The Remuneration Committee ("the Committee")
Remuneration paid to executive directors is considered and determined by the Remuneration Committee. The Committee comprises Jonathan Fry, the Chairman of the Committee, Michael Hartnall, Edward Wilson and Richard McNeel, all of whom are non-executive directors. The Chief Executive attends some meetings of the Committee in an advisory capacity but is not a Committee member and is not present for discussions which directly concern him.

Advisers to the Remuneration Committee
The Director of Human Resources is the internal adviser to the Committee who provides information and advice to facilitate discussion and decision-making on remuneration matters. He also provides the Company and its subsidiaries with services which include the setting of employment policies, recruitment of senior managers and overall responsibility for all major human resources. The Director of Human Resources was appointed by the Company.

New Bridge Street Consultants, who were appointed by the Committee, provide information and data to the Committee to assist with the development of executive remuneration and, in particular, in relation to the development of share incentive schemes. They also help the Committee agree appropriate packages reflecting the remuneration policy.

The Committee also uses information provided by Hay Group, who were appointed by the Company, relating to rates of pay for similar positions in comparable companies.

Policy on directors' remuneration
Remuneration policy centres, and will continue to centre, on ensuring that remuneration packages are sufficiently competitive, in both fixed and variable terms, to attract, retain and motivate the right calibre of executive director for each individual function. The fixed and variable elements are of equal importance in achieving these objectives. Incentive payments are conditional upon demanding performance criteria so as to align incentive awards paid to directors directly with the interests of shareholders. The constituent parts of those packages are set out in the following paragraphs.

The policy of the Committee is to set basic salaries at a level which is competitive with that of comparable businesses, with a substantial proportion of the overall remuneration package being linked to performance through participation in short-term and long-term incentive schemes.

Salaries, fees and benefits
Salaries for executive directors are determined by the Committee and are reviewed annually by it, taking into account individual performance over the previous twelve months and pay and employment conditions elsewhere in the Group. Any increases in basic salary are effective from 1 July in each year.

Benefits relate to the provision of cars, life assurance and medical cover.

Fees for non-executive directors are determined by the Board, having regard to fees paid to non-executive directors in other UK quoted companies. Individuals cannot vote on their own remuneration.

Short-term incentive arrangements
The 2002 annual bonus scheme for executive directors was based on a shareholder value measure which takes into account not only post tax earnings but also the cost of capital employed. Under this scheme, directors could earn a bonus of up to 60 per cent of their basic annual salaries based on a pre-determined scale. For 2002, executive directors are entitled to a bonus under this scheme as shown in the Directors' remuneration table. The Company is proposing to introduce a revised annual bonus scheme. For 2003, the performance measures used to determine the level of annual reward will relate to operating profit and working capital relative to the operating plan for that year. The maximum value of an annual bonus under the scheme will be 70 per cent of basic salary. Executive directors would be eligible to receive 80 per cent (equivalent to 56.0 per cent of annual basic salary) of any bonus in cash and 20 per cent (equivalent to 14.0 per cent of annual basic salary) in the form of a deferred share award. The shares would be held in trust by the Trustee of the Company's Employee Share Ownership Trust for three years and would normally be forfeited if an executive left or was dismissed.

Performance incentive plan
The executive directors have previously participated in the Performance Share Plan which is a long-term incentive plan. Total shareholder return (TSR) was used as the performance measure in order to align the level of reward to directors with the interests of shareholders.

Under the Performance Share Plan, participants are, on payment of a nominal option price of 1 penny per share, able to exercise options over shares in the Company in respect of an individual grant if the performance criteria are met over a three year performance period. Details of options granted to executive directors under the Performance Share Plan are shown in the table of directors' share options at the end of this report; this includes details of options granted in 2000 which have now lapsed.

At the date of this report, grants made in 2001 and 2002 remain outstanding. The maximum value of shares over which options were granted in each of these two years was equivalent to 80 per cent of annual basic salary as determined at 1 January in each year or at date of appointment, if later.

The method used to assess whether the performance condition was achieved is carried out by taking the TSR for each comparator company over a three year period commencing 1 January in the year of the relevant grant, with each company then placed in descending order according to their TSR returns on the basis that the company with the highest return is shown first. If the Company's TSR over the same period is more than the company in the 30th percentile position, all options will become exercisable; options to the value of 60 per cent of salary will be exercisable if in the top 40; 40 per cent if in the top 50 and 20 per cent if in the top 60. No options will be exercisable if the Company's performance is below the 60th percentile position. The TSR information and calculations are carried out by Alithos Limited.

The comparator companies for purposes of grants in 2001 were the FTSE 250 companies, excluding investment trusts. With effect from 1 January 2002, the comparator companies were changed to a number of national and international chemical companies which the Committee considered to be a more appropriate group against which to measure the performance of the Company. The current comparator companies are:

In relation to awards made after 1 January 2002 under the Performance Share Plan, the definition of market value in relation to a share on any date was changed from the average of the daily middle market quotations of such shares over a period of 12 months ending on the dealing day immediately preceding such date to a period of 3 months.

In order to emphasise the long-term nature of the Performance Share Plan, participants may only sell enough shares to cover their liability for income tax arising on the exercise of an option within the two year period following the date of the exercise of that option.

The Company's Employee Share Ownership Trust (ESOT) was established in 1995 and has purchased some of the shares in the Company which would be required if participants were entitled to exercise the maximum number of options outstanding under the Performance Share Plan. At 31 December 2002, the ESOT held 670,729 shares with a market value of £0.19 million. The right to dividends on ordinary shares owned by the ESOT has been waived.

Executive share option schemes
The 1987 Executive Share Option Scheme (the "1987 Scheme") and the 1998 approved and unapproved Executive Share Option Schemes (the "1998 Scheme") which replaced the 1987 Scheme, are discretionary option schemes under which senior management below Board level were granted options to purchase shares in the Company. The option price at which options may be exercised is the average market price over the five working days preceding the grant and there is no discount. Options are capable of exercise after three years and within ten years of the date of grant; those granted since 1995 are subject to earnings per share performance targets.

Proposed Executive Share Option Scheme
Following a review of the 1998 Scheme and the Performance Share Plan, the Committee has concluded that shareholders' approval should be sought at the 2003 AGM for the adoption of a new executive share option scheme. The proposed scheme will replace the 1998 Scheme and is designed to reflect changes to guidelines issued by institutional investors and developments in market practice. After the adoption of this scheme, no further awards will be made under the 1998 Scheme or the Performance Share Plan. Existing awards will, however, continue to be exercisable.

The Committee has concluded that an executive share option scheme delivering market value share options is the most appropriate way of aligning the interests of executives and shareholders. Participants, who will include executive directors, will only benefit if and to the extent that the share price increases above the option exercise price. The exercise of the options will be subject to demanding performance targets.

The key points of the proposed Scheme are as follows:

• options will be granted with an exercise price per share based on the Company's share price immediately before the date of grant;
• the shares valued at the date of grant under options granted to an executive in any financial year will not normally exceed 1.5 times basic salary;
• it is proposed that the exercise of options granted in 2003 to executive directors and other members of the management team will be based partly on the Company's earnings per share growth relative to inflation, and partly on the Company's total shareholder return relative to the initial comparator group comprising national and international chemical companies currently used in the Performance Share Plan. The following targets will apply to executive directors and other members of the management team.

Proportion of option grant exercisable as multiplier of base salary	EPS/TSR split	Performance criteria to be met for options to be exercisable
0.0 to 0.7	50% EPS 50% TSR	Annual average EPS growth of 4% + RPI TSR at median
0.71 to 1.5	50% EPS 50% TSR	Annual average EPS growth of 4.1% + RPI to 10% + RPI (straight line vesting) Median to upper quartile (straight line vesting)

The EPS performance condition and TSR condition will apply separately to options granted under the proposed scheme.

• The performance conditions will initially be tested after three years. If they are not satisfied then they may be retested after four years, from the same fixed base point. To the extent they are not met after the end of the fourth financial year, the options will lapse.
• The Committee believes that this combination of targets is the most appropriate way of measuring both the total returns to shareholders relative to similar businesses and the Company's underlying financial performance. The assessment of the performance targets will be carried out by New Bridge Street Consultants who were chosen because they are advisors to the Committee.
• Shareholding guidelines will be introduced for executive directors, who will be expected to retain in shares 50 per cent of the post-tax gains made from the exercise of options under the proposed scheme, or the vesting of awards under the Performance Share Plan, or annual bonuses paid in the form of shares, until they have built up a shareholding equal to their basic salaries.

Savings related share option scheme
The 1998 UK savings related share option scheme (the "SAYE Scheme") is a scheme under which all eligible UK employees, including executive directors, can enter into savings contracts with a building society or bank for a period of three or five years and use the proceeds from their savings accounts to acquire shares in the Company on the exercise of their options. The option price at which options may be exercised is the average market price over the five working days preceding the invitation date discounted by a maximum of 20 per cent.

Options granted to executive directors under the SAYE Scheme are not subject to performance conditions. The SAYE Scheme is an Inland Revenue approved all-employee scheme, the terms of approval for which do not allow the imposition of performance conditions on the exercise of options.

Total Shareholder Return Performance
The following graph illustrates the Company's total shareholder return since 1 January relative to the FTSE All Share Index, in accordance with paragraph 4 of the Director's Remuneration Report Regulations 2002.

The Company is a member of the FTSE All Share Index and accordingly this is considered to be the most appropriate broad equity market index for the purpose of measuring the Company's relative performance.

Source: Datastream

This graph looks at the value, by the end of 2002, of £100 invested in Elementis on 31 December 1997 compared with that of £100 invested in the FTSE All Share Index.