Remuneration Policy

The Remuneration Committee, in setting remuneration policy, recognises the need to be competitive in an international market. The Committee’s policy is to set remuneration levels which ensure that the executive directors are fairly and responsibly rewarded in return for high levels of performance. Remuneration policy is designed to support key business strategies and create a strong, performance-orientated environment. At the same time, the policy must attract, motivate and retain talent. Accordingly, executive directors receive base salaries comparable with companies of a similar size and international scope and have the opportunity to earn enhanced total remuneration for meeting the performance targets set by the Committee. In setting remuneration levels for the executive directors, the Committee takes account of the remuneration policy and practice applicable to other Group employees.

The components of remuneration for executive directors comprise base salary (a fixed sum payable monthly which is reviewed annually in October), benefits (including car allowance and non-contributory health insurance), an annual bonus (with a deferred element), long term incentives (comprising share options and awards under a performance share plan) and pension contributions.

The Remuneration Committee considers that a successful remuneration policy must ensure that a significant part of the remuneration package is linked to the achievement of stretching corporate performance targets. Performance-related elements for the year ended 30 September 2006 comprise share options, awards under a performance share plan and annual bonus. The policy adopted by the Committee ensures that a significant proportion of the remuneration of executives is aligned with corporate performance, generating a strong alignment of interest with shareholders. As a result, significantly over half of the executive directors’ potential remuneration packages is performance-related.

Policy on Salary of Executive Directors

It is the policy of the Committee to pay base salaries to the executive directors at broadly market rates compared with those of executives of companies of a similar size and international scope (in particular those within the FTSE 50-150 with more than 50% of revenue derived from overseas), whilst also taking into account the executives’ personal performance and the performance of the Group.

Policy on Fees of non-Executive Directors

In relation to the non-executive directors other than the Chairman, the policy has been in respect of the financial year to 30 September 2006 to offer a basic fee of £33,000 which was set in the light of market practice and to ensure that individuals of the appropriate experience, expertise and skill were attracted to the Group. To this basic fee were added additional fees for membership and Chairmanship of the Remuneration and Audit Committees of the Board to reflect the time commitment and responsibility associated with these positions. The premiums for Audit Committee and Remuneration Committee membership were £5,000 and £4,000 respectively. Additional fees of £6,000 were paid for chairing such Committees. These annual fees for non-executive directors were set for the two year accounting period ending on 30 September 2006 and have, therefore, been recently reviewed.

Recognising that non-executive fees had not increased in the two years since the previous review, the basic fee for directors increased to £40,000 with effect from 1 October 2006. An additional fee of £5,000 and £7,000 is paid for membership of the Remuneration and Audit Committees respectively. Therefore, a director sitting on both those Committees will receive fees of £52,000. Further payments are made to the chair of each of these Committees, being £6,000 and £8,000 for chairing the Remuneration and Audit Committees respectively. A further payment of £4,000 is made each year to the Senior Independent Director. These revised fees are in place for the two financial years ending on 30 September 2008.

In relation to the Chairman, it is the policy of the Board for remuneration to be comparable to that of the median fees for non-executive chairs of companies of a comparable size and complexity

Non executive directors are not entitled to participate in long term plans or pension schemes.

Policy on Bonus

The bonus in the case of executive directors (and indeed all employees) is designed to reward outstanding performance. Full details of the scheme and bonus payments can be found within the company’s annual report.

Policy on Long-Term Incentives
Executive Share Options

Under the 1999 Executive Share Option Scheme (“ESOS”), market value option grants are made to senior executives and managers across the Group, as well as to other staff with high potential or to recognise significant achievement or local market practice. The annual grant is normally made after the preliminary declaration of the annual results. Under the rules of the ESOS, as amended at the annual general meeting in 2005, the annual grant of options to an individual is limited to shares worth up to 300% of base salary. In practice, annual grants to executive directors are limited to shares under option worth 100% of base salary except in exceptional circumstances, such as a promotion or recruitment or to reflect local market practice.

Performance Share Plan

The Performance Share Plan (the “Plan”), was approved by shareholders at the annual general meeting in 2005. Annual grants of performance shares will normally be made to executive directors and senior executives across the Group after the preliminary declaration of the annual results. This Plan is operated in conjunction with the ESOS.

Annual awards under the Plan are limited to shares worth up to 150% of base salary. In practice, annual grants to executive directors are limited to shares worth 100% of base salary except in exceptional circumstances, such as a promotion or recruitment or to reflect local market practice.

The performance shares are subject to performance conditions measuring the Group’s total shareholder return (“TSR”) against a comparator group of international software and computer services companies. TSR has been chosen as the performance condition because it helps to align the interests of award holders with shareholders and complements the focus on Group financial results that arises from using EPS under the ESOS and annual bonus plan.

The Committee believes that granting both options and performance shares provides a well balanced, long-term incentive package and considers that it is appropriate for executive directors to receive an annual grant worth up to 100% of salary under each of the ESOS and the Plan. However, if, for example, local legislation makes it less tax efficient to grant performance shares to any executive, an enhanced option grant may be made above 100% of salary in value to ensure equality of treatment to these executives with a corresponding reduction in the value of performance shares.

Policy on Pensions

All the executive directors’ pension arrangements are of the defined contribution type. The Sage Executive Pension Scheme is the main pension fund for Sage executives in the UK. It is a defined contribution plan where the standard contribution rate is 15% of base salary subject, where appropriate, to limits set by HMRC. The components of remuneration other than base salary are not pensionable. The Remuneration Committee has not changed this policy in the light of proposed changes in pension legislation.

Policy on Directors’ Shareholdings

The Committee believes that all executive directors should hold a substantial number of shares in the Company. It is, therefore, its policy that all executive directors over time hold shares equivalent in value to 150% of their annual salary. Until the required holding is achieved, executive directors will be expected to retain (net of any taxes) at least 50% of:

• shares received as deferred bonus
• shares resulting (net of exercise costs) from the exercise of share options granted from December 2004 onwards; and
• performance shares received under the Plan.

In assessing whether the target of 150% of salary is met, vested options under the share option schemes of the company will be deemed to have a value equal to the net value after exercise costs and taxation of those options as if exercised on the relevant date.

Policy on Service Contracts

In relation to contracts with executive directors, the Remuneration Committee aims to set notice or contract periods at one year. If it is necessary to offer longer notice or contract periods to new directors recruited from outside the Group, it is the Company’s policy to reduce these as soon as contractually possible after the initial period to a notice period of one year. In the event that a contract is to be terminated, the Committee may stage any payments made to that executive over the notice period, or, in the case of executives other than Mr Berruyer, terminate the contract but make payments in lieu of notice at the same time as salary would have been paid throughout the 12 month notice period.

Both executive and non-executive directors are subject to election by shareholders at the first annual general meeting following their appointment and thereafter require re-election at least once every three years. The appointment of a non-executive director may be terminated without compensation if that director is not re-elected by shareholders or otherwise in accordance with the Company’s Articles of Association. The appointment of the non-executives is for a fixed term of one, two or three years, during which period the appointment may be terminated by the Board on notice, ranging from 6 to 12 months. There are no provisions on payment for early termination in their letters of appointment.

Executive directors are permitted, where appropriate and with Board approval, to take non-executive directorships with other organisations in order to broaden their knowledge and experience in other markets and countries. Mr P A Walker is currently a non-executive director of Diageo plc. Mr P L Stobart is a non-executive director of Capital & Regional plc and was until 1st December 2006 a non-executive director of Planit Holdings plc. Fees received in their capacity as directors of these companies are retained by each of them reflecting the personal responsibility they undertake in these roles. In the financial year ended 30th September 2006, these fees were £60,000 in the case of Mr P A Walker and £59,000 in the case of Mr P L Stobart

The Board recognises the significant demands that are made on executive and non-executive directors and has therefore adopted a policy that no executive director should hold more than two directorships of other listed companies. The Board encourages executive directors to limit other directorships to one listed company and in no case should more than one directorship of another FTSE 100 company be taken. Where an executive director holds non-executive positions at more than one listed company only the fees from one such company will be retained by the director. No formal limit on other board appointments applies to non-executive directors under the policy but prior approval from the chairman on behalf of the Board is required in the case of any new appointment.

The service contracts of executive directors and the letters of appointment of non-executive directors prohibit the disclosure of confidential information relating to the Group both during the term of the contract and after its termination. The letters of appointment of non-executive directors and service contracts of executive directors are available for inspection at the Company’s registered office during normal business hours and will be available at the Annual General Meeting.