Remuneration report

As a Co-operative, the Society is required to produce its accounts in accordance with the Industrial and Provident Societies Act 1965 to 2003, the Industrial and Provident Societies (Group Accounts) Regulations 1969 and applicable accounting standards. In the interests of best governance practice, as a guideline for its disclosure in relation to remuneration, the Society uses the disclosure requirements applicable to listed companies, as set out in the Directors' Remuneration Report Regulations 2002 (incorporated into the Companies Act 1985).

The Co-operative Financial Services (CFS) Board comprises Non-Executive Directors including Independent Professional Non-Executive Directors, a Professional Non-Executive Director and Executive Directors appointed by the Co-operative Group Board.

This report provides details of the remuneration of both the Executive Directors, other members of the Executive, and Non-Executive Directors.

This report will be put to an advisory vote of shareholders of the Society at its Annual General Meeting, which will be held on 16 May 2008.

back to top

Introduction

The Remuneration Report is presented by the Board and contains the following information:

• a description of the role of the CFS Remuneration and Appointments Committee (the 'Committee');
• a summary of the Society's remuneration policy, including a statement of policy on Executive Directors, other Members of the Executive and Non-Executive Directors' remuneration; and
• details of the terms of the Service Contracts and the remuneration of the Executive Directors, other Members of the Executive and Non-Executive Directors for the 2007 financial year.

back to top

Role of the Remuneration & Appointments Committee

The Committee's principal terms of reference are to:

• determine policy on remuneration and other main terms and conditions of employment;
• oversee contractual arrangements for the Executives and approve the principal terms and conditions of employment of such Executives;
• review remuneration using comparisons against the agreed market policy for the Executive; and
• approve any relevant incentive schemes, and ensure that they are in line with current market practice, and authorise payments under any incentive schemes in line with their rules.

The Co-operative Group Remuneration & Appointments Committee oversees these arrangements in respect of the Chief Executive.

At the end of 2007, the Committee comprised seven members. The members are Bob Burlton as Chair, together with Graham Bennett, Simon Butler, Terry Morton, Kathryn Smith, Graham Stow and Len Wardle. During the year, Martin Beaumont (Deputy Chair of CFS) served as a member until his retirement from the Board on 31 July 2007.The Board believes that all members of the Committee are independent for the purposes of reviewing remuneration matters.The CFS Chief Executive and the Human Resources Director also attended the meetings of the Committee, except when their own remuneration was being considered. Other individuals are invited to attend for specific agenda items when necessary. The Committee works with the Co-operative Group Remuneration & Appointments Committee in ensuring consistency, where appropriate, across the wider Group.

The Committee members are all Non-Executive Directors, one of whom is an Independent Professional Non-Executive Director. They have no personal financial interests in the Committee's decisions, and they have no involvement in the day-to-day management of the Society. The Committee met eight times in the period under review.

To ensure that it receives independent advice on remuneration matters, the Committee retained New Bridge Street Consultants LLP as its advisers during 2007 to provide advice solely on remuneration matters. New Bridge Street has supplied advice on remuneration survey data, market trends and pensions matters, including incentive schemes. Other than specialist advice in relation to remuneration matters, New Bridge Street does not provide other services to CFS. Solicitors Addleshaw Goddard were also retained to provide legal advice to the Committee with respect to Executives' service contracts.

back to top

Policy on Executives Remuneration

Executive Directors and other Members of the Executive

In determining the remuneration policy for Executives, the Committee has considered a number of factors including:

• the importance of attracting, retaining and motivating senior management of the appropriate calibre to further the success of the Society;
• the linking of reward to business and individual performance and the strengthening of co-operative values; and
• ensuring that the interests of the Executives are aligned with those of the Society.

The current policy is to pay base salaries at a level around the market median, when compared with other organisations of comparable size and complexity, and also organisations in the same business sector. The Committee supports the principle of performance-related pay and operates an annual incentive plan and a long term incentive plan but does not consider it appropriate to follow the quantum available in PLCs. Accordingly, the amounts payable under these plans are lower than in comparable PLCs.

The Committee considers that a successful remuneration policy needs to be sufficiently flexible to take account of future changes in the CFS business environment, and in comparative remuneration practice. Accordingly, the Committee keeps CFS' remuneration policy under review.

back to top

The main components of Executives' remuneration are:

1) Basic Salary

It is the Committee's policy to ensure that the basic salary for each Executive is appropriate and competitive for the responsibilities involved. Basic salaries for Executives are reviewed by the Committee, normally annually, having regard to competitive market practice (in particular, salary levels for similar positions in comparable companies), business and individual performance during the financial year. The normal salary review date for Executives is at the start of each financial year in January. Basic salary is the only element of remuneration that is pensionable. Salaries received by Executives during the financial year are set out in Table 1.

2) Annual Incentive Plan

Each Executive is eligible to participate in an annual performance related incentive plan. The Committee reviews and sets incentive targets and levels of eligibility annually. The target level under the plan for the 2007 financial year was 35% of base salary for CFS Executives, including the Chief Executive. Under the incentive plan the maximum potential for Executives (including the Chief Executive) is 60% of base salary for substantially exceeding targets. These percentages remain unchanged for the 2008 plan.

For CFS Executives, targets in the bonus year 2007 (paid 2008), are constructed so that 75% of any payout relates to financial measures, these being Total Shareholder Result, Life & Savings New Business Profit ('NBP') and Life & Savings Maintenance Expenses, with the remaining 25% being based on colleague and customer satisfaction.

For the CFS Chief Executive, the ratio was 90% against CFS performance, and 10% based on wider Co-operative Group initiatives for the whole of 2007. For the Chief Information Officer for CFS and Co-operative Group, two thirds of the payment was weighted towards CFS performance, with the remaining third relating to Group performance up to the merger of Co-operative Group and United Co-operatives on 28 July 2007. Following the merger, the Chief Information Officer's annual incentive plan is based only on CFS performance.

For 2008, the same arrangements will apply for the CFS Chief Executive's bonus, however, the Chief Information Officer's bonus will be based 100% on CFS performance.

The payments for the annual incentive plan in respect of the year 2007 are reflected in Table 1 within 'Performance Related Pay'.

3) Long Term Incentive Plan

A medium term incentive plan was initially introduced in 2003 for CFS Executives in order to align their objectives with the longer-term interests of the business.The plan sets targets across a three-year period. Performance against these targets is reviewed by the Committee on an annual basis. Annual profit performance must be at or above 'Threshold' level for payment to be made. The third three-year period of operation of the plan was 2005-2007 with potential payment in 2008. The target annualised payment level under the plan for CFS Executives (including the Chief Executive) for that three-year period (and subsequent years) is 28% of basic salary with a stretch level of 42% of basic salary for substantially out-performing targets.

Following a review of incentives, this medium term incentive plan is being phased out with the plans that have started, ie 2006-2008 and 2007-2009, continuing for their three-year term being replaced by a new long term incentive plan from the start of 2008.

The review of incentives, led by New Bridge Street, resulted in a new long term incentive plan for 2008 and beyond being approved. The plan will be measured on the achievement of Financial Performance targets together with a Balanced Scorecard, ie customer satisfaction, growing colleague engagement, membership and corporate reputation, over a fixed three-year period starting 2008-2010 with potential payment in 2011. For Executives, the threshold payment level, subject to performance conditions being met, is 16.7% of basic salary, with a maximum payment of up to 50% of salary for substantially exceeding targets. It is envisaged that equivalent awards will be made annually thereafter.

The payments for the medium term incentive plan are reflected in Table 1 within 'Performance Related Pay'.

4) Service Agreements

It is CFS policy for the notice period in Executives' Service Contracts not to exceed one year. CFS Executives have consistent contracts that are terminable by up to one year's notice by the organisation and six months' notice by the individual. In the event of termination, any payments due to an Executive would be based on this. The Remuneration & Appointments Committee may make a discretionary award of outstanding bonus payments earned up to the date of termination of employment.

All the Executives had similar contracts during 2007. The dates of existing contracts or dates of appointment are shown in Table 1.

In normal circumstances, it is the Committee's policy to apply service contracts for any newly recruited Executives in a similar form to the model that has been developed for existing Executives.

5) Share Options

Senior executives of most companies get a payout under an executive share option scheme. Because of the co-operative nature of the business it is not appropriate to operate a share option scheme.

6) Non-Executive Directorships

The Committee has determined that Executives may accept one Non-Executive directorship, or similar, with an external organisation believing that this represents an important opportunity for professional development. Any fees received from such a role will normally be paid to CFS or Co-operative Group.

At this time, none of the Executives hold any Non-Executive Directorships with companies outside of the Co-operative Group.

7) Pensions

The Financial Services businesses participate in the Co-operative Group Pension (Average Career Earnings) Scheme (the PACE Scheme), which is a defined benefit pension scheme available to all employees. The PACE Scheme, which is a registered occupational pension scheme, provides pensions based on 1/60th of average pensionable earnings,re-valued for inflation for each year of pensionable service from 6 April 2006.Accrued benefits as at 5 April 2006 continue to be linked to final pensionable salary at a member's date of leaving or retirement, whichever is earlier. Pensions are also payable to dependants on death and a lump sum is payable if death occurs in service.

Members of the PACE Scheme currently contribute 6% of their pensionable salary towards the cost of providing pension benefits with the employer paying the balance.

Executives have the facility of opting out of future pension accrual under the PACE Scheme when the value of their accrued pension benefits reaches the lifetime allowance under the tax rules in favour of a non-pensionable salary supplement of 16% of basic salary in lieu of pension provision. John Reizenstein had previously opted out of the PACE Scheme on this basis and is entitled to a deferred pension. He receives a salary supplement of 16% of basic salary.

David Anderson and Stephan Pater have previously elected not to join the PACE Scheme and were each paid a salary supplement of 16% of basic salary. All other Executives were members of the PACE Scheme during the year, although Craig Shannon became entitled to a deferred pension when he left the Scheme on 28 July 2007.

Supplementary life cover is provided to Executives in order to provide total life cover of 4 x salary when aggregated with benefits from the PACE Scheme.

Additional details are available in Table 2.

Non-Executive Directors

All the Non-Executive Directors are appointed, and their Directors' fees are determined and paid, by Co-operative Group. In October 2007, Co-operative Group approved a fee of £100,000 per annum for the CFS Chair (Bob Burlton) with effect from October 2007 and an additional payment of £10,000 per annum to the Chair of the CFS Audit & Risk Committee (Graham Stow) with effect from November 2007. Details of the Directors' fees are shown in Table 3.

Paul Hewitt became a Professional Non-Executive Director on 29 July 2007 having previously been an Executive Director by virtue of his former position as Deputy Chief Executive of Co-operative Group.

The CFS Board includes four Independent Professional Non-Executive Directors, who are:

• David Davies was appointed to the Board on 3 June 2003. In addition, he was appointed as Senior Independent Non-Executive Director on 23 February 2005, for which he receives an additional fee;
• Robert Newton was appointed to the Board on 1 August 2007;
• Graham Stow was appointed to the Board on 4 March 2003; and
• Piers Williamson was appointed to the Board on 1 July 2005

Tony Lancaster retired on 13 June 2007.

Details of their remuneration are also shown in Table 3.

Of the Non-Executive Directors the Independent Professional Non-Executive Directors and the Professional Non-Executive Director are party to agreements with Co-operative Group governing the terms on which their services are made available to the Bank.

• Graham Stow holds an agreement effective up to 31 May 2009 with approval of the Co-operative Group Board in September 2007;
• David Davies holds an agreement effective up to 31 May 2010 with approval of the Co-operative Group Board following his appointment as Senior Independent Director, with effect from 23 February 2005;
• Robert Newton holds a three-year agreement, effective up to 31 July 2010;
• Piers Williamson holds a three-year agreement, effective up to 31 May 2008;
• Paul Hewitt holds a three-year agreement, effective up to 28 July 2010.

The Co-operative Group Board may resolve to reappoint any of the Independent Professional Non-Executive Directors at or before the date their contracts expire for a further three-year term. It is the normal policy of the Board not to allow an Independent Professional Non-Executive Director to serve for more than 9 years in aggregate.

The agreements contain no specific provision for liquidated damages on early termination of an agreement.

None of the above Independent Professional Non-Executive Directors are Directors of Co-operative Group or members of any Group pension scheme or incentive plan.

back to top

Table 1 - Emoluments of Executive Directors and Other Members of the Executive Committee

	Date of service or appointment £'000	Basic Salary £'000	Other Supplements £'000	Annual £'000	Medium Term	Benefits in Kind £'000	2007 Total Emoluments £'000	2006 Total Emoluments £'000
David Anderson (1) (3) (5) (6)	1 June 2005	570	94	216	385	13	1,278	844
Mike Fairbairn (2) (6)	16 January 2006	194	4	71	55	16	340	303
Richard Parkhouse (2) (6)	2 October 2006	220	-	105	-	113	438	145
Stephan Pater (2) (3) (5) (6)	1 March 2005	321	54	98	78	23	574	599
Gerry Pennell (2) (6)	2 February 2004	230	2	109	80	16	437	360
John Reizenstein (2) (3) (5) (6)	6 January 2005	336	57	123	87	16	619	556
Craig Shannon (4) (5) (6) (10)	11 February 2005	194	6	-	-	13	213	499
Cathy Wilcher (2) (3) (6) (11)	18 April 2006	200	2	75	-	16	293	234
		2,265	219	797	685	226	4,192	3,540
Former Members who served in CFS in 2005 and 2006 (7) (8) (9)		-	-	107		-	107	293
Compensation for loss of office (4)		-	-	-		-	405	274
		2,265	219	1,589		226	4,704	4,107

* Also members of the Co-operative Group Audit and Risk Committee

Notes

1. Emoluments paid by the Society's ultimate parent organisation - Co-operative Group.
2. Benefits in kind includes a car allowance, which is paid with base salary, but is not pensionable.
3. The other supplements figures for David Anderson, Stephan Pater and John Reizenstein include a salary supplement in lieu of pension provision.
4. Compensation paid for loss of office was in respect of Craig Shannon for 2007 and Ken Lewis for 2006.
5. Executive Directors of CFS.
6. Members of the Executive of CFS.
7. Sheila Macdonald was paid in full the remaining amount due for the Medium Term Incentive Scheme 2005-2007 of £34k.
8. John Marper was paid in full the remaining amount due for the Medium Term Incentive Scheme 2005-2007 of £36k.
9. Ken Lewis was paid in full the remaining amount due for the Medium Term Schemes 2005-2007 and 2006-2008 of £37k.
10. Craig Shannon resigned as an Executive Director on 20 August 2007.
11. Cathy Wilcher resigned as an Executive member on 14 March 2008.

back to top

Table 2 - Pension details of Executive Directors and Other Members of the Executive Committee

	Years of service	Total accrued pension at 12 January 2008 (1) £'000	Increase in accrued pension during the year £'000	Increase in accrued pension during the year (net of inflation) £'000	Transfer value of previous column at 12 January 2008 net of members' contributions £'000	Transfer valueof total accrued pension at 13 January 2007 (3) £'000	Transfer value of total accrued pension at 12 January 2008 (3) £'000	Increase in transfer values net of members' contributions £'000
David Anderson (4)	2	-	-	-	-	-	-	-
Mike Fairbairn (2)	32	94	8	4	47	1,293	1,445	141
Richard Parkhouse (2) (6)	1	4	4	4	35	-	48	35
Stephan Pater (4)	2	-	-	-	-	-	-	-
Gerry Pennell (2)	5	19	5	4	31	154	203	36
John Reizenstein (5)	4	5	-	-	-	59	62	3
Craig Shannon (2) (7)	4	45	24	23	146	178	350	161
Cathy Wilcher (2)	1	5	3	3	16	13	42	17

Notes

1. The total accrued pension is that which would be paid annually on retirement at normal retirement age based on service to 12 January 2008 and includes any transferred-in benefits as appropriate. Under the terms of their contracts, existing Executive Directors at 17 January 2007 may take these benefits from age 60 and new Executives after 17 January 2007 may take these benefits from age 65. The transfer values in the table above have been calculated on this basis.
2. Members of the PACE Pension Scheme have the option of paying additional voluntary contributions within the tax rules. Neither these contributions nor the benefits arising from them are shown in the above Table.
3. All transfer values have been calculated in accordance with Actuarial Guidance Note GN11.
4. David Anderson and Stephan Pater were each paid a non-pensionable salary supplement of 16% of basic salary in lieu of pension provision.
5. John Reizenstein opted out of the occupational pension scheme in the previous year when he became entitled to a deferred pension under the PACE Scheme rules. He was paid a non-pensionable salary supplement of 16% of basic salary in lieu of pension provision. Deferred pensions are revalued under the PACE Scheme rules but no account has been taken of this in the above figures.
6. Richard Parkhouse joined the PACE Scheme on 15 January 2007.
7. Craig Shannon resigned as a Director on 20 August 2007. He became entitled to a deferred pension under the PACE Scheme rules when he left the Scheme on 28 July 2007. The deferred pension was augmented by payment of a contribution of £128,476 by the employer to the PACE Scheme in lieu of termination monies which would otherwise have been payable.

back to top

Table 3 - Non-Executive Directors' Remuneration

Non-Executive Directors	Date Appointed				Fee £'000	Fee £'000
	CFS	Bank	CIS	CISGIL	2007	2006
David Anderson (1) (3) (5) (6)	2002	1989	2000	2005	17	15
Mike Fairbairn (2) (6)	2002	2003	1999	2005	17	15
Richard Parkhouse (2) (6)	2002	2006	1998	2005	9	8
Stephan Pater (2) (3) (5) (6)	2002	2001	2006	2006	9	8
Gerry Pennell (2) (6)	2002	2006	2001	2005	9	8
John Reizenstein (2) (3) (5) (6)	2007	2007	2007	2007	0	0
Craig Shannon (4) (5) (6) (10)	2002	2006	2000	2005	9	8
Cathy Wilcher (2) (3) (6) (11)	2002	2004	2003	2005	21	0
Professional Non-Executive Directors
Graham Stow	2003	2003	2003	2005	51	46
David Davies	2003	2003	2003	2005	55	51
Paul Hewitt (3)	2003	2003	2003	2005	21	0
Tony Lancaster (4)	2004	2004	2004	2005	18	46
Robert Newton (5)	2007	2007	2007	2007	22	0
Piers Williamson	2005	2005	2005	2005	48	46

Notes

1. Up to 27 October 2007, Bob Burlton's fee was paid as a combined fee in respect of his position as Chair of Co-operative Group and was paid to his nominating Society - The Midcounties Co-operative. With effect from 28 October 2007, he is remunerated by CFS for his position as CFS Chair.
2. Martin Beaumont, Chief Executive of Co-operative Group served as Non Executive Director of CFS and was remunerated by Co-operative Group in respect of this appointment until his retirement on 31 July 2007.
3. Paul Hewitt was Deputy Chief Executive of Co-operative Group until 28 July 2007 and was remunerated by Co-operative Group in respect of his Non- Executive Director appointment. With effect from 29 July 2007, he became a Professional Non-Executive Director and is remunerated by CFS.
4. Tony Lancaster retired on 13 June 2007.
5. Robert Newton was appointed as Non-Executive Director on 1 August 2007.
6. Martyn Wates, Chief Financial Officer of Co-operative Group was appointed as a Non-Executive Director of CFS on 13 November 2007 and is paid by Co-operative Group in respect of this appointment.

By Order of the Board
Bob Burlton, Chair, CFS Remuneration & Appointments Committee
3 April 2008