Directors’ remuneration report - 2007 Annual Report

Introduction

This report has been prepared in accordance with the requirements of the Directors’ Remuneration Report Regulations 2002, which set out requirements for the disclosure of directors’ remuneration and also in accordance with the requirements of the Listing Rules of the Financial Services Authority.

The Regulations require the auditors to report to the Company’s members on the ‘auditable part’ of the Directors’ Remuneration Report and to state whether, in their opinion, the part of the report that has been subject to audit has been properly prepared in accordance with the Companies Act 1985 (as amended by the Directors’ Remuneration Report Regulations 2002). The report is therefore divided into separate sections to disclose the audited and unaudited information.

Unaudited information

Remuneration Committee

The members of the Remuneration Committee are Clare Spottiswoode (Chairman), David Bamford, Steven McTiernan, Pat Plunkett and David Williams. Rohan Courtney was a member of the Committee until 31 December 2007. The Committee met five times during the year.

The main responsibilities of the Committee include:

Determining and agreeing with the Board the remuneration policy for the Chief Executive, Chairman, Executive Directors and senior executives;
Approving the design of, and determining targets for, an annual performance-related pay scheme for the Executive Directors and senior executives;
Reviewing the design of share incentive plans for approval by the Board and shareholders and determining the annual award policy to Executive Directors and senior executives under existing plans; and
Within the terms of the agreed policy, determining the remainder of the remuneration packages (principally comprising salary and pension) for each Executive Director and senior executive.

The full terms of reference for the Committee are available on the Company’s website.

The Chief Executive and other relevant executives are invited to attend meetings of the Committee but do not take part in any decision affecting their own remuneration. The Company Chairman, Pat Plunkett, also absents himself during discussion relating to his own fees. The Committee has previously appointed New Bridge Street Consultants LLP who remain its independent remuneration advisers. They also provide technical advice to the Company in connection with the operation of its share incentive arrangements. A statement outlining the business relationship with New Bridge Street Consultants can be viewed on the Investor Relations section of the Company’s website. The Committee also consults with the Company’s major investors and investor representative groups as appropriate.

Remuneration policy

The Company’s policy is to maintain levels of remuneration so as to attract, motivate and retain Executive Directors and senior executives of the highest calibre who can contribute their experience to the Company’s operations. The elements of the remuneration package for Executive Directors and senior management are base salary, annual bonus, taxable benefits, pension payments and participation in the Company’s share incentive arrangements. A significant element of the potential remuneration package is, therefore, performance-linked.

When determining the total remuneration of the Executive Directors and senior management, the Committee predominately takes into account the remuneration practices adopted by UK listed companies of a similar market capitalisation and overseas complexity to Tullow. Practice within other oil and gas companies is also considered although the availability of relevant data is limited due to there being few other UK listed companies in the sector of a comparable size to Tullow. Finally, in setting the remuneration policy for the Executive Directors, regard is also given to pay practices elsewhere in the Group.

As explained in the introduction to this report, the Remuneration Committee has recently undertaken a comprehensive review of the senior executive remuneration policy at Tullow. In carrying out this review, the Committee considered a number of relevant issues including:

Tullow has achieved outstanding growth in recent years by implementing the strategy formulated by its management team. This is demonstrated by its performance relative to both the Oil & Gas sector and the FTSE 250 (of which Tullow was, until recently, a member). Over the three years to 31 December 2007 the Company achieved a total shareholder return (‘TSR’) of over 350%, using the same basis of calculation as applies under the PSP, ranking it at the top amongst a group of comparable Oil & Gas peers and second within the FTSE 250 (excluding Investment Trusts);
As a result of this growth, in September 2007 Tullow was promoted to the FTSE 100 index for the first time. Since then, it has continued to perform strongly, and as at 11 March 2008 it is ranked 60th within the index (by market capitalisation);
The Committee believes that the remuneration policy followed to date has a number of key strengths which have supported the achievement of Tullow’s strategic goals. These include (i) a high proportion of the package being performance-linked (ii) a significant element of incentive pay being directly related to Tullow’s TSR performance, and (iii) the payment of a material proportion of incentive pay being in the form of Tullow shares. All these factors create a very strong alignment with shareholders. The Committee is keen to ensure that these key strengths of the existing remuneration policy are retained; and
Taking into account Tullow’s promotion to the FTSE 100, the Committee feels that it is critical to ensure that management is rewarded competitively against companies of a broadly similar size. It also believes that this should be achieved without significantly increasing fixed pay, but via greater levels of performance-related pay.

The key outcomes of the Committee’s review, in relation to the Executive Directors, are set out in Executive Directors' remuneration.