences their performance related awards. Those with the lowest value ratings would receive no annual performance related bonus, even if they achieve all their financial targets.

Our board-level Remuneration Committee determines the total amount assigned to performance related compensation for each business unit. Again, factors other than financial performance are taken into consideration. These include non-financial measures and our performance against a group of our peers. In particular, the Committee considers the risk profile of the various businesses, drawing on information in reports from Risk and the other control functions, when determining the variable compensation pools. In Global Markets, where this is most relevant, variable compensation is determined as a function of a risk-adjusted measure of adjusted economic profit, which takes into consideration the higher of actual and expected losses. As a result, our employees' interests are strongly aligned with those of our shareholders.

The changing regulatory environment has made this a challenging year. Our reward structures and practices are already well aligned with emerging regulatory best practice, partly as a consequence of a review we initiated in 2008. We have strengthened our governance arrangements to ensure the variable compensation for the control functions is determined independently of the businesses they support. Additionally, our Group Chief Risk Officer attends the key Remuneration Committee meetings and chairs the Global Markets Performance Plan Committee, which oversees the most significant part of the overall variable compensation spend.

We have increased the proportion of performance related compensation that is deferred, and, without exception, this element is delivered in shares. During the year we also enhanced our clawback policy, which means that, in exceptional circumstances, certain deferred awards will not vest. These circumstances relate not only to the restatement of financials but could also apply where an employee has caused a material loss as a result of inappropriate behaviour. We increased the proportion of variable compensation awards delivered in deferred form during the year following a review of the deferral framework.

In line with our One Bank approach, we have a consistent structure of compensation for all employees directly linked to both performance and values ratings. The balance between fixed and variable elements of performance related compensation varies with seniority and the size of the variable compensation awards, but the structure is common across all businesses and countries. All performance awards above a defined level are delivered in a mixture of cash and deferred shares; employees at a senior level may also receive an award of performance shares, which will only vest to the extent that the Bank achieves a set of challenging long-term performance conditions. At least two thirds of pay is performance related for directors.

The importance of long-term performance is recognised in a number of ways in our reward structures. Deferred awards vest over three years, and the value received depends on the movement in the share price over that time.

Performance share awards also vest as early as three years, and the value received depends on the achievement of earnings per share and total shareholder return targets, which aligns the interests of the recipients with those of our shareholders.

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Annual Report and Accounts 2009