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Remuneration report:part 1

This report has been prepared in accordance with the provisions of the Companies Act 2006 (the 'Act') and Schedule 8 of the Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008 and has been approved by the Board and the Remuneration Committee. The report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the Principles of Good Governance relating to Directors' remuneration. A resolution to approve the report will be proposed at the Annual General Meeting.

The Act requires the external auditors to report on certain parts of the report and to state whether, in their opinion, those parts of the report have been properly prepared in accordance with it. The report has therefore been divided into separate sections for audited and unaudited information.

Unaudited information Remuneration Committee
Role

The Remuneration Committee is responsible for determining and agreeing with the Board the pay, benefits and contractual arrangements for the Executive Directors of the Company and other members of the Executive Committee. It aims to develop and recommend remuneration strategies that drive performance and reward it appropriately. In determining its policy, the Committee has paid regard to the principles and provisions of good governance contained in the Combined Code published in July 2003 by the UK Financial Reporting Council as updated in June 2008 ('the Code'). The Committee operates under the delegated authority of the Board and its terms of reference are available on request from the Company Secretary.

Membership

The Committee was chaired throughout the year by Ian Chippendale. The other members of the Committee were Barry Gibson and Mark Morris. All of the members are independent Non-Executive Directors. The Board has determined that the new Chairman, Barry Gibson, should remain a member of the Committee taking account of the fact that he is considered to be independent and also that, as a former Chairman of the Remuneration Committee, his knowledge of the development of the remuneration policy and practices at HomeServe is invaluable. He takes no part in discussions relating to his own remuneration.

Meetings

Attendance at Committee meetings held during the year and the number of meetings held is set out on Corporate governance page.

Advisers

During the year Hewitt New Bridge Street ('HNBS'), a firm of independent remuneration consultants, served as advisers to the Committee. The Company also instructed HNBS to advise it on a limited number of remuneration matters concerning individuals below the Executive Committee during the year. Other than in relation to advice on remuneration, HNBS has no other connections with the Company. The terms of engagement for HNBS are available on request from the Company Secretary.

The Committee has also received assistance from Brian Whitty, the Group's Chairman, Richard Harpin, the Chief Executive and Anna Maughan, the Company Secretary, all of whom attended meetings of the Committee as required. None took part in discussions in respect of matters relating directly to their own remuneration.

Remuneration policy

The Committee's remuneration policy for the remuneration of Executive Directors and other senior executives is based on the following principles:

• to provide a remuneration package that is sufficient, but no more than necessary, to attract, retain and motivate high calibre executives;
• to align rewards with the Group's performance;
• to reward good performance with remuneration that is in line with that payable by broadly comparable businesses i.e. high-growth companies of a similar size and those with similar operating characteristics;
• to reward exceptional performance in such a way as to align the executives' interests with those of the Company's shareholders, with the potential to deliver above market levels of reward for outstanding performance.

To that end, the committee structures executive remuneration in two distinct parts: fi xed remuneration of basic salary, pension and benefi ts and variable performance-related remuneration in the form of a cash bonus and long-term incentive arrangements. remuneration for executive Directors is structured so that the variable pay element forms a signifi cant portion of each Director's package.

The charts below demonstrate the balance between fixed and variable pay at 'on-target' and maximum performance levels, in the case of the long-term incentive arrangements assuming certain levels of share price growth. Maximum performance assumes the achievement of maximum bonus and full vesting of shares under the company's long-term incentive arrangements.

They demonstrate the signifi cant weighting of the package towards variable (performance-related) pay. In particular, the majority of executive Directors' total remuneration at the maximum performance level will derive from the company's long-term incentive arrangements, which are strongly aligned to shareholder value creation.

The committee has the discretion to take into account performance on environmental, social and governance matters when setting the remuneration of the executive Directors. However, the committee has chosen not to take these into specifi c account in setting performance targets for 2010/11 in the belief that the structures in place neither encourage nor reward inappropriate behaviour in this regard and that relevant operational controls relating to such matters are in place.

Key activities of the remuneration committee During the year

In line with its remit, the following key issues were discussed by the committee during the year:

• Review of salary levels for the executive Directors and other members of the executive committee;
• Agree the bonuses payable for the 2008/9 fi nancial year;
• Determination of the targets for the 2009/10 annual bonus plan;
• Approval of the 2009 remuneration report and review of the fi nal outcome of the annual General Meeting voting for the report;
• Approval of the performance targets and individual and aggregate award sizes to be granted under the 2008 LTIP;
• Review of the performance targets and confi rmation of the level of vesting of 2006 share option and deferred share bonus plan awards and approve vesting levels of other awards for 'good leavers' from the company as appropriate;
• Review of, and agreement to, all Director joining and leaving arrangements, covering all elements of their reward package, including that of the chairman, Brian Whitty;
• Review of the remuneration arrangements for the executive Directors and other members of the executive committee for 2010; and
• Consideration of institutional investor guidelines on executive compensation.

Summary of components of Executive Directors' remuneration

Type	Objective	Performance Period	Policy
Basic salary	To reflect the particular skills and experience of an individual and to provide a competitive base salary compared with similar roles in similar companies.	Annual (reviewed on 1 April)	Individual pay is determined by reference to the median pay for the top-half of the FTSE 250 or roles of a similar type. Consideration is also given to pay and employment conditions elsewhere in the Company when determining base salary increases.
Performance-related bonus	To incentivise the delivery of Group and individual performance-related objectives.	Annual (determined after the year-end)	The maximum potential quantum is determined by reference to the median for the top-half of the FTSE 250. Actual bonus payments are determined according to the Group’s financial (80%) and individual (20%) performance.
Pension	To provide benefits comparable with similar roles in similar companies.	N/A	Pension benefits are determined by reference to the median for the top-half of the FTSE 250. Only basic salary is pensionable.
Other benefits	To provide benefits comparable with similar roles in similar companies.	N/A	Other benefits comprise a fully expensed car (or cash alternative), private health and (for Messrs Florsheim and Bennett) long-term sickness cover.
Long-term incentives	To drive long-term delivery of the Group’s objectives, to align Directors’ interests with those of the Company’s shareholders and to encourage exceptional performance with the opportunity to receive upper quartile rewards.	Three years	Awards under the 2008 LTIP will deliver rewards based on relative TSR performance (subject to satisfactory underlying earnings performance) and EPS growth.

Summary of changes to the Board structure and individual roles and responsibilities in the year

On 31 March 2010, Brian Whitty, Executive Chairman, retired and was replaced by Barry Gibson as Non-Executive Chairman. Mr Whitty had begun to reduce his overall executive involvement in the business following the reorganisation of the UK businesses which was announced in November 2008. He assumed responsibility for Emergency Services at that time and, following the sale of certain of those businesses in September 2009 and the closure of Property Repairs in January 2010, continued to reduce his executive responsibilities. Mr Gibson will fulfil a conventional Non-Executive chairman role.

Remuneration for Executive Directors

The main components of the remuneration package for Executive Directors are:

Basic salary

Basic salary for each Executive Director is determined by the Remuneration Committee taking into account the roles, responsibilities, performance and experience of the individual. This is normally reviewed annually with any increase usually being effective from 1 April (unless responsibilities change). Salary levels are determined taking into account market data on salary levels for similar positions at comparable companies and pay and employment conditions of employees elsewhere in the Company.

Following a review undertaken by HNBS in March 2009 the Committee determined that the top-half of the FTSE 250 was the most appropriate comparator group against which to benchmark salaries. Reflecting the desire to control fixed costs across the business, no pay increases were implemented as at 1 April 2009 for either the Board or the members of the Executive Committee. The budgeted increase for the general workforce was 2%.

HNBS updated their review in February 2010 using the top-half of the FTSE 250 as a comparator group (at the time of the review the Company was ranked 163rd in the FTSE). It was agreed that the basic salaries of the Board and Executive Committee be increased by 2% with effect from 1 April 2010. This was also the budgeted increase for the general workforce.

Current salaries are set out below:

Name of Director	2009/10 Salary	2010/11 Salary
R D Harpin	£500,000	£510,000
M Bennett	£300,000	£306,000
J Florsheim	£500,000	£510,000

Annual bonus

The annual bonus is designed to drive and reward excellent short-term operating performance of the Company and encourage real year-on-year growth in profitability. No annual bonus is paid unless a very high level of profit performance is achieved. The maximum annual bonus for 2010/11 will be maintained at 100% of basic salary (with the exception of Jon Florsheim whose maximum bonus potential is unchanged at 150% of salary).

During the year, Executive Directors were able to earn up to 80% of bonus potential for Group financial performance, measured by profit before tax, amortisation and exceptional items. The remaining 20% of bonus potential was based on measurable personal targets, relating to the part of the business or the function for which the Director is responsible. This weighting differed for Jon Florsheim who was able to earn a higher proportion of his bonus potential based on targets specifically related to the performance of UK Membership.

For 2010/11 the maximum limits will remain the same and the weighting between business and personal objectives will remain 80% financial: 20% personal. Provided their personal objectives are met in full, the normal 'on-target' bonus payable to Executive Directors in any year is expected to be in the region of 60% of their basic salary (90% for Jon Florsheim).

Executive Directors' bonuses are paid entirely in cash, though under the Long Term Incentive Plan adopted in 2008, Directors have the opportunity to invest part of their net bonus in shares. If they choose to do this, they may be awarded a matching award which is subject to a comparative Total Shareholder Return ('TSR') performance condition and an EPS target.

Long-term incentives

The Committee's policy for the provision of long-term incentives to Executive Directors is to grant awards of performance shares (performance awards) and to provide them with the opportunity to voluntarily invest their annual bonus into a matching share arrangement (matching awards) under the Long Term Incentive Plan adopted in 2008 (the '2008 LTIP').

The maximum individual award limit under the 2008 LTIP is 200% of basic salary for performance awards and for matching awards of up to two shares for each share invested, based on a maximum investment of the net of tax equivalent of 75% of the maximum bonus potential.

Consistent with the grant policy applied in 2008 and 2009, the Committee intends to limit the size of performance share awards in 2010 to the Executive Directors to 150% of salary. Matching awards up to the maximum ratio of two shares for each invested share will continue to be granted. It should be noted that, under the plan rules, the executives may invest up to the lower of their actual bonus earned in the preceding financial year and 75% of their maximum bonus potential. In the event that actual bonuses are lower than 25% of salary, executives may invest up to 25% of salary in shares from their own money.

The Committee has conducted a review of the performance targets to be attached to the 2010 awards under the LTIP. Following the review the Committee concluded that TSR remains an important performance condition and should be retained. However, in order to balance this measure with one which provides a stronger link to the long-term financial performance of the Company, the Committee has decided that it would be appropriate to incorporate a stretching Earnings per Share ('EPS') target. The Committee considers that the use of both EPS and TSR creates a balance between internal financial and external relative stock market measures and both measures are aligned to shareholder value creation.

Accordingly, 50% of the award of performance and matching shares will be subject to TSR targets. 25% of any award subject to TSR will vest if HomeServe's TSR performance is equal to the FTSE-250 index, increasing in a straight line basis to 100% vesting where TSR performance exceeds the Index by an average of 15 percentage points per annum.

In determining the vesting of awards in any year under the TSR part of the award, the Committee will also take into account the underlying financial performance of the business.

50% of the award will be subject to a target based on a range of EPS growth. 25% of any award subject to EPS will vest for average annual EPS growth of RPI + 4%, increasing in a straight line to 100% vesting where average annual EPS growth is RPI + 10%.

For both conditions performance will be measured over a period of three financial years.

The fair value of LTIP awards granted in 2009 was 60% of the face value of the share at the time of grant.

Awards under the 2008 LTIP may be satisfied through a mixture of either market purchase or new issue shares. To the extent new issue shares are used, the 2008 LTIP will adhere to a 5% in 10 year dilution limit.

Executive Directors may also participate in the Group's Save As You Earn Scheme (where share options are exercisable after three or five years at a discount of up to 20% of the market value of the shares at the time of grant). No performance criteria are attached to this scheme.

Benefits

Non-pension benefits comprise company car and fuel allowance and medical insurance. The range of benefits and their value are considered to be broadly in line with those provided to Executive Directors in similar companies in the FTSE-250.

Shareholding guidelines

It is the Board's policy that Executive Directors and certain members of the Company's senior management build up and retain a minimum shareholding in the Company. Each Executive Director is encouraged to hold shares of at least equal value to his annual basic salary.

Accordingly, if the holding guideline has not been fulfilled at the point of exercise of any option or the vesting of any other long-term incentive award, the Director must retain 50% of the net proceeds in the Company's shares until the holding requirement is achieved. Details of the current shareholdings of the Executive Directors are provided on Remuneration report page.

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