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Remuneration report

Introduction from Philip Clarke

The future success of Whitbread is dependent on the skills and enthusiasm of the people who work in our businesses. It is important that our employees are appropriately incentivised and rewarded to continue to deliver outstanding service to our customers and value to our shareholders.

In this report you will find a summary of key facts, information about our remuneration policy and the TSR graph, followed by a series of questions and answers. The usual tables outlining directors' remuneration, pension arrangements and share scheme participation are further down this page. The remuneration report will be the subject of a shareholder resolution to be proposed at the AGM. There are parts of this report that have to be audited and these are clearly marked as 'audited information'.

There have been no substantive changes to the remuneration policy for 2009/10. The Remuneration Committee will be undertaking a full review of the remuneration policy during 2010/11. Key points I wish to highlight to shareholders are:

• senior executives, including the executive directors, did not receive any salary increases in 2009;
• in light of the economic uncertainty the maximum annual bonus potential for 2009/10 was reduced from the 2008/09 level and a wider bonus range was set. This principle has been retained for 2010/11;
• the increase in profits has resulted in good bonuses deservedly being awarded, with about two-thirds of these bonuses paid in deferred shares; and
• the 2007 LTIP award has vested at 75.9% of its maximum.

Total shareholder return

Source: Thomson Reuters

This graph looks at the value, by 4 March 2010, of £100 invested in Whitbread PLC on 3 March 2005 compared, on a consistent basis, with that of £100 invested in the FTSE 100 Index based on 30 trading day average values.

Questions & Answers

In this section, Philip Clarke answers questions on how remuneration is managed at Whitbread.

Does Whitbread's Remuneration Committee fully meet the requirements of the Combined Code on Corporate Governance?

Yes, the membership of the Committee is compliant with the Combined Code.

The Combined Code (which is available at www.frc.org.uk) sets out the duties and powers which companies are expected to delegate to their remuneration committees. Whitbread's Committee has terms of reference (available at www.whitbread.co.uk or by requesting a copy in writing from the General Counsel's office) which set out its duties and powers and these terms of reference comply with the Combined Code.

The Committee met seven times in 2009/10. The attendance of individual members of the Committee at meetings is shown in our section on Corporate Governance.

Who provides advice to the Committee?

The Committee has appointed independent remuneration consultants Hewitt New Bridge Street and Towers Watson to provide external advice. Internal advice is received from the Group Human Resources Director, Louise Smalley. Simon Barratt, General Counsel, acts as Secretary to the Committee.

The Whitbread Group receives advice on the implementation of the Committee's decisions and recommendations from Hewitt New Bridge Street, Towers Watson and Slaughter and May. Neither Hewitt New Bridge Street or Towers Watson provide other services to the Whitbread Group, although a different part of the Hewitt group provides services to the trustee of the Company's pension fund. Slaughter and May provides legal services to the Whitbread Group.

What are the main principles of Whitbread's remuneration policy?

It is important that our senior executives have the skills, expertise, enthusiasm and drive to achieve the Group's objectives and to enhance shareholder value. Our job is to ensure that the overall remuneration package is sufficiently competitive to attract, retain and motivate executives with the necessary attributes.

We are determined to ensure that the interests of executives and shareholders are aligned and we recognise the importance of having a significant proportion of an executive's remuneration being linked to performance as well as the importance of the balance between short and long-term rewards.

How are base salaries determined?

We review base salaries on an annual basis and consider a number of factors, including market data as well as pay and employment conditions across the Group. When awarding a base salary increase to an executive director, we take into account the personal performance of the director measured against agreed objectives as well as the trading circumstances across the whole Group. Any salary increases take effect from 1 May. In 2009 we applied a salary freeze and have maintained this approach for executive directors in 2010. The Committee has awarded a 10% salary increase to Christopher Rogers as a market adjustment, with effect from 1 May 2010.

Fees for the Chairman and non-executive directors will remain unchanged this year.

Are executives entitled to other benefits?

All executives are entitled to life assurance and private health cover. Non-core benefits, for which cash alternatives are available, are family health cover and a fully expensed company car.

What are the pension arrangements for executive directors?

The final salary section of the Whitbread Group Pension Fund was closed to new entrants, including directors, on 31 December 2001. New recruits since that date are offered the opportunity to participate in the defined contribution section of the scheme.

Our policy is to pay a Company contribution of 25% of salary for executive directors, with these contributions being increased by a further 2.5% of salary after each of five and ten years' service. Executives are given the option of receiving a monthly amount in cash (less an amount equal to the employer's national insurance payable on the amount) instead of the company pension contribution. Alan Parker opted out of the final salary section of the pension scheme on 31 May 2005 and receives a cash supplement instead. Christopher Rogers and Patrick Dempsey participate in the defined contribution scheme and receive cash or pension contributions in line with their selection. Full details of the directors' pension entitlements, including cash supplements, can be found below.

What is the Directors' Incentive Scheme (DIS)?

The DIS, which was implemented in 2004/05 and was formerly known as the Leadership Group Incentive Scheme, is a bonus scheme which applies to over 50 executives. The scheme is intended to provide a clear link between performance and reward in order to motivate key executives. It promotes alignment with shareholders by providing an emphasis on equity rewards and promotes retention by deferring a significant part of the awards.

How does the DIS work?

At the beginning of each financial year profit targets are set for the Group and its businesses. Depending on the performance achieved during the year, awards of cash and deferred shares may be made at the end of the year. The cash element of the bonus is payable immediately. The deferred shares will normally be transferred into the executive's name three years after the award date as long as the executive remains employed by the Whitbread Group during that period. Staggered vesting, with one third of the award vesting on each of the first, second and third anniversaries of grant applies to executives who are not Executive Committee members.

The threshold, target and stretch bonus potential will remain the same for the 2010/11 financial year, although the level of stretch above budget has been marginally reduced. The levels of cash and deferred shares (expressed as percentages of base salaries) that can be awarded at different levels of performance to executive directors are as follows:

Straight lines will operate between the above levels of performance. Threshold will be the minimum target at which awards will be earned, targeted level of performance will be consistent with budgeted performance and stretch will be significantly above budget. In addition to the profit targets explained above, the Group, together with each business, has a financial target. The failure to meet this target would result in the reduction of cash and deferred shares payable as outlined above being reduced by 25%.

In view of the importance of the Chief Executive transition process, the Committee has set an additional range of non-profit targets for Alan Parker this year. The maximum bonus payable for achieving all these targets will be 50% of salary. Alan will not be granted an LTIP award in 2010.

Targets for future financial years will be determined by the Committee at, or near to, the beginning of each financial year.

The Committee assesses the profit results at the end of each financial year, as well as the performance of each executive director against pre-determined targets before agreeing the awards, which are then independently verified by Hewitt New Bridge Street.

Whitbread uses the WINcard to manage its businesses, but to what extent are executives incentivised based on WINcard measures?

Profit growth, a key WINcard measure, is the basis for awards made under the DIS. Executives may also earn a maximum cash bonus of 20% of base salary for meeting other WINcard targets. These targets apply to all management throughout the Company. They are set at the beginning of the financial year and, for directors, they are reviewed and approved by the Committee after the year-end. For the first time, in 2010/11, the WINcard bonus will be reduced in the event that a health and safety hurdle is not achieved. Further details on the WINcard can be found on our KPIs page.

Is the Long Term Incentive Plan (LTIP) another incentive scheme?

Yes, although it serves to drive future performance and retention rather than to reward past performance.

The DIS rewards executives for their performance at the end of a successful year, with an immediate cash bonus and an award of deferred shares. Once those deferred shares have been awarded, they will normally be transferred to the executive as long as they remain a Whitbread employee.

The LTIP, by contrast, is all about the future. It rewards executives if earnings and relative total shareholder return over a three-year period exceed specified hurdles. Executive directors will be granted awards in 2010/11 as follows:

The shares will normally only be transferred into the executive's name in the event that the executive remains a Whitbread employee and that performance conditions are met over a three-year performance period.

How are the LTIP performance conditions selected and what are they?

The Committee selects conditions that it believes will closely align the interests of executives to those of shareholders.

For awards made in 2010, as was the case for grants made in 2008 and 2009, two performance conditions have been selected. Each condition will apply to half of the awards. The two conditions are relative total shareholder return (TSR) and earnings per share (EPS) growth as shown in the table below.

The measurement of relative TSR will compare Whitbread's TSR with that of a comparator group of companies over a three-year period. For the 2010 awards, this is from 5 March 2010 to 1 March 2013. Averaging will take place before the start and end of the performance period to reduce the impact of short-term share price fluctuations. The Committee has decided that the most appropriate comparator group for 2010 awards continues to be the FTSE 51-150 excluding certain sectors: asset managers, consumer finance, equity investment instruments, investment services, life insurance, non-life insurance, mining, oil & gas and speciality finance.

Our policy for the EPS targets is that there must be real growth of 4% to 10% per annum from the most recent EPS figure at the time of grant. Again this is measured over three years with the third year's EPS determining the vesting level. For the 2009 awards, and as disclosed in last year's remuneration report, the Committee had to adapt this policy to take account of 2008/09's record EPS figure and the economic uncertainty. The EPS and TSR targets for the 2009 awards, as well as those made in 2006, 2007 and 2008 are set out in the Long Term Incentive table below.

The TSR calculations are produced for the Committee by Hewitt New Bridge Street, while the EPS calculations are verified by the Company's auditor Ernst & Young LLP. The results are considered by the Committee before the vesting level is confirmed.

Have any LTIP awards vested in 2010?

The awards made in 2007 were subject to a relative TSR performance condition and EPS condition. The EPS performance condition was met in full and TSR condition was met to 51.8% (Whitbread was between the median and upper quartile of the FTSE 51-150 comparator group), resulting in an overall vesting level of 75.9%.

The LTIP awards granted in 2010 will vest in three years' time as follows:

Are executive directors required to hold Whitbread shares?

Under our share ownership guidelines executive directors are required to build and hold a shareholding equal to 100% of their salary within five years and other senior executives 50% of salary.

What will the new Chief Executive be paid?

When Andy Harrison joins Whitbread in September 2010 he will receive £700,000 per annum together with 25% in lieu of pension contribution. He will join the Directors' Incentive Scheme for 2010/11 on the same basis as the other executive directors.

He will be granted shares to the value of 175% of salary subject to the terms of the LTIP. Provided he acquires £1 million worth of shares by the end of the financial year 2010/11, he will be granted a matching award, with vesting three years later depending on continued service, retention of all of his acquired shares and satisfaction of performance conditions based on the 2010 LTIP award, but with no vesting at threshold performance. Full details will be disclosed in next year's remuneration report.

Directors' remuneration for the year to 4 March 2010 (audited information)

The table below shows a breakdown of the various elements of pay received by the directors for the period from 27 February 2009 to 4 March 2010

Total emoluments for the year were £5,131,966 (2008/09: £4,127,081)

* The performance related awards include two cash elements (one of which is based on WINcard targets) and a deferred equity element described in the question and answer section above. In addition, Patrick Dempsey and Christopher Rogers received awards under the Long Term Incentive Plan (LTIP) to the value of £400,000 and £556,500 respectively. The LTIP awards are conditional on the achievement of a combined TSR/EPS target described in the question and answer section above.

1. Includes a non-pensionable car allowance.
2. Fees/salary for part-year.
3. Includes fees as Chairman of the Audit Committee.
4. Includes fees for part-year as Chairman of the Remuneration Committee.
5. Includes fees as Senior Independent Director.
6. Total for the full year, of which £134,503 was received following his appointment as an executive director.

Directors' pension entitlements (audited information)

None of the executive directors are accruing benefits under any other company pension arrangements. No elements of the executive directors' pay packages are pensionable other than base salaries. Neither the Chairman nor any of the non-executive directors are entitled to participate in any of these pension arrangements.

Defined Benefit

Alan Parker was the only executive director remaining in the defined benefit scheme and he elected to take his pension on 28 February 2010 as permitted by the Fund's rules. No discretion was applied and he will receive a pension of £135,439 p.a. (accumulated accrued benefit at 28 February 2009 was £128,990). As a result of his decision to take the pension, the transfer value* as provided for him in the Fund is reduced to zero (2008/09: £2,945,158).

In respect of his service up to 31 March 2005 Alan Parker was also entitled to a defined benefit pension under the Whitbread Group Pension Fund. As disclosed in the 2005/06 annual report (and every report since then) in 2005 we decided to end future accrual under this pension arrangement and crystalised the capital sum payable under it. The advantages for Whitbread in doing this included breaking the link between this pension entitlement and future salary increases and derisking the liability to make cash payments in the years following Alan's retirement. Alan's decision to take his pension triggered payment of this capital pension payment of £5,418,190 in cash from the pension scheme to him.

* Transfer values represent a liability of the pension fund, not a sum paid to the individual.

Defined Contribution

Christopher Rogers received no employer pension contributions into the Company's money purchase scheme (28 February 2009: £nil). He received a cash supplement of £98,670 during the year.

Patrick Dempsey received employer contributions of £104,666 into the Company's money purchase scheme.

Long Term Incentive Plan ('the LTIP')
(audited information)

Potential share awards held by the executive directors under the LTIP at the beginning and end of the year, and details of awards vesting during the year and their value, are as follows:

Information on the awards made in 2006 and 2007

The 2006 and 2007 awards were made as part of the Whitbread Leadership Group Incentive Scheme. Executive directors were entitled to an award based on 25% of salary at the threshold level of performance, 62.5% at on target performance and 125% at stretch performance, with a straight line operating in between. The 2006 award made to Christopher Rogers reflected the fact that he was a recent joiner with a low level of equity incentives and was not made as part of the Leadership Group Incentive Scheme. The intention was that he should be appropriately incentivised to deliver excellent shareholder value.

Information on awards made in 2008 and 2009

The awards made in 2008 and 2009 were calculated as a percentage of the director's base salary. In both years Alan Parker received an award to the value of 125% of his base salary and Christopher Rogers received an award to the value of 100% of his base salary. In 2009 Patrick Dempsey received an award to the value of 100% of his base salary.

Details of the performance conditions and comparator groups for awards made from 2006 to 2009 are shown in the Deferred Bonus Plan below.

Information on the awards made in 2010

Details on the policy with regard to the 2010 awards under the Plan can be found in the Long Term Incentive Plan section above.

Changes since 4 March 2010

On 19 March 2010, the Remuneration Committee determined that the 2007 LTIP awards had vested at a level of 75.9% and the vested awards were converted to nil cost options. On 22 March 2010, pursuant to Trading Plans entered into by the executive directors prior to the close period, the nil cost options were automatically exercised. Alan Parker sold all of the shares at 1511.93p each. Christopher Rogers and Patrick Dempsey sold enough shares to settle the income tax and NIC liability and retained the balance.

LTIP performance conditions

The performance conditions for awards made between 2006 and 2009 are shown below:

Deferred Bonus Plan ('the Plan') (audited information)

At 4 March 2010 the directors held the following deferred shares under the Plan, which forms part of the Directors' Incentive Scheme described in the question and answers section above:

The awards are not subject to performance conditions and will vest in full on the release date subject to the director remaining an employee of Whitbread to that date. If the director ceases to be an employee of Whitbread prior to the release date by reason of redundancy, retirement, death, injury, ill health, disability or some other reason considered to be appropriate by the Remuneration Committee the awards will be released in full. If the director ceases to be an employee of Whitbread for any other reason the proportion of award which vests depends upon the year in which the award was made and the date the director ceases to be an employee. If the director leaves within the first year after an award is made none of the award vests, between the first and second anniversary 25% vests and between the second and third anniversary 50% vests.

Share options
(audited information)

The Remuneration Committee has no intention of granting any further executive options. Executive directors may participate in the Company's Savings-related Share Option Scheme which is open to all employees on the same terms.

The exercise periods shown below are the normal exercise periods at the date of grant. Actual exercise periods are subject to change in accordance with the rules of the schemes when a director ceases to be employed by the Company.

At 4 March 2010 the directors held the following share options under the Savings-related Share Option Scheme. All of the executive share options held by directors at the beginning of the year were exercised during the year. The earliest date on which any of the executive options could have been exercised was June 2005, with the latest being May 2015. Savings-related share options have a six-month exercise period.

* Options held at 26/02/09 included executive share options which have been exercised during the year.

Options exercised
(audited information)

The aggregate gain made by directors on the exercise of options was £1,032,901 (2008/09: £nil).

(1) The price on exercise is either the actual price attained where the shares were sold on exercise, or the mid-market price on the day of exercise where the shares were retained.

Employee Share Ownership Trust (ESOT)

The Company funds an ESOT to enable it to acquire and hold shares for the LTIP, executive share option schemes and the Directors' Incentive Scheme. As at 28 April 2010, the ESOT held 384,190 shares. The executive directors each have a technical interest in these shares as potential beneficiaries of the trust. All dividends on shares in the ESOT are waived by the Trustee. During the period from 5 March 2010 to 28 April 2010, 99,902 shares have been transferred from the ESOT.

Share price information
(audited information)

The mid-market price of Whitbread ordinary shares on 4 March 2010 was 1,472.0p (26 February 2009: 748.5p). The highest and lowest price paid for ordinary shares during the year were as 1,479.0p and 693.5p respectively.

Changes since 4 March 2010

The changes in directors' interests in ordinary shares since 4 March 2010 are disclosed in the Directors' Report and beneath the LTIP table above. There have been no other changes since 4 March 2010.

Signed and approved on behalf of the Board

Philip Clarke
Chairman, Remuneration Committee
28 April 2010