Directors' Remuneration Report
INTRODUCTION
This report has been prepared in accordance with Schedule 8 to the Accounting Regulations under the Companies Act 2006. The report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the principles relating to the Directors’ remuneration in the Combined Code. As required by the Act, a resolution to approve the report will be proposed at the Annual General Meeting of the Company at which the financial statements will be approved.
The Act requires the auditors to report to the Company’s members on certain parts of the Directors’ remuneration report and to state whether in their opinion those parts of the report have been properly prepared in accordance with the Accounting Regulations. The report has therefore been divided into separate sections for audited and unaudited information.
INFORMATION NOT SUBJECT TO AUDIT
REMUNERATION COMMITTEE
The members of the Remuneration Committee are Mr John St. John (Chairman), Mr Peter Bingham and Mr Ennio Sganzerla. All are Non-executive Directors.
No Director plays a part in any discussion about his or her own remuneration.
Executive remuneration packages are designed to attract, motivate and retain Directors of the calibre required to grow the business and enhance value to shareholders. The performance measurement of the Executive Directors and the determination of their annual remuneration package are undertaken by the Committee.
Executive Directors are entitled to accept appointments outside the Company providing that the Chairman’s permission is sought and fees in excess of £10,000 from all such appointments are accounted for to the Company, except where specific approval is gained from the Board.
There are five main elements of the remuneration package for Executive Directors:
- Basic annual salary
- Benefits in kind
- Pension contribution
- Annual bonus payments
- Share option incentives or other equity instruments
The Company’s policy is that a substantial proportion of the remuneration of the Executive Directors and senior management should be performance related.
BASIC SALARY
An Executive Director’s annual salary is reviewed by the Remuneration Committee prior to the beginning of each year and when an individual changes position or responsibility. In deciding appropriate levels, the Committee relies on objective research which gives up-to-date information on a comparable group of companies. Basic salaries are reviewed in December, with increases taking effect from 1 January.
BENEFITS IN KIND
The Executive Directors receive certain benefits in kind, principally private medical insurance, club membership and critical illness cover.
PENSION CONTRIBUTION
UK-based Executive Directors are members of the Company pension scheme. The scheme is a defined contribution scheme and the Company contributes 10% of salary subject to the participant contributing at least 5% of their salary.
ANNUAL BONUS PAYMENTS
A formal annual cash bonus scheme has been in place since 2006. During 2009 bonuses were awarded to all the Executive Directors serving throughout the relevant period. Details of the Executive Directors’ bonuses.
SHARE OPTIONS
The Company’s policy is to grant options or an alternative share-based incentive on appointment and at regular intervals thereafter.
Share Options
The 2005 Share Option Scheme was established to incentivise the Directors and staff, aid recruitment to the Company and enable Directors and employees to share in the benefit from the increased market capitalisation of the Company. The Remuneration Committee has responsibility for supervising the scheme and the grant of options under its terms.
Options were awarded to the Executive Directors under this scheme as detailed here.
Long-term incentive Plan
An alternative share plan was introduced during 2008 to give awards to Directors and staff subject to outperforming a comparator group of similarly focused oil and gas exploration and production companies in terms of shareholder return over a three-year period. The Afren Performance Share Plan awards a number of shares to Directors and staff based on a multiple of salary. However, these shares only vest after a three-year period and the full award is made only if Afren has performed in the top quartile when compared against a selected peer group of upstream oil and gas companies with significant interests in Africa. This group is reviewed prior to each award, but for 2009 consisted of Addax, Bowleven, Gulf Keystone Petroleum, Gulfsands Petroleum, Hardy Oil & Gas, Mart Resources, Petroceltic International, Roc Oil Company, Serica Energy, Soco International, Sterling Energy, Stratic Energy, Tullow Oil and Vaalco Energy. If Afren does not achieve at least median performance in the peer group, no shares will be awarded. At the median level, 30% of the shares will vest and there is a sliding scale between median and top quartile performance where only a percentage of the total award will vest.
Awards under this scheme were granted in June 2009 and will vest in June 2012 subject to meeting the performance criteria detailed above. Details of the awards by Director are included below.
DIRECTORS’ CONTRACTS
It is the Company’s policy that Executive Directors should have contracts of an indefinite term providing for a maximum of one year’s notice. The details of the Directors’ contracts are summarised below:
| Name of Director |
Date of contract |
Notice period |
|
| Egbert Imomoh |
Non-executive Director and Chairman | 1 January 2009 | 3 months |
| Osman Shahenshah |
Chief Executive Officer | 27 February 2009 | 12 months |
| Constantine Ogunbiyi |
Executive Director | 12 June 2008 | 12 months |
| Shahid Ullah |
Chief Operating Officer | 16 April 2008 | 6 months |
| Darra Comyn |
Group Finance Director | 29 October 2009 | 6 months |
NON-EXECUTIVE DIRECTORS
All Non-executive Directors have specific terms of engagement and their remuneration is determined by the Board based on independent surveys of fees paid to non-executive directors of similar companies. The Chairman, in recognition of his role as both Chairman of a main listed Company and ambassador for the Company, is paid a basic fee of £140,000 p.a. The basic fee paid to each other Non-executive Director is £47,000 p.a. pro rata except the senior Non-executive Director who receives £50,000 p.a. The Non-executive Directors do not participate in the share option scheme, although the awards from 2008 and earlier remain in place, and are not eligible to join the Company’s pension scheme.
TOTAL SHAREHOLDER RETURNS
TSR performance since IPO
Afren vs. the market
The graph shows the relative performance of Afren plc against the AIM Oil & Gas Index, the AIM All Share Index and the Ernst & Young Oil & Gas Index since Afren’s IPO. The selected indices give the most appropriate benchmark for other similar-sized oil and gas companies.
AUDITED INFORMATION
DIRECTORS’ EMOLUMENTS
| Name of Director | Fees/Basic salary US$'000 | Benefits in kind US$'000 | Pension contributions US$'000 | Termination payments US$'000 | Annual bonus US$'000 | Total 2009 US$'000 | Total 2008 US$000 |
|---|---|---|---|---|---|---|---|
| Executive | |||||||
| Osman Shahenshah |
511 |
18 | 51 |
- | 547 | 1,127 | 1,765 |
| Constantine Ogunbiyi | 341 | 5 | 23 | - |
294 | 663 | 899 |
| Shahid Ullah | 513 | 25 | - | - | 520 | 1,058 | 348 |
| Egbert Imomoh* | 27 | - | - | - |
- | 27 |
1,049 |
| Evert Jan Sibinga Mulder | - | - |
- | - |
- | - | 822 |
| 1,392 | 48 | 74 | - | 1,361 | 2,875 |
4,833 | |
| Non-executive |
|||||||
| Egbert Imomoh* | 162 | 19 | - | - |
- | 181 |
n/a |
| Peter Bingham | 62 | - | - | - |
- |
62 | 75 |
| John St. John | 62 | - | - | - |
- |
62 |
75 |
| Guy Pas | 29 | - | - | - | - | 29 | 75 |
| Toby Hayward** |
33 | - | - | - | - | 33 | - |
| Ennio Sganzerla** | 33 |
- | - | - |
- | 33 |
- |
| Rilwanu Lukman | - | - |
- | - |
- | - | 410 |
| 381 | 19 |
- | - |
- |
400 |
635 |
|
| 1,773 | 67 | 74 | - |
1,361 | 3,275 | 5,518 |
* Egbert Imomoh was paid as an Executive Director until the end of January 2009 and then as Non-executive Chairman. His Chairman’s fee includes a housing allowance of US$41,000 for the period.
** Toby Hayward and Ennio Sganzerla were appointed on 26 June 2009.
Two of the Executive Directors were members of the Company’s defined contribution scheme during 2009 (2008: three).
DIRECTORS’ EQUITY INTERESTS
Share options
Aggregate emoluments disclosed above do not include any amounts for the value of options to acquire ordinary shares in the Company granted to or held Directors. Details of the options held and granted during the year under the 2005 Share Option Scheme are as follows:
There have been no variations to the terms and conditions or performance criteria for the share options during the financial year.
The options issued on 28 June 2005, 28 March 2007, 25 April 2008 and those issued to Peter Bingham and Guido Pas on 21 June 2007 have no performance criteria attached to them. Those issued to John St. John on 21 June 2007 only vest if a closing share price for the Company of over £1.00 has been achieved for a three-month period. The options issued on 30 May 2006 will only vest if the share price has increased by 40% over the market price at date of grant for a period of ten days. The options issued on 23 January 2009 and 30 December 2009 will only vest if the share price has increased by 40% over the market price at date of grant for a period of three months.
Guy Pas exercised 125,000 options at 80.25p in October 2009 and 145,000 options at 94.5p in November 2009, making a nominal gain before tax of 30.25p per share and 24.5p per share respectively.
LONG-TERM INCENTIVE PLAN
On 1 June 2008, awards were made to Afren Directors and employees under the Afren Performance Share Plan. Shares were awarded to each member of the scheme that will vest in full only if Afren achieves top quartile performance against its peers of oil and gas upstream companies with significant interests in Africa over a three- year period, based on Total Shareholder Return (TSR). No shares will vest if Afren does not at least perform at the median level. At the median level, 30% of the shares
will vest and there is a straight-line calculation between the median level and the top quartile. Awards
to date under this scheme were as follows:
| Date of award |
Date of vesting |
Market price at date of award |
Maximum number of shares |
|
| Osman Shahenshah |
01.06.2008 19.06.2009 |
01.06.2011 19.06.2012 |
£1.66 £0.43 |
361,446 1,526,012 |
| Constantine Ogunbiyi |
01.06.2008 19.06.2009 |
01.06.2011 19.06.2012 |
£1.66 £0.43 |
240,964 1,017,341 |
| Shahid Ullah |
19.06.2009 | 19.06.2012 | £0.43 |
1,322,600 |
| Egbert Imomoh |
01.06.2008 | 01.06.2011 | £1.66 |
271,084 |
The closing market price of the ordinary shares at 31 December 2009 was 85p and the range during the year was 13.5p to 98p.
FOUNDERS’ SCHEME
As presented to the AGM in June 2007, a Founders’ Scheme was introduced. Under this scheme the Founders of Afren undertook to invest a total equivalent in Afren shares prior to 30 September 2008 and were granted a total of 40 million warrants at an exercise price of £1.60 per share but only if the share price has reached £2.50 for at least 30 days (an increase of 56% above the exercise price). The shares were purchased at an average price of £1.28 and the agreements were finalised in January 2009. As highlighted last year, the warrant agreements included anti-dilution clauses and, following the shares issued in April 2009, there was a subsequent repricing of the warrants to an exercise price of £0.3795 and a target price of 56% higher than the revised exercise price (£0.592). Following the subsequent increase in the share price, these warrants were exercised as part of the placing in December 2009. The shares are subject to a retention clause such that, other than for the settling of certain tax and dealing costs at exercise of the warrants, the Founders are required to hold the shares for a minimum of one year. Details of the exercises and gains in relation to Directors are presented below:
| Date of award |
Exercise Date |
Number of warrants |
Revised strike price per share |
Price on exercise per share |
Gain on exercise per share |
|
| Osman Shahenshah |
01.01.2009 |
03.12.2009 | 12,000,000 |
£0.3795 |
£0.8100 |
£0.4305 |
| Constantine Ogunbiyi |
01.01.2009 |
03.12.2009 | 4,000,000 |
£0.3795 |
£0.8100 |
£0.4305 |
| Shahid Ullah |
01.01.2009 | 03.12.2009 | 4,000,000 |
£0.3795 |
£0.8100 | £0.4305 |
| Egbert Imomoh |
01.01.2009 | 03.12.2009 | 6,000,000 |
£0.3795 |
£0.8100 | £0.4305 |
SHARES ON JOINING
On joining in April 2008, Shahid Ullah was granted 2,025,000 shares to be issued at nominal consideration subject to certain time constraints. Of these, 1,462,500 were issued during 2009 with 187,500 outstanding as at 31 December 2009. These final shares were all issued in January 2010.
APPROVAL
This report was approved by the Board of Directors on 29 March 2010 and signed on its behalf by:
Mr John St. John
Chairman, Remuneration Committee
29 March 2010