BP (BP)

Share Element

        The committee may make conditional share awards (performance shares) to executive directors, which will only vest to the extent that a demanding performance condition imposed by the committee is met at the end of a three-year performance period. As explained above, for 2005 and future years, the committee currently intends that the share element alone will provide the long-term performance-based component of the executive directors' package, and award levels have been adjusted to reflect this.

        Share element awards have been made in 2001 to 2004 inclusive using performance units that may convert into ordinary shares at a ratio of up to two shares for each performance unit (full details of which are set out in Compensation — 2004 Remuneration for Executive Directors — Long-term Performance-based Components in this Item on page 129). To simplify the operation of the plan and

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increase transparency, the award of performance shares will, for 2005 and future years, replace performance units. Vesting of performance shares will be at a maximum ratio of one-for-one. This change will not increase the value of the award levels or make performance conditions easier to achieve.

        The maximum number of performance shares that may be awarded to an executive director in any one year will be determined at the discretion of the remuneration committee and will not normally exceed 5.5 times base salary and, in the case of the group chief executive, 7.5 times base salary.

        In addition to the performance condition described below, the committee will have an overriding discretion, in exceptional circumstances, to reduce the number of shares which vest (or to provide that no shares vest).

        The shares which vest will normally be subject to a compulsory retention period determined by the committee, which will not normally be less than three years. This gives executive directors a six-year incentive structure, and is designed to ensure that their interests are aligned with those of shareholders. Where shares vest under awards made in 2005 and future years, the executive director will receive additional shares representing the value of reinvested dividends on these shares.

        For share element awards in 2005, the performance condition will relate to BP's TSR performance against the other oil majors (ExxonMobil, Shell, Total and Chevron) over a three-year period. TSR is calculated by taking the share price performance of a company over the period, assuming dividends to be reinvested in the company's shares. All share prices will be averaged over the three months before the beginning and end of the performance period and will be measured in US dollars. At the end of the performance period, the TSR performance of each of the companies will be ranked to establish the relative total return to shareholders over the period. Shares under the award will vest as to 100%, 70% and 35% if BP achieves first, second or third place respectively; no shares will vest if BP achieves fourth or fifth place.

        Extensive research was independently commissioned by the committee into alternative measures of business performance. After careful review of the studies, the committee is satisfied that relative TSR is the most appropriate measure of performance for BP's long-term incentives for executive directors as it best reflects the creation of long-term shareholder value. Relative performance of the peer group is particularly key in order to minimize the influence of sector-specific effects, including oil price.

        The committee is convinced that this comparator group, while small, has the distinct advantage of being very clearly comprised of BP's global competitors. Consultation with major shareholders confirmed that this is the group already used by most of them, as well as by management, in assessing BP's comparative performance. The committee will have the discretion to amend this peer group in appropriate circumstances, for example, in the case of any significant consolidations in the industry.

        The committee is mindful of the possibility that a simple ranking system may in some circumstances give rise to distorted results in view of the broad similarity of the oil majors' underlying businesses, the small size of the comparator group and inherent imperfections in measurement. To counter this, the committee will have the ability to exercise discretion in a reasonable and informed manner to adjust (upwards or downwards) the vesting level derived from the ranking if it considers that the ranking does not fairly reflect BP's underlying business performance relative to the comparator group.

        The exercise of this discretion would be made after a broad analysis of the underlying health of BP's business relative to competitors, as shown by a range of other measures including, but not limited to, return on average capital employed (ROACE), earnings per share (EPS) growth, reserves replacement and cash flow. This will enable a more comprehensive review of long-term performance, with the aims of tempering anomalies created by relying solely on a formula-based approach and ensuring that the objectives of the plan are met.

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        It is anticipated that the need to use discretion is most likely to arise where the TSR performance of some companies is clustered, so that a relatively small difference in TSR performance would produce a major difference in vesting levels. In these circumstances, the committee will have power to adjust the vesting level, normally by determining an average vesting level for the companies affected by the clustering.

        In line with its policy on transparency, the committee will explain any adjustment to the relative TSR ranking in the next directors' remuneration report following the vesting.

        The committee may amend the performance conditions if events occur that would make the amended condition a fairer measure of performance and provided that any amended condition is no easier to satisfy.

        For 2005, all executive directors will receive performance share awards on the above basis, over a maximum number of shares set by reference to 5.5 times base salary. For awards under the share element in future years, the committee may continue with the same performance condition, or may impose a different condition which it considers to be no less demanding.

        As group chief executive, Lord Browne is eligible for performance share awards of up to 7.5 times base salary. The committee has determined that, while the largest part of this should relate to the TSR measure described above, it is appropriate that a specific part (up to 2 times base salary) should be based on long-term leadership measures. These will focus on sustaining BP's financial, strategic and organizational health and will include, but not be limited to, maintenance of BP's performance culture and the continued development of BP's business strategy, executive talent and internal organization. As with the TSR part of his award, this part will be measured over three-year performance periods.

Share Element

        The committee may make conditional share awards (performance shares) to executive directors, which will only vest to the extent that a demanding performance condition imposed by the committee is met at the end of a three-year performance period. As explained above, for 2005 and future years, the committee currently intends that the share element alone will provide the long-term performance-based component of the executive directors' package, and award levels have been adjusted to reflect this.

        Share element awards have been made in 2001 to 2004 inclusive using performance units that may convert into ordinary shares at a ratio of up to two shares for each performance unit (full details of which are set out in Compensation — 2004 Remuneration for Executive Directors — Long-term Performance-based Components in this Item on page 123). To simplify the operation of the plan and

117

increase transparency, the award of performance shares will, for 2005 and future years, replace performance units. Vesting of performance shares will be at a maximum ratio of one-for-one. This change will not increase the value of the award levels or make performance conditions easier to achieve.

        The maximum number of performance shares that may be awarded to an executive director in any one year will be determined at the discretion of the remuneration committee and will not normally exceed 5.5 times base salary and, in the case of the group chief executive, 7.5 times base salary.

        In addition to the performance condition described below, the committee will have an overriding discretion, in exceptional circumstances, to reduce the number of shares which vest (or to provide that no shares vest).

        The shares which vest will normally be subject to a compulsory retention period determined by the committee, which will not normally be less than three years. This gives executive directors a six-year incentive structure, and is designed to ensure that their interests are aligned with those of shareholders. Where shares vest under awards made in 2005 and future years, the executive director will receive additional shares representing the value of reinvested dividends on these shares.

        For share element awards in 2005, the performance condition will relate to BP's TSR performance against the other oil majors (ExxonMobil, Shell, Total and Chevron) over a three-year period. TSR is calculated by taking the share price performance of a company over the period, assuming dividends to be reinvested in the company's shares. All share prices will be averaged over the three months before the beginning and end of the performance period and will be measured in US dollars. At the end of the performance period, the TSR performance of each of the companies will be ranked to establish the relative total return to shareholders over the period. Shares under the award will vest as to 100%, 70% and 35% if BP achieves first, second or third place respectively; no shares will vest if BP achieves fourth or fifth place.

        Extensive research was independently commissioned by the committee into alternative measures of business performance. After careful review of the studies, the committee is satisfied that relative TSR is the most appropriate measure of performance for BP's long-term incentives for executive directors as it best reflects the creation of long-term shareholder value. Relative performance of the peer group is particularly key in order to minimize the influence of sector-specific effects, including oil price.

        The committee is convinced that this comparator group, while small, has the distinct advantage of being very clearly comprised of BP's global competitors. Consultation with major shareholders confirmed that this is the group already used by most of them, as well as by management, in assessing BP's comparative performance. The committee will have the discretion to amend this peer group in appropriate circumstances, for example, in the case of any significant consolidations in the industry.

        The committee is mindful of the possibility that a simple ranking system may in some circumstances give rise to distorted results in view of the broad similarity of the oil majors' underlying businesses, the small size of the comparator group and inherent imperfections in measurement. To counter this, the committee will have the ability to exercise discretion in a reasonable and informed manner to adjust (upwards or downwards) the vesting level derived from the ranking if it considers that the ranking does not fairly reflect BP's underlying business performance relative to the comparator group.

        The exercise of this discretion would be made after a broad analysis of the underlying health of BP's business relative to competitors, as shown by a range of other measures including, but not limited to, return on average capital employed (ROACE), earnings per share (EPS) growth, reserves replacement and cash flow. This will enable a more comprehensive review of long-term performance, with the aims of tempering anomalies created by relying solely on a formula-based approach and ensuring that the objectives of the plan are met.

118

        It is anticipated that the need to use discretion is most likely to arise where the TSR performance of some companies is clustered, so that a relatively small difference in TSR performance would produce a major difference in vesting levels. In these circumstances, the committee will have power to adjust the vesting level, normally by determining an average vesting level for the companies affected by the clustering.

        In line with its policy on transparency, the committee will explain any adjustment to the relative TSR ranking in the next directors' remuneration report following the vesting.

        The committee may amend the performance conditions if events occur that would make the amended condition a fairer measure of performance and provided that any amended condition is no easier to satisfy.

        For 2005, all executive directors will receive performance share awards on the above basis, over a maximum number of shares set by reference to 5.5 times base salary. For awards under the share element in future years, the committee may continue with the same performance condition, or may impose a different condition which it considers to be no less demanding.

        As group chief executive, Lord Browne is eligible for performance share awards of up to 7.5 times base salary. The committee has determined that, while the largest part of this should relate to the TSR measure described above, it is appropriate that a specific part (up to 2 times base salary) should be based on long-term leadership measures. These will focus on sustaining BP's financial, strategic and organizational health and will include, but not be limited to, maintenance of BP's performance culture and the continued development of BP's business strategy, executive talent and internal organization. As with the TSR part of his award, this part will be measured over three-year performance periods.