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Report on remuneration

Introduction

This report has been prepared in accordance with Schedule 7A of the Companies Act 1985 (the “Act”) and complies with the Combined Code on Corporate Governance. 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 Directors’ remuneration under the Directors’ Remuneration Report Regulations 2002. As required by the Act, a resolution to approve this report will be proposed at the Annual General Meeting of the Group at which the financial statements will be approved.

The Act requires the auditors to report to the Group’s members on certain parts of the Report on remuneration and state whether in their opinion those parts of the report have been properly prepared in accordance with the Companies Act 1985 (as amended by the Regulations). The report has, therefore, been divided into separate sections for unaudited and audited information.

Unaudited information

Remuneration Committee
The Remuneration Committee consists entirely of NEDs and is constituted in accordance with the recommendations of the Combined Code. Its members for the year ended 31 March 2009 were Dr Foden (Chair), Dr Brown, Mr Cashman and Dr Richards. The Committee met formally three times during year ended 31 March 2009. It seeks independent advice, where appropriate, for the purpose of determining the remuneration policy for the Group. The remuneration of each Executive Director and senior employees is determined by the Committee (including the award of annual bonuses, share options and LTIP awards), as are the terms of their service agreements. If appropriate, the Committee will commission reports from expert remuneration consultants. The Committee also recommends to the Board the fees paid to the Chairman. The Chairman is excluded from this process. The fees of the Non-Executive Directors are determined by the Board on the joint recommendation of the Chairman and the Chief Executive.

None of the Committee’s members has any personal financial interest (other than as a shareholder) or conflicts of interests arising from cross-directorships or day-today involvement in running the business. No Director plays a part in any discussion about his or her own remuneration.

In determining the Directors’ remuneration for the year, the Committee reviewed executive compensation packages in the UK pharmaceutical and biotech sectors; it also referred to a number of specialist studies on executive remuneration.

Remuneration policy

Policy on remuneration of Executive Directors and senior employees
In determining the Group’s policy, and in constructing the remuneration arrangements of each Executive Director and senior employee, the Board, advised by the Remuneration Committee, aims to provide remuneration packages that are competitive and designed to attract, retain and motivate Executive Directors and senior employees of the highest calibre. To achieve this objective, the Committee takes account of information from both internal and independent sources.

The total remuneration of each individual Executive Director and senior employee is benchmarked against the relevant sector. Vectura’s policy is to provide remuneration generally at levels that are broadly aligned with the mid-points for equivalent roles in comparable companies in the UK.

The Group’s ongoing policy is that a substantial proportion of the remuneration of Executive Directors and senior employees should be performance-related. Performance measures are balanced between internal measures and sectorcomparative measures to achieve maximum alignment between executive and shareholder objectives. Base salaries are supplemented by bonuses based on the achievement of corporate goals set at the start of each year.

Components of the remuneration package
The principal components of remuneration packages are base salary, short-, mediumand long-term incentives, and pension benefits. The policy in relation to each of these components, and key terms of the various incentive and benefit programmes, is explained further below.

Basic salary
Basic salaries are reviewed annually, taking into account recommendations on individual performance and salary levels in comparable companies. In formulating its decision, the Committee takes into account appropriate benchmarks. As in the prior year, for the financial year ended 31 March 2009 the Committee chose the UK pharmaceutical sector.

Each Executive Director’s base salary was broadly aligned with the mid-points of the chosen UK pharmaceutical sector comparator group (see below) and adjusted to reflect company size and complexity. Basic salaries aligned with these mid-points, combined with bonus incentives, continue to provide competitive compensation packages, in which performance-related components represent a substantial element. For the year ending 31 March 2010 the Remuneration Committee determined that no base salary increases would be paid to the Executive Directors (2008/09: 6%).

Performance-related cash bonuses
All employees are eligible for an annual discretionary cash bonus, whereby performance objectives are established at the beginning of the financial year by reference to suitably challenging corporate goals. Goals typically include revenue generation, development pipeline progress and control of cash expenditure. Performance-related payments may be paid annually, dependent upon achievements measured against corporate goals. The scheme is offered to all staff and Executive Directors. Bonus award entitlements range between 10% and 50% (100% in the case of the Executive Directors) of salary depending on grade. Cash bonuses are limited to a maximum of 100% of basic salary for each Executive Director; however, the Remuneration Committee maintains the right to make one-off bonus awards for exceptional performance.

Long-Term Incentive Plan
Annually, Executive Directors and certain senior executives are granted an award in the form of nil-cost options under the Vectura Group plc 2005 Long-Term Incentive Plan (“the LTIP”). Under the LTIP, each participating executive is granted an annual award of shares, dependent on the achievement of a rigorous, pre-determined set of performance conditions. At the end of a three-year performance period, a percentage of the shares so awarded is made available to the participating executives, dependent upon the Group’s Total Shareholder Return (“TSR”) as compared to those of a comparator group of similar, quoted UK pharmaceutical and biotechnology companies. Awards are released in accordance with the following table:

* Linear vesting between points

In addition, the Remuneration Committee is required to ensure that the underlying financial performance of the Group is consistent with its TSR performance, by considering the Group’s performance against a range of objective financial measures. If the Committee believes that the underlying corporate financial performance is not consistent with its TSR performance, then no LTIP awards will be released.

For grants made up to 31 March 2009, the comparator group of companies to which the performance of Vectura Group plc is compared is as follows:

Alizyme plc
Allergy Therapeutics plc
Antisoma plc
Ark Therapeutics plc
Axis-Shield plc
CeNeS Pharma plc
Futura Medical plc
GW Pharmaceutical plc
Oxford BioMedica plc
Proteome Sciences plc
Sinclair Pharma plc
SkyePharma plc
Vernalis Group plc

During the year ended 31 March 2009, grants of shares were made to Dr Blackwell and Ms Hyland under the LTIP scheme, as further detailed in this report, below. The market price of the shares on the date of grant of the LTIP awards was 53.50p.

For grants issued after 31 March 2009, the comparator group of companies will be as follows:

Allergy Therapeutics plc
Antisoma plc
Ark Therapeutics plc
Axis-Shield plc
Biocompatables International plc
BTG plc
GW Pharmaceutical plc
Oxford BioMedica plc
ProStrakan Group plc
Sinclair Pharma plc
SkyePharma plc
Vernalis Group plc

Value Realisation Plan
On 31 October 2008, the shareholders approved the Vectura Group plc Value Realisation Plan (“the VRP”). The VRP runs in parallel to the LTIP and provides participants with a share of a predetermined percentage of the total consideration paid for the Group in the event of a change in control. In this event, under the VRP members of the Executive Committee of the Group will be granted a one-off entitlement in the form of units, which convert into ordinary shares in Vectura Group plc, the actual number of shares that convert being linked to the offer price per share achieved. The VRP is triggered upon achievement of a minimum bid price of £1.27 per share, with a maximum number of shares available to participants if the bid price reaches or exceeds £1.77 per share.

Share Incentive Plan
The Vectura Group plc Share Incentive Plan (“SIP”) is available to all employees, including Executive Directors, for the purpose of encouraging employees to become shareholders of the Group and to retain their shares over the medium to long term. It introduces share ownership to the employee in three ways: free shares, partnership shares, and matching shares. Vectura Group plc may award free shares annually, employees may buy partnership shares out of pre-tax salary, and Vectura Group plc may match any partnership shares purchased in a year with the award of additional matching shares on a one-forone basis. The SIP is an HMRC approved scheme through which benefits are provided in a tax efficient manner.

Sharesave Share Option Scheme
Vectura Group plc also operates a Sharesave (“SAYE”) Share Option Scheme for both employees and Executive Directors. Under this Scheme all eligible employees and Executive Directors are invited to subscribe for options, which may be granted at a discount of up to 20% of market value. The Sharesave Share Option Scheme is an all-employee plan where shares must be held for a minimum of three years, and to which performance conditions do not apply.

Approved and Unapproved Share Option Plans and the EMI Plan
Executive Directors hold options under the Approved and Unapproved Share Option Plans and under Enterprise Management Incentive arrangements (the “EMI Plan”).

Historically, before it was listed, Vectura Group plc did grant NEDs share options as part of their remuneration package. At the early stage of the Group’s development this was considered to be essential to secure the recruitment and retention of high-calibre NEDs with the appropriate experience. This policy of granting share options to NEDs has not applied since the Group was publicly listed, and no further share option awards will be made to NEDs. In this connection, reference should also be made to the Corporate governance statement. The options held by the NEDs have vested and are exercisable at any time. The Board does not believe that the retention of these fully vested options in any way compromises the independence of the NEDs concerned.

Historically, no performance conditions were attached to the options granted under the above schemes. The exercise price is equal to the market value of Vectura Group plc’s shares at the time the options are granted.

Pension arrangements
All employees, including Executive Directors, are invited to participate in the Group Personal Pension Plan, which is money-purchase in nature. The only pensionable element of remuneration is basic salary. During the year, the Group contributed 20% of basic salary to the Group Personal Pension Plan in the name of the Executive Directors.

Performance graph
The following graph shows Vectura Group plc’s performance since its initial listing in July 2004, measured by TSR, compared with the performance of the current comparator group of companies in the sector, as described above.

Performance Graph

Directors’ service contracts
It is the Group’s policy that Executive Directors should have contracts with an indefinite term and providing for 12 months’ notice. This applies to the contracts of Dr Blackwell and Ms Hyland, which were effective from 25 June 2004. All Executive Directors are subject to reelection at an AGM at intervals of no more than three years.

Dr Blackwell is also a Non-Executive Director of AGI Therapeutics plc for which he receives a fee of €30,000 per annum.

Non-Executive Directors
All NEDs have specific terms of engagement which are terminable on three months’ notice by either party and their remuneration is determined by the Board within the limits set by the Articles of Association and based on a review of fees paid to NEDs of similar companies. NEDs are not eligible to join the Group’s pension scheme, nor do they receive other benefits. All NEDs are subject to re-election at an AGM at intervals of no more than three years.

The dates of appointment of each of the NEDs serving at 31 March 2009 are summarised in the table below:

All of the NEDs are considered independent including those with service greater than nine years. This is due to the major change in the operating activities of the Group that occurred with effect from July 2004 when the Company completed its Initial Public Offering.

Directors’ interests
The Directors that held office at 31 March 2009 and their interests in the share capital of Vectura Group plc at 31 March 2008 and 31 March 2009 were as follows:

(1) The holdings of C P Blackwell and A P Hyland include 16,925 ordinary shares of 0.025p each, which are held in the Vectura Group plc
     Employee Benefit Trust (Share Incentive Plan).

(2) The holding of J R Brown includes 8,929 ordinary shares of 0.025p each, which are held through nominees.

There was no change in the Directors’ interests between 31 March 2009 and 18 May 2009, the date of this report.

Audited information

Directors’ remuneration
The remuneration of the individual Directors who served during the year was as follows:

* Included within the NEDs’ fees are the fees for chairing committees. Dr Brown received £15,000 for chairing the Audit and Nomination
  Committees. Dr Foden received £7,500 for chairing the Remuneration Committee.

Also included in the above are fees for consultancy services of £7,000 (2008: £4,000) paid to Dr Foden, for the provision of specialist advice in intellectual property matters.

Benefits represent payments for medical insurance.

Directors’ pension entitlements
The money-purchase pension contributions paid by the Group for Executive Directors were as follows:


Directors holding office at 31 March 2009 with options outstanding over ordinary shares of 0.025p are as follows:

All options were granted for nil consideration.

(1)  Vesting in three equal annual instalments from date first exercisable.
(2)  On 23 May 2008, C P Blackwell and A P Hyland each acquired a total of 25,000 ordinary shares through the exercise of options. Of this total,
      6,349 shares were acquired at a share price of 36p through the exercise of Unapproved options granted on 29 April 2004, and 18,851 shares
      were acquired at a share price of 50.8p through the exercise of options granted under Vectura Group plc’s SAYE Scheme that vested on 1 April
      2008. On the date of exercise the share price was 53.75p per share. The total cost of this exercise was £12,308.95 per Director, including
      taxation. No gains were realised by the Directors on this exercise. The nominal gain was £1,683.05.

Directors’ LTIP awards

Under the LTIP scheme, the grants made to Directors at 31 March 2009 were as shown in the table below:

(1)  The award made on 12 September 2005 reached the end of its holding period on 12 September 2008. The TSR of the Group during this
      period compared with that of the comparator group was in the upper quartile. Accordingly, 100% of the shares awarded were released. The
      nil–cost options relating to this award lapse on 11 September 2015.

The number of shares released to the Directors at the end of the three–year performance period is dependent upon the performance TSR of the Group during that period in comparison to that of a comparator group of companies as described in the LTIP section of this Report on remuneration.

On behalf of the Board

S Foden
Dr S E Foden
Chair of the Remuneration Committee
18 May 2009