Remuneration Report to Shareholders
Management Development and Remuneration Committee and its Terms of Reference
The Management Development and Remuneration Committee of the board comprises all the non-executive directors of the company, other than the group Chairman, as set out in the Board of Directors section. Mr Jenkins retired from the Committee on 16th July 2003 and Mr Miles stepped down from the Committee on 25th November 2003.
The Committee’s terms of reference are to determine on behalf of the board competitive remuneration for the executive directors, which recognises their individual contributions to the company’s overall performance. The Committee believes strongly that remuneration policy should be completely aligned with shareholder interests. In addition the Committee assists the board in ensuring that the senior management of the group are recruited, developed and remunerated in an appropriate fashion.
The remuneration of the non-executive directors is determined by the board, within the limits prescribed by the company’s Articles of Association.

Executive Remuneration Policy
The Committee recognises that, in order to maximise shareholder value, it is necessary to have a competitive pay and benefits structure. The Committee also recognises that there is a highly competitive market for successful executives and that the provision of appropriate rewards for superior performance is vital to the continued growth of the business. To assist with this the Committee appoints and receives advice from independent remuneration consultants on the pay and incentive arrangements prevailing in comparably sized industrial companies in each country in which Johnson Matthey has operations. During the year such advice was received from The Hay Group, which also provided advice on job evaluation, and the Monks Partnership. Watson Wyatt provided actuarial services. The Committee also receives recommendations from the Chief Executive on the remuneration of those reporting to him as well as advice from the Director of Human Resources. Total potential rewards are earned through the achievement of demanding performance targets based on measures that represent the best interests of shareholders.
The remuneration policy was reviewed by the Committee in 2002 and consists of basic salary, annual bonus, a long term incentive plan, share options and other benefits as detailed below. Salaries are based on median market rates with incentives providing the opportunity for upper quartile total remuneration, but only for achieving outstanding performance. Following a further comprehensive review by the Committee in 2003/04, which included advice from independent consultants, changes are proposed to the annual bonus, long term incentive plan and share options. These require shareholder approval and are the subject of a separate circular.
Executive directors’ remuneration consists of the following:
Basic Salary – which is in line with the median market salary for each director’s responsibilities as determined by independent surveys. Basic salary is normally reviewed on 1st August each year and the Committee takes into account individual performance and promotion during the year. Where an internal promotion takes place, the median salary relative to the market would usually be reached over a period of a few years, which can give rise to higher than normal salary increases while this is being achieved.

Annual Bonus – which is paid as a percentage of basic salary under the terms of the company’s Executive Compensation Plan (which also applies to the group’s 150 or so most senior executives). The executive directors’ bonus award is based on consolidated profit before tax, exceptional items and goodwill amortisation (PBT) compared with the annual budget. The board of directors rigorously reviews the annual budget to ensure that the budgeted PBT is sufficiently stretching. An annual bonus payment of 30% of basic salary (prevailing at 31st March) is paid if the group meets the annual budget. This bonus may rise to 50% of basic salary if the group achieves PBT of 107.5% of budget. There is a provision that a maximum 105% of basic salary may be paid to the Chief Executive and 85% to other executive directors if 125% of budgeted PBT is achieved. PBT must reach 95% of budget for a minimum bonus to be payable. The Committee has discretion to vary the awards made. The bonus awarded to executive directors in 2003/04 was 42.5% of salary at 31st March 2004.

Long Term Incentive Plan (LTIP) – which was introduced in August 1998, is designed to achieve above average performance and growth. Shares are allocated to directors and key executives subject to performance conditions. For shares allocated in the years 1998, 1999 and 2000 the number of shares released to the individual was dependent upon growth in Johnson Matthey’s relative total shareholder return (TSR) compared with the FTSE 250 over a three year performance period. 100% of the allocated shares will be released to the individual if the company’s relative TSR is in the 75th percentile or above. Between 35% and 100% of the allocated shares will be released pro rata between the 50th and the 75th percentiles. No shares will be released at or below 50th percentile performance. Earnings per share (EPS) is used as a second performance measure and requires an increase in EPS to be at least equal to the increase in UK RPI plus 2% p.a. over the performance period before any release is made.
In 2001 shareholder approval was obtained for certain changes to the LTIP. The LTIP will continue to provide for the release of half of the allocated shares based on the company’s relative TSR and EPS measures, as described above. The other half of the allocation will be released subject to the achievement of absolute TSR growth over a three year period. Under this test no shares will be released should the absolute TSR growth be less than 30%. 100% of the allocated shares will be released should the absolute TSR growth be 45% or more. Pro rata allocations will be made for absolute TSR growth between 30% and 45%.
On 12th June 2002 Johnson Matthey moved into the FTSE 100, and as a consequence of this the Committee decided that a comparator group of those companies ranked 51 – 150 in the FTSE index would be more appropriate than the FTSE 250 previously used. Hence the August 2002 and 2003 allocations will be tested against this revised comparator group for that half of the allocation subject to the relative TSR test.

Share Options – option grants were not made to executive directors in the years 1998, 1999 and 2000. Previously, options were granted to executive directors under the 1985 scheme (under which the final grant was made in November 1994) and the 1995 schemes with the latter having a performance target of EPS growth of UK RPI plus 2% over a three year period. Options under all the schemes were granted in annual tranches, up to the maximum permitted of four times earnings.
Following the review by independent remuneration consultants, the Committee obtained shareholder approval in 2001 for the introduction of a new employee share option scheme, known as the Johnson Matthey 2001 Share Option Scheme. The executive directors and approximately 800 employees are awarded an annual grant of share options under the terms of this scheme. For executive directors the Committee will award options each year up to a maximum value equal to basic annual salary. The options will only be exercisable upon the achievement of appropriate performance targets. The performance target is EPS growth of UK RPI plus 4% p.a. over any three year period. The Committee has discretion to alter the performance targets for future options, but not so as to make the targets less challenging, and would only do so after consultation with institutional investors.

Pensions – all the executive directors are members of the Johnson Matthey Employees Pension Scheme in the UK, with the exception of Mr Pentz who is a member of the Johnson Matthey Inc. Salaried Employees Pension Plan in the US. Under the UK scheme, members are entitled to a pension based on their service and final pensionable salary subject to Inland Revenue limits. The scheme also provides life assurance cover of four times annual salary. The normal pension age for directors is 60. None of the non-executive directors are members of the schemes. Details of the individual arrangements for executive directors are given below.

Other Benefits – available to the executive directors are private medical insurance, a company car and membership of the group’s employee share incentive plans which are open to all employees in the countries in which the group operates such schemes.

Service Contracts – Mr Clark was appointed to the board on 1st March 1990, Mr Sheldrick on 1st September 1990, Messrs Carson and Morgan on 1st August 1999 and Dr Hawker and Mr Pentz on 1st August 2003. All are employed on contracts subject to one year’s notice at any time. On early termination of their contracts the directors would normally be entitled to 12 months’ salary and benefits.

Non-executive directors’ remuneration consists of fees, which are set following advice taken from independent consultants. They are reviewed at three year intervals.

Remuneration
Directors’ Emoluments 2003/04

C D Mackay
Chairman of the Management Development and Remuneration Committee