Governance

Non Executive Directors

The remuneration of Non Executive Directors is made up of a basic fee and an additional fee where a Non Executive Director acts as chairman of either the Audit or Remuneration Committees and for the Director nominated as Senior Independent Director. Fees are reviewed from time to time by the Chairman and the Executive Directors of the Board. The Non Executive Directors have letters of engagement rather than service contracts and do not participate in any incentive plan, nor is any pension payable in respect of their services as Non Executive Directors. The Board's policy is that Non Executive Directors are normally appointed for an initial term of three years, which is then reviewed and extended for a further three-year period. Appointments may be terminated upon six months' notice. There are no provisions for compensation in the event of termination. The terms and conditions of appointment of the Non Executive Directors are available for inspection at the Company's registered office during normal business hours and at the Annual General Meeting.

Executive Directors

The Company's policy continues to be to provide remuneration packages that fairly reward Executive Directors for the contribution they make to the business, having regard to the size and complexity of the Group's operations and the need to attract, retain and motivate executives of the highest quality. Remuneration packages comprise salary, performance bonuses, share options, long term incentive awards, benefits in kind and retirement benefit provisions. The Company takes fully into account all of these individual elements in adopting a total approach to remuneration. The Company's policy is that each of the packages should incorporate components linking individual and company performance, short- and long term returns as well as absolute and relative financial performance. None of the variable elements of remuneration are pensionable. These packages are designed to be broadly comparable with those offered by other similar international businesses and reflect competitive practices in the countries and markets in which the Executive Directors operate.

The committee believes that the choice of performance measures for the incentive plans continues to be suitable and provides an appropriate mix and balance. The measures are earnings per share ('EPS') for executive options and total shareholder return ('TSR') for long term incentive awards. The targets are felt to be demanding for the next three years and align executives' interests with those of shareholders over this period.

The policy is designed to incentivise the Executive Directors to meet the Company's financial and strategic objectives, such that a significant proportion of total remuneration is performance related. The committee considers that the targets set for the different elements of performance related remuneration are appropriate and demanding in the context of the Company's trading environment and the business challenges it faces. The following chart shows the average of total remuneration attributable to salary, target bonus and the estimated value of long-term incentive awards and executive share options granted during the financial year to Executive Directors in office at the date of this report:

Service agreements

The Executive Directors have service agreements with Wolseley plc, which are subject to a maximum of 12 months' notice of termination if given by the Company and six months' notice of termination if given by the Executive Director. Such notice periods reflect current market practice and the balance that should be struck between providing contractual protection to the Directors that is fair and the interests of shareholders. The date of each service agreement and the year in which each Executive Director was last re-elected are noted in the table below. There are no provisions in any service agreement for early termination payments and, in the event of early termination of any service agreement, the committee will give full and proper consideration to mitigation, which should be taken into account when computing any compensation payable.

The Non Executive Directors do not have service agreements; their terms of service are contained in their respective letters of engagement.

Salaries

Basic salaries are determined having regard to individual responsibility and performance and are benchmarked with market data which is derived from a group of companies selected on the basis of comparable size, geographic spread and business focus. Consideration is also given to general pay and employment conditions across the Group. The target salary is set at the median, with the opportunity to go above this level, subject to sustained individual performance. New appointments, and in particular internal promotions, will tend to move to the median over two to three years once their expertise and performance has been proven. The payment of salaries at this level is considered appropriate for the motivation and retention of the calibre of executive required to ensure the successful management of the Company in the challenging international business environment in which it operates. The committee reviews the fees of the Chairman and the salaries of the Executive Directors annually on 1 August, having sought the views of both the Chairman and the Group Chief Executive (other than in the case of their own remuneration). In recognition of the financial circumstances currently being faced by the Company, an increase of 3 per cent was awarded to each member of the Board and the Executive Committee for the financial year commencing 1 August 2008. The fees payable to the Chairman and base salaries in respect of the Executive Directors for the financial year commencing on 1 August 2008 are as follows: J W Whybrow £360,500; C A S Hornsby US$1,493,500; R H Marchbank US$964,100; F W Roach US$957,900; and S P Webster £556,200.

Benefits in kind

These principally consist of car benefits, healthcare insurance and, in the case of Messrs Hornsby and Marchbank, relocation and housing allowances following their relocation from the USA to the UK. In addition, to ensure that senior executives who are US citizens are not disadvantaged as a result of paying both UK and US taxes on their income, there is a mechanism of tax equalisation, which avoids the need to increase salaries to meet any additional tax burden.

Performance bonuses

Performance bonus arrangements for the Executive Directors are designed to encourage individual performance, corporate operating efficiencies and profitable growth. Stretching targets are set for each element of the bonus, determined by the committee each year, which also considers the levels of performance targets to be achieved for bonus payments to be made in the succeeding year. The annual bonus awards are based on a mix of demanding financial targets, derived from the Company's historic performance, annual long-term strategic business plan and annual budget, as well as market expectations. For 2007/08, performance was measured by trading margin, cash flow and growth in EPS, reflecting key performance indicators in line with the Group's 'Earn, Turn, Grow' initiative. These elements accounted for 80 per cent of the potential bonus with the balance depending on specific personal objectives set for each Executive Director.

The following percentages of base salary, which vary between Executive Directors depending on their particular responsibilities, will be paid as bonus for the year ended 31 July 2008, subject to the achievement of the minimum, on-target and maximum levels of performance for each element (with the percentages increasing on a linear basis for achievement between each level):

For the year ending 31 July 2009, performance bonuses will be measured by trading profit and cash flow. These elements will account for 80 per cent of the bonus with the balance depending on specific personal objectives set for each Executive Director. The committee has determined that the following percentages of base salary will be paid as bonus, subject to the achievement of the minimum, on-target and maximum levels of performance for each element (with the percentages increasing on a linear basis for achievement between each level):