Media centre

Monday 23 Jun 2003

NETWORK RAIL ANNUAL REPORT AND 2003/4 MANAGEMENT INCENTIVE PLAN PUBLISHED - EXECUTIVE PAY ALIGNED WITH PASSENGERS’ INTERESTS

Region & Route:

National

Annual Report and Accounts Network Rail, the ‘not for dividend’ successor to Railtrack, today published its Annual Report and Accounts.  The period under review began with Railtrack in Joint Special Railway Administration and ended with Network Rail publishing its first Business Plan.  The 2003/4 Management Incentive Plan ensures that executive remuneration is directly linked to improvements in railway performance. Commenting on the year, Ian McAllister, Chairman of Network Rail, said; “This was a year of significant change.  We have always said that there are no quick fixes to the accumulated problems facing Britain’s rail network, but during the first six months of Network Rail’s ownership we began to put in place the building blocks to deliver a sustainable improvement in performance of the rail network. “We achieved good performance in key areas with a 28% reduction in temporary speed restrictions, the incidence of broken rails fell 17% while signals passed at danger were down 7%.  The increase in train delays attributable to infrastructure was disappointing and provides a clear focus for the year ahead.  We are targeting a 20% improvement over 3 years. “We are determined to deliver safe, reliable and efficient rail infrastructure.  Efficiency will be a particular focus in the months ahead – our Business Plan recognised that costs were unacceptable and unaffordable in the longer term.  We have set ourselves a target of achieving overall efficiencies equivalent to 20% of costs or £1 billion by March 2006.”                                                                         -more-                                                                                                                                     annual report-2 Notes to editors Network Rail is required to publish two Annual Reports; Network Rail Infrastructure Limited and Network Rail Limited.  The Annual Report of Network Rail Infrastructure Limited provides a like for like comparison with Railtrack PLC while the Network Rail Limited Report and Accounts only covers the six months since it took ownership of Britain’s rail infrastructure. High standards of corporate governance and accountability Network Rail is committed to high standards of corporate governance.  In addition to the rigorous accountability provided to its Members, the Office of the Rail Regulator, customers and stakeholders, Network Rail also adheres to the governance principles contained in the Combined Code.  The Annual Report details the group's compliance with the Combined Code, how the Board has incorporated as many of the recommendations of the Higgs Report as practicable (given that the Higgs Report has not yet been formally adopted by the UKLA) and, of course, the company's adoption of the principles and recommendations of the Smith Report. Directors’ Remuneration Network Rail introduced a direct link between executive pay and improvements in rail services in its 2002/3 Management Incentive Plan.  For the first time, the interests of rail users and management were totally aligned.  A series of demanding performance criteria encompassing the key challenges of improving performance, tackling costs and delivering Network Rail’s vision of engineering excellence were established to determine whether senior executives would receive bonus payments.  Under this new regime, if the performance targets are not met, no bonus payments are made. The 2002/3 Management Incentive Plan applied to a limited group of individuals and covered some six months (from date of the acquisition of Railtrack PLC by Network Rail to 31 March 2003).  Despite significant progress in many areas, overall performance did not meet the challenging targets to deliver visible improvements for passengers.  As a consequence, the payments were as follows; Director                                                                    Salary             2002/3 MIP payment

• John Armitt, Chief Executive                                      £450,000                     £0
• Iain Coucher, Deputy Chief Executive                       £400,000                     £0
• Ron Henderson, Group Finance Director                 £300,000                     £0
• Peter Henderson, Project & Engineering Director    £300,000                     £0
• Chris Leah, Safety & Compliance Director                £300,000                     £0

  -more- annual report-3 The Annual Report also discloses details of past payments made, during the last financial year, to former Railtrack Directors.  In addition, certain retention payments agreed by the Joint Special Railway Administrators are included, and other acquisition related costs.  2003/4 Management Incentive Plan The 2003/4 Management Incentive Plan is based on the principle that executive remuneration should be aligned with the interests of rail users. The Remuneration Committee has selected the most critical Key Performance Indicators contained in Network Rail’s recently published Business Plan as the targets for the Incentive Plan.  If management does not meet or exceed these challenging benchmarks then no bonuses will be paid.  Performance criteria Three key business objectives – public performance, financial efficiency and asset stewardship – form the criteria by which the success of Group Executives will measured.  The targeted performance levels demand a significant improvement on the results achieved in the previous year.  Each key business measure carries equal weight under the scheme and contains three trigger points to calibrate reward to performance improvements. The amount payable will be calculated according to a fixed formula although the Remuneration Committee has the discretion to reduce or cancel bonuses to take account of safety factors or other business related issues. Plan participants The following Group Executives are eligible to participate in the Incentive Plan; John Armitt, Chief Executive                                      Iain Coucher, Deputy Chief Executive                                   Ron Henderson, Group Finance Director                             Peter Henderson, Project & Engineering Director    Chris Leah, Safety & Compliance Director                In addition, participation has been extended to include certain Senior Executives, although at lower potential award levels.                                                                                                                         -more-                                                                                                                                     annual report-4                                                                                                                                     Performance measures and trigger points Performance Measure 2002/03Achievement 2003/04 Trigger Points Target Performance Level Enhanced Performance Level Maximum Performance Level Public Performance (network-wide calculation) 79% 82% 83% 84% Financial Efficiency Index  (company calculation) 2,148 2,446 2,383 2,320 Asset Stewardship Index (company calculation) 1.03 0.96 0.92 0.88 Potential Awards If the stringent performance targets demanded by the 2003/4 Business Plan are met, Group Executives could earn an incentive payment equivalent to 18% of salary.  If the target performance levels are not met, no bonus is payable. If rail users benefit from a performance which exceeds the key Business Plan measures to the extent that the enhanced performance level is attained, a higher level of bonus (up to 36% of salary) can be achieved.  In the event that the public performance and asset stewardship measures targeted for April 2005 are reached a full twelve months ahead of schedule and the financial efficiency performance beats the April 2006 target during the current year, the maximum payout could reach up to 60% of salary. Ian McAllister, Chairman of Network Rail, says; “We have set challenging targets for improvements in performance for the current year.  Directors will benefit if passengers benefit.  There will be no reward for failure.” “We said in our first ever public statement that “management incentives will be linked to industry-wide performance targets”.  This scheme delivers on that promise and will incentivise senior management to work with our industry partners to deliver improvements in punctuality.”                                                                         -more-                                                                                                                                     annual report-5 “Passengers quite rightly want to see fewer delays and it requires the whole industry to work together to achieve this.  We have aligned executive pay with the interests of rail users.  It is now time for management to produce the visible improvements in performance we all wish to see.”