Directors’ remuneration report

Due to the weak economic conditions in 2009 the basic salaries of Executive Directors and senior management were held at 2008 levels, apart from those in positions who were promoted or changed their responsibilities. This will be continued for 2010. The Committee believes that it is important that the pay freeze reflects the remuneration decisions being taken across our businesses. The Committee noted that all employees are paid in accordance with the market conditions and business requirement for their role. There is no system of comparing the differential across the Group as it consists of a diverse mix of businesses and it would reduce the ability for salaries to be decided at a business level. It is also important that the remuneration for all our employees is decided on the business need and market conditions for any given role. We believe that this policy keeps us competitive as a business and within the sector in which we operate.

In 2009, each Executive Director was awarded a bonus of 105% of base salary. The bonuses are awarded on the achievement of an annual target based on underlying profit before tax set at the beginning of the year by the Remuneration Committee and approved by the Board.

Although full achievement of the annual target was met on an underlying basis, the Remuneration Committee decided that the bonus should be scaled back. This was due to the exceptional item in respect of estimated costs of £30m to resolve the issue of the suspension of 2 OEIC investment funds for which Capita Financial Managers is the authorised corporate director. This is explained further in note 4 and in note 25 of the Consolidated financial statements.

The bonus has been split between 35% of salary payable in cash and the remaining 70% in Deferred Shares under the Deferred Annual Bonus Plan. This is a reduction of 25% of the total bonus that would otherwise have been awarded. The Deferred Annual Bonus Plan also includes a matching award of up to 1.5 shares for each deferred share dependent on achievement of certain performance criteria over a 3 year period.

The bonus for the year therefore reflects the performance of the Company and has been weighted towards long term share based incentives, strongly linking the interests of the Executive Directors with those of the Group’s shareholders.

It was agreed that the vesting schedule would be amended to start the vesting at EPS growth of RPI + 4% per annum – 33% of the award will vest and full vesting at EPS growth of RPI +14% per annum for awards from 2010. The Remuneration Committee decided to reduce the EPS growth targets on the matching award by 2% compared with previous awards. The new targets are considered to be stretching compared to many FTSE companies especially as this growth is being measured from a high base point given Capita's earnings growth over the last 5 years. This would bring this plan in line with the Long Term Incentive Plan.

Following the introduction of the 50% tax rate by the Government, a review was undertaken of the share plans and the impact that this change would have on the participants.

In respect of the Deferred Annual Bonus Plan it was agreed that the use of restricted shares would be made available to the Directors. This meant that they could choose to turn their deferred award into restricted shares and pay the tax and national insurance due prior to the tax rate change. The restricted shares are held in trust and have the same conditions as the deferred award. No change was made to the matching awards as there are performance conditions attached to these and this would have required an early vesting for these awards.

There was no impact to the accounting treatment of these awards and no detriment to the Company in respect of the changes made to the DAB.

The DAB is due to expire in 2010. The Company will seek to renew this plan for a further 10 years at the forthcoming AGM.

It has been agreed that the full vesting of this award would be at EPS growth of RPI +14% per annum for awards from 2010.

The Committee considered the stretching nature of the performance conditions and it was felt that this continued to be a challenging target for the Executive Directors and no less challenging to previous awards. They also considered other measures for the performance conditions and this included Total Shareholder Return (TSR) and also softer objectives. It was concluded that an auditable target was most appropriate and that other objectives would be part of the annual review of the Director.

Remuneration strategy and policy for Executive Directors

The table below shows our remuneration strategy and policy for our Executive Directors and how these link to the package of remuneration:

Strategy	Policy	Package
To provide a remuneration package that:
Is aligned to shareholders’ interests	Set base salary at lower quartile level	Base salary Annual bonus
Is competitive in the current market and our business sector	Reward upper quartile performance with upper quartile rewards	Deferred bonus Long Term Incentive Plan
Encourages and supports a high performance culture	Balance between short and long term rewards with a balance on longer term rewards	Share matching plan
Attracts, retains and motivates	Competitive package of benefits	Pension provision Car allowance Healthcare All employee share plans

Capita’s Remuneration Committee is satisfied that the remuneration policy is appropriate, particularly with regard to total executive remuneration and Group performance. The Committee plans to continue this approach in its future remuneration policy. Consistent with this principle, approximately half of an Executive’s target total remuneration
is performance-linked and weighted to the long term. This percentage increases in the case of performance above target. For further information regarding the remuneration strategy for Directors and the wider workforce please see Motivating workforce.

Membership

Martina King was Chairperson of the Remuneration Committee throughout the year. Membership of the Remuneration Committee during the year is shown below. Eric Walters was a member of the Remuneration Committee in 2008, but stood down as a member at the beginning of 2009.

The Committee met 3 times and the attendance is shown below:

Name of Director		Number of meetings attended
Martina King		3
Bill Grimsey		3
Martin Bolland		3

Terms of reference

The Remuneration Committee has formal terms of reference and these are agreed by the Board. These include:

• Setting and reviewing performance targets
• Determining remuneration and benefits for Executive Directors and senior management
• Determining contractual terms for Executive Directors
• Granting of long term incentive plan options.

The Committee also considers the remuneration packages within the organisation when reviewing the Executive Directors’ remuneration.

The terms of reference for the Committee are reviewed annually and updated as required. The terms of reference were recommended and approved by the Board. These are available at www.capita.co.uk/investors or copies can be requested from the Company Secretary.

Advisers to committee

During 2009 the Committee sought advice from PricewaterhouseCoopers (PwC), the remuneration advisers, as required. Paul Pindar was invited to provide further information to the Committee on the performance and proposed remuneration for the Executive Directors and other senior management.

PwC also provide services in respect of overseas tax compliance, share plans and other ad hoc tax projects.

KPMG were also engaged to review some elements of the Long Term Incentive Plan and the Deferred Annual Bonus Plan during the year. KPMG also provides services in respect of share plans and ad hoc tax projects.

The Company has complied with the provisions set out in Section B of the Financial Reporting Council's Combined Code on Corporate Governance (June 2008).

The Remuneration Committee confirmed that the remuneration strategy and policies remained in line with the Financial Services Authority guidance, sent out in October 2008.

The following chart compares the value of an investment of £100 in the Company’s shares with an investment of the same amount in the FTSE All Share Index and the FTSE 350 Support Services Index over the 5 years starting 1 January 2005 and ending 31 December 2009 assuming that all dividend income is reinvested. The Committee is of the opinion that this comparison provides a clear picture of the performance of the Group relative to both a wide range of companies in the United Kingdom and also a specific group of companies within the same sector.

Capita vs. FTSE All Share Index and FTSE 350 Support Services Index Value of investment of £100 on 1 January 2005

A £100 investment in Capita shares on 1 January 2005 would be worth £224.60 at 31 December 2009 compared to £137.10 for an investment in the FTSE All Share Index and £136.80 for an investment in the FTSE 350 Support Services Index.

Basic salary and benefits

The Committee regularly commissions independent reviews of the salaries and benefits of the Executive Directors. The policy adopted by the Committee requires that basic salaries and benefits be below those provided to comparable roles in comparable companies to enable the provision of a higher performance-related element of remuneration.

This low basic salary policy allows the Directors to provide a lead in terms of keeping fixed remuneration costs low across the Group as a whole and is reflective of the Group’s remuneration policy in general. The continued success of the Group has enabled it to provide the benefits of a highly geared reward structure which delivers a competitive total remuneration package.

Annual bonus

The maximum annual bonus potential for Executive Directors is 140% of salary. The value of the annual bonus is determined at the start of the financial year and payment triggered at a pre-determined Group profit before tax target.

Information on the bonuses paid for the period to 31 December 2009 is detailed in Corporate governance.

Non-Executive Directors’ fees reflect the time, commitment and responsibilities of the role. They are reviewed annually and determined by the Executive Directors. The fees paid to the Non-Executive Directors include consideration of all the responsibilities that they are asked to undertake. The Non-Executive Directors have equal responsibilities and therefore receive equal pay.

Non-Executive Directors' fees were held at 2008 levels of £42,500. They are not paid further amounts for specific duties and responsibilities, such as chairing a committee. Eric Walters was paid £105,000 per annum as Chairman of the Group to the end of 2009. Non-Executive Directors fees are reviewed regularly.

The service contracts for Executive Directors are for an indefinite period and provide for a 1 year notice period. They do not include provisions for predetermined compensation on termination that exceed 1 year’s salary and benefits. There are no arrangements in place between the Company and its Directors that provide for compensation for loss of office following a takeover bid.

All Directors are appointed for an indefinite period but are subject to re-election at the Annual General Meeting every 3 years.

Details of the contracts are set out below:

Executive Directors	Date of contract	Notice period
Paul Pindar	17 December 2007	12 months
Gordon Hurst	17 December 2007	12 months
Paddy Doyle	17 December 2007	12 months
Simon Pilling	17 December 2007	12 months
Maggi Bell	1 August 2008	12 months

Paddy Doyle will move to a letter of appointment from 1 March 2010.

Non-Executive Directors		Date of joining the Board
Eric Walters*		1 January 2001
Martin Bolland		1 March 2008
Martina King		1 January 2005
Bill Grimsey		9 October 2006

* retired 1 January 2010

Deferred Annual Bonus Plan (DAB)

The Deferred Annual Bonus Plan was approved and adopted at the Annual General Meeting on 28 April 2005. The DAB is comprised of Deferred Shares, which form part of the annual bonus scheme, and Matching Shares.

The Committee believes that this plan focuses participants on delivering strong year-on-year annual performance, which will in turn drive long term shareholder value creation. Executive Directors and Divisional Directors are eligible to participate in the DAB.

This plan is split into 2 elements. The Deferred Award (which can be awarded as a gross deferred award or as a net restricted share award) and this is made as part of the bonus for the year ending 31 December 2009. This part is not subject to performance conditions. The second part is awarded as a matching award which has performance conditions. This part is awarded as a ratio of 1.5 for each gross share awarded under the deferred award. Although this is a fixed amount the calculation is based on a percentage of salary. In 2009 this was 70% of base salary which is the maximum that could be awarded.

In February 2009, an aggregate of 151,176 Deferred Shares were awarded to Executive Directors at a price of 657.5p, being the market price determined, as detailed in Directors’ remuneration .

The DAB operates as follows:

The value of Deferred Shares is determined by the entitlement under the annual bonus scheme: half of the bonus entitlement is paid in cash and the remainder is deferred, on a gross basis, into deferred shares. The Deferred Shares are held for a period of 3 years from the date of award. They are only forfeited in the case of dismissal for gross misconduct.

A conditional award of Matching Shares is made at the same time as the award of Deferred Shares. Participants are eligible to receive up to 1.5 Matching Shares for every Deferred Share. Matching Shares vest after the 3 year holding period to the extent to which performance criteria have been met. During the year an aggregate of 226,762 Matching Shares were awarded to Executive Directors as detailed in Directors’ remuneration and subject to the following performance conditions.

The Committee has decided that the performance condition that will apply to the Matching Shares is earnings per share (EPS) growth against the UK Retail Price Index (RPI). The Committee believes that long term EPS growth is the most appropriate performance condition for the Company as it is a key indicator of shareholder value creation. The EPS based performance conditions are as follows. The proportion of awards that vest will be determined by the following schedule:

• EPS growth of RPI + 6% per annum – 33% of the award vests
• EPS growth of RPI + 16% per annum – 100% of the award vests
• Straight-line vesting occurs between these points.

The performance conditions attached to the Matching Shares awards made under the bonus scheme may be amended by the Committee from time to time, subject to the new performance condition being no less demanding than the original condition.

The Committee has considered the challenging target set for both the Executive Directors and other participants of the scheme. It does feel that the targets are very challenging especially as this growth is being measured from a high base point given Capita's earnings growth over the last 5 years. Given this the Remuneration Committee has decided that awards made in 2010 will have the following vesting conditions:

• EPS growth at RPI + 4% per annum – 33% of the award vests
• EPS growth at RPI + 14% per annum – 100% of the award vests
• Straight-line vesting occurs between these points.

Although there are no non-financial targets for this plan, the annual appraisal process considers non financial measures and awards consider the prior year performance as a whole.

Long Term Incentive Plan (2008 LTIP)

The 2008 LTIP was approved and adopted at the Annual General Meeting on 6 May 2008. In calculating the LTIP awards granted to Executive Directors, the Committee considered that a fixed number of shares approach was preferable to fixing awards as a percentage of salary. Under the plan rules the Committee could award up to 3 times salary or a maximum of 165,000 shares. Paul Pindar has been awarded the maximum number of shares for the award in 2009.

On 20 March 2009, an aggregate of 533,000 shares were awarded to the Executive Directors, as detailed in the Directors’ remuneration.

The vesting of awards made during 2009 will depend on share price growth and EPS growth targets measured over a 3 year period. An award will not vest if Capita’s average share price at the date of vesting is below the average share price at the date of grant.

The proportion of awards that vest will be determined by the following schedule:

• EPS growth of RPI + 4% per annum – 20% of the award vests
• EPS growth of RPI + 16% per annum – 100% of the award vests
• Straight-line vesting occurs between these points.

The Committee may vary the performance conditions if it considers that the original conditions are not appropriate and a fair measure of performance. Where the performance conditions are not met, the award will lapse. There will be no re-testing of performance. The Committee has considered the challenging target this has set both the Executive Directors and other participants of the scheme. It does feel that the targets are very challenging especially in the current market. Given this the Remuneration Committee has decided that awards made in 2010 will have a maximum target of EPS growth of RPI +14% to achieve 100% vesting.

Although there are no non-financial targets for this plan, the annual appraisal process consider non-financial measures and awards consider the prior year performance as a whole.

Capita Share Ownership Plan (CSOP)

The CSOP is open to all employees of the Company under certain eligibility criteria, including Executive Directors. Under the plan, eligible employees may invest up to £125 per month in the Company’s shares and the Company matches these at a ratio of 1 Matching Share for every 10 Participant Shares.

Save as you Earn (SAYE)

The SAYE is open to all employees of the Company, including Executive Directors, under certain eligibility criteria. Under the SAYE employees can save up to £250 per month for a period of 3 years and purchase shares at the price set at the beginning of the savings period. The SAYE is due to expire in 2010. The Company will seek to renew this plan for a further 10 years at the forthcoming AGM.

Executive Share Scheme

The 1997 Executive Share Option Scheme (including both HMRC approved and unapproved elements) is a discretionary scheme for senior managers, in which the Executive Directors no longer participate.

Options granted under the 1997 Executive Share Option Scheme become exercisable if the growth in the Company’s EPS exceeds growth in RPI by 8% over the 3 year period from the date of grant.

Long Term Indexed Share Appreciation Scheme (LTISAS)

The LTISAS was only open to the Executive Directors and Divisional Directors. Under the scheme, participants were provided with 2 equal tranches of 600,000 options. The criteria were the same for each of these grants and therefore both tranches had performance periods that ended on 31 December 2006. The exercise price of the option was adjusted in line with the movement in the FTSE All Share Index from the date of grant to 25 November 2007. The adjusted exercise prices were 348p for the 2002 award and 474p for the 2004 award. This feature ensured that participants only gained if the share price out-performed the index.

As growth in the Company’s EPS over the 3 year period to 31 December 2006 exceeded RPI growth by 17.6%, 100% of the options vested (representing 1,200,000 shares per participant) and became exercisable on 25 November 2007.

The last award under the LTISAS was made in November 2004 and vested in full on 31 December 2006 and no further awards have or will be made under this plan.

Satisfaction of options

When satisfying awards made under its share plans and long term incentive plans, the Company uses newly issued, treasury or purchased shares as appropriate.

All awards are made under plans that incorporate dilution limits as set out in the Guidelines for Share Incentive Schemes published by the Association of British Insurers. The current estimated dilution from subsisting awards, including executive and all-employee share awards, is approximately 9.1%
of the Company’s share capital as at 31 December 2009.

The remuneration of the Directors is made up as follows:

	Salary and fees £	Benefits £	Performance related bonus £	Total 2009 £	Total 2008 £	Dividend equivalent for DAB	Gain on exercise of options 2009 £	Gain on exercise of options 2008 £	Pension 2009 £	Pension 2008 £
Martin Bolland	42,500	–	–	42,500	35,417	–	–	–	–	–
Paul Pindar	375,000	1,260	393,750	770,010	901,248	15,175	833,033	8,955,632	18,750	18,750
Gordon Hurst	275,000	17,160	288,750	580,910	659,148	10,910	577,676	38,495	13,750	46,270
Simon Pilling	285,000	15,377	299,250	599,627	634,696	8,501	450,309	–	49,150	43,617
Maggi Bell	225,000	15,384	236,250	476,634	378,827	8,501	660,502	–	–	–
Paddy Doyle	120,000	8,422	126,000	254,422	706,520	12,051	660,817	1,356,000	13,200	63,199
Martina King	42,500	–	–	42,500	42,500	–	–	–	–	–
Bill Grimsey	42,500	–	–	42,500	42,500	–	–	–	–	–
Eric Walters	105,000	–	–	105,000	105,000	–	–	–	–	–

Directors’ interests

Shareholder	Shares held beneficially for Director in trust	31 December 2009 or date of appointment if later ordinary shares of 21⁄15 p	31 December 2008 or date of appointment if later ordinary shares of 21⁄15 p
Martin Bolland	–	12,500	12,500
Paul Pindar	45,903	1,451,613	1,451,613
Gordon Hurst	33,641	10,217	10,181
Simon Pilling	32,383	–	–
Maggi Bell	25,152	–	–
Paddy Doyle	–	27,077	26,741
Martina King	–	717	–
Bill Grimsey	–	12,209	12,209
Eric Walters	–	52,212	51,158

The Directors are required to hold part of their bonus as deferred share awards. Recently the Directors exercised options over these awards and turned them into shares known as restricted stock under the plan rules and these are held beneficially for them in trust. The amount held for them is shown above.

Directors’ remuneration

	2009 £000s	2008 £000s
Basic salaries	1,279	1,227
Compensation	–	–
Benefits	58	61
Annual bonus*	1,344	1,988
Dividend equivalent for DAB	55	–
Pension contributions to the Group’s defined contribution scheme	82	109
Pension contributions to external defined contribution pension schemes	13	63
Fees	233	257
Total	3,064	3,705

*The sum disclosed above represents the total value of the performance related bonus payable in respect of the year ended 31 December 2009. 35% will be paid in cash and the remainder will be settled through the issue of Deferred Shares as explained on page 79.

In addition, by way of salary sacrifice, the base salaries of Paddy Doyle and Simon Pilling have been reduced by, £7,200 (2008: £33,931) and £20,000 (2008: £16,666) respectively and paid into separate defined contribution schemes.

The benefits of Gordon Hurst, Simon Pilling, Maggi Bell and Paddy Doyle are in respect of private medical insurance and the provision of a company car allowance. The benefits of Paul Pindar, the highest paid Director, are in respect of a company car and private medical insurance.

Paul Pindar was released by the Company to serve as a Non-Executive Director of Debenhams Plc with effect from 9 May 2006. He receives £57,077 per annum in fees from Debenhams Plc which he retains.

Share plan awards

Deferred Annual Bonus Plan (DAB)

Details regarding the DAB can be found in share plans. The value of the Deferred Shares is included in the Performance Related Bonus figure in the first table above.

	At 1 January 2009	Awarded in the year	Matching Shares awarded in the year	Exercised in the Year	Matching Shares exercised in the Year	Market price at exercise	At 31 December 2009
Paul Pindar	308,484	39,923	59,884	49,431	74,146	674.1	284,714
Gordon Hurst	223,054	29,277	43,915	35,538	53,307	650.2	207,401
Simon Pilling	189,907	28,212	42,318	27,692	41,538	650.4	191,207
Maggi Bell	171,779	21,825	32,737	27,692	41,538	702.4	157,111
Paddy Doyle	244,462	31,939	47,908	39,254	58,881	673.3	226,174

The market price on the date of the award was 657.5p.

Long Term Incentive Plan (2008 LTIP)

	At 1 January 2009	Awarded in the year	Vesting date	At 31 December 2009
Paul Pindar	165,000	165,000	20-Mar-12	330,000
Gordon Hurst	120,000	120,000	20-Mar-12	240,000
Simon Pilling	120,000	120,000	20-Mar-12	240,000
Maggi Bell	30,000	80,000	20-Mar-12	110,000
Paddy Doyle	120,000	48,000	20-Mar-12	168,000

The market price on the date of the grant was 684p.

Capita Share Ownership Plan

Paddy Doyle and Gordon Hurst participated in the Capita Share Ownership Plan during 2009. As a result of their participation, they were awarded 22 and 3 Matching Shares respectively during the period to 31 December 2009. The Participant Shares and their Matching Shares are included in the table of Directors’ interests above.

Capita Sharesave Scheme

The Directors’ interests in the Capita Sharesave Scheme are listed below:

	Exercise price p	At 1 January 2009	Granted in the year	Exercised in the year	Market price at exercise £	At 31 December 2009	Exercisable between
Paddy Doyle1	733	1,289	–	–	–	1,289	01.11.2010 and 30.04.2011

1 The exercise price quoted above was set at 100% of the market price at the date of grant.

There are no performance criteria to be satisfied under this scheme.

1997 Executive Share Option Scheme

The Directors’ interests in the 1997 Executive Share Option Scheme are listed below:

	Exercise price p	At 1 January 2009	Granted in the year	Exercised in the year	Market price at exercisep	At 31 December 2009
Maggi Bell	436	79,467	–	75,000	702.4	4,467

Long Term Indexed Share Appreciation Scheme

The Executive Directors’ interests in the LTISAS are listed below:

	Date of award	Price at date of grant p	Final exercise price p	At 1 January 2009	Exercised in the year	Market price at exercise £	At 31 December 2009	Exercisable between
Paul Pindar	25.11.2004	351	474	600,000	–	–	600,000	25.11.2007 to 25.11.2012

The grant price was calculated based on the average of the closing share price over the month prior to the date of grant. The exercise price of the options increased in line with the FTSE All Share Index, measured from the date of grant to 25 November 2007. The final exercise prices are set out above.

Details of the performance conditions attached to awards made under the LTISAS can be found in Performance conditions for 2010 Awards onwards.

The market value of an ordinary share of the Company at 31 December 2009 was 751p, and the high and low values for the year were 781.5p and 617.5p respectively.

Pensions

Pension contributions are made into the Group’s defined contribution scheme. The Company makes contributions at a rate of 5% of basic salary. Simon Pilling and Paddy Doyle made additional contributions, by way of salary sacrifice in the year, to a separate executive defined contribution scheme.

Changes in Directors’ interests

Between the end of the financial year and 19 February 2010, Paddy Doyle and Gordon Hurst acquired 38 shares under the Capita Share Ownership Plan, increasing their beneficial interest in ordinary shares of the Company to 27,115 and 10,255 respectively.

The remuneration report has been approved by the Board and has been signed on behalf of the Board by:

The Directors’ report was approved by the Board and has been signed on behalf of the Board by:

Gordon Hurst
Company Secretary
24 February 2010