Remuneration report
Remuneration Policy for Executive Directors
Salary
Executive Bonus Plan
Long Term Incentive and Option Scheme
Pensions
Other benefits
Service contracts
Non-executive directors
External directorships
Performance graph
Directors' remuneration
Directors' interests
Share schemes
Directors' pension entitlements
Auditable information

This report is presented to shareholders by the Board and sets out the Board’s remuneration policy and details of the remuneration of each director. The Remuneration Committee (‘the Committee’) is responsible for developing policy on executive remuneration and for approving the remuneration packages of individual executive directors.

The members of the Committee during the period under review were Mr R L Börjesson (Committee Chairman), Sir Philip Beck, Mr L E Farmer and Mr J-C Guez (appointed on 21 January 2003). They are all independent non-executive directors. The Committee takes advice, as appropriate, from independent remuneration consultants and internally from relevant executives and human resources professionals. Specifically, the Committee has taken advice internally from the Chairman, the Chief Executive, the Senior Vice President Human Resources and Group Services (Regina Hitchery), the Vice President Compensation and Benefits (John Reed) and the Company Secretary. Externally, following a review, the Committee has during the year appointed and taken remuneration consultancy advice from New Bridge Street Consultants. This firm now provides the principal source of external advice to the Committee on issues relating to the remuneration of the executive directors. Prior to the appointment of New Bridge Street Consultants, the Committee received advice on such issues from Mercer HR Consulting. The Committee has also received advice from Freshfields Bruckhaus Deringer and previously from Linklaters (in their capacity as lawyers to the Company) on such issues and from Punter Southall & Co Limited which provided advice in relation to executive directors’ pensions and actuarial advice to the Company generally. New Bridge Street Consultants provided no other services to the Company. Mercer HR Consulting also acts as actuary to certain of the Group’s overseas pensions schemes.

No non-Committee member may attend other than by invitation of the Committee Chairman. No director is involved in deciding their own remuneration.

Remuneration Policy for Executive Directors
The Invensys Group operates world-wide and will be focusing its operations within the production management industry with a high proportion of executives in the US. The markets for executives and staff within which it will operate are therefore the electronic, software and related industries. It is the objective of the remuneration policy with respect to the current year and, subject to any changes of circumstances, future years to provide a remuneration package which is competitive and performance-linked whilst attracting, motivating and retaining the highest calibre executive directors and senior executives. The Committee has established a remuneration package for the executive directors after taking proper account of the specific requirements of the business including the international spread of the business, the remuneration applicable at other levels within the Group and developments in UK best practice. The main components of the remuneration package are as follows:

1 Salary
The Committee determines the level of salary for each executive director annually. Base salaries are set at a level to take account of personal performance and salaries in comparable companies. In establishing individual levels the Committee is conscious that it should pay no more than is necessary to retain the executive whilst ensuring business objectives are fulfilled. There is no automatic adjustment in respect of inflation.

The Chief Executive’s salary is currently £660,000 (which was last increased on 1 April 2002) and the Chief Financial Officer’s is £400,000 (which took effect on 1 January 2003, being the date of his appointment as Chief Financial Officer). No increase will be awarded to either director in respect of the 2003/04 financial year and the next review date will be 1 April 2004. In view of the restructuring of the Group explained in the Chairman’s statement on page 2 of this report, the Committee considers it appropriate to ensure that the executive directors are properly incentivised to undertake the restructuring in the interests of all shareholders. Accordingly, the Committee is satisfied that the arrangements explained in the following pages represent an appropriate balance between fixed and performance linked pay.

2 Executive Bonus Plan
The main objectives of the Executive Bonus Plan (‘the Plan’) for the executive directors are to encourage executives to achieve defined annual financial objectives and focus on the most important measures of business success whilst rewarding them for outstanding performance. In this way the Plan seeks to align the interests of shareholders and those participating in the Plan. In designing the Plan, the Committee has followed the provisions set out in Schedule A to the Combined Code appended to the Listing Rules of the UK Listing Authority.

As described in last year’s report, the targets for the Chief Executive for the year ended 31 March 2003 were set to reflect profit and cash flow targets and a number of measurable operational targets reflecting the key areas of targeted performance improvement. No bonuses were paid under the Plan to executive directors in respect of that year except a guaranteed bonus of £88,125 due to the Chief Financial Officer. This was negotiated as a term of his recruitment. He has no such guarantee in respect of 2003/04 or subsequent years.

For the forthcoming year 2003/04, the performance targets, for both the Chief Executive and the Chief Financial Officer, have been set to reflect targets related to operating profit before interest and tax, with a range of supplemental measures. The achievement of all targets would produce a payment of 50% of annual base salary and the maximum bonus achievable in respect of performance in excess of targets is 100% of annual base salary.

The Committee considers these targets to be fully appropriate as they provide an effective blend of measures reflecting the need both to develop the ongoing operations and to dispose of non-core activities on as favourable terms to shareholders as possible. The Committee confirms that it is not its policy to pay transactionrelated bonuses.

Shareholder approval has been given for the operation of a Deferred Share Bonus Plan. In the current circumstances, the Committee has concluded that it will not be appropriate to operate this plan for the foreseeable future.

3 Long Term Incentive and Option Schemes
(i) Long Term Incentive Plan (‘LTIP’)
The Committee has decided that in future the LTIP will be operated as the principal vehicle for long-term incentivisation for the executive directors. Under the LTIP, awards may be made subject to a performance condition under which the Company’s Total Shareholder Return (‘TSR’) will be ranked over a fixed three year period against the TSR of the constituents (as at the date of grant) of the FTSE Mid 250. The Company’s TSR must rank at the median position for 25% of an award to be available (subject to a retention period of, generally, two years), rising to all of the shares being available if the upper decile position is achieved. Intermediate awards between those points are assessed on a straight-line basis. If at least the median position is not achieved, the whole award lapses. In addition to satisfying the TSR test, awards will only vest to the extent that the Committee is satisfied that there has been sustained delivery, over the performance period, regarding the trading performance of continuing operations, disposal proceeds and reduction in Group indebtedness.

TSR was selected as an effective means of determining the Company’s performance relative to that of other companies of comparable size. The Committee selected the supplemental tests as being appropriate to the strategy and scale of the Company following the recently announced new strategic direction and because they would be capable of being measured by reference to the progress achieved in implementing that strategy.

The TSR calculation will be periodically undertaken by New Bridge Street Consultants using data supplied by Datastream and reported to the Committee. The Committee will monitor performance against budget and other objectives set by the Board in considering whether the other tests have been met.

The level of awards to executive directors is determined by the Committee according to the prevailing market practice and within the overriding limit of two times salary.

For the forthcoming year 2003/04, each executive director will receive an award of shares worth one times salary. This reflects an award in respect of broadly 50% of the value of shares awarded in previous years. The Committee considers this to be an effective, but not excessive, award in light of the current circumstances that is likely to be sufficient to cover both the 2003/04 and 2004/05 financial years; it is not currently intended that a further award be made before June 2005 as the awards were structured to incentivise the executive directors through the principal phase of restructuring.

(ii) Executive Share Option Scheme
The Company does not propose to operate the Executive Share Option Scheme in relation to executive directors except by exception, in the case of recruitment situations, where it may be considered appropriate.

(iii) Savings Related Share Option Scheme (‘SRSOS’)
The Company has an established SRSOS that operates in the UK, together with a related SRSOS that operates in approximately 20 overseas countries. It is based on a three, five or seven year (UK only) savings plan and offered to eligible full and part-time employees. Options may be granted at up to a 20% discount to the market price of the Company’s shares immediately preceding the date of invitation. Executive directors are eligible to participate in the SRSOS.

4 Pensions
Details of the individual executive directors’ pension arrangements are set out on page 28. Pensionable pay is defined as base salary only; bonuses are not pensionable.

Typical pension and life assurance benefits are provided to the executive directors, comprising participation in the Company’s final salary pension on salaries up to the Inland Revenue’s earnings cap (currently £99,000) with appropriate top-up arrangements.