Remuneration Policy Introduction & Purpose Origin Energy Limited is committed to ensuring that its remuneration practices enable the Company to: o Appropriately compensate employees for the services they provide to the Company; o Attract and retain employees with skills required to effectively manage the operations and growth of the business; o Motivate employees to perform in the best interests of the Company and its stakeholders; o Provide an appropriate level of transparency; and o Ensure a level of equity and consistency across the group. Accountabilities Remuneration Committee Under the terms of the Remuneration Committee Charter, the role of the Committee is to provide advice and make recommendations to the Board on the following matters: o Remuneration policy and any changes to remuneration policy and practices for all employees whose remuneration is not determined through Awards or Enterprise Bargaining Agreements; o The remuneration for non-executive Directors; o The remuneration for the Managing Director and members of the Executive Management Team, being those executives reporting to the Managing Director; o Targets for the Company’s financial performance as they relate to incentive plans, and the performance-based (at-risk) components of remuneration; and o Allocations made under all equity-based remuneration plans. The Board of Directors has authority to approve remuneration matters brought before it, subject to any shareholder approvals that may be required by law. The Remuneration Committee is comprised solely of non-executive Directors, with no fewer than three members. General Manager, Human Resources, Health, Safety & Environment The General Manager, HR & HSE, provides secretarial assistance to the Remuneration Committee and is accountable for ensuring that appropriate processes and procedures are in place to effectively implement the performance management and remuneration system. This system includes: o A consistent role evaluation methodology to establish appropriate levels of remuneration; o A framework for assessing the performance of individual employees relative to objectives and providing an ongoing program to train managers, supervisors and employees in the effective application of the system; July 2005 1. o A remuneration structure designed to deliver fixed and performance-based elements; o Appropriate control procedures to ensure the effective operation of the performance management and remuneration system; o Appropriate disclosure of remuneration information; and o The provision of adequate, accurate and timely market information to enable the Remuneration Committee to make informed decisions. Managers and Supervisors Managers and supervisors are responsible for: o Ensuring accurate role descriptions are in place, with sufficient detail on elements required to allow consistent assessments and comparison to be undertaken; o Conducting effective assessments of employee performance; and o Negotiating relevant enterprise agreements, in consultation with the Human Resources group to optimise alignment with the Company’s remuneration practices and other employment matters. Approval for agreements will be through the General Manager, HR & HSE or the Managing Director. Remuneration Policy and Procedures Non-Executive Director Remuneration Non-executive Directors are remunerated by way of fees paid, including fees paid in recognition of membership on Board sub-committees, superannuation and participation in the shareholder- approved non-executive Directors share plan. Some non-executive Directors retain entitlements to retirement allowance benefits under the terms of the arrangements which ceased at 31 December 2002. No new entitlements will arise from this allowance in future. The overall level of annual non-executive Director fees is approved by shareholders in accordance with the requirements of Corporations Act. Directors decide on actual fees, set by reference to the market and within the bounds of the shareholder approval. Attachment 1 is a schedule of non- executive Director fees currently applicable. Employee Remuneration Principles Origin aligns its remuneration with that of comparable organisations for roles at all levels of the Company. A systematic role evaluation methodology is used to establish each employee’s appropriate level of remuneration. Remuneration comprises elements of fixed remuneration and performance-based (at-risk) remuneration. At a minimum, all full-time and part-time employees have an element of their remuneration at- risk once they have been with the Company for a one-year qualifying period, after which they are eligible to participate in the Employee Share Plan described below in Equity-Based Remuneration. The proportion of an employee’s total remuneration that is at-risk increases with seniority and with the individual’s ability to impact the performance of the Company. At-risk elements of total remuneration comprise both short-term incentives as a reward for performance and long-term incentives that align medium and long-term shareholder interests. The long-term incentive structure also encourages retention of high performance employees in the organisation. Attachment 2 provides details of the key features of the terms of employment and remuneration for the Managing Director. Attachment 3 provides details of the performance-based elements of remuneration for senior executives reporting to the Managing Director. An annual performance review process assesses the degree to which each employee is satisfying the requirements of his/her role and the degree to which established performance objectives have been achieved. For positions where pay is primarily controlled by collective bargaining or industrial agreements, Origin’s strategy is to promote and maximise the implementation of “pay-for-performance” scales and structures. These may result in base salaries that include elements of market and performance consideration, but nevertheless reflect the principal strategy of discriminating for superior performance. July 2005 2. Fixed Remuneration Origin’s principal remuneration strategy for fixed remuneration is to align it with the medians of comparable industry positions. Origin benchmarks its position against broad-banded target market rates, using role evaluation criteria, market surveys and analysis supported by information gathered from a number of consulting organisations. A systematic assessment of roles at all levels of the organisation is done, using techniques that facilitate comparison with the markets in which Origin competes for employees. The Performance Management System (PMS) assists to determine whether an employee has effectively mastered a role and is performing at a fully satisfactory level. Where this is not the case, the PMS provides a structure for providing support to achieve the required levels of performance. In general, where an employee has reached the fully satisfactory level in both “workplace effectiveness” and “objective achievement” dimensions of his/her position, individual remuneration will be aligned to or move closer toward the market median for that position. Performance that consistently exceeds expectations can result in remuneration paid at above- median levels. Fixed remuneration for executives is provided on a Total Cost basis, providing flexibility to receive remuneration as cash, payments to superannuation or non-cash benefits such as vehicles, along with related expenses. Where FBT is payable by the Company for allowed items such as vehicles, the amount of the FBT is included in determining the amount allocated to the Total Cost package. All employees have the flexibility to receive a portion of their remuneration in the form of minor items limited by the provisions of legislation covering Fringe Benefits Tax (FBT) or as superannuation beyond that contributed by the Company. Performance-Based (At-Risk) Remuneration In addition to fixed remuneration, a proportion of total remuneration for more senior employees is at risk and only payable on the basis of performance achieving defined hurdles. Performance relative to financial and individual targets set during the annual budget process provides the basis for determining payments made for at-risk remuneration. Financial performance targets relate to the Company and Divisional or Business Unit results relevant to each individual. Individual performance targets relate to key objectives that must be delivered during the period. Achievement of established performance objectives results in the payment of at-risk remuneration of 60% of the maximum entitlement. Threshold and stretch hurdles are also established for each performance measure, yielding payment for at-risk elements ranging from 20% to 100% of the maximum potential. No payment is made if performance does not achieve threshold levels. The proportion of remuneration that is at risk increases with seniority and can include short-term (payable annually) and long-term (vesting after three years) components. The amount of remuneration that is at risk is set at a level that, subject to the achievement of stretch targets for both financial and individual performance, will realise total remuneration at the upper quartile of competitors and comparable industry positions. Performance-based remuneration is paid as cash or equity. The forms of equity component used are described below in Equity-Based Remuneration. Maximum entitlements to short and long-term incentives for executive Directors and senior executives are included in Attachments 2 and 3. Achievement of maximum payments under incentive schemes requires performance of both the Company and the individual to achieve stretch targets. The Board also has the discretion to consider additional payments above the maximum in the event performance exceeds the established stretch targets. Equity-Based Remuneration Equity-based remuneration is used for delivering components of at-risk remuneration through: o Shares awarded under the terms of the Employee Share Plan, under which all qualifying employees, except executive Directors, are eligible to receive up to $1,000 worth of Company shares per year, depending on performance relative to financial and safety targets, with qualifying permanent part-time employees participating at pro-rata levels. Shares awarded through the Plan are purchased on market, with costs fully expensed; or July 2005 3. o Options awarded under the terms of the shareholder-approved Senior Executive Option Plan as a long-term component of remuneration provided to senior executives. Options awarded through the Plan have an exercise price established on the basis of the market price at the time of approval, a three-year vesting period and clear performance hurdles requiring out- performance relative to a reference group of listed companies. Values disclosed for options awarded are determined by actuaries using a Monte Carlo Simulation technique that adopts the same principles and assumptions used in the Black-Scholes formula but allowing for the incorporation of performance hurdles. Options are currently not recorded as an expense in the Statement of Financial Performance but the Company discloses an estimate of the expense that would be incurred when accounting standards relating to options come into effect. The total number of options that can be awarded is limited to 5% of total number of shares on issue. Termination Payments Termination payments are based on specific contractual arrangements or governed by the Total Cost Remuneration Policy, General Terms and Conditions of Employment, or relevant industrial instruments as appropriate for all other employees. The basis for determining entitlements in the event of termination is consistent with the contractual obligations set out in those documents, which in turn align with market norms and practice. Attachment 4 provides details of termination provisions applicable to senior executives. Disclosure of Remuneration Total remuneration reported will include appropriate values for all elements of remuneration, incorporating fixed remuneration, performance-based remuneration comprising payments made or value provided for at-risk components, superannuation and value for benefits provided and equity- based components of remuneration. Where possible, reported remuneration will relate to the year in which the remuneration is earned. Other than disclosure included in this document and annual reports, remuneration information is confidential between the Company and the employee, other than when disclosure is required by law, and there is a mutual obligation and expectation to retain that confidentiality. Remuneration data may be used for valid internal benchmarking, review and analysis and may be disclosed pursuant to regulatory and compliance requirements, but is otherwise required to be dealt with sensitively and confidentially and in accordance with the company’s Privacy Principles. Similarly, performance data are to be used only for performance management and related review processes. July 2005 4. Attachment 1 Annual Fees Payable to Non-Executive Directors Board Fees Chairman $340,000(1) Member $105,000 Committee Fees Audit Chairman $40,000 Member $20,000 Remuneration Chairman $13,333 Member $6,666 Health, Safety & Environment Chairman $13,333 Member $6,666 Nomination Chairman & Members $0 (1) Chairman’s fees are inclusive of all Committee fees as from 1 July 2004 25% of fees must be sacrificed for the purchase of shares under the terms of the shareholder- approved Non-Executive Director Share Plan or as superannuation, provided a Director electing to receive the benefit as superannuation holds a minimum of 25,000 Origin Energy shares either directly or indirectly. The benefits accrued to Non-Executive Directors under the terms of the Non-Executive Directors Retirement Scheme were frozen at multiples, to be applied to 75% of final remuneration, determined as at 31 December 2002 for Non-Executive Directors in office as at that date. July 2005 5. Attachment 2 Key Terms of Executive Director Contract of Employment Managing Director Contract End Date 30 June 2009 Fixed Remuneration $1.3 million from 1 July 2004 Subject to annual review Short-Term Incentives Maximum 60% of Fixed Remuneration Long-Term Incentives Delivered at Board discretion in the form of Options as approved by shareholders* Termination With cause Immediate with payment of accrued entitlements only Without cause 12 months notice or payment in lieu, including payment of short-term incentive potential Poor Performance Maximum of 12 months of fixed remuneration, including 6 months notice or payment in lieu, with no payment of short-term incentive Resignation 12 months notice or payment in lieu, with no payment of short-term incentive * With options, as the mechanism through which long-term incentives are provided, the relative value used to determine the corresponding number of options is determined using a Monte Carlo Simulation technique that adopts the same principles and assumptions used in the Black-Scholes formula but allows for Total Shareholder Return performance hurdles to be incorporated in the valuation process. Options awarded have an exercise price based on the market price at the time of approval, a three-year vesting period and clear performance hurdles requiring out-performance relative to a reference group of listed companies. July 2005 6. Attachment 3 Senior Executive Performance-Based Remuneration For executives reporting to the Managing Director, maximum potential entitlements are expressed as a proportion of an executive’s fixed Total Cost, as set out in the following table: Position Held Maximum Maximum Short-term Incentive Long-term Incentive (as a percentage of (as a percentage* of Total Cost) Total Cost) Members of the 45% - 60% 45% - 60% Executive Management Team * With options, as the mechanism through which long-term incentives are provided, the relative value used to determine the corresponding number of options is determined using a Monte Carlo Simulation technique that adopts the same principles and assumptions used in the Black-Scholes formula but allows for Total Shareholder Return performance hurdles to be incorporated in the valuation process. Options awarded have an exercise price based on the market price at the time of approval, a three-year vesting period and clear performance hurdles requiring out-performance relative to a reference group of listed companies. July 2005 7. Attachment 4 Senior Executive Termination Payments Senior executives, other than executive Directors, are employed as permanent employees under the terms of Executive Service Agreements. Those agreements provide for termination, with related payments, as follows: With cause Immediate termination, with payment of accrued entitlements only. Without cause Notice period of up to 3 months notice or payment in lieu plus severance payment equivalent to 3 weeks of Fixed Remuneration per year of service, to a maximum of 74 weeks entitlement. A minimum of 6 months combined notice and severance applies. Resignation One month notice or payment in lieu. In certain circumstances, primarily redundancy, senior executives may also be entitled to receive pro-rata portions of at-risk remuneration for the year during which termination occurs. July 2005 8.
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