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Directors' remuneration report

This report to shareholders by the Remuneration Committee contains all relevant information required to be disclosed by the Company regarding the remuneration of Directors.

Specifically, the following subject areas are covered:

• the role of the Remuneration Committee;
• advice to the Remuneration Committee and some of the key topics discussed during 2007;
• the principles of the Executive Director remuneration policy, followed by detailed information on the various components of Executive Director reward;
• information on Directors’ service contracts;
• Non-Executive Director terms and shareholding requirements;
• audited information relating to the Directors’ aggregate remuneration and compensation and Directors’ interests in the Company’s shares.

The role of the Remuneration Committee

The Committee is responsible for:

• the establishment of the remuneration policy for Executive Directors;
• the determination of the compensation and terms of employment (including any termination arrangements) of Executive Directors and other senior executives of the Company;
• approving all Company share plan and pension plan arrangements including the establishment and measurement of all performance conditions;
• monitoring the total compensation of Executive Directors in light of Group and individual performance.

In undertaking its responsibilities, the Remuneration Committee is guided by the strategic priorities of the Group and the measures used to monitor financial performance. The Committee also takes account of the changing nature of the business and its markets both in the UK and internationally.

The Committee has reviewed compliance with the Combined Code on reward-related matters and confirms that the Company has complied with all aspects.

The following independent Non-Executive Directors are members of the Remuneration Committee: Sir Neville Simms, John Roberts, Tony Isaac, Alan Murray and Struan Robertson. John Roberts replaced Adri Baan as Chairman of the Remuneration Committee in October 2007. The Committee met four times during the year.

Advice to the Remuneration Committee

The Remuneration Committee has access to external independent remuneration advice. The Committee undertook a review of advisers in 2007 and Towers Perrin were re-appointed to provide specialist advice on Executive Director and senior management remuneration. Towers Perrin did not undertake any other services on behalf of the Company during the year ended 31 December 2007.

In addition, the Committee received advice from the director of global resources on all aspects of remuneration. The CEO attended Committee meetings to report on Executive Directors’ performance (other than his own).

The principles of the remuneration policy for Executive Directors

The Committee has based its Executive Director remuneration policy on the following principles to ensure that it remains relevant to business needs:

The Committee intends to maintain these principles for 2008 in that the Committee believes they are delivering fair and proportionate rewards to the Executive Directors based on the Group’s performance, and it will continue to monitor and consider changes in light of developing market practice.

The components of remuneration packages

The table below sets out the various components of the remuneration package for the Executive Directors, which reflect a mix of fixed elements and variable, performance-related elements relating to financial and personal targets over the short and medium-term.

The package comprises a market competitive base salary, performance related annual cash bonus, a long-term share-related incentive, pension benefits and other benefits including a healthcare programme and a company car allowance.

Total remuneration summary for Executive Directors

Note:
Earnings per share and regional profit from operations both exclude exceptional items and specific IAS 39 mark to market movements.

The relationship between fixed and variable elements

The following chart demonstrates the approximate value of both the fixed and variable elements of the overall package over a range of performance outcomes for a typical International Power Executive Director.

As can be seen in the diagram, Executive Director remuneration packages are structured to provide significant rewards for superior performance.

THE RELATIONSHIP BETWEEN FIXED AND VARIABLE ELEMENTS

Base salary

At the time of the 2007 salary review the Committee determined that, unless there were changes of role, salary increases would be made on the basis of inflation and market movements. This approach was followed in setting salaries for the Executive Directors from 1 January 2008, as set out below, where 2007 salaries are also shown for comparison.

Annual bonus

International Power’s Executive Directors are eligible to participate in an annual performance bonus plan, which is awarded for the achievement of stretching individual and collective, financial and non-financial targets over the financial year.

The maximum annual bonus opportunity for all Executive Directors was 100% of base salary in 2007. The target level of payout for each of the financial measures was set at 67% of the maximum and this became payable upon achieving budgeted levels of performance. No bonus was payable under any of the financial measures unless at least 90% of the budgeted performance was achieved in 2007. Maximum awards under each area became payable when year-end performance levels exceeded budget by at least 10%.

The table below sets out for each Executive Director the performance measures, which reflect the extent to which the Remuneration Committee believes they are both relevant to the Executive Director’s role and open to influence by the individual. The Committee undertakes an annual review into whether the most appropriate measures are used for the Executive Directors’ bonus arrangements. Earnings per share, free cash flow and profit from operations are the KPIs used to monitor the performance of the business on a daily basis. In addition, all Executive Directors have a common personal, non-financial objective relating to health and safety.

Maximum 2007 and 2008 bonus achievable (% of salary)

All awards under the bonus plan are non-pensionable.

The details of these payments are set out in the Directors’ aggregate remuneration table.

Share Plans for Executive Directors

Performance Share Plan

Eligibility for conditional awards

Under the International Power 2002 Performance Share Plan Executive Directors are eligible annually for the following conditional award of shares:

• the equivalent of 200% of base salary for the Chief Executive;
• the equivalent of 150% of base salary for the other Executive Directors.

Performance conditions

Awards made conditionally under this Plan are held in trust and vest subject to a performance assessment at the end of a three-year performance period against the targets put in place at the commencement of each cycle.

Awards made conditionally between 2002 and 2005 inclusive incorporated a performance condition that reflected growth in EPS before exceptional items and specific IAS 39 mark to market movements only.

For awards made from 2006, the performance conditions reflect both an absolute target for growth in EPS before exceptional items and specific IAS 39 mark to market movements and a relative total shareholder return (TSR) performance measure. This ensures that vesting is in alignment with a key underlying performance measure as presented in the Group’s financial statements, and the inclusion of a significant TSR element recognises shareholders’ wishes to include a relative, market-based measure when assessing performance.

TOTAL SHAREHOLDER RETURN (TSR)

International Power net total return index
FTSE 100 net total return index

The graph above shows the TSR performance of International Power’s shares relative to the FTSE 100 index between 2003 and 2007.

For the conditional awards made in 2006 and 2007, 50% of the awards have been subject to a TSR performance condition measured against companies in the FTSE 51-100, whilst 50% of the award is subject to the achievement of a specific EPS, before exceptional items and specific IAS 39 mark to market movements, growth target.

For the purposes of assessing performance, TSR and EPS measures are treated separately, so that if one element of performance does not achieve the required level, the other element may still count towards vesting provided that it has achieved the required level of performance.

Given that the principal performance measures for the Company’s share plans are based on growth in EPS before exceptional items and specific IAS 39 mark to market movements and TSR, the Committee will also take into account, and adjust appropriately for, the enhancement effects of any purchase and subsequent cancellation of shares, or placing of shares into treasury, by the Company.

Before releasing any award in respect of the TSR element, the Remuneration Committee will also seek to satisfy itself that the Group’s TSR performance is a genuine reflection of the true underlying performance of the Group.

For 2008, the performance requirements in respect of the TSR element remain as for 2006 and 2007, with the exception that the comparator group now comprises FTSE 41-80 companies.

Benefits on vesting

The method of calculating an Executive Director’s entitlement to shares upon vesting is as set out below:

• In respect of the TSR element, 25% of the maximum vests for median TSR performance and the maximum vests for upper quartile performance.
• In respect of the EPS element, 25% of the maximum vests for performance at the threshold target established by the Remuneration Committee and the maximum vests when the stretch target is achieved.
• Straight line pro-rating will apply for performance between the threshold and maximum data points for both the TSR and EPS growth elements.

Performance Share Plan awards

The specific performance and vesting arrangements for all conditional Performance Share Plan awards made between 2004 and 2007 are set out in the following table.

Performance Share Plan vesting in 2008

As a consequence of the result of the three-year performance period for the March 2005 conditional awards, the following shares under the 2002 Performance Share Plan will be released to the Executive Directors on 11 March 2008:

2008 conditional awards

After the release of its preliminary results, the Company will make Performance Share Plan conditional awards to Philip Cox equivalent to 200% of his base salary and to Mark Williamson, Tony Concannon, Steve Riley and Bruce Levy equivalent to 150% of their base salaries.

For the 2008 Performance Share Plan awards, covering the three-year performance period 2008-2010, the Remuneration Committee has determined the following to comprise appropriate EPS performance targets which have been set on a cumulative basis over three years:

• The threshold EPS performance condition has been set at 87 pence, which represents a 3.4% compound annual growth on 2007 EPS performance.
• The maximum EPS performance condition has been set at 94 pence, which represents a 7.45% compound annual growth on 2007 EPS performance.

Executive Share Option Plans

Eligibility for awards

International Power operates a range of Approved, Unapproved and Global Executive Share Option Plans for the benefit of senior management and other employees. The Executive Directors have also historically been entitled to grants under these Plans and one Director also holds options under another pre demerger National Power Plan.

With effect from 1 January 2006, the Executive Directors have no longer been eligible to participate in new awards under any of the Company’s Executive Share Option Schemes.

Performance conditions

In accordance with the rules at the time, no performance conditions are attached to the National Power ‘Legacy’ Unapproved Options, which were granted to Tony Concannon prior to the demerger from National Power.

For all other awards made previously to the Executive Directors under the Approved, Unapproved and Global Executive Share Option Plans, the performance conditions were based exclusively on EPS growth as this reflected the underlying business performance of the Group, as presented in the financial statements.

No retesting has been permitted in respect of any share option grant.

Given that the principal performance measures for the Company’s share option plans are based on growth in EPS, the Committee has always resolved to take into account, and adjust appropriately for, the enhancement effects of any purchase and subsequent cancellation of shares, or placing of shares into treasury, by the Company.

Benefits on exercise

The method of calculating an Executive Director’s ability to exercise Options has been subject to the following conditions:

• The exercise of 30% of each year’s grant is permitted where EPS performance over the fixed three-year performance period is not less than the threshold target for EPS established by the Remuneration Committee at the outset.
• The exercise of 100% of each year’s grant is permitted where EPS performance over the fixed three-year performance period is equal to or greater than the stretch target for EPS established by the Remuneration Committee at the outset.
• Straight line pro-rating has applied to EPS performance between the threshold and stretch data points.

The following table comprises a summary of the performance periods and performance conditions relating to those Executive Share Options grants made under International Power Executive Share Option Plans which may still be exercised by one or more of the Executive Directors.

As a result of the 2007 stretch performance target applicable to the final grant of Executive Share Options made to the Executive Directors in 2005 having been exceeded, the following Options become exercisable from 11 March 2008:

Pension benefits

The pension arrangements for Philip Cox and Mark Williamson are provided through the Senior Section of the International Power Group of the Electricity Supply Pension Scheme, which is an Her Majesty’s Revenue and Customs (HMRC) registered scheme. The scheme provides for: a normal retirement age of 60; an accrual rate that targets two thirds of pensionable salary at normal retirement age; four times salary death-in-service benefits; a widow’s pension of two-thirds of Executive’s pension; and Executive’s contribution of 6% of salary up to 15% of an earnings cap based on the limits previously imposed by HMRC.

The benefits provided through the scheme are also restricted by an earnings cap based on that previously imposed by HMRC. To compensate for this, the scheme benefits are supplemented by the Company arranging additional life assurance cover and providing a non-pensionable cash allowance. The cash allowance is 33% of salary less an allowance for actual pension provision and the cost of the additional life assurance cover.

The pension arrangements for Tony Concannon and Steve Riley are also provided through the Senior Section of the International Power Group of the Electricity Supply Pension Scheme. As they are not restricted by the HMRC earnings limit, the scheme provides for them: a normal retirement age of 60; an accrual rate that targets two-thirds of pensionable salary at normal retirement age; four times salary death-in-service benefits; a widow’s pension of two-thirds of Executive’s pension; and Executive’s contribution of 6% of salary. The Company does not supplement this arrangement.

The pension arrangements for Bruce Levy are provided through a 401k Savings Plan, a Retirement Plan and a Supplemental Retirement Plan, which are money-purchase schemes operated by International Power America, up to a cost to the Company of 33% of salary.

Further information on the Executive Directors’ pension benefits for 2007 can be found within the audited section of this Report.

Directors’ service contracts

Philip Cox

Philip Cox has a service contract subject to 12-months’ notice by the Company. For termination other than for cause, he may receive a payment of 125% of annual basic salary (which includes the 12-months’ notice) to take account of the value of contractual benefits. The date upon which this contract was entered into was 25 February 2003.

Mark Williamson, Steve Riley and Tony Concannon

Mark Williamson, Steve Riley and Tony Concannon have service contracts which are subject to 12-months’ notice by the Company. For termination other than for cause, these Executive Directors may receive a payment of 125% of annual basic salary (which includes the 12-months’ notice), which will be paid on a monthly basis until the Executive Director secures alternative employment, up to a maximum of 12 monthly payments. The date upon which these contracts were entered into was 23 February 2004.

Bruce Levy

Bruce Levy has a US-appointment agreement which is subject to 12-months’ notice by the Company. For termination other than for cause, he may receive a payment of 125% of annual basic salary (which includes the 12-months’ notice), which will be paid in semi-monthly instalments, plus benefit continuation. If the Company elects to release Bruce Levy from the restrictive covenants in his contract, he can be required to account for any salary received to reduce the amount of these semi-monthly payments, to a maximum of 24 semi-monthly payments. The date upon which his agreement was entered into was 21 December 2005.

Executive Director service contracts terminate automatically on the date they reach normal retirement age which is 22 September 2011 for Philip Cox, 16 December 2015 for Bruce Levy, 29 December 2017 for Mark Williamson, 16 August 2021 for Steve Riley and 17 December 2023 for Tony Concannon.

Non-Executive Directors

The Chairman of International Power plc, Sir Neville Simms, has a letter of appointment with a 12-month notice period. The letter of appointment was signed on 22 February 2000. The other Non- Executive Directors are appointed on a three-year fixed-term, annual fixed-fee basis. Their appointment is reviewed at the end of each three-year period and extended for a period of one to three years if both parties agree.

Sir Neville Simms’ contract will expire at the 2010 AGM, following his 65th birthday, or earlier, subject to the above notice period.

Non-Executive Directors’ fees

The annual fees for the Non-Executive Directors in 2007 are set out below:

The above fees for the Non-Executive Directors comprise a basic fee of £45,000, which covers Board membership duties (i.e. attendance at Board meetings, general duties as Directors and their membership of Board committees) and where applicable a fee of £10,000 per annum for chairing each of the Audit and Remuneration Committees and a fee of £5,000 per annum for acting as Senior Independent Director.

With effect from 1 January 2008, the Chairman’s fees were increased from £250,000 to £285,000 per annum to reflect the growing size and complexity of the Group and in order to maintain competitiveness in light of market trends. With effect from the same date, the basic fee for all other Non-Executive Directors was also increased by £5,000 to £50,000 and a £5,000 fee was introduced for Committee participation. The fees for chairing a committee and acting as Senior Independent Director remain unchanged. From 1 January 2008, a new Board committee has been set up to cover health, safety and environmental matters, which also attracts a Chairmanship fee of £10,000.

Audited content

The detail of the Directors’ remuneration, pensions and interests in share options and long-term incentive plans as disclosed below, have been audited by the Company’s external auditor.

2007 Directors’ remuneration and interests

Directors’ aggregate remuneration

The table below shows the aggregate remuneration of the Directors of International Power plc for the year ended 31 December 2007.

Notes:

1. For Philip Cox, the payment in lieu of pension detailed in the above table sets out the contributions made in respect of a pension cash allowance (£136,450) and the cost of providing supplementary life assurance above the notional pensions cap (£8,500). He also received a car allowance and private medical insurance, which are included in ‘Other benefits’.
2. For Mark Williamson, the payment in lieu of pension detailed in the above table sets out the contributions made in respect of a pension cash allowance (£88,416) and the cost of providing supplementary life assurance above the notional pensions cap (£2,500). He also received a car allowance and private medical insurance, which are included in ‘Other benefits’.
3. The ‘Other benefits’ entry of £143,501 for Tony Concannon comprises elements delivered from the UK (£43,637) and in Australia (£38,228). From the UK, a car allowance, private medical insurance, relocation support (which is tapering off from a previous relocation) and certain elements of the expatriate package are provided. The balance of the expatriate package (rent, utility costs and children’s schooling fees) is provided locally in Australia.
   Also included within the ‘Other benefits’ disclosure for 2007 are taxes paid by the Company in the UK and Australia, net of hypothetical tax paid by Tony Concannon in 2007, under the Company’s expatriate policy. The net tax liability for 2007 has been estimated by the Company’s taxation specialists to be £61,636. The disclosure for 2006, calculated on the same basis, has been re-stated by a negative adjustment of £51,530. The fluctuations over the past two years are explained by changes in Tony Concannon’s personal tax treatment, a change in his residency status mid-year and the general balancing mechanism which operates between estimated, accrued and actual taxes under the Company’s expatriate taxation policy.
4. The ‘Other benefits’ entry for Steve Riley incorporates a company car allowance, private medical insurance, the payment of children’s schooling fees and the value of relocation support.
5. Bruce Levy’s payment in lieu of pension figure comprises contributions to a 401k Savings Plan (US$12,115), a Retirement Plan (US$17,385) and a Supplemental Retirement Plan (US$218,000). He also received a car allowance (US$21,600), medical and dental insurance (US$6,458), disability and life insurance (US$3,231) and relocation support (US$25,000), the total of which is included under ‘Other benefits’. The values shown in the above table have been converted from US dollars to sterling using the average annual exchange rate of 2.002.
6. Tony Isaac received a basic fee of £45,000 plus an additional fee of £5,000 for his role as Senior Independent Director and £10,000 for his role as Chairman of the Audit Committee.
7. Adri Baan received a basic fee plus an additional £10,000 for his role as Chairman of the Remuneration Committee.
8. Alan Murray was appointed on 1 July 2007, hence he received only half the basic fee of £45,000 during 2007.
9. Jack Taylor resigned as a Director on 17 May 2006 and hence has been excluded from the above table. His aggregate remuneration in 2006 was £22,500.

Directors’ pension benefits

• The accrued benefit, as at 31 December 2007, is the pension entitlement which would be paid annually on retirement based on service to the end of 2007. In addition to the pension shown above, Mark Williamson has an entitlement to an accrued lump sum of £359, Steve Riley has an entitlement to an accrued lump sum of £197,199 and Tony Concannon has an entitlement to an accrued lump sum of £187,166, payable on retirement in each case. The normal retirement age is 60.
• Dependants’ pensions on death are 58% of members’ pension in respect of service prior to 2 October 2000 and two-thirds of members’ pension in respect of service thereafter. On death-in-service a lump sum of four times salary is payable. On death within the first five years of retirement, a lump sum is payable equal to the balance outstanding of the first five years’ pension payments.
• Post-retirement increases are expected to be in line with inflation (guaranteed up to the level of 5% p.a. and discretionary above that level).
• The transfer value has been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11.
• Members of the pension scheme have the option to pay Additional Voluntary Contributions: neither the contributions, nor the resulting benefits are included in the above table.
• In addition to the above entitlements, cash allowances of £136,450 and £88,416 were paid to Philip Cox and Mark Williamson respectively during 2007. These allowances are explained in the notes to the Directors’ aggregate remuneration table, alongside an explanation of the £123,602 in pension contributions payable in 2007 to three arrangements in respect of Bruce Levy.

Directors’ interests

The following information shows the interests of the Directors as at the end of the financial year in the Company’s Performance Share Plans, Executive Share Option Plans and the Sharesave Plan.

Long-term incentive plans

i) 2002 Performance Share Plan
Conditional rights awarded over International Power plc Ordinary Shares under the 2002 Performance Share Plan held by Directors at 1 January 2007 and 31 December 2007 (together with details of awards made and vested during the period) were as follows: