BT : Report on directors’ remuneration

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Report on directors' remuneration

Committee chair's letter

Sir Ian Cheshire

Chair of the Remuneration

Committee

12 May 2021

During what has been an extraordinary year for everyone, not just for BT, the committee has recognised the commitment and contribution

of our entire workforce. We've also ensured that any remuneration decisions taken during the year are in line with the new Directors' Remuneration Policy.

Contents

Committee chair's letter

Review of the year; committee decisions; key outturns and plans for the year ahead - pages 88 to 90.

Focus on remuneration

The key aspects of our remuneration structure, outcomes for 2020/21 and implementation of the Directors' Remuneration Policy (Policy) in 2021/22 - pages 91 to 93.

Annual remuneration report

More detail on how we have implemented our Policy during 2020/21 including the single figure of remuneration for each director - pages 94 to 102.

Remuneration in context

How we take account of remuneration conditions across the group - pages 103 to 104.

Membership and attendance

The committee comprises five independent non-executive directors only. The company secretary or her appointed delegate acts as secretary to the committee, and they attend all meetings and provide advice and support as required.

The chairman, chief executive, group HR director and director of reward are typically invited to attend meetings. None of the above attends meetings where their own remuneration is discussed or in other circumstances where their attendance would not be appropriate.

Deloitte LLP, as the independent remuneration adviser to the committee, also attends all meetings.

The committee held four scheduled meetings during the year and four ad hoc meetings. The ad hoc meetings have predominantly been focused on remuneration arrangements as a result of changes to the Executive Committee.

Member	Attended	Eligible to attend
Ian Cheshire (chair)a	4	4
Iain Connb	3	3
Isabel Hudson	4	4
Mike Inglisc	2	2
Matthew Key	4	4
Leena Nair	4	4
Nick Rosed	2	2

1. Ian became committee chair on 16 July 2020.
2. Iain joined the committee on 16 July 2020.
3. Mike stepped down from the committee on 16 July 2020.
4. Nick stepped down from the committee and as committee chair on 16 July 2020.

Key responsibilities

• Determines the salary and benefits for the executive directors, members of the Executive Committee and the company secretary, and monitors remuneration practices and policies for the wider workforce
• Operation of the annual bonus scheme for senior executives, including setting performance targets for the year ahead
• Determines awards under the annual bonus scheme for senior executives
• Governance of the company's long-term incentive plans
• Reviews and approves the Report on directors' remuneration for inclusion in the Annual Report
• Reviews and approves the Policy including seeking shareholder approval, on a binding basis, at least every three years
• Ensures that all remuneration decisions are made within the parameters of the approved Policy and align with our reward philosophy and our values. No senior executive is involved in any decision about their own remuneration.

After each meeting, I report back to the Board on the committee's activities and the main issues discussed.

The committee's key responsibilities are set out in its terms of reference available at bt.com/governance

BT Group plc Annual Report 2021

This is my first letter since becoming the remuneration committee chair and I would like to start by thanking Nick Rose, the former committee chair, for his seamless handover and for securing strong shareholder support for BT's new Directors' Remuneration Policy (Policy) at the 2020 Annual General Meeting (AGM). I must admit that I had envisaged a relatively quiet year implementing the new Policy across the business. However, it has been an extraordinary year, and the committee has spent much of its time focused on five key areas: purpose, people, the pandemic, performance and Policy.

Purpose, people, and the pandemic

"We connect for good", BT's purpose, has really been brought to life during the pandemic. Despite the surge in demand on our fixed-line, broadband, and mobile networks, BT kept our customers and the country connected. BT also played a vital role in supporting the NHS by connecting the Nightingale hospitals and testing centres, rolling out our high-speed network to vaccination centres, keeping the Emergency Services Network working 24/7, and gifting unlimited data to NHS workers to show our appreciation of their valiant work.

Achieving this required an enormous amount of effort and commitment from our entire workforce. A special mention must be made of our frontline colleagues and key workers such as the Openreach engineers, who have worked around the clock to install services and repair technical faults, our call centre colleagues who assisted our customers, and the retail teams that kept our EE/BT retail shops running where possible.

At the start of the pandemic, the chief executive made a commitment that BT would support the wellbeing of our colleagues as best it could, and that no colleague would lose their job as a direct result of changing trading conditions brought about by Covid-19. I am pleased to say that we delivered on this promise. Despite the challenges we have faced, we have continued to invest in our network, we have not needed to make use of the Government's furlough scheme, and we have created new jobs in Openreach at a time when many companies have cut employees' pay, cut working hours and made redundancies. Like many other companies, we did expect our profits to be lower than last year given the impact of Covid-19 on the global economy, however the committee and the Executive Committee felt it was important to reward our colleagues and to recognise their commitment and contribution during an extraordinarily challenging year. All frontline colleagues and key workers will receive a special one-off cash bonus of £1,000, and all eligible colleagues will receive £500 worth of shares that vest after three years.

We took the difficult decision to freeze executive salaries for a second consecutive year and, despite the higher formulaic outturn of 129% of target, the committee exercised its discretion to cap executive bonuses at 100% of target in line with the chief executive's recommendation. In addition, all members of the Executive Committee have for a second year voluntarily agreed to defer all of their annual bonus into shares for three years. This means that executives have not received cash bonuses for the last two years. As announced in April 2020, the chief executive also donated six months of his salary to health charities and small businesses in his local community.

During the year, there were a few changes to the Executive Committee as mentioned by Philip Jansen in his introduction on page 7. The committee considered and approved competitive remuneration packages for the new joiners and the treatment to be applied for leavers.

Corporate governance report	89

Performance and executive remuneration outcomes for 2020/21

Annual bonus performance was based on a scorecard of seven key financial and non-financial measures that align to our strategic priorities. All targets were set at the start of the financial year based on a forecast impact of the Covid-19 pandemic. Acknowledging the significant uncertainty caused by the pandemic at the time the targets were set, the committee reviewed the measures and targets in the middle of the year. No adjustments to the targets were made as a result of the Covid-19 pandemic.

Financial performance accounts for 70% of the bonus scorecard:

• EBITDA (35%) - the outcome was in line with our expectations at £7,415m and came in between target and stretch. Despite pressures on our revenue, we continued to see benefits from our simplification and transformation programme.
• Normalised free cash flow (35%) - the outcome was £1,459m which was also between target and stretch.

Our non-financial measures account for 30% of the bonus scorecard and comprise the following:

• Customer (10%) - our colleagues have worked hard to deliver standout customer experience during the year, and the overall group Net Promoter Score (NPS) saw its 19th consecutive quarterly improvement, with Consumer and Global results at an all-time high.
• Converged networks (10%) - Openreach worked hard to maintain FTTP connection rates despite multiple lockdowns and delivered performance between target and stretch. We took advantage of new product launches to drive sales of our 5G tariffs and handsets and significantly exceeded our 5G customers stretch target.
• Digital impact (5%) - as Covid-19 hit, we successfully pivoted to a digital-first model for Skills for Tomorrow, delivering campaigns designed to help small businesses and families, as well as Stand Out Skills, focusing on providing support
  to jobseekers. We also launched our Top Tips on Tech TV campaign, which reached an incredible 5.7m people. As this campaign was not foreseen at the time the target was set, we removed it from our scorecard results - however the number of people reached through our other delivery channels still exceeded our stretch goal for the year.
• Sustainability (5%) - significant progress has been made towards reducing our carbon emissions intensity; putting in the foundations for accelerated fleet electrification and switching to purchasing 100% renewable electricity globally. While Covid-19 has had a positive impact on our emissions during the year due to factors such as increased homeworking and reduced vehicle usage, our underlying performance for the year excluding the impact of Covid-19 was still between target and stretch. We are on-track to meet our KPI of an
  87% reduction in carbon emissions intensity by the end of March 2031.

When determining overall performance and bonus pay-outs, the committee also considers a number of other factors including share price performance, the external environment and overall affordability. Given ongoing cost constraints, pay freezes across the organisation and continued economic uncertainty, despite the formulaic outturn of the final bonus scorecard being 129% of target, the committee exercised its discretion to cap executive bonuses at 100% of target in line with the chief executive's recommendation. The committee also believes this is a fair outturn given the overall performance of the business under challenging conditions.

BT Group plc Annual Report 2021

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Report on directors' remuneration Committee chair's letter continued

Accordingly, the chief executive and chief financial officer will be awarded bonuses of £1,320,000 and £882,526 respectively. As was the case last year, both executive directors have volunteered to defer their annual bonuses in full into shares for three years.

The 2018 Incentive Share Plan (ISP) award will lapse in full in May 2021 as we did not meet the threshold performance target in respect of each measure over the last three years.

Policy implementation in 2021/22

a) Salary

As outlined above, we have made the decision this year to not increase base salaries for the management population. Accordingly, the chief executive and the chief financial officer will not receive a salary increase in June 2021.

b) Pension

As set out in our Policy last year, Simon Lowth's pension allowance was reduced to 15% of salary from 1 April 2021 and will further reduce to 10% of salary from 1 April 2022, which will fully align him with the rate offered to the majority of our UK workforce. Philip Jansen's pension allowance remains at 10% of salary.

c) Annual bonus

We have reviewed the bonus scorecard measures and weightings and determined that they remain well-aligned to our strategic priorities for the coming year. The committee is satisfied that they represent a meaningful balance of financial performance measures and our broader strategic priorities, including the impact we make for our customers and society. The same group bonus scorecard applies to all eligible managers, so everyone is focused on and aligned to the same goals. Openreach managers have a similar bonus scorecard but it is based on Openreach performance to maintain independence and to reflect our Commitments.

No changes are proposed to the structure of the annual bonus plan: the on-target and maximum opportunity will remain at 120% and 200% of salary for both executive directors, with half deferred for a period of three years.

d) Long-term incentives

Awards will be made to both the chief executive and chief financial officer in June 2021 under our Restricted Share Plan (RSP). The committee considers the level of such awards each year, taking into consideration several factors, including the share price performance over the preceding year. In 2020, the level of awards granted was reduced from the normal Policy level of 200% of salary to 160% of salary due to share price performance and the decision to suspend the dividend until 2021/22. Since then, our share price has recovered, with performance above that of the FTSE 100 index, and the committee has therefore agreed that awards would be granted to both executive directors this year at the normal Policy level of 200% of salary.

Awards will vest in three equal tranches after three, four and five years, and no tranche may be sold until year five. As per last year, awards are subject to both return on capital employed (ROCE) and environmental, social and governance (ESG) underpins (see page 96), and the committee retains ultimate discretion to adjust the vesting outcome if considered appropriate.

Other matters

The committee receives regular updates on HR policies and reward practices for the wider workforce as well as updates on employee relations. The committee takes account of these factors when making decisions relating to executive remuneration.

During the year, Isabel Hudson, as the designated non- executive director for workforce engagement, also fed back any comments to the committee on sentiments being raised by our colleagues in relation to the remuneration of our workforce and related decisions, as raised by the Colleague Board through their 'hot topics' discussions at their meetings.

We increased our focus on race equality and launched our Ethnicity Rapid Action Plan, which was set up to help improve diversity and inclusion across BT. As part of this plan we have elected to voluntarily undertake our first ethnicity pay gap, in addition to the mandatory gender pay gap. The result of the ethnicity pay gap will be included in our inaugural Diversity and Inclusion Report, which is to be published in early summer 2021.

Following the Policy review, the change in the committee chair during the year and as agreed by the committee as part of last year's internal committee evaluation, we decided that it was timely and in good order to run a competitive tender for the appointment of advisers to the committee. Further to this, Deloitte were successful in retaining their appointment and the committee is satisfied that Deloitte continues to provide independent and objective advice.

As always, the committee and I wish to maintain an open dialogue on remuneration matters with our investors and I would welcome their comments or feedback and support at the forthcoming AGM.

Sir Ian Cheshire

Chair of the Remuneration Committee

12 May 2021

BT Group plc Annual Report 2021

Corporate governance report	91

Focus on remuneration

Our remuneration principles are to maintain a competitive remuneration package that promotes the long-term success of the business, avoids excessive or inappropriate risk taking and aligns management's interests with those of shareholders.

Below is how remuneration is aligned with the principles of the Code.

Clarity

• Our remuneration framework is structured to support the financial and strategic objectives of the company, aligning the interests of our executive directors with those of
  our shareholders
• We are committed to transparent communication with all our stakeholders, including our shareholders
• Performance for senior management and all other managers is measured against a single consistent scorecard.

Predictability

• The long-term RSP reflects that we operate in a tightly regulated environment, ensuring a narrower but more predictable range of reward and performance outcomes to align with
  our business model.

Simplicity

• We operate a simple but effective remuneration framework which is applied on a consistent basis for all employees
• The annual bonus rewards performance against key performance indicators, while the RSP provides long-term sustainable alignment with our shareholders
• There is clear line of sight for management and shareholders.

Directors' Remuneration Policy (Policy)

The Policy as approved by shareholders at the AGM on 16 July 2020 in accordance with section 439A of the Companies Act 2006 can be found online at bt.com/annualreport

Legacy matters

The committee can make remuneration payments and payments for loss of office outside of the Policy where the terms of the payment were agreed (i) before the Policy came into effect, provided that the terms of the payment were consistent with any applicable policy in force at the time they were agreed, or (ii) at a time when the relevant individual was not a director of the company (or another person to whom the Policy applied) and that, in the opinion of the committee,

Risk

• Our incentives are structured to align with the company's risk management framework
• The three-year deferral under the annual bonus and having no release of RSP awards until five years from the date of award create long-term alignment, as do our in- and post- employment shareholding requirements
• The annual bonus, deferred bonus and RSP also incorporate malus and clawback provisions, and there is overarching committee discretion to adjust formulaic outcomes.

Proportionality

• There is clear alignment between the performance of the company, the business strategy, and the reward paid to executive directors
• Target total compensation levels are set competitively compared to other companies of similar size and complexity to ensure we can attract and retain the executives needed to deliver the business strategy. However, the maximum total compensation levels are set lower than typical market practice to reflect the narrower and more predictable range of performance outcomes for BT
• Formulaic incentive outcomes are reviewed by the committee and may be adjusted having consideration to overall group performance and wider workforce remuneration policies and practices.

Alignment to culture

• When considering performance, the committee takes account of BT's values
• The committee receives regular updates on pay conditions across the company, and colleagues may provide feedback to the Board via the Colleague Board and the designated non- executive director for workforce engagement
• All-employeeshare plans help encourage our colleagues to become shareholders in the business.

the payment was not in consideration for the individual becoming a director of the company (or taking on such other applicable position). This includes the exercise of any discretion available to the committee in connection with such payments. For these purposes, payments include the committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms

of the payment are agreed at the time the award is granted.

Minor amendments

The committee may make minor amendments to the arrangements for the directors as described in the Policy, for regulatory, exchange control, tax or administrative purposes, or to take account of a change in legislation.

BT Group plc Annual Report 2021

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Focus on remuneration continued

Look out for these icons in the Report on directors' remuneration to distinguish the different types of pay.

F	V
Fixed pay	Variable pay
Base salary	Annual bonus
Pension allowance	RSP awards
Benefits

Remuneration earned in 2020/21
Philip Jansen	3,500			Simon Lowth	3,500
Chief executive	3,000			Chief financial officer	3,000
£000	2,500		1,379	£000	2,500
	2,000	1,308			2,000
	1,500				1,500	905	976
	1,000		1,869		1,000
	1,320
	500			500	883	900
	0				0
		2020/21	2019/20			2020/21	2019/20
		£000	£000			£000	£000

F	Base salary	1,100		1,100	F	Base salary	735		732
	Pension	110		165			Pension	147	220
	Benefits	98		114			Benefits	23	24
	Total fixed pay						Total fixed pay
	1,308		1,379			905	976
V	Annual bonus (shares)	1,320		1,320		V	Annual bonus (shares)	883	900
	Annual bonus (cash)a	0		0		Annual bonus (cash)a	0	0
	ISP (shares)b,c	0		n/a			ISP (shares)c	0	0
		n/a					Total variable pay
	RSP (shares)d	549		883	900
	Total variable pay	1,320		1,869
	Total	2,628		3,248			Total	1,788		1,876

1. The executive directors have again voluntarily agreed to defer all their bonus for 2020/21 into shares for three years.
2. Philip's first ISP award was made in February 2019.

1. The group returned below threshold performance against all the performance measures for the 2018 ISP. The awards will lapse in full.
2. The buyout award granted to Philip on appointment to compensate him for his loss in shares forfeited from Worldpay.

Performance outcomes in 2020/21

Annual bonus 2020/21

Measure

Payout (% of max)

• Bonus was subject to seven measures of financial and non- financial performance
• EBITDA and cashflow performance was between target and stretch despite challenging circumstances
• Performance under each of the non-financial measures was either close to or above our stretch targets
• This resulted in a formulaic outcome of 129% of target. However, the committee exercised its discretion to cap executive bonuses at 100% of target in line with the chief executive's recommendation
• In line with the commitment made last year, the executive directors have again voluntarily agreed to defer all their bonus for 2020/21 into shares for three years.

Adjusted EBITDA		70%
Normalised free cash flow		70%
Group Net Promoter Score (NPS)					99%
5G customers						100%
FTTP connections				87%
Carbon emissions			80%
Skills for Tomorrow						100%

2018 ISP

Measure

Payout (% of max)

• Awards are subject to three performance measures
• Performance was below threshold, so the awards will lapse in full.

Total shareholder return (TSR)

Normalised free cash flow

Underlying revenue growth (excluding transit)

0%

0%

0%

BT Group plc Annual Report 2021