Executive Directors’ remuneration

Base salary

Following the most recent review, the base salary of each Executive Director with effect from January 2008 is:

In setting the above salaries, the Committee’s general policy was to keep percentage increases broadly in line with those across the rest of the Company and the market as a whole and ensure that a significant proportion of executive remuneration is linked to performance. However, in respect of Paul McDade and Angus McCoss, their increases reflect their criticality to the business, particularly given its current growth strategy, and also the fact that when they joined the Board, their salaries were set at a level to provide scope for an above average increase as they gained experience at Board level and progressively increased their contribution to Board discussion and debate.

Following the 2008 salary increases, the salaries of the Executive Directors are around or below the lower quartile of benchmarking data for UK listed companies of a similar size and international scope.

Annual bonus

Each Executive Director is entitled to participate in the Executive Annual Bonus Scheme in respect of each financial year of the Company.

2007 Executive Annual Bonus Scheme

In 2007, a bonus of up to 100% of salary could be earned. More particularly, for 2007, the bonus arrangements for the Executive Directors were structured as follows:

Aidan Heavey, Tom Hickey and Graham Martin:

• Up to 33.33% of salary could be earned subject to the achievement of relative TSR performance targets against the same Oil & Gas comparator group used for the PSP awards made in 2007 (see below), with upper quartile performance required for this part of the bonus to be earned in full. Over the relevant period, Tullow was placed in the top quartile of the comparator group;
• A further 33.33% of salary could be earned for the achievement of absolute TSR targets, with a 15% improvement in TSR required for this part of the bonus to be earned in full. Tullow’s TSR growth over the year to 31 December 2007 was 66%; and
• The final 33.34% of salary could be earned based on how the Committee considered that the Company had performed over the year as against certain Company-specific key performance indicators (such as production performance, reserve replacement, exploration success, health and safety and overall financial stability).

Paul McDade and Angus McCoss:

• 50% of their potential bonus could be earned based on the achievement of individual and non-financial targets relating to their specific discipline or field of responsibility;
• 20% could be earned on the achievement of certain corporate key performance indicators; and
• 30% could be earned on relative TSR performance against the comparator group above.

Matthew O’Donoghue:

• 50% of his potential bonus could be earned based on the achievement of individual and non-financial targets relating to his specific field of responsibility; and
• 50% could be earned on the achievement of certain corporate key performance indicators.

In terms of the key performance indicators in 2007, the Committee’s assessment of their achievement ranged from 60% to 70% in respect of certain operational targets to 100% in the case of key exploration targets. In certain cases, the Committee recognised that other corporate priorities had affected performance against targets.

Based upon that performance, and in particular reflecting another year of excellent TSR performance, Aidan Heavey, Tom Hickey, Graham Martin, Paul McDade and Angus McCoss received bonus amounts for 2007 equating to 90% of base salary. In the case of Matthew O’Donoghue the Committee determined his bonus award for 2007 as 70% of salary.

For 2007, to align the interests of Executive Directors and shareholders, the portion of any bonus amount above 60% of base salary was required to be deferred into shares under the terms of the related Deferred Share Bonus Plan (‘DSBP’) adopted by the Board in 2005. Shares awarded under this plan will normally vest following the end of the period of three financial years commencing with that in which the award is granted. Awards made under the DSBP are disclosed in the Deferred Share Bonus Plan table.

2008 Executive Annual Bonus Scheme

Following the Committee’s review of the remuneration policy for the Executive Directors, several changes will be made to the Annual Bonus Scheme for 2008. A summary of the key changes is as follows:

• From 2008, the maximum annual bonus potential for the Executive Directors, for the achievement of outstanding performance, will be 150% of salary;
• For meeting target performance, a bonus of 60% of salary will be payable (i.e. 40% of the maximum);
• Any bonus earned in excess of 75% of salary will be paid in shares and deferred for three years;
• All the Executive Directors will be subject to the same performance targets which will include two thirds of the bonus being linked to Tullow’s TSR performance. More specifically:
  
  • —
    One third will be based on TSR relative to the same Oil & Gas group as will be used to measure performance for the PSP awards it is proposed to make in 2008 (see below) – no bonus will be paid unless median performance is delivered, with the full bonus for upper quartile performance;
    
    
  • —
    One third will be based on growth in absolute TSR, with the full bonus payable if Tullow’s TSR grows by 15% over the year; and
    
    
  • —
    One third will be based on certain corporate key performance indicators designed to reflect major strategic and financial targets specific to the Company.
    
    
• The Committee also has broad discretion before finalising any award level on the above parameters, to take into account such other factors and circumstances reflecting the general financial condition and the performance of the Company as it considers appropriate.

The Committee believes that these changes to the Annual Bonus Scheme will help to ensure that the Executive Directors are competitively rewarded against companies of a similar size to Tullow, but only for the achievement of a common set of challenging, clear and transparent targets which are closely aligned with the interests of shareholders.

Pension and other benefits

The Executive Directors do not participate in the Company pension plan. Each Executive Director is entitled to receive a payment of 10% of his base salary into his private pension scheme which increases to 15% at age 50, as well as 30 days’ annual leave, permanent health insurance, private medical insurance and life assurance benefits. The Group also reimburses the Executive Directors in respect of all expenses reasonably incurred by them in the proper performance of their duties.