Long-term incentives

The Company currently operates a long-term incentive plan which provides ordinary shares in the capital of the Company, conditional upon the Company's total shareholder return ("TSR") over single three-year periods. All awards are made subject to the achievement of stretching performance conditions and TSR has been selected as the performance measure to more closely align the interests of the Executive Directors and senior executives with those of shareholders over the long term. The plan rewards the relative out-performance of the Company against a defined list of comparator companies. Calculations are performed independently and are approved by the Committee.

The long-term incentive plan is discretionary. The Committee's current policy is to make annual awards to the Group Chief Executive, Executive Directors and other senior executives under the Wolseley plc 2002 Long Term Incentive Scheme ("2002 Scheme"), which was approved by shareholders in December 2002 and amended at the Annual General Meeting held on 18 November 2004. Prior to this date only cash awards were made. Since 2004, awards will normally be made in shares, save where there are material securities or tax law constraints in overseas jurisdictions where the scheme is to be operated, in which case conditional awards in cash would continue to be made.

Details of the awards conditionally made to the Executive Directors in office during the year under the amended 2002 Scheme and outstanding at 31 July 2006, as well as at the date of this Report, are shown in the table below.

1. The share price on the date of grant of the award was 1127 pence per share.
2. The share price on the date of grant of this award was 1127 pence per share in respect of 9,409 shares and 1281 pence per share in respect of 10,000 shares awarded on appointment as a Director.
3. Awards granted in 2003 (granted at 50% of salary as at 1 August 2003, save for Messrs Marchbank and Roach whose awards were granted at 40% of salary) vested at 34.5% of award on 31 July 2006. Subsequent awards were made in shares.

The maximum amount that can be granted under the amended 2002 Scheme for each award is 200% of base salary per annum; however awards made to date have not exceeded 125% (or 150% in the case of the Group Chief Executive) of base salary. Each year the Committee assesses the proportion of awards that should be made up of both share options and long-term incentive awards. It is the Committee’s intention that for the year ending 31 July 2007, awards are made to the Group Chief Executive over 150% of salary with lower award levels for other Executive Directors. The vesting level for a maximum award under the amended 2002 Scheme requires performance to be in the upper decile. To better reflect market practice, shareholder approval was sought and received on 18 November 2004 so that 25% of awards made from that date would vest for achievement of performance at the median (with a straight line percentage to vest between median and upper decile). Extant awards remain subject to the achievement of performance conditions following a participant’s agreed retirement and vesting is determined at the end of the performance period.

The following table sets out the percentage of each award which has vested and the percentage of each extant award, had it vested on 31 July 2006:

During the year, the Committee reviewed whether future grants under the amended 2002 Scheme should be subject to a financial performance underpin, in addition to the satisfaction of a TSR performance target. The Committee has decided that future awards under the amended 2002 Scheme may, if deemed appropriate, be subject to performance criteria in addition to the current TSR targets. The factors which would demonstrate a significant influence to their decision include: a substantial drop in the Company’s share price; the presence of significant bid speculation in the sector; the adoption of weaker targets for the TSR condition; or, a significant change in policy away from granting options to granting only long-term incentive awards. The Committee will continue to monitor whether circumstances warrant the imposition of such additional criteria. The Committee decided that for the 2005 award, the continuing use of EPS as a performance target under the Wolseley Share Option Plan 2003 and the use of financial measures for the annual bonus plan provided an appropriate balance to the use of TSR within the amended 2002 Scheme.

The lists of comparator companies for awards made since 2001 under the 2001 cash plan (a plan introduced to facilitate Mr Banks’ recruitment which is similar in structure to the 2002 Scheme) and, since 2002, under the 2002 Scheme are based upon the constituent members of the FTSE 100 as at the respective dates of grant, excluding banks, telecommunications, IT and utility companies but together with CRH plc and Travis Perkins plc, which compete in the same sector as the Company. A similar group of companies will be selected for the 2006 awards under the amended 2002 Scheme.

Performance graph

Total return indices

This graph shows the Company's TSR performance against the performance of the FTSE 100 Index over the five-year period to 31 July 2006. The FTSE 100 Index has been chosen as being a broad equity market index consisting of companies comparable in size and complexity to Wolseley.