The Remuneration Committee is responsible for remuneration policies that create value for shareholders.

Remuneration structures and packages therefore include competitive base salaries, a high potential for variable pay but clearly linked with superior performance and absolute value delivered in the business, with key business value drivers used as a basis for measuring performance and a significant proportion of variable pay in restricted conditional shares.

This report has been prepared in accordance with the Directors’ Remuneration Report Regulations 2002 and describes how the Board has applied the principles of the Combined Code on Corporate Governance in relation to the remuneration of the Directors.

As required by the Remuneration Report Regulations, a resolution to approve the Board Report on Remuneration will be proposed at the Annual General Meeting of the Company. The Chairman of the Remuneration Committee will be available at the Annual General Meeting to answer questions about Directors’ remuneration.

The sections of this report dealing with Directors’ emoluments paid, pensions and share options and incentives have been audited. The remaining sections are not subject to audit.

THE REMUNERATION COMMITTEE

The Committee is responsible for recommending to the Board the remuneration of Executive Directors and senior executives (in all its forms), and the terms of the service contracts and all other terms and conditions of employment of the Executive Directors. The Committee’s full terms of reference are available on the Group’s website. The members of the Remuneration Committee during 2007 were J. Vogelsang (Chairman), R.T. Scholes (until 16 August 2007), L.P Bermejo, J.A. Biles (from 16 August 2007) and A.M. Thomson (from 1 December 2007). The Committee has taken advice from Ernst & Young LLP (appointed by the Remuneration Committee in 2006) to provide independent advice in determining appropriate levels of remuneration. In addition, the Company received actuarial and other pensions advice from KPMG LLP (appointed in 2005) in relation to the management of risk arising from the UK final salary pension scheme.

REMUNERATION POLICY

The Committee aims to provide a remuneration policy consistent with the Group’s overall business objectives and thereby attract and retain high calibre executives, align executives’ rewards with the creation of shareholder value and motivate executives to achieve and maintain challenging levels of company and individual performance. Market rates are determined by reference to other companies of similar size, activities and complexity. At the same time, policy in this area is sensitive to the remuneration structure within the Group. The Committee keeps both the fixed and variable elements of each Executive Director’s and senior executive’s overall package under review. In recent years, the Committee has progressively increased the proportion of variable as against fixed element of pay.

The changes introduced include:

• Performance related annual bonus initially increased for all executives to a maximum of 60% of base salary in 2006 and 2007 and to 80% for 2008 onwards;
• The 2003 share option scheme being replaced in 2006 by a long term incentive plan known as the Bodycote Incentive Plan; and
• The introduction of the Bodycote Share Match Plan in 2006 with the first awards being made in 2007.

The Committee considers the targets set for the variable element of Executive Directors’ and senior executives’ remuneration and has sought to encourage and incentivise “stretch” or exceptional and sustainable financial performances, as measured against the Group’s strategic plans.

FIXED ELEMENTS OF PAY

The fixed elements of remuneration are salaries, pensions and other benefits.

Base salary

The base salaries for Executive Directors and senior executives are reviewed annually and are determined by taking into account the responsibilities and performance of the individual, having regard to current market practice.

In line with the remuneration policy the Committee has, since 2002, only made inflationary (and where appropriate market) adjustments following benchmarking. The Committee has used UK engineering businesses and FTSE 250 companies, as well as other North American or European companies in similar trades, as comparables. This resulted in the following salaries being set with effect from 1 January 2008:

Mr J D Hubbard	£405,000
Mr D F Landless	£260,000
Mr D R Sleight	£197,600

Pension

Pensions for current UK domiciled Executive Directors are, up to the UK Government salary cap, provided for under the Group’s UK contributory final salary pension scheme which has a normal retirement age of 65 and which is closed to new members. The main features, in respect of the Executive Directors are:

1. Pensions from age 65 of 1/60th highest average salary of any consecutive three years out of the last ten years prior to retirement (restricted to the earnings cap where it applies) for each year of pensionable service, and with increases in pensionable salary after 31 December 2006 restricted to 3% each year (‘the Salary Limit’);
2. A cash death-in-service benefit of four times basic salary at date of death;
3. Spouse or dependant’s pension on member’s death equal to half member’s prospective retirement pension (restricted as before) at 65 on death in service, or half member’s pension entitlement on death in retirement;
4. Member’s contributions are 8% of basic salary; and
5. For Executive Directors with basic salaries above the Salary Limit or the earnings cap the Group will contribute between 14% and 16% of the excess to a defined contribution arrangement.

An analysis of accrued pension entitlements for the two Directors with accruing benefits under the scheme during 2007 is given in the following table.

Directors’ pensions – audited

	D.F. Landless	D.R. Sleight
	£000	£000
Accrued annual pension at 01/01/07	14	66
Transfer value at 01/01/07	117	887
Real increase in accrued annual pension	2	3
Inflation	–	2
Increase in accrued annual pension	2	5
Transfer value of real increase in accrued annual pension (less members’ contributions)	9	28
Real increase in transfer value less members’ contributions	35	98
Members’ contributions	9	9
Accrued annual pension at 31/12/07	16	72
Transfer value at 31/12/07	165	1,028

Arrangements for Mr Hubbard are for a Company contribution to a defined contribution arrangement of 16% of his basic salary (including any payments being made by the Group into the Group’s US 401k retirement plan) from January 2007 onwards. Mr Hubbard is a member of the Group’s US 401K retirement plan to which the Group contributed £9,488 (2006: £8,491). Pension contributions for Mr Landless’ salary above the earnings cap amounted to £20,573 (2006: £16,156).

Other fixed elements

The Company provides other benefits in line with market practices. These include the provision of a company car, private medical insurance for the Executive Directors and their families, and long-term disability insurance.

VARIABLE ELEMENTS OF PAY

There are essentially four variable elements of pay.

Annual Bonuses

For 2007 an annual bonus is payable to all Executive Directors and senior executives, based on the Group and individual performance. For those senior executives with Strategic Business Unit (SBU) responsibilities, part of the performance-related bonus is based on their relevant sphere of responsibility. Payment of the maximum cash bonus for 2007 required Executive Directors and senior executives to achieve challenging target increases over 2006 performance in Economic Profit (69.7% of target achieved), ROCE (Group return on capital employed) (58.8% achieved), organic sales (fully achieved) and quantitative improvements in safety and health (fully achieved). As a result, Executive Directors received a cash bonus of 45.7% of basic salary (against a maximum of 60%) and senior executives’ cash bonuses ranged from 11.8% to 51.8% depending upon individual SBU performances (again compared to maximum of 60%). Executive Directors and senior executives with SBU responsibilities will have the potential to receive annual cash bonus awards of up to 80% of base salary for 2008 onwards.

Share Awards

In 2006, the Company introduced the Bodycote Incentive Plan (BIP) under which Executive Directors and senior executives are rewarded for the delivery of the Company’s Strategic Plan and in particular enhanced Economic Profit. Economic Profit for these purposes is defined as adjusted earnings before interest and tax (EBIT), less a 15% charge per annum for the aggregate average of shareholders’ funds, net borrowings and goodwill previously written off to reserves, amortised or impaired. To achieve the improvement in Economic Profit both pre-tax ROCE as well as EBIT improvements have to be made.

The Strategic Plan targets ROCE improvement by approximately one percentage point each year until a mid-teens pre-tax ROCE performance has been achieved. In addition significant growth in EBIT is targeted. Based on the Group’s typical capital requirements in the initial three year performance period 2006 to 2008, maximum vesting under the BIP will require a compound annual growth of EBIT of approximately 30%. Minimum vesting will be made for compound annual growth in EBIT of approximately 15%. Below this level no vesting will be made. A sliding scale will be applied to performance between the maximum, target and minimum. Based upon the Group’s Economic Profit Performance in 2006 and 2007 the Committee expects final vesting of awards for performance in the three-year periods 2006 to 2008 and 2007 to 2009 to be in the mid-range of possible outcomes. As a result Executive Directors’ awards made in 2006 and 2007 and that would vest in 2009 or 2010 respectively could equate to around 100% of their basic 2005 or 2006 salaries (as applicable) using the share price at the date of the award. Details of the awards under the BIP are noted later in this report.

Deferred Share Awards

This plan first operated in 2007 by reference to the 2006 financial year bonus. Every year, annual bonus up to the value of 20% of base salary may be deferred into Company shares for three years. The maximum level of matching shall be calculated by reference to the gross bonus deferral on a one for one basis subject to the achievement of a robust and challenging ROCE target.

Details of the awards under the BSMP are noted later in this report. The BSMP replaces the Deferred Restricted Stock Bonus Plan (“DRSBP”) which permitted Executive Directors and senior executives to defer up to one-third of their cash bonus payable in 2003 and 2004 for shares to be held for three years and which the Company would then match. It also replaces the Bodycote Short Term Stock Bonus Plan (“STSBP”) which was introduced in 2005 as a temporary measure until the BIP and BSMP could be presented to shareholders for approval. Under the STSBP, Executive Directors and senior executives received the maximum awards as a consequence of Bodycote being in the upper quartile of TSR achieved by companies within the FTSE 350 Engineering & Machinery Index and certain other comparator companies. The shares will vest in 2009 and at the end of the holding period, the awards will be enhanced by an amount reflecting dividends paid on the award shares over the three-year period. No further awards will be made under the STSBP or DRSBP following adoption of the BIP and BSMP. Details of shares held by Directors pursuant to the schemes noted are given later in this report.

Option Arrangements

The Committee also manages share incentive schemes established between 1994 and 2003. Following adoption of the BIP no further share options will be granted to Executive Directors and staff pursuant to the 2003 executive share option scheme, but share options granted before this decision will continue to be capable of exercise. At the time each scheme was approved by shareholders, institutional guidelines were followed and latterly leading investors were consulted.

All outstanding share options have now qualified for exercise. Options granted since 1998 have all qualified on the basis of the increase in headline earnings per share (EPS) since 2002 using the UK GAAP headline EPS data for 2002 to 2004 and the IFRS headline EPS figure for 2005. Having received and reviewed a reconciliation between the two accounting standards (the calculations for which have been approved by the Audit Committee), the Committee were satisfied that each performance criterion had been met by a wide margin.

Share options granted under the 1994 and 1996 share option schemes were only exercisable if, over any rolling period of three years from the date of the award, the growth in the Group’s headline EPS exceeds United Kingdom retail inflation by 6% (10% in respect of those options granted in September 2002).

Under the 2003 scheme the value of shares over which options may be granted to an executive in any one year may not normally exceed 1.5 times basic salary. The extent to which options may be exercised will depend on the Company’s growth in pre-tax EPS exceeding the growth in the retail price index (RPI) in the three or five year period following grant. Options over shares worth up to 0.5 times salary may be exercised if the growth in EPS exceeds the growth in RPI by 3% per annum.

The Committee believed that the use of growth in pre-tax EPS was at the time the most appropriate measure of the Company’s financial performance and was consistent with market practice, when adopted.

The market price of Bodycote’s ordinary shares at 31 December 2007 was 186.75p, the range during 2007 was 176p to 325p and the average was 273p. The aggregate gains made by Executive Directors in 2007 before the impact of tax and national insurance were £27,442 for Mr Landless (2006: £123,220) and nil for Mr Sleight (2006: £115,447). An analysis of all Executive Directors’ share options is given later in this report.

The following tables show analysis of all Directors share interests and options.

Directors’ share interests – audited

The beneficial interest of the directors and their families in the ordinary shares of the Company are detailed below.

Ordinary Shareholdings		31 December 2007 Number of shares	31 December 2006 Number of shares
J.D Hubbard		962,067	949,103
D.F Landless		37,824	30,520
D.R Sleight		107,500	87,500
J.A.S Wallace		132,287	57,287
R.T. Scholes		18,750	18,750
J.Vogelsang		–	–
L.P Bermejo		–	–
A. M. Thomson		25,000	–
J. A. Biles		20,000	–

None of the directors has a beneficial interest in the shares of any other Group Company, or non-beneficial interest in the Company or any other Group Company.

Executive Directors’ Shareholding Retention Policy

The Committee introduced in 2005 a shareholding retention policy under which Executive Directors and other senior executives will be required, within five years, to build up a shareholding in the Company. In respect of Executive Directors the requirement will be for their Directors’ interests in shares to be worth at least 100% of basic salary.

Share Options – audited

Director	Options as at 1 January 2007	Lapsed	Exercised in year	Options at 31 December 2007	Option prices (pence) at date of grant	Prices (pence) at date of exercise	Dates from which exercisable	Expiry date
J.D Hubbard	44,178	(44,178)	–	–	315.43	–	03/12/2000	03/12/2007
	40,107	–	–	40,107	370.26	–	26/04/2002	26/04/2009
	26,738	–	–	26,738	292.19	–	14/12/2002	14/12/2009
	12,834	–	–	12,834	231.42	–	02/05/2003	02/05/2010
	16,042	–	–	16,042	203.37	–	24/04/2004	24/04/2011
	64,170	–	–	64,170	125.76	–	16/09/2005	16/09/2012
	84,882	–	–	84,882	147.27	–	15/09/2006	15/09/2013
D.F Landless	8,021	–	–	8,021	370.26	–	26/04/2002	26/04/2009
	16,042	–	(16,042)	–	231.42	275.64	02/05/2003	02/05/2007
	21,390	–	(21,390)	–	203.37	298.50	24/04/2004	24/04/2008
D.R Sleight	8,021	–	–	8,021	370.26	–	26/04/2002	6/04/2009

The Performance Criteria are set out in the Option Arrangements section of this report.

Directors’ share interests - Deferred Restricted Stock Bonus Scheme – audited

Director	At 1 January 2007	Awarded in year1	Vested in year	At 31 December 2007	Earliest vesting date
J.D Hubbard	37,691	1,004	–	38,695	April 2008
D.F Landless	25,126	669	–	25,795	April 2008
D.R Sleight	19,411	516	–	19,927	April 2008

Directors’ share interests - Short Term Stock Bonus Plan – audited

Director	At 1 January 2007	Awarded in year1	At 31 December 2007	Market price at award date	Earliest vesting date
J.D Hubbard	63,106	1,682	64,788	£2.58	March 2009
D.F Landless	41,747	1,112	42,859	£2.58	March 2009
D.R Sleight	31,262	833	32,095	£2.58	March 2009

1These additional awards take into account the interim and final dividend for the financial year ended 31 December 2006.

Directors’ share interests under the Bodycote Incentive Plan – audited

Director	At 1 January 2007	Awarded in year	At 31 December 2007	Market price at award date	Earliest vesting date
J.D Hubbard	125,322	–	125, 322	£2.59	March 2009
	–	110,420	110,420	£2.94	March 2010
D.F Landless	82,905	–	82,905	£2.59	March 2009
	–	76,784	76,784	£2.94	March 2010
D.R Sleight	31,262	–	62,083	£2.59	March 2009
	–	57,078	57,078	£2.94	March 2010

Directors’ share interests - Bodycote Share Match Plan – audited

Director	At 1 January 2007	Awarded in year	Potential maximum matching award if performance conditions achieved1	At 31 December 2007	Market price at award date	Earliest vesting date
J.D Hubbard	–	12,964	21,793	34,757	£2.93	March 2010
D.F Landless	–	1,994	3,380	5,374	£2.93	March 2010

1These additional awards take into account the interim and final dividend for the financial year ended 31 December 2006.

TOTAL SHAREHOLDER RETURN (TSR)

In line with market practice the calculation for TSR assumes reinvestment of dividends and is based on data provided by Datastream.

SERVICE CONTRACTS

It is the Company’s policy that Executive Directors have service contracts with a one year notice period. All the Executive Directors have service agreements which are terminable by one year’s notice by the employer at any time, and by one year’s remuneration in lieu of notice by the employer, and by one year’s remuneration in the event of a change in control of the Company. Legally appropriate factors would be taken into account to mitigate any compensation payment, covering basic salary, annual and long term incentives and benefits, which may arise on the termination of employment of any Executive Director, other than payments made on a change in control or for payments in lieu of notice. Mr Hubbard’s contract is dated 5 February 2002 and those for Messrs Landless and Sleight are each dated 26 September 2001.

EXTERNAL APPOINTMENTS

NON-EXECUTIVE DIRECTOR

To determine the fees it pays to Non-Executive Directors, the Board takes into account the need to attract individuals of appropriate calibre and expertise, the fees paid to Non-Executive Directors by other companies of a similar size and the time commitment attached to each appointment. The Board keeps fees under review. The Chairman and Non-Executive Directors are not entitled to any pension or other employment benefits or to participate in any incentive scheme.

Directors’ emoluments – audited

							2007		2006
	Basic salary and fees		Benefits		Annual Bonus		Total		Total
	£000		£000		£000		£000		£000
Executive
J. D. Hubbard	390		24		178		586		416
D. F. Landless	250		21		114		382		293
D. R. Sleight	190		16		87		290		215
	830		61		379		1,270		924
Non-Executive
J. A. S. Wallace	124		–		–		124		120
R. T. Scholes (retired 16 August 2007)	31		–		–		31		44
J. Vogelsang	42		–		–		42		39
L. P. Bermejo	36		–		–		36		34
A. M. Thomson (appointed 01 December 2007)	5		–		–		5		–
J. A. Biles (appointed 16 August 2007)	17		–		–		17		–
	1,085		61		379		1,525		1,161

Approved by the Board

J. Vogelsang
Chairman of the Remuneration Committee
26 February 2008