Introduction to the Directors' remuneration report

This is a report made by the board of Lloyds TSB Group plc, on the recommendation of the remuneration committee. It covers the current and proposed components of the remuneration policy and details the remuneration for each serving director during 2007.

Statement from Wolfgang Berndt

I am delighted to introduce the report of the board in relation to remuneration policy and practice.

In 2005, we conducted a comprehensive and independent review of remuneration policy for our most senior executives which led to a number of important policy changes, including the introduction of a new long-term incentive plan. This plan has been used for all long-term awards made since its introduction and we believe that this plan will continue to underpin our primary objective of attracting, retaining and motivating executives of the highest calibre.

As detailed in last year’s report and given strong endorsement by shareholders who voted on the Directors’ Remuneration Report at our 2006 AGM, we made some changes to the annual incentive scheme for 2007, with an increase in the maximum bonus opportunity for executive directors to 200 per cent of salary (225 per cent for Mr Daniels) to ensure that the individual elements and the totality of our reward offering is competitive. We believe that a policy of positioning basic salaries at the median of the market combined with the substantial proportion of total reward opportunity being at risk through our short and long-term incentive schemes, underpinned by demanding performance conditions, provides strong levels of alignment with shareholders’ interests as well as engaging the executive directors in pursuing long-term shareholder value.

Looking forward, Lloyds TSB’s remuneration policy remains unchanged and, following further independent review, we intend to maintain the short and long-term incentive schemes in their current form. We believe that it is essential for the positioning of our package to be highly competitive against the external market; and in setting appropriate pay levels we will continue to consider remuneration practice of FTSE 20, and at the same time take close account of our direct competitors, namely the major UK banks, with whom we typically compete for high calibre talent.

The committee met on four occasions during 2007 and, in addition to its regular business, attention was given to:

• reviewing the appropriateness of comparator groups used for the purpose of benchmarking overall levels of reward opportunity
• considering the level of Group performance and the correlation with outcomes under our previous long-term incentive awards
• examining the linkage between performance and remuneration elsewhere in the business, with a particular focus on annual bonus schemes which apply to areas of the Group operating in highly specialised pay markets
• monitoring the appropriateness of remuneration arrangements applicable to the wider executive management population across the Group.

In terms of changes to the committee’s membership, Mr Green joined the committee in May, replacing Dr Julius. In addition to welcoming Mr Green, I am extremely grateful to Dr Julius for her contribution to the work of the committee.

We have made a number of changes to this year’s report which are intended to demonstrate our commitment to the highest levels of clarity and comprehensive disclosure. Given our stated aim of ensuring a strong level of alignment between overall performance and reward outcomes, I believe that the actual levels of reward disclosed in the report which follows are entirely consistent with Lloyds TSB’s performance in 2007.

The remuneration committee unanimously recommends that you vote to approve the remuneration report at the 2008 AGM.

Dr Wolfgang Berndt
Chairman, Remuneration Committee