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

11 May 2022

Contents

Committee chair's letter

Review of the year; committee decisions; key outturns and plans for the year ahead - pages 98 to 100.

Focus on remuneration

The key aspects of our remuneration structure, outcomes for FY22 and implementation of the Directors' Remuneration Policy (Policy) in FY23 - pages 101 to 103.

Annual remuneration report

More detail on how we have implemented the Policy during FY22 including the single figure of remuneration for each director - pages 104 to 111.

Remuneration in context

How we take account of remuneration conditions across the group - pages 112 to 113.

Committee membership and attendance

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

The chairman, chief executive, group HR director and director of reward are typically invited to attend meetings. They do not attend 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 five scheduled meetings during the year and three ad hoc meetings. The ad hoc meetings have predominantly been focused on remuneration arrangements for the Executive Committee.

Meetings attended
Ian Cheshire (chair)	5/5	Matthew Key	5/5
Iain Conn	5/5	Leena Nairb	4/5
Isabel Hudsona	4/5

1. Isabel gave apologies for one meeting during the year due to other business commitments.
2. Leena gave apologies for one meeting during the year due to other business commitments.

The Committee has recognised the hard work and dedication of our workforce and how that has enabled us to continue to deliver for the country. We've have continued to ensure that any remuneration decisions taken during the year were in line with our Directors' Remuneration Policy."

Committee role

• Determines the salary and benefits for the chairman, executive directors, members of the Executive Committee including the company secretary, and monitors remuneration practices and policies for the wider workforce
• Sets the performance targets for the annual bonus scheme for senior executives for the year ahead
• Determines awards under the annual bonus scheme and the group's long-term incentive plans for senior executives
• Reviews and approves the Report on directors' remuneration
• 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

I am immensely proud of our colleagues who have continued to improve customer service and deliver vital connectivity, as we extended and strengthened our networks to support the country's recovery despite continued disruption to our business and the wider economy.

This report sets out information on the committee's activities during the year, our remuneration framework and its implementation. I have also provided further context on the performance of the business throughout the year and the environment in which the committee made decisions on executive pay.

Wider workforce context

Supporting our workforce throughout the pandemic has been a key priority. No colleagues lost their jobs as a result of the pandemic, and we did not make use of the Government's furlough scheme; instead we created new jobs in Openreach and expanded our investment in UK fibre infrastructure at

a time in which other companies cut pay, reduced hours and made redundancies.

However, we were not immune to the financial impact of the pandemic: although we have continued to support our UK frontline colleagues each year (through a 1.5% increase in 2020 and a £1,000 one-off bonus in 2021), our UK management colleagues have not received an annual salary increase since June 2019.

This year we committed that all eligible colleagues would receive an annual salary increase. Given the rising cost-of-living pressure faced by many of our colleagues, we have worked hard

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to maximise the impact of this year's pay increase budget, focused our efforts on our lowest-paid colleagues, and sought to deliver the increase as soon as possible.

Although we regretfully were not able to reach agreement with the CWU, this year's pay rise of £1,500 for our UK frontline colleagues and key workers is the biggest investment we've made in more than two decades. We have also voluntarily committed to paying UK colleagues at least the Real Living Wage and recently increased our minimum salary across the board to reflect that.

For our UK management population a total salary increase budget of 3% was confirmed, but again we targeted this toward our lower-paid managers. A lower budget of 2% was available for the UK senior management team.

However, we acknowledge that this remains a sensitive and challenging time, and the committee has borne that in mind throughout the year when considering remuneration matters within its remit.

Performance and executive remuneration outcomes for FY22

FY22 annual bonus plan

Annual bonus performance was based on a scorecard of seven key financial and non-financial measures that align to our strategic priorities.

Financial performance accounts for 70% of the bonus scorecard and comprises the following measures:

• Adjusted EBITDA (35%) - the outcome was in line with our expectations at £7,577m, just below target. Despite pressures on our revenue, we continued to see benefits from our modernisation programme.
• Normalised free cash flow (35%) - cash flow performance was strong through the second half of the year, and the final outcome of £1,392m was between target and stretch.

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

• Customer (10%) - although there was some volatility during the year as the impact of the pandemic dropped off, we saw strong group NPS performance and finished the year just above target. This reflected record NPS results in Consumer, BT SME and Global.
• Converged networks (10%) - we have continued to drive sales and delivery of the latest network technologies throughout the year. The number of FTTP connections was just above target, while performance against our 5G customers measure was close to stretch.
• Digital impact & sustainability (10%)
• • Skills for tomorrow (5%) - during the year we launched multiple wide-reaching campaigns with targeted support for jobseekers, SMEs and families, reaching 893,000 people across the country. Performance was between target
    and stretch.
  • Carbon emissions (5%) - performance against the carbon emissions intensity metric was close to stretch.

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. Despite the formulaic outcome of the

final bonus scorecard being 123%, the committee exercised its discretion to cap the bonuses of our executive directors at 100% of target, in line with the chief executive's recommendation. Although we have met our financial goals, held to our commitment to reinstate the dividend in FY22, and delivered

a competitive salary review for our colleagues, the committee believes that this is a better reflection of the overall performance of the business and the wider stakeholder experience.

Accordingly, Philip and Simon will be awarded bonuses of £1,320,000 and £882,526 respectively. In line with the Policy, 50% of the bonus will be deferred into shares for three years.

2019 Incentive Share Plan (ISP) award

The final award under our legacy ISP was granted in 2019, with performance measured over the three years to 31 March 2022. Vesting is based on three performance measures: relative total shareholder return (40%) (TSR), normalised free cash flow (40%) and growth in underlying revenue (including transit) (20%).

Since the performance targets were set, we have made a number of critical strategic decisions which were not foreseen in our original business plan. Most notably, this includes our commitment to expand the rollout of our full-fibre capability, and the implications for capital expenditure and cash flow. These decisions were being made against an uncertain backdrop given the pandemic, and the level of our commitment and its impact on normalised free cash flow evolved materially. We committed in 2020 to increase our FTTP build to 20m premises by the mid-to-late 2020s and began mobilising to do so. Then in

2021 we increased and accelerated this to 25m premises by December 2026, and made the decision to fully fund the rollout at this level in November 2021. Our increased investment supports the Government's full-fibre ambitions and will be instrumental in delivering further value to our shareholders, but has meant an additional £1.3bn of capital expenditure during the 2019 ISP performance period; something which was not envisaged at the time the targets were set. While this investment will create significant value for the business and our shareholders, the return on investment will not be seen until after the 2019 ISP performance period has ended.

It is not the committee's intention to penalise management for making strategic decisions that are in the best interests of the business, our shareholders, our customers, and the country as a whole. Following a consultation with our largest shareholders, the committee approved an adjustment to the cash flow measure to reflect the increased investment. In addition, in line with our usual practice, we have made appropriate adjustments to both the cash flow and revenue measures to reflect acquisitions and divestments during the period, to ensure performance is being measured on a like-for-like basis.

No adjustments were made to the TSR measure.

In aggregate, these adjustments ensure that the targets are no more or less stretching than originally intended. These adjustments reflect major Board decisions with significant impact on our targets, but no adjustments have been made for other adverse external impacts including the Government's decision on the use of Huawei equipment.

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Report on directors' remuneration continued Committee chair's letter continued

Performance against the adjusted cash flow measure was mid-way between target and stretch, while performance against both TSR and adjusted revenue measures was below threshold. Accordingly, 19.1% of the total 2019 ISP award will vest in August 2022.

Further detail is set out on pages 105 to 106.

Policy implementation in FY23

a) Salary

Philip's salary was fixed for five years on appointment and therefore no increase will be made in FY23. Simon's salary will be increased by 2% on 1 June 2022, in line with the increase offered to our UK senior management team.

b) Pension

In line with that previously agreed when the Policy was approved at the 2020 AGM, Simon's pension allowance was reduced to 10% of salary from 1 April 2022 which now fully aligns him with the rate offered to the majority of our UK workforce. Philip'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 with 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, used in tandem with divisional scorecards for colleagues in each CFU. Group and divisional measures are aligned to ensure a consistent focus across the business. Openreach managers have a similar bonus scorecard but

it is based on Openreach performance only, to maintain independence and to reflect the Commitments.

For FY23, we have also introduced two underpins, based on health and safety and EBITDA performance. If either of the underpins are triggered, the committee retains the discretion to reduce the pay-out as it considers appropriate.

No changes are proposed to the structure of the annual bonus plan for FY23: the on-target and maximum opportunity will remain at 120% and 200% of salary for both Philip and Simon, with 50% deferred into shares for a period of three years.

d) Long-term incentives

In line with the Policy, awards will be made to both Philip and Simon in June 2022 under our Restricted Share Plan (RSP) to the value of 200% of salary. These 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 109), and the committee retains ultimate discretion to adjust the vesting outcome as it considers appropriate, including to nil.

e) Chairman and non-executive director fees

As part of the annual compensation cycle the Board has reviewed the fees payable to our non-executive directors. Given these fees have also remained unchanged since 1 June 2019, on the recommendation of the chairman and the executive directors, the Board has agreed that the base fee will be increased by 2%, effective 1 June 2022, in line with the increase offered to the UK senior management team.

In FY22, the committee agreed a fee of £700,000 per annum for Adam Crozier who joined as a non-executive director and chairman designate on 1 November 2021, and became chairman on 1 December 2021. No review of the chairman's fee took place as he voluntarily waived any increase this year.

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 published this year's gender pay gap statistics at the end of March in our gender pay gap statement. For the second year running, we have also elected to voluntarily publish similar analysis of our ethnicity pay gap. Both analyses, alongside more detail on how we are addressing inequality and championing diversity across our business, can be found in our Diversity and Inclusion Report. The recently launched BT Group Manifesto, also reaffirms our bold targets for gender, ethnicity and disability across the organisation.

See pages 32 to 33.

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

11 May 2022

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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 group, 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
• The same annual performance framework applies to all our management colleagues, including executive directors, with aligned group and divisional metrics to ensure a consistent focus.

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.

Risk

• Our incentives are structured to align with the group's risk management framework
• Three-yeardeferral under the annual bonus and a five-year release period on RSP awards 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 Remuneration Committee discretion to adjust formulaic outcomes.

Proportionality

• There is clear alignment between group performance, strategic progress, and remuneration outcomes for our 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, maximum total compensation levels are set lower than typical market practice to reflect the narrower and more predictable range of performance outcomes for BT Group
• Formulaic incentive outcomes are reviewed by the Remuneration 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 Remuneration Committee takes account of BT Group's values
• The Remuneration Committee receives regular updates on remuneration practices and policies for the wider workforce, and colleagues may provide feedback to the Board via the Colleague Board and the designated non-executive director for workforce engagement
• All-employeeshare plans encourage our colleagues to become shareholders in the business.

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 Remuneration 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 BT Group plc (or another person to whom the Policy applied) and that, in the

opinion of the Remuneration Committee, the payment was not in consideration for the individual becoming a director of BT Group plc (or taking on such other applicable position). This includes the exercise of any discretion available to the Remuneration Committee in connection with such payments. For these purposes, payments include the Remuneration 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 Remuneration 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.

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Focus on remuneration continued

Remuneration earned in FY22

Philip Jansen	3,500	1,310
Chief executive	3,000
£000	2,500			1,308
	2,000
	1,500
	1,000
	500
	0	2,150		1,320

		FY22	FY21
		£000	£000
F	Base salary	1,100	1,100
F	Pension allowance	110	110
	Benefits	100	98
	Total fixed pay	1,310	1,308
		FY22	FY21
		£000	£000
V
Annual bonus (shares)a	660	1,320
	Annual bonus (cash)	660	0
	ISP (shares)b,c	830	0
	Total variable pay	2,150	1,320
	Total	3,460	2,628

1. In line with the Policy, 50% of the FY22 bonus will be deferred into shares for three years. Both executive directors voluntarily agreed to defer all their FY21 bonus into shares for three years.
2. The group returned below threshold performance against all the performance measures for the 2018 ISP. The awards lapsed in full in May 2021.

Simon Lowth	3,500
Chief financial officer	3,000
£000	2,500
	2,000	867		905
	1,500
	1,000
	500
	0	1,368		883

		FY22	FY21
		£000	£000
F	Base salary	735	735
	Pension allowance	110	147
	Benefits	22	23
	Total fixed pay	867	905
		FY22	FY21
		£000	£000
V	Annual bonus (shares)a	441	883
	Annual bonus (cash)	442	0
	ISP (shares) b,c	485	0
	Total variable pay	1,368	883
	Total	2,235	1,788

1. Performance against the adjusted cash flow measure was mid-way between target and stretch, whilst performance against both the TSR and adjusted
   revenue measures was below threshold. Accordingly, 19.1% of the total award will vest in August 2022. Further detail is set out on pages 105 to 106.

Performance outcomes in FY22

Annual bonus FY22

Measure

Payout (% of max)

• Bonus was subject to seven measures of financial and non-financial performance
• Adjusted EBITDA performance was in line with our expectations and cash flow performance was strong through the second half of the year
• Performance under each of our non-financial targets was either in line with or above target, with our 5G customers measure and carbon emissions performance close to stretch
• This resulted in a formulaic outcome of 123% 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 Policy, 50% of the bonus will be deferred into shares for three years.

2019 ISP

Adjusted EBITDA		59%
Normalised free cash flow				87%
Group Net Promoter Score (NPS)			69%
5G customers			93%
FTTP connections		65%
Carbon emissions		94%
Skills for Tomorrow		69%

Measure

Payout (% of max)

• Awards are subject to three performance measures
• Performance against the adjusted cash flow targets was mid-way between target and stretch, whilst performance against both the TSR and adjusted revenue measures was below threshold. Accordingly, 19.1% of the total award will vest in August 2022. For more details see pages 105 to 106.

Relative total shareholder return (TSR)

Normalised free cash flow

Underlying revenue growth (including transit)

0%

47.7%

0%

BT Group plc  Annual Report 2022