ALUMINA (AWC)

Variable Payments

During the year, the Company arranged for an independent consultant to review the structure of its STI and LTI plans. After considering the review, the structure of the LTI was modified, effective from 1 January 2007. Details of the arrangements applying during 2006 and the changes applying from 1 January 2007 are set out under paragraph (ii) below.

Variable Payments

During the year, the Company arranged for an independent consultant to review the structure of its STI and LTI plans. After considering the review, the structure of the STI and LTI were modified, effective 1 January 2006. Details of the arrangements applying during 2005 and the changes to apply from 1 January 2006 are set out below.

The amount of STI awarded varies according to a combination of individual and Company performance criteria. For the STI, Company performance has been measured using the TSR for a one year period.

Short-term incentive payments are calculated as a percentage of the Senior Executive’s fixed remuneration and are paid in the form of cash. The Committee reviews performance assessments and approves all STI payments to all employees. In 2005, the maximum payable to senior executives was 45 per cent of FAR, of which 25 per cent related to performance against individual objectives, and 20 per cent related to the Company’s relative TSR performance during the 2005 year. The STI was designed to encourage superior performance and link Senior Executive remuneration to the returns achieved by shareholders.

Performance against individual objectives link achievement to reward for Senior Executives for meeting or exceeding measurable objectives in their work. Specific tasks and objectives relate to AWAC joint venture matters and strategy, capital management and dividends, which ultimately support Alumina Limited’s objectives and shareholder interests.

These objectives in 2005 included completion of the acquisition of the Juruti bauxite deposit, implementing a funding plan to ensure Alumina’s participation in AWAC’s growth projects, undertaking action to release franking credits from Alcoa of Australia, the basis of any participation in the Pingguo bauxite and alumina assets and implementation of AIFRS.

Performance of Senior Executives is measured against agreed objectives and targets. Individual performance against the measures was assessed for each Senior Executive for 2005 and an average of 20 per cent of FAR was awarded for this component of STI. The objective of releasing franking credits from Alcoa of Australia was achieved during the year and the 2005 interim dividend was fully franked. The change from Australian generally accepted accounting standards to AIFRS was implemented successfully during the year. Progress was also made during 2005 on the funding plan for AWAC growth projects.

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The TSR component of the 2005 STI plan is measured against the same two comparator peer groups used for the 2005 LTI plan grant (see below).

The STI reward attributed to the TSR performance fluctuates according to the relative performance of the Company. An entitlement is triggered according to the scale set out in table 1.0.

TABLE 1.0

For 2005, an STI component of 8 per cent of FAR was attributed to short-term relative TSR performance, with Company relative performance registering in the second quartile against peer group performance.

The Comparator companies whose performances the Company’s TSR is measured against are shown in tables 3.1 and 3.2:

Company TSR and individual performance objectives provide an incentive to achieve high levels of personal performance and contribute to high levels of Company performance. TSR has been used as a performance hurdle in the STI plan because it was considered an appropriate means of measuring Company performance. The STI is paid in December in respect of the performance within that year.

Senior Executives are invited to participate in the Alumina Employee Share Plan (ESP). The ESP is designed to link Alumina Limited employee rewards with the long-term goals and performance of the Company, and the generation of shareholder returns.

Each year Senior Executives may be offered (at the Board’s discretion) a conditional entitlement under the ESP, to fully paid ordinary shares in the Company (Performance Rights), which are purchased on market. The Performance Rights vest to Senior Executives at the end of the performance period if the performance tests are achieved over that performance period.

An initial grant of three tranches of Performance Rights, approved by the Board in March 2003, covered a three year period 2003 to 2005. The first tranche was tested in December 2003, the second tranche in December 2004 and the third tranche in December 2005. Subsequent grants of Performance Rights made after March 2003 have a three-year performance test period. The LTI grant value for Senior Executives was set at 30 per cent of FAR for the initial grant of three tranches of Performance Rights in March 2003. The LTI grant value was set at 55 per cent for the subsequent grants in January 2004 and January 2005. The LTI grant value is divided by the prevailing Company share price at the time of the offer to determine the number of Performance Rights offered to Senior Executives under the ESP.

The performance criteria and testing period for each annual offer under the ESP are determined by the Committee at the time of issue of each tranche of Performance Rights.