Directors’ Report on Remuneration

The Remuneration Committee (the “Committee”) has adopted the principles of good governance relating to directors’ remuneration as set out in the Code. This report complies with the Companies Act 2006, Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and the Listing Rules made by the United Kingdom Listing Authority. These regulations require the Company’s auditor to report on the “audited information” within the report and to state if this section of the report has been properly prepared in accordance with the regulations. This report has therefore been divided into separate sections for unaudited and audited information.

The report covers the remuneration policy for Directors and includes specific disclosures relating to Directors’ emoluments, their shares and other interests. This remuneration report is being put to shareholders at the forthcoming Annual General Meeting for an advisory vote. The vote will be in respect of the remuneration policy and overall remuneration packages and will not be specific to individual levels of remuneration.

Part 1: Unaudited Information

1. The Remuneration Committee

The Committee currently comprises the following Non-Executive Directors of the Company: Chris Littmoden, Chairman of the Committee; Folkert Blaisse; Martin Flower; John Sheldrick and Steve Hannam. John Sheldrick was appointed to the Committee on 1 October 2011, and the other Non-Executive Directors were members of the Committee throughout the year under review. All of the Committee members, with the exception of Mr Flower, are considered by the Board to be independent. Mr Flower became a member of the Committee on 6 July 2010 and, while it is no longer appropriate to apply the test of independence to him following his appointment as Chairman, he was considered by the Board to be independent on his initial appointment as a Non-Executive Director. Mr Hannam will succeed Mr Littmoden as Chairman of the Committee with effect from 1 March 2012.

The Group Chief Executive and the Group Finance Director may be invited to attend meetings of the Committee. The Committee keeps itself informed of all relevant developments and best practice in the field of remuneration and seeks advice where appropriate from external advisers. During the year, the Committee sought advice from New Bridge Street (“NBS”, an Aon Hewitt Company) and Freshfields Bruckhaus Deringer. The Group Chief Executive, the Group Finance Director and the Company Secretary also assist the Committee, except in relation to their own remuneration. NBS has no connection with the Company other than in the provision of advice in relation to executive remuneration and nor does Aon Hewitt, the ultimate parent company of NBS. Freshfields Bruckhaus Deringer provides legal advice to the Company on matters other than remuneration on a regular and continuing basis.

The Committee’s remit is set out in the terms of reference which were reviewed during the year under review and are approved by the Board. A copy of the terms of reference is available on the Company’s website. In 2011, the Committee recommended to the Board the broad policy for the remuneration of the Chairman, the Executive Directors and other senior executives.

2. Remuneration policy

The Group's remuneration policy is to ensure that the remuneration of Executive Directors and senior executives properly reflects their duties and responsibilities and is sufficient to recruit, retain and motivate high-quality executive talent, whilst aligning the interests of senior executives as closely as possible with the interests of shareholders. The remuneration of the Executive Directors has been structured to provide a significant performance-related element linked to the achievement of stretching performance targets.

In line with the Association of British Insurers’ Guidelines on Responsible Investment Disclosures, the Committee considers whether the incentive policies for Executive Directors and senior executives will raise any ESG issues or risks by inadvertently motivating irresponsible behaviour. More generally, the Committee also takes into account the principles of sound risk management when setting pay policies (with liaison between the Audit and Remuneration Committees where appropriate) and is satisfied that the current remuneration structure at Low & Bonar is appropriate. In reaching this conclusion, the Committee took into account the results of a remuneration risk assessment that was undertaken during the year under review. This assessment confirmed that the Company’s remuneration policy is aligned with the Group's strategy and does not encourage undue risk taking given the internal controls operated by the Group, the range of performance measures used for incentive purposes and the significant weighting placed on long-term performance.

The Committee intends to keep the Company’s remuneration policy under review to ensure that an appropriate balance between fixed and variable pay is maintained.

When setting Executive Directors’ pay, the Committee takes due account of remuneration levels elsewhere in the Group (for example, consideration is given to the overall salary increase budget and incentive structures that operate across the Group).

The main components of remuneration of the Executive Directors are as follows:

Objective

Performance period

Policy

Basic salary To position at a competitive level
for similar roles in comparable international manufacturing companies and companies from across all FTSE sectors
Annually Individual pay levels determined by reference to performance, skills and experience in post. Consideration given to the wider pay levels and salary increases across the Group
Performance-related bonus To incentivise delivery of performance objectives One year Bonus payments are based on the achievement of challenging financial targets
Long-term Incentive Plans To drive performance, aid retention and align the interests of Executive Directors with shareholders Three years 50% of any award is subject to EPS growth. The remaining 50% is subject to the relative total shareholder return (“TSR”) of the Company compared against the constituents of an appropriate FTSE index
Share ownership guidelines To align interests of Executive Directors with shareholders Ongoing Executive Directors are expected to retain 50% of the after-tax number of vested long-term incentive awards until a shareholding of 100% of salary is achieved (applicable to awards granted from 2011 onwards)
Other benefits To provide competitive benefits in line with market practice Ongoing Executive Directors receive a car allowance, private health insurance, death in service cover and a pension contribution. They may also join the SAYE share scheme

i) Basic salary – Executive Directors

The Committee considers the individual’s role and responsibilities, performance, skills, experience and pay levels in similar roles in comparative international manufacturing companies and, more generally, companies from across all FTSE sectors. For guidance, the Committee sources relevant comparative pay data from its advisers (as appropriate). Furthermore, due consideration is also given to the wider pay levels and salary increases being proposed across the Group.

In terms of the salary levels of the current Executive Directors, these are as follows:

Group Chief Executive: £332,175 (effective from 1 December 2011; £322,500 from 1 December 2010); and Group Finance Director: £252,350 (effective from 1 December 2011; £245,000 from 1 December 2010).

The increase awarded to the Group Chief Executive and the Group Finance Director, at 3%, took due account of the cost of living salary increase budget set across the Group for the current financial year and also reflected the Company’s desire to maintain a competitive level of total remuneration and to recognise robust performance over the financial year just completed.

ii) Performance-related bonus – Executive Directors

The maximum bonus potential is set at 100% of basic salary.

The bonus earned against the targets set for 2011 was 81.0% of salary. This bonus award reflected 98.7% of the maximum profit target being met (which determined 55% of the total bonus opportunity), a total of five of the month-end net debt targets for the year being met (which determined 25% of the total bonus opportunity) and 100% of the maximum sales volume growth target being met (which determined 20% of the total bonus opportunity). The sales volume growth target was underpinned by a minimum profit requirement to ensure that the sales growth and returns were delivered on a profitable basis. To provide further context on the level of performance delivered, profit before tax, amortisation and non-recurring items increased 26% from the result delivered in the year to 30 November 2010, total borrowings were maintained within the Group's target range of 1.5–2.0 times EBITDA and relevant sales volumes increased by 6%.

In 2012, the Executive Directors will again be eligible to receive a performance-related bonus of up to 100% of salary. However, reflecting the Group's stated medium-term objectives, the weighting applied to the Group's core short-term performance measures are to be rebalanced. There will be a greater focus on Group profit (60% of the total bonus opportunity) alongside a new focus on profitable sales volume growth outside of the Group's heartland markets (10% of the total bonus opportunity). As the Group has substantially reduced net debt over recent years and now has a stated policy to operate at or below a net debt to EBITDA ratio of 2 times, performance will no longer be measured against absolute net debt levels but will instead be measured against return on capital employed targets (30% of the total bonus opportunity).

With regard to the sales volume growth and return on capital employed targets, these will be underpinned by a minimum profit requirement to ensure that the sales growth and returns are delivered on a profitable basis. No bonus is earned against non-financial targets. The 2012 annual bonus will also be subject to clawback provisions which will enable the Committee to recover the value overpaid to an Executive Director in respect of 2012 performance in the event of a material misstatement of the Company’s financial results or misconduct that leads to such material misstatement. The clawback provisions will operate for a two-year period following the date on which the bonus is paid.

iii) Long-term Incentive Plans

The Low & Bonar 2003 Long-term Incentive Plan (the “2003 LTIP”)

The 2003 LTIP, which was approved by shareholders in February 2003, and amended by shareholders in August 2005, forms the long-term element of the remuneration structure for the Executive Directors and senior executives.

Both restricted share awards (subject to challenging performance conditions and transferred to recipients without payment) and share options (also subject to performance conditions but requiring payment of an exercise price prior to transfer to recipients) may be granted under the 2003 LTIP. Executive Directors do not currently receive share options. At 30 November 2011, a total of 23 current employees of the Group held restricted share awards and 14 held share options.

Executive Directors have historically received awards of restricted shares under the 2003 LTIP which have been subject to a combination of EPS and TSR performance conditions. The use of EPS and TSR performance targets in tandem with the 2003 LTIP is considered to provide a well balanced set of performance measures focusing executives on internal and external performance. EPS is a key internal financial measure of performance and is fully aligned with measuring the Group's long-term success in delivering its profitable growth strategy. TSR focuses executives on the delivery of above-market returns which is in alignment with shareholders’ interests.

Quantum

The maximum award that may be made to a participant in any financial year is 200% of salary, although awards to date have been restricted to 150% of salary, save that in relation to facilitating the appointment of Mr Holt in 2010, it was considered appropriate to grant an award equal to 180% of his salary on joining the Group taking into account his experience and abilities and remuneration forfeited in his joining Low & Bonar.

During the year under review, awards were granted with a value equal to 125% of salary to both Mr Good and Mr Holt.

A full summary of the awards made to the Executive Directors and the targets applying to each award are set out in Table 3 below.

2012 Long-term incentive awards

It is the Company’s intention to make further awards to Executive Directors (and other members of the Company’s senior management) in March 2012. The Committee currently intends to grant awards at 110% of salary to the Group Chief Executive and 100% to the Group Finance Director. In determining the level of awards to be granted, the Committee took into account (i) the need to set a competitive level of total remuneration to retain and motivate the Company’s robustly performing executive team (ii) the Company’s recent share price performance and (iii) the challenging range of targets set, with higher actual EPS performance requirements at the threshold and maximum performance levels than the awards granted during the year under review.

Awards granted under the 2003 LTIP in 2012 to Executive Directors will also be subject to clawback provisions which will enable the Committee to recover the value overpaid to an Executive Director under an award in respect of performance to the year ending 30 November 2014 in the event of a material misstatement of the Company’s financial results or misconduct that leads to such material misstatement. The clawback provisions will operate for a two-year period following the date on which the awards vest.

As in prior years, awards will be split so that half will vest dependent on challenging EPS growth targets and half dependent on relative TSR measured against the constituents of the FTSE Small Cap Index. The proposed targets, each tested over three years, are as follows:

Relative Total Shareholder Return (50% of an award)

Low & Bonar TSR Ranking versus FTSE Small Cap Index (excluding investment trusts)

Percentage vesting

Below median

0%

Median

20%

Upper quartile

100%

Straight-line vesting between performance points

Earnings Per Share (50% of an award)

2014 adjusted EPS

Percentage vesting

Below 7.1p

0%

7.1p

20%

8.8p

100%

Straight-line vesting between performance points

The use of EPS and TSR reflects our continued long-term focus on earnings growth and creating shareholder value. Setting EPS targets as actual numbers for the financial year ending 30 November 2014 is considered to provide a clear and transparent approach to incentivising Executive Directors. The range of EPS targets reflect the current trading environment and are aligned with the Group Chief Executive’s continued focus on profitable growth, which is a key factor in our strategy. We believe the targets to be appropriately challenging given the proposed level of the awards.

When testing the targets, the Committee’s policy is to (i) request from its advisers an independent assessment of the extent to which the relative TSR target has been satisfied and (ii) consider the Company’s audited results (and the need to make any adjustments) when determining the extent of vesting in respect of EPS targets.

iv) Other share-based incentives

Executive Directors remain eligible to participate in the Low & Bonar 1997 Sharesave Scheme (the SAYE scheme), which is open to all eligible UK employees. During the year, options were granted under three- or five-year contracts at a 20% discount to the share price at the offer date. The maximum overall employee contribution is £250 per month. None of the Directors has an interest in this scheme except for Steve Good and Mike Holt.

The Company also operates the Low & Bonar 2007 Sharesave Scheme, which is open to a large number of the eligible non-UK employees and operates in a substantially similar way to the Low & Bonar 1997 Sharesave Scheme. None of the Directors has an interest in this scheme.

v) Share ownership guidelines

Share ownership guidelines operate in respect of long-term incentive awards. Executive Directors are expected to retain 50% of the after-tax number of future vested long-term incentive awards until a shareholding of equivalent value to 100% of salary is achieved (in respect of awards granted from 2011 onwards).

vi) Other benefits

Executive Directors receive a car allowance, private health insurance, death in service cover and a Company pension contribution of up to 25% of salary. They may also join the SAYE scheme on the same terms as all other Company employees.

3. Directors’ service contracts and letters of appointment

i) Executive Directors

In setting notice periods and determining termination payments under Directors’ service contracts, the Company’s policy includes the following:

  • notice periods should be set at one year or less to reflect the recommendations of the Code;
  • in the event of termination, the Committee considers what compensation commitments the Directors’ terms of appointment would entail and seeks to avoid rewarding poor performance where possible; and
  • taking a robust line on reducing compensation to reflect departing Directors’ obligations to mitigate loss.

In relation to the specific provisions included in each of the Executive Directors’ service contracts that served during the year under review, these are detailed below.

a) Steve Good, Group Chief Executive

Steve Good entered into a service agreement in November 2003 (as amended in 2009 following his becoming Group Chief Executive) in respect of his appointment.

His employment may be terminated by the Company giving him not less than twelve months’ notice in writing or by Mr Good giving the Company not less than six months’ notice in writing. In the event of termination by the Company, the Company has the discretion to make a payment in lieu of notice (of his basic salary plus other emoluments (but not bonus)). In the event that Mr Good’s employment is terminated by the Company, then the Company shall, if it is making a payment in lieu of notice, make a payment to him on the date of such notice of termination equivalent to his salary for a period of six months. Further payments are only made if Mr Good is not otherwise in full time employment at the time such payments become due.

b) Mike Holt, Group Finance Director

Mike Holt entered into a service agreement in September 2010 in respect of his appointment, which commenced on 22 November 2010.

His employment may be terminated by the Company giving him not less than twelve months’ notice in writing or by Mr Holt giving the Company not less than six months’ notice in writing. In the event of termination by the Company, the Company has the discretion to make a payment in lieu of notice (of his basic salary plus other emoluments (but not bonus)). In the event that Mr Holt’s employment is terminated by the Company, then the Company shall, if it is making a payment in lieu of notice, make a payment to him on the date of such notice of termination equivalent to his salary for a period of six months. Further payments are only made if Mr Holt is not otherwise in full time employment at the time such payments become due.

Both Mr Good and Mr Holt can be dismissed without notice for gross misconduct.

It is the Company’s policy that Board approval is required before any external appointment may be accepted by an Executive Director. Neither of the Executive Directors have external appointments.

ii) Non-Executive Directors

Non-Executive Directors do not have service contracts but are appointed pursuant to letters of appointment renewable usually for periods of three years as follows:

Original
appointment
date

Renewed for
a period of
3 years from

Steve Hannam1

1/9/2002

1/9/2011

Chris Littmoden1

23/2/2005

23/2/2011

Folkert Blaisse

1/1/2007

1/1/2010

Martin Flower2

1/1/2007

1/1/2010

John Sheldrick

1/10/2011

N/A

1 Mr Hannam’s appointment has been renewed until 31 August 2012. Mr Littmoden’s appointment has been renewed until 28 February 2012.
2 Martin Flower became Chairman on 30 June 2010 and entered into a revised service contract as detailed below.

The appointment of the Non-Executive Directors may be terminated by either the Director or the Company giving six months’ notice in writing. Continuation of an appointment is contingent on re-election by the shareholders as required by the Articles.

During the year under review, the remuneration of the Non-Executive Directors was reviewed by the Board (without the Non-Executive Directors participating in Board decisions) but was not increased and remains at £38,012, which is the third consecutive year without an increase being awarded. The fee for chairing the Remuneration Committee also remains at £5,000 and the fee for chairing the Audit Committee remains at £7,000.

The Non-Executive Directors do not participate in the Company’s annual bonus scheme, in any of the Company’s share incentive schemes or in the Company’s pension scheme.

Remuneration paid to the Non-Executive Directors during the year is shown in Table 1 below.

iii) Martin Flower, Chairman

Martin Flower has a service contract with the Company dated 12 February 2010 (which replaced his letter of appointment relating to his previous service as a Non-Executive Director dated 1 January 2007) under which he is paid a fee of £135,757. This fee was reviewed by the Committee, but not increased, for the year ending 30 November 2012. He does not participate in the Company’s annual bonus scheme, in any of the Company’s share incentive schemes or in the pension scheme.

Mr Flower’s appointment is for a period of three years from 30 June 2010. The appointment may be terminated at any time by either party giving to the other six months’ prior written notice. If the Company gives notice it may, at its discretion, terminate the appointment with immediate effect by paying an amount in respect of the fee for the notice period. Mr Flower’s appointment as Chairman will terminate forthwith and without any compensation for loss of office if he is removed as a Director by resolution passed at a general meeting or if he ceases to be a Director pursuant to any provision of the Articles of Association.

The Committee recommends the remuneration of the Chairman to the Board. Remuneration paid to the Chairman during the year is shown in Table 1 below.

4. Performance graph

The following graph illustrates the TSR performance of the Company compared to the FTSE Small Cap Total Return Index (the “Index”) over the past five years. The Index has been chosen as the appropriate benchmark for the Company. It is a recognised broad equity market index of which the Company has been a member throughout the period. The Index constituents are also used for the purposes of measuring the Company’s relative TSR performance in the 2003 LTIP which governs 50% of each award’s vesting. Performance, as required by legislation, is measured by TSR, being the increase in the share price over the period including the value of net dividends which are assumed to be reinvested in the Company’s shares on the ex-dividend date by the Company.

Total shareholder return

source: Thomson Reuters

Total shareholder return

This graph shows the value, at 30 November 2011, of £100 invested in the Company’s Ordinary Shares on 30 November 2006 compared with the value of £100 invested in the FTSE Small Cap Total Return Index. The other points plotted are the values at intervening financial year-ends.

Part 2: Audited Information

Table 1 Analysis of individual Directors’ emoluments

Salaries
and fees
£

Annual
bonus
£

Pensions
£

Benefits

in kind2

£

Total

2011
£

Total

2010
£

Executive Directors

S Good3

322,500

261,225

80,625

18,155

682,505

710,067

M Holt1,3

245,000

198,450

61,250

17,837

522,537

8,782

K Higginson1

226,789

567,500

459,675

141,875

35,992

1,205,042

945,638

Non-Executive Directors

RD Clegg1,4

90,082

SJ Hannam5

43,835

43,835

43,012

C Littmoden6

43,012

43,012

43,012

MC Flower

135,757

135,757

78,739

FB Blaisse

38,012

38,012

38,012

JN Sheldrick7

7,500

7,500

268,116

268,116

292,857

835,616

459,675

141,875

35,992

1,473,158

1,238,495

1 Mike Holt became a Director on 22/11/2010 and information in this report for 2010 relates only to the period from that date to 30/11/2010.
   Kevin Higginson was a Director until 24/8/2010 and information in this report for 2010 relates only to the period from 1/12/2009 up to that date.
   Duncan Clegg was a Director until 30/6/2010 and information in this report for 2010 relates only to the period from 1/12/2009 up to that date.

2 Benefits in kind are a car allowance and health insurance for the Director and his spouse/children under 21.

3 In addition to their salaries, the Executive Directors are entitled to a percentage of their basic salary to enable them to make retirement benefit
   arrangements. Payments made under this arrangement during the year were:

 

% of annual
basic salary

Cash payment, subject to statutory deductions

£

Employer’s contribution
into personal pension plan

£

Total payment in respect of retirement benefit arrangements

£

M Holt

25

7,500

53,750

61,250

S Good

25

33,625

47,000

80,625

41,125

100,750

141,875

4 Included in the fee paid to Duncan Clegg for 2010 was a fee of £7,500 for his chairmanship of the Low & Bonar Group Retirement Benefit
   Scheme (the “Scheme”). This fee was recharged by the Company to the Scheme.

5 Steve Hannam received a fee of £7,000 (2010: £5,000) for his Chairmanship of the Audit Committee (which is included in the number in the

6 Chris Littmoden received a fee of £5,000 for his Chairmanship of the Remuneration Committee (which is included in the number in the table).

7 John Sheldrick became a Director on 1/10/2011 and information in this report for 2011 relates only to the period from that date to 30/11/2011.
   Mr Sheldrick receives a fee of £7,000 for his chairmanship of the Audit Committee (a pro rata proportion of which is included in the number in the
   table).

Table 2 Directors’ interests in shares

The interests of the Directors and their connected persons in the shares of the Company were:

30/11/2011

1/12/2010

MC Flower

388,142

388,142

SJ Hannam

348,232

348,232

S Good

208,193

208,193

C Littmoden

166,458

161,437

FB Blaisse

124,285

124,285

M Holt

J Sheldrick

During the period 1/12/2011 to 7/2/2012, no changes in Directors’ interests have been notified to the Company.

No Director held any beneficial interest in or options over shares in or debentures of any other Group company at 30/11/2011 or at 7/2/2012.

Table 3 The Low & Bonar 2003 Long-Term Incentive Plan

Awards held by Directors under the 2003 LTIP were as follows:

At 1/12/2010

Awarded in year

Vested in year

Lapsed in year

At 30/11/2011

Award price

Date of award

S Good

292,858

292,858

35.00p

21/8/20091

S Good

146,428

146,428

35.00p

3/9/20091

S Good

1,397,932

1,397,932

33.00p

1/3/20102

M Holt

980,000

980,000

45.00p

22/11/20102

S Good

753,505

753,505

53.50p

15/3/20113

M Holt

572,430

572,430

53.50p

15/3/20113

1 The performance criteria applying to these awards are structured as follows:
  50% of the shares are subject to an EPS growth target and 50% a relative TSR target measured against the constituents of the FTSE Small Cap
  Index. Under the EPS element, 25% of shares vest for EPS in the financial year ended 30/11/2011 of 4.2 pence, rising on a straight-line basis to
   full vesting for EPS of 5.0 pence. Under the TSR element, 25% of shares vest for median TSR, rising on a straight-line basis to full vesting for
   upper quartile.

2 The performance criteria applying to these awards are structured as follows:
   50% of the shares are subject to an EPS growth target and 50% a relative TSR target measured against the constituents of the FTSE Small Cap
   Index. Under the EPS element, 25% of shares vest for EPS in the financial year ended 30/11/2012 of 4.7 pence, rising on a straight-line basis to
   full vesting for EPS of 5.4 pence. Under the TSR element, 25% of shares vest for median TSR, rising on a straight-line basis to full vesting for
   upper quartile.

3 The performance criteria applying to these awards are structured as follows:
  50% of the shares are subject to an EPS growth target and 50% a relative TSR target measured against the constituents of the FTSE Small Cap
   Index. Under the EPS element, 20% of shares vest for EPS in the financial year ended 30/11/2013 of 5.9 pence, rising on a straight-line basis to
   full vesting for EPS of 7.0 pence. Under the TSR element, 20% of shares vest for median TSR, rising on a straight-line basis to full vesting for
   upper quartile.

Directors’ share options

As at 30/11/2011, Steve Good held 24,643 options under the Low & Bonar 1997 Sharesave Scheme. As at 30/11/2011, Mike Holt held 36,039 options under the Low & Bonar 1997 Sharesave Scheme. No options were exercised by any Director during the year ended 30/11/2011. No options have been granted to any Director during the period 1/12/2011 to 7/2/2012.

The market price of a share at 30/11/2011 was 44.75p and the range during the year to 30/11/2011 was 42.30p to 77.00p.

Chris-Littmoden-signature.jpg

Christopher Littmoden

Chairman, Remuneration Committee

On behalf of the Board of Directors

7 February 2012

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