Composition and terms of reference

The Remuneration Committee (the "Committee") comprises only independent non-executive Directors. Its members during the year to 31 March 2007 (the "year") were Sir Robert Smith (Committee Chairman from 1 August 2006), Mr F D Rosenkranz (Committee Chairman until 1 August 2006), Mme C J M Morin-Postel, Mr F G Steingraber and Mr O H J Stocken. None of the Committee members sits with any executive Director on the board of any other quoted company. The Committee's terms of reference take into account the provisions of the Combined Code on corporate governance and are available on the Company's website.

Activities during the year

The Committee met six times during the year to consider remuneration policy and to determine, on behalf of the Board, the specific remuneration packages for each of the executive Directors and the other members of Management Committee. The Committee also reviewed the fees payable to the Chairman of the Board. Details of Committee members' attendance at the Committee's meetings are set out in the Directors' report.

During the year the Committee considered and, where appropriate, made recommendations to the Board on the Company's framework of executive remuneration and its costs to ensure that remuneration policy continued to support the Group's strategy.

The Committee considered performance for the year to 31 March 2006 against key performance measures in assessing executive Director performance for bonus awards in respect of that year. In addition, the Committee reviewed the key performance measures to be used for remuneration purposes in relation to the year to 31 March 2007.

The Committee reviewed the long-term incentives available to senior executives and introduced a new category of performance shares ("Super-performance Shares") with a particularly challenging performance condition.

The Committee determined revised remuneration arrangements for Mr M J Queen, the executive Director responsible for Growth Capital and Infrastructure, to take effect from 1 April 2007.

The Committee determined appropriate adjustments to be made to share awards and performance conditions as a result of the Company's issue of B shares and share capital consolidation in July 2006. The aim of the Committee was to achieve neutrality of treatment, neither advantaging nor disadvantaging participants.

Back to top

Assistance to the Committee

Persons who materially assisted the Committee with advice on Directors' remuneration in the year were: PricewaterhouseCoopers LLP ("PwC") (until September 2006) and Kepler Associates (from September 2006), external remuneration advisers appointed by the Committee; the Chairman of the Board, Baroness Hogg; the Chief Executive, Mr P E Yea; and the Group's Human Resources Director, Ms D R Collis (Ms D R Collis was not appointed by the Committee). Baroness Hogg, Mr P E Yea and Ms D R Collis did not advise the Committee on their own remuneration. During the year, PwC also provided the Group's businesses with taxation advice, HR services, training services, due diligence and advisory services in relation to investments and services of an employee on secondment. Kepler Associates did not provide any other services to the Group during the year.

Background

The Company operates in the private equity and venture capital sector and is a constituent of the FTSE 100 Index. The majority of the Company's competitors are either partnerships of individuals managing funds for investment on behalf of third parties or unquoted subsidiaries of larger banking or financial services groups. The private equity and venture capital sector continues to be well funded and the ability of trained and experienced executives to gain substantial rewards in the industry remains. Maintaining a remuneration structure to support the recruitment and retention of senior executives continues to be critical. In addition to cash bonuses, it is market practice for investment executives in the private equity and venture capital sector to be given the opportunity to participate in carried interest schemes, which allow executives to share directly in the future profits on investments, subject normally to a variety of conditions relating to the performance of those investments. These are often coupled with co-investment schemes, which require participants in carried interest schemes to put money of their own at risk.

The left hand graph below compares the Company's total shareholder return ("3i TSR") for the five financial years to 31 March 2007 with the total shareholder return of the FTSE All-Share Index. The Directors consider that since the Company invests in a broad range of industrial and commercial sectors, this continues to be the most appropriate index against which to compare the Company's total shareholder return. Additional information is provided by the right hand graph below, which compares percentage changes in the Company's diluted net asset value per share over each of the last five financial years (with dividends re-invested), with the Company's total shareholder return and the FTSE All-Share Index total return over the same periods. This has been included as changes in net asset value have been one of the tests used in the Company's long-term incentive schemes.