Policy on remuneration of Executive Directors and senior executives

The Committee aims to ensure that remuneration packages are offered which:

• Set the total remuneration package at an appropriate level to reflect the competitive market in which the Group operates;
• Link a substantial proportion of the total remuneration package to the achievement of demanding financial performance targets;
• Structure the reward of senior management to align their interests with those of the shareholders over the long term; and
• Reinforce the high-performance culture throughout the Group.

The Group has performance-related reward policies. These are designed to provide the appropriate balance between fixed remuneration and variable ‘at-risk’reward which is linked to the performance of both the Group and the individual. Group performance-related measures are chosen carefully to ensure a strong link between reward and true underlying financial performance. Individual performance is measured through an assessment of comprehensive business unit deliverables, modelling the Group’s values and the achievement of specific objectives. At a minimum, the individual performance of the Executive Directors is assessed on an annual basis.

In assessing levels of pay and benefits, TUI Travel compares the packages offered by different groups of comparator companies. These groups are chosen having regard to:

• Financial size – turnover, profits and market capitalisation;
• Scale of business – the number of people employed;
• Diversity and complexity of businesses;
• Geographical spread of businesses;
• Industry type; and
• Relevance as:
  – a potential source for candidates for roles within the Group; and
  – a potential threat in respect of attracting TUI Travel executives.

External consultants are used to advise the Committee on the structure and level of pay and benefits in TUI Travel’s markets.

The normal policy for Executive Directors is that, using ‘target’or ‘expected value’calculations, long term performance drives 60% of total annual remuneration (excluding benefits) and the total proportion of performance-related remuneration (including annual bonus) is 70%.

The main components of remuneration in the Company are:

• Fixed remuneration
  – base salary
  – benefits
  – pension contribution
• Performance-related remuneration
  – annual bonus
  – long term incentives

Base salary

The salary for each Executive Director is based on individual performance and on information from independent professional sources on the salary levels for similar jobs in groups of comparable companies. This approach is consistent with that used to determine salary and benefit levels for all employees within the Group. Internal relativities and salary levels in the wider employment market are also taken into account.

During the year, the Committee decided that it was not appropriate to increase fixed remuneration in the current climate. Consequently, the Executive Directors’base salaries were not increased at the normal annual review in October 2009 and will remain at 2009 levels during the financial year to 30 September 2010. In addition, the Committee does not anticipate undertaking the next normal annual review prior to 1 October 2011.

Benefits are provided to Executive Directors in accordance with the practice applying to other executives in their geographic location.

Annual performance bonus

Within the Annual Bonus Plan, challenging performance goals are set and these must be achieved before the maximum bonus becomes payable. The Annual Bonus Plan measures are weighted heavily to the Group’s financial performance and the balance to personal objectives. The maximum bonus opportunity for each Executive Director varies by individual but will not exceed 175% of annual base salary. The maximum bonus opportunity is greater than the maximum bonus for the financial year ending 30 September 2009 (150%). This change, combined with not increasing fixed remuneration, implements a policy decision to increase the portion of total remuneration that is performance related. This will have the benefit of helping to manage the Group’s fixed cost base and improve the alignment between executive reward and the value created for shareholders.

Long term incentives

Deferred Annual Bonus Scheme

All Executive Directors also participate in the Deferred Annual Bonus Scheme (DABS) which requires a minimum of 25% and a maximum of 50% of any annual performance bonus payable to be deferred into awards of shares. Matching shares may also be awarded up to four times the deferred amount and are subject to the achievement of stretching performance conditions. Awards of deferred and matching shares are subject to forfeiture conditions until the release date. The earliest point at which the shares are eligible for release is at the end of three years following deferral.

For awards of matching shares made during the year, no shares will vest unless the annual average of the ratio of the Group’s return on invested capital (ROIC) to the weighted average cost of capital (WACC) meets or exceeds one over the three-year period. A hurdle of ROIC, being at least equal to WACC, is used to ensure that the relevant long term incentive awards pay out only when shareholder value is being created over the performance periods. If the ROIC/WACC hurdle is met, shares will only vest to the extent to which two further performance conditions are satisfied over the three-year period as follows:

• Up to three-quarters of the matching shares will vest based on growth in the Group’s earnings per share (EPS), before amortisation of goodwill and merger intangibles, goodwill impairment and separately disclosed items, in relation to the growth in the UK Retail Price Index (RPI) as shown in the table below:

• Up to one-quarter of the matching shares will vest based on the Group’s ranking of total shareholder return (TSR) performance relative to companies ranked 30th to 100th by market capitalisation as at the date of the award as shown in the table below:

Matching share awards lapse if the performance conditions are not met.

Performance Share Plan

The Performance Share Plan (PSP) allows Executive Directors and eligible participants to receive share awards, subject to the satisfaction of performance conditions, set by the Committee, which are normally measured over a three-year period. Awards are normally made annually and, except in exceptional circumstances, will not exceed two times annual salary for Executive Directors.

For awards made during the year, no shares will vest unless the annual average of the ratio of the Group’s ROIC to the WACC meets or exceeds one over the three-year period.

If the ROIC/WACC hurdle is met, shares will only vest to the extent to which two further performance conditions are satisfied over the three-year period as follows:

Up to half of the shares will vest based on growth in the Group’s EPS, before amortisation of goodwill and merger intangibles, goodwill impairment and separately disclosed items, in relation to the growth in the UK RPI as shown in the table below:

• Up to half of the shares will vest based on the Group’s ranking of TSR performance relative to companies ranked 30th to 100th by market capitalisation as at the date of the award as shown in the table below:

Awards under the Performance Share Plan lapse if the performance conditions are not met.

The Committee considers that EPS and TSR are the key performance conditions that are most relevant to the Group. EPS is a key indicator of the Group’s underlying financial performance whilst TSR is a relative measure of shareholder value creation. A hurdle of ROIC, being at least equal to WACC, is used to ensure that the relevant long term incentive awards pay out only when shareholder value is being created over the performance periods.

Value Creation Synergy Plan

Under the Value Creation Synergy Plan (VCSP), which is a one-off three-year plan, Executive Directors and eligible participants will receive an award which will be satisfied by a combination of cash and shares provided that stretching performance targets are satisfied. The performance targets, set by the Committee, are based on the achievement of the synergistic objectives of the merger of First Choice Holidays PLC (now First Choice Holidays Limited) and the Tourism Division of TUI AG.

The maximum aggregate awards for Executive Directors are:

The awards will be a combination of cash and shares, which will vest in three tranches over three years, as shown below:

Tranche 1 (2007/2008):    50% cash and 50% shares;

Tranche 2 (2008/2009):    50% cash and 50% shares; and

Tranche 3 (2009/2010):    100% cash.

While any cash entitlement will be paid annually, shares will be deferred until the end of the three-year period.

The vesting of the annual tranches will be subject to the achievement of annual performance targets over the three-year period. The release of the share elements will be subject to a further overall three-year performance target.

The overall three-year performance targets have been set at a target of £100m of synergistic value (below which no vesting will occur) with a payment and vesting scale up to a ‘stretch’level of £150m. In addition, the Committee have set annual profit margin targets below which no payment or vesting will occur.

At target and stretch annual performance, the proportion vesting under each annual tranche will be 50% and 100% respectively. In the event that the overall three-year performance target is not achieved, any net amounts that have been previously paid in relation to the cash elements of Tranches 1 and 2 must be repaid to the Company.

All-employee share schemes

Executive Directors based in the UK are eligible to participate in the HMRC-approved Share Incentive Plan which is an all-employee share scheme enabling staff to acquire shares in the Company on preferential terms. To further encourage employee shareholding in the Company, the Share Incentive Plan provides a matching share for every four shares bought by a participant under the plan. Matching shares are not subject to performance conditions.

Shareholding guidelines

The Executive Directors will be expected to build, within five years of their appointment, and then maintain, a shareholding equal in value to 1.5 times their basic salary or two times in the case of the Chief Executive.

No new shares were issued during the year and therefore the Company has remained within its headroom limits for the issue of new shares under share incentive schemes. All share incentive awards made, and all future share incentive awards, will normally be settled with shares purchased in the market.