Remuneration report

“The Remuneration Committee considers that the Executive Incentive Plan (EIP)
has been effective in delivering and returning value to the Group’s shareholders
and the nature and the structure of the EIP was appropriate for the Group in 2009.
Now that the performance period is nearing completion, the Remuneration
Committee has undertaken a full scale review of the long-term incentive
arrangements at the Group and believes that it is necessary to introduce
a new long-term incentive plan to continue to drive performance.”

Graham Holden
Chairman, Remuneration Committee

This report is presented in the following sections:


During 2011/12 the Committee has reviewed the performance of the Executive Directors against 2011/12 targets and objectives. The Committee has reviewed also the market positioning, appropriateness and effectiveness of the executive reward arrangements in order to determine whether or not changes are needed. The Committee is satisfied that the overall remuneration policy and approach remains appropriate. With the Executive Incentive Plan (EIP) concluding in July 2012 the Committee was conscious of the need to introduce a long-term incentive plan to build on the strong performance of the last two years. Accordingly the only change proposed to the executive remuneration arrangements is the establishment of a new long-term incentive plan.

Last year we noted that having completed the second year of the two-year restructuring plan successfully and achieved the objective of creating a strong, resilient base from which to grow, the focus of the Group is on delivering profitable growth and increased shareholder returns.

The EIP was introduced in 2009 at the start of the two-year restructuring plan. Awards under the EIP are due to vest, subject to the achievement of the performance conditions, on 24 July 2012. At the time of its introduction several of the Group’s largest shareholders expressed a preference for a one-off scheme which would reinforce the delivery of stretching Total Shareholder Return (TSR) targets. The KCOM Group share price was 27.48 pence in July 2009 and the vesting TSR target was set against the achievement of a minimum TSR of 45 pence with vesting on a straight-line basis up to a maximum TSR of 100 pence. To date the maximum TSR over the performance period would suggest a vesting of 69 per cent of the awards granted.

Vesting is also subject to the Remuneration Committee being satisfied that there has been a demonstrable and sustainable improvement in the Group’s financial and non-financial performance over the performance period.

As part of the consideration of whether there has been a demonstrable and sustainable improvement in the Group’s financial and non-financial performance, the Committee has formally considered the increase in the KCOM Group share price in comparison to the increase in the FTSE 350 Price Index since the date of the approval of the EIP by shareholders on 24 July 2009. This was tested as at 29 March 2012 and it was found that the KCOM Group share price had increased by 147.8 per cent whilst the FTSE 350 Price Index had increased by 27.7 per cent over the same period.

In addition, the Remuneration Committee considered the increase in shareholder value over the same period, which showed that the market capitalisation of KCOM Group shares as at 24 July 2009 was £145.9 million compared with the market capitalisation at 29 March 2012 of £361.6 million. Over the period dividends of £34.5 million were paid, resulting in a total increase in shareholder value between the start of the scheme and 29 March 2012 of £250.2 million. The current performance would suggest that awards with a value of £9.3 million (based on the share price on 29 March 2012) would be made to the Executive Directors in July 2012, and senior executives in November 2012, which is equivalent to 3.7 per cent of the total increase in shareholder value over the life of the scheme up to 29 March 2012. In terms of the financial performance of the Group since the EIP was introduced there has been a substantial reduction in indebtedness and a significant improvement in earnings, with the Group establishing a strong resilient base from which to grow.

When the EIP was introduced in 2009, it replaced the LTCIP as the Group’s main long-term incentive scheme and no further investments in the LTCIP were allowed. The LTCIP required the Executive Directors to hold KCOM Group shares for up to five years and this scheme is therefore due to reach its third and final performance measurement period on 31 August 2012. The scheme’s Earnings Per Share (EPS) underpin is measured as at 31 March 2012 and should it be achieved matching shares may vest depending upon the comparative performance of the Group against its comparator group measured as at 31 August 2012. The EPS underpin is measured as adjusted basic earnings per share as per note 12 of the financial statements. The EPS underpin has been met as at 31 March 2012 and full details of the LTCIP can be found below.

The Remuneration Committee considers that the EIP has been effective in delivering and returning value to the Group’s shareholders and the nature and the structure of the EIP was appropriate for the Group in 2009. Now that the performance period is nearing completion, the Remuneration Committee has undertaken a full scale review of the long-term incentive arrangements of the Group and believes that it is necessary to introduce a new long-term incentive plan to continue to drive performance.

The Remuneration Committee is conscious that, whilst performance under the EIP has been strong, there is still a desire to focus on delivering superior returns to shareholders and reflect the Group’s current position. The Remuneration Committee intends to seek shareholder approval at the 2012 AGM for a new long-term incentive plan which will offer the opportunity to make regular annual awards of shares which will vest after three years and it is intended that the first award will be dependent on the Company’s TSR performance relative to the constituents of the FTSE 250 index (excluding investment trusts).

As agreed last year our remuneration policy remains to maintain our constraint on Executive Directors’ base pay and the emphasis on variable performance related pay. Accordingly, there will be no increase in the Executive Directors’ salaries in July 2012 with focus on the delivery of reward for superior performance, the annual bonus and new LTIP.

In undertaking our review we considered the general reward arrangements for the Group as a whole against those of our competitors and other relevant market comparators. We considered then our requirements to retain and motivate talented employees before making any decision. We believe that both Executive Directors and other employees must be aligned with and motivated by the Group’s success so that they continue to work together as a productive team.

As part of an effectiveness review for the entire Board, an evaluation of the Remuneration Committee was also undertaken. We are pleased to report this review concluded that the Committee has operated effectively.

Graham Holden

Chairman, Remuneration Committee

31 May 2012


The role of the Remuneration Committee

The membership and attendance at Committee meetings is shown on the Corporate governance page. The Committee is responsible for:

The Committee consults regularly with the Executive Chairman and the Group HR Director, although neither is present when their own reward is under discussion. The Committee received advice over the year on all aspects of remuneration including both specific and general market trends and data from independent remuneration consultants New Bridge Street, an Aon Hewitt Company, who were appointed by the Committee in August 2011. Aon Hewitt also provide actuarial and investment consultancy advice to the Trustees of the Group’s two defined benefit pension schemes, which the Committee considers does not produce a conflict of interest. Prior to August 2011 advice was received from Kepler Associates who also provided no other services to the Group.


Key Committee activities during 2011/12:

Area of focus What have we done?
Reviewing the independent remuneration consultants Appointed new independent remuneration consultants to the Committee following a tendering process
Reviewing appropriateness and adequacy of performance-related pay schemes Reviewed the performance of executive incentive schemes designed and consulted with shareholders on the proposed new long-term incentive plan
Aligning Executive Director and shareholder objectives Introduced share ownership guidelines for Executive Directors
Reviewing performance against performance-related pay scheme targets Considered performance against targets for the annual bonus scheme, EIP, LTCIP and the level of achievement/pay-out

Executive remuneration at a glance

The KCOM Group reward package has a number of elements. Base salaries and benefits for all employees are determined with reference to the Group’s reward principles and through benchmarking against relevant comparators. In order to align an individual’s reward to the long-term success of the Group’s performance, other components annual bonuses and long-term incentives, are linked to the Group’s strategy and determined by the levels of performance achieved against key targets.

The Committee reviews annually the remuneration structure to ensure that it remains aligned with business needs and is appropriately positioned relative to the market to ensure that it retains and motivates talented employees. We use target performance to estimate the total potential reward and benchmark our reward package against those of KCOM Group’s competitors. The Committee reviews also pay and employment conditions across the Group when determining Executive Directors’ and senior executives’ remuneration each year.

What are the principles of our remuneration policy?

Our remuneration policy aims to be:

Competitively geared:
Performance linked:
Shareholder aligned:
Simple and transparent:
Aligned to business objectives:
Annual bonus scheme

The majority of employees have the opportunity to earn an annual cash bonus. With effect from 1 April 2009 the award of the bonus has been dependent upon achievement of Group financial performance targets with the level of benefit calculated at the end of the period. All employees are now bonused on the same Group targets apart from those employed by Smart421, who have bonuses set in relation to the performance of the Smart421 brand. The Executive Chairman, with input from the Chief Financial Officer, recommends the percentage earned by Executive Directors and senior executives against their financial targets. These recommendations are considered and approved by the Remuneration Committee. The targets are monitored also at various intervals during the performance period and the final calculation is thoroughly checked by the Remuneration Committee. Bonuses are payable annually, following publication of the Group’s full year results. We believe the timing of payments emphasises the link between the Group’s results and an individual’s reward.

It is the Group’s policy that bonuses and other incentives are not pensionable.

Remuneration explained

Overview: KCOM Group remuneration structure explained

How are the rewards structured?
Assessing what is ‘competitive’

The peer group companies are noted below; this is the main group against which we monitor whether our rewards for Executive Directors and senior executives are competitive relative to our performance and it includes those that we use for monitoring the Group’s business performance. We look also at reward arrangements in other types of telecoms and technology-based companies, as these are potential competitors for talent. In addition, we examine market reward data for UK industrial companies of a similar market capitalisation to the Group to help ensure we do not inadvertently lose talent by falling behind the broader marketplace. For completeness, the Remuneration Committee then considers the pay and employment conditions across the whole of the Group before reaching a conclusion.

The total number of companies in the peer group including KCOM Group is 22. For more information, see below.

Balancing short and long-term remuneration

Based on our view of current market practice, and the principles of our remuneration policy, we have established the remuneration structure set out in the table below. Fixed annual elements (including salary, pension and benefits) are to recognise the status of our Executive Directors and senior executives and to enable them to undertake current and future lifestyle planning. The short and long-term incentives are to motivate and reward Executive Directors and senior executives for delivering strong and sustainable performance to the Group’s shareholders. The long-term incentive arrangement with its Total Shareholder Return linkage ensures that there is good alignment between shareholders, Executive Directors and senior executives.

Key elements of Executive Director short and long-term remuneration

Element Objective Market positioning How much? Conditions
Base salary To recognise status and responsibility Median Historically increased only with increased responsibility or to align with the market None
Benefits To provide lifestyle benefits that are
market competitive
Median Cost of life assurance, income protection, car or cash allowance, fully expensed fuel card, medical insurance and medical screening None
Annual bonus To reinforce the achievement of stretching Company objectives Market median for delivering objectives Target 50 per cent of salary, maximum
100 per cent
Achievement of Group EBITDA and Group revenue targets
Pension To provide funding for retirement Median Cost of employer pension contribution at
20 per cent
None
Long-term incentive – EIP To augment shareholder alignment, ensure direct link between reward and superior shareholder returns Above median 2009 grant of 22 million shares split; one-third Executive Chairman, one-third Executive Directors, one-third senior executives Vesting of 10 per cent at a TSR of 45 pence with straight-line proportionate vesting to a maximum of 100 pence

In addition to the elements above two Executive Directors may receive awards under the LTCIP. Full details of this can be found below. At the AGM in July 2012, we will also be seeking shareholder approval for a new long-term incentive plan. Details of this can be found in the AGM notice.

Linking reward to Company performance

The Group’s remuneration strategy is to align rewards closely with sustainable shareholder value creation. This is achieved by incentivising and motivating the delivery against targets, designed to create financial stability, resilience and growth in specific shareholder return measures. Having created strong financial underpinning through 2009/10, the emphasis on growth measures will increase, as part of the mix, but always with core fundamentals as the priority.

All Executive Directors’ bonus payments are linked to performance against financial targets and the delivery of future growth. With effect from 1 April 2011, the financial targets were changed and whilst we continue to use growth in Group EBITDA as a measure of sustainable operational excellence we replaced our net debt to EBITDA target with growth in Group revenue, which will be driven materially by performance of our Kcom brand.

How did our performance drive Executive Director reward in 2011/12?

2011/12 saw continued challenges in the market. Despite those sustained pressures, the business saw improvements in profitability and continued strong cash generation with a reduction in overall indebtedness. The EIP will deliver rewards for improvement in shareholder value.

Performance highlight
KCOM Group Net debt reduction despite increased investment, pension contributions and dividends
Improvement in Group profitability
Investment to drive improved profitability
Increase in dividend with medium-term growth commitment
KC segment Continued and substantial business profitability performance and growth
Kcom segment Contract wins and continued improvement in sustainability of earnings

Long-term incentives in which the Executive Directors participate

The Executive Directors participate in two share schemes; the EIP and the LTCIP. The EIP was introduced in 2009 and replaced the LTCIP as the Group’s main long-term incentive following extensive consultation with shareholders. The Group operates also other share schemes which are available either to all employees or to specific groups of employees (excluding the Executive Directors) at the discretion of the Committee.

As mentioned above shareholder approval is being sought for a new long-term incentive plan which will be used as the sole executive long-term incentive plan following vesting of the EIP awards. Details of this new plan can be found in the AGM notice.

Executive Incentive Plan (EIP)

The EIP was introduced in 2009 following an extensive consultation with shareholders who expressed a preference for a scheme which would reinforce the delivery of stretching Total Shareholder Return (TSR) targets. A participant is granted a conditional right to a number of ordinary shares in the Group which vest after three years to the extent that the associated performance condition is met.

EIP awards vest according to a performance condition based on the TSR (i.e. share price plus dividends paid) measured over any three months during the three-year performance period ending on 24 July 2012, as follows:

EIP vesting schedule

EIP awards vest at ten per cent of the maximum award for a TSR of 45 pence and vest in full for a TSR of 100 pence, with a straight-line vesting between 45 pence and 100 pence.

For the majority of participants, vested shares are released 50 per cent after three years and 25 per cent equally after four and five years; vested shares held by the Executive Chairman are released in full after three years because at the time the scheme was introduced this timescale was better aligned to his expected tenure in this role. Dividends are accrued on vested shares.

EIP three-month average share price and TSR to 31 March 2012

Vesting is also subject to the Remuneration Committee being satisfied that there has been a demonstrable and sustainable improvement in the Group’s financial and non-financial performance over the performance period.

During the year ended 31 March 2012, a three-month average TSR of 81 pence was achieved. This current performance would, subject to the Committee’s final discretion, result in a total 13.4 million shares vesting (69 per cent of the total award), as detailed in the table below:

EIP grant holding
Date of grant Award (maximum
potential vesting)
000’s
Potential vesting as at
31 March 20121
000’s
Current Directors
Bill Halbert 24 July 2009 7,480 5,187
Paul Simpson 24 July 2009 2,420 1,678
Kevin Walsh 24 July 2009 2,420 1,678
Senior executives Various 6,041 4,189
Previous Director
Paul Renucci 24 July 2009 1,028 713

1. Potential vesting based on the maximum TSR achieved over the performance period to date.

Long-Term Co-Investment Plan (LTCIP)

The LTCIP was established in 2007 and was replaced by the EIP as the Group’s main long-term incentive scheme in 2009 accordingly no further shares could be lodged in the plan. Participation in the LTCIP was restricted to the Executive Directors and requires an Executive Director to purchase and hold KCOM Group shares for up to five years (either by transferring existing shares or through new share purchases). Purchased shares must be held in the plan for a minimum of twelve months and, dependent upon meeting the performance criteria, up to 6.6666 matching shares are awarded for each purchased share. Transferred-in shares must be held for a minimum of twelve months, and dependent upon meeting the performance criteria, up to four matching shares are awarded for each transferred-in share.

The total value of purchased and transferred-in shares is limited to 150 per cent of maximum bonus entitlement per year (scaled back in years four and five to 100 per cent and 75 per cent respectively). The plan is subject to the usual ABI dilution limits, as well as a limit on the value of awards at 2.5 per cent of the market value of the Group. Following the introduction of the EIP, no further investment into the LTCIP was allowed from 1 September 2009, thus concluding the LTCIP investment opportunity three years earlier than had been planned at its introduction.

LTCIP performance condition elements

The LTCIP performance condition has three elements:

1. Earnings per share (EPS) underpin

EPS growth (as defined in the scheme rules) must equal or exceed the growth in RPI over the relevant performance period.


2. TSR

Upon achievement of the EPS underpin matching shares may vest depending upon the comparative TSR performance of the Group against its comparator group. TSR is calculated by comparing the average share price over the three-month period prior to the start of the scheme (1 September 2007) with the final average share price over the three-month period prior to the end of the relevant performance period and adding back dividends.

KCOM Group TSR rank Number of matching shares that vest per transferred-in share Number of matching shares that vest per
purchased share
Below median Nil Nil
At median 1 1.6666
Between median and upper quartile Between 1 and 3 on a straight line basis Between 1.6666 and 5 on a straight-line basis
Upper quartile and above 3 5

The Remuneration Committee agreed on 26 March 2010 to adopt a revised comparator group of companies due to prior consolidation in the market and the likelihood of further consolidation. JP Morgan Cazenove’s report demonstrated that the participants in the LTCIP would be neither advantaged or disadvantaged by the amendments. The revised comparator group is as follows:

Anite Group Logica Telecom Plus
Pace Morse Qinetiq Group
Cable & Wireless Comms Telecity Group XChanging
Colt Telecom THUS Micro Focus
Computacenter Timeweave Phoenix IT
Dimension Data Cable and Wireless Worldwide RM
Spirent Communications BT Group Tribal Group

3. Actual growth in share price

If the Group achieves share price growth of 25 per cent compound per annum over the relevant performance period then a further matching share may vest for each purchased or transferred-in share in the following ratio:

Additional matching share awarded per transferred-in share Additional matching share per purchased share
1 1.6666

Second performance measurement period

There are three performance periods for TSR and absolute share price growth, all starting from the adoption date of the plan, 1 September 2007, and ending consecutively on 31 August 2010, 2011 and 2012.

At the end of the second performance period, whilst TSR performance was at the upper quartile, the Remuneration Committee determined that the EPS underpin had not been met and therefore no matching shares vested.

Measurement of the performance conditions as at 31 March 2012 confirms that the EPS underpin has been met and the TSR performance was between median and upper quartile at 31 March 2012, the actual growth in share price target had not been achieved. The final performance period for the measurement of TSR and absolute share price growth is 31 August 2012.

General
Performance graph

The following graph shows, for the financial year ended 31 March 2012 and for each of the previous four financial years, the TSR on a holding of the Group’s ordinary shares compared with a hypothetical holding of shares in the FTSE Fixed Line Allshare and the FTSE 250. These indices have been chosen as appropriate comparators because they reflect the performance of other companies most similar to KCOM Group in terms of product and service offering and in market capital.

TSR performance since 2 April 2007 – KCOM Group vs. FTSE Fixed Line Allshare and FTSE 250
Value of £100 invested at 2 April 2007

Keeping Directors’ and shareholders’ interests aligned
Minimum shareholding

The interests of the Executive Directors are aligned closely with those of shareholders through linking the vesting of EIP shares to TSR. From July 2012 the Committee is introducing share ownership guidelines for the Executive Directors to hold 100 per cent of salary in shares using the vesting EIP share scheme to build up such a shareholding, if their current shareholding is not sufficient to meet this criteria.

Actual share ownership as a percentage of salary March 2012 Guideline on share ownership as a percentage of salary Guideline met?
Bill Halbert 100% No
Paul Simpson1 134.4% 100% Yes
Kevin Walsh1 230.0% 100% Yes

1. This includes matching shares awarded under the share incentive plan which may be subject to forfeiture in certain circumstances.

Share dilution and headroom

We adhere to both the latest ABI guidelines and our own share scheme rules in limiting the level of share dilution. The issue of shares to satisfy discretionary share schemes will not exceed five per cent of the Group’s issued ordinary share capital in any rolling ten-year period. Additionally, the issue of shares to satisfy all the Group’s employee share schemes will not exceed ten per cent of the Group’s issued ordinary share capital in any rolling ten-year period.

The Committee regularly reviews the current dilution level, available headroom and general trends.

Non-Executive Directors

Non-Executive Directors do not participate in any of the Group’s incentive or benefit plans. Their fees are reviewed every year against those for companies of similar scale and complexity to KCOM Group and their fees are set by the Board as a whole.

Fees were reviewed at the end of the 2011/12 financial year and determined to be in line with the market median.

Outside appointments

We believe that where Board members hold directorships in other companies the Group can benefit from their experience. As a result, and subject to the Board’s prior approval, Executive Directors may take on more than one external non-executive directorship and retain the fees earned. In 2011/12 Bill Halbert received no direct remuneration for his external non-executive positions.

Other senior executives

In addition to the contribution made by the Executive Directors, the Committee recognises also that other senior executives have a direct and significant influence on the ability of the Group to achieve its goals. Consequently, in addition to setting the reward packages for Directors, the Committee reviews also the packages for those senior employees to:

The Committee is satisfied that an appropriate reward structure exists below Board level to motivate and retain our top talent.

Directors’ Service Agreements

Service agreements for Executive Directors have a maximum notice period of twelve months, apart from the Executive Chairman, whose notice period is six months. The notice period for Non-Executive Directors is six months. All Non-Executive Directors are appointed for an initial period of three years, and with effect from the 2012 AGM will be subject to annual reappointment, in line with the UK Corporate Governance Code.

The Executive Directors’ Service Agreements allow for payment in lieu of notice in the event of loss of office. The Group has the ability to pay this in instalments if it so wishes. No payment in lieu of notice is payable by the Group if an Executive Director is dismissed for serious breach of contract, serious misconduct or for serious underperformance or acts that bring the Executive Director or Group into serious disrepute. The Group is able also to reclaim variable components of remuneration in the exceptional circumstance of misstatement. The Non-Executive Directors’ Contract for Services does not include any compensation for loss of office.

Date of Board appointment Notice period (months)
Executive Directors
Bill Halbert 1 September 2006 6
Paul Simpson 24 May 2004 12
Kevin Walsh 24 May 2004 12
Non-Executive Directors
Graham Holden 27 November 2007 6
Tony Illsley 2 June 2009 6
Martin Towers 2 June 2009 6

Audited information

In this section we have included the information that is required by statute or recommended by best practice guidelines and not disclosed elsewhere in the Remuneration report. The information that is required to be audited is labelled specifically as audited information. We consider that we have complied with the disclosure recommendations.

Directors’ emoluments
Salaries / fees
£’000
Taxable benefits
£’000
Bonuses
£’000
Pensions
£’000
Total
2011/12
£’000
Total
2010/11
£’000
Current Directors
Bill Halbert 383 16 38 851 522 476
Paul Simpson 276 16 25 58 375 324
Kevin Walsh 240 25 24 55 344 311
Graham Holden 47 47 45
Tony Illsley 52 52 50
Martin Towers 47 47 45
Previous Director
Paul Renucci 576
Total 1,045 57 87 198 1,387 1,827

1. Bill Halbert has elected not to be a member of the Group pension scheme and, accordingly, the Group made no contributions on his behalf. Instead, he received cash payments totalling £85,350 (2011: £84,600).

Directors’ interests

The table below sets out the interests of Directors (as listed on the Our board page) and their families in the Group’s shares at 31 March 2012, other than with respect to options to acquire ordinary shares which are detailed separately. All of the interests held by Directors and their families are beneficial.

At 31 March 2012 ordinary shares At 31 March 2011 ordinary shares
Executive Directors
Bill Halbert Nil Nil
Paul Simpson 497,2621 470,6501
Kevin Walsh 751,1271 712,8271
Non-Executive Directors
Graham Holden 50,000 50,000
Tony Illsley Nil Nil
Martin Towers 95,0002 95,0002

1. This includes matching shares awarded under the share incentive plan which may be subject to forfeiture in certain circumstances.

2. Purchased via a self-invested pension plan. In addition on 22 and 23 May 2012 Martin Towers and his connected persons purchased an additional 65,000 shares, resulting in a total beneficial shareholding of
160,000 as at 23 May 2012.

There has been a change since the end of the year where the Executive Directors participate in the Share Incentive Plan (SIP), for which we make monthly announcements as required under section 5.6.1 of the Disclosure and Transparency Rules. This has resulted in the following additional shares being held:

SIP holdings
Executive Directors
Paul Simpson 644
Kevin Walsh 648

Executive Directors’ interest in share options

At the start of the financial year, Paul Simpson held 15,000 shares in an approved scheme. However, these lapsed on 20 August 2011 and no further options have been granted during the year.

None of the other Executive Directors held share options at the beginning of the year and have not been granted further options during the year.

Share awards under long-term incentive plans held at 31 March 2012
Maximum potential
vesting at
31 March 20111
000’s
Lapsed in year Maximum potential
vesting at
31 March 20121
000’s
Normal
vesting dates
Share
price
on grant
Current Directors
Bill Halbert
EIP 7,480 7,480 24/07/2012 28.25p
Paul Simpson
EIP2 2,420 2,420 24/07/2012 – 24/07/2014 28.25p
LTCIP – TSR 3 1,619 1,619 01/09/2010 – 01/09/2012 40.86p
LTCIP – Growth in Share Price 3 540 540 01/09/2010 – 01/09/2012 40.86p
Kevin Walsh
EIP2 2,420 2,420 24/07/2012 – 24/07/2014 28.25p
LTCIP – TSR 3 2,461 2,461 01/09/2010 – 01/09/2012 40.86p
LTCIP – Growth in Share Price 3 820 820 01/09/2010 – 01/09/2012 40.86p
Previous Director
Paul Renucci
EIP 1,028 1,028 24/07/2012 – 24/07/2014 28.25p
LTCIP – TSR 1,510 (407) 1,103 01/09/2010 – 01/09/2012 40.86p
LTCIP – Growth in Share Price 503 (230) 273 01/09/2010 – 01/09/2012 40.86p

1. This is the maximum potential vesting assuming all performance conditions achieved at the maximum levels.

2. Vested shares are released in three tranches: 50 per cent after three years, and 25 per cent equally after four and five years.

3. LTCIP price on grant is an average price based on the share price at the date when purchased or transferred-in shares are entered into the plan and potential share awards are granted.

MyShare – Share Incentive Plan (SIP)

The SIP was introduced in 2003 and was redesigned fundamentally in 2007 in an effort to embed a culture of share ownership throughout the Group. As part of the redesign we offered 200 free shares to each eligible employee during 2007.

The scheme is open to all employees and offers free dividend, partnership and matching shares. Matching shares are offered on a sliding scale of between 2:1 for contributions of £20 per month to 1:3 for contributions of over £51 per month.

Currently 1,150 employees (including two Directors and six Persons Discharging Managerial Responsibilities) participate in this scheme with an average allocation of 95 matching shares per employee per month.

We are delighted to announce that the MyShare scheme will be five years old later this year and all participants who were awarded free shares in 2007 will have access to these shares tax free after August 2012. Any other partnership matching and dividend shares that are over five years old will be available also tax free once they reach the five-year anniversary from issue.

General information

The closing mid-market price of KCOM Group PLC shares on 31 March 2012 was 73.50 pence. The high and low closing mid-market share prices during the year were 84.50 pence and 59.25 pence respectively.

Kathy Smith

Company Secretary

31 May 2012

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