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A letter from the Chairman of the remuneration committee

Dear Shareholder

I am pleased to introduce this report after succeeding John Maxwell as Chairman of the remuneration committee at the 2009 AGM. I would like to thank John Maxwell for his role in chairing the committee for the last six years.

Following the issues surrounding the directors' remuneration report at the 2009 AGM, and to ensure that our 2010 remuneration policy takes due account of investors' views, I met with several of our major shareholders during the summer of 2009. The purpose of these meetings was to better understand the key areas of concern in relation to our 2009 remuneration policy so that these factors could be taken into account when setting our 2010 policy.

In addition, the committee appointed new independent advisors, Hewitt New Bridge Street on 1 June 2009.

The 2010 remuneration policy has been designed to address key concerns raised by investors while still providing a competitive total remuneration package (given our size and sector) with targets set to reflect our key challenges (i.e. balancing growth, credit quality and collections capacity in the current economic environment). Furthermore, the committee is very mindful of the need to appropriately incentivise and retain our high performing team at a time when there is an acute shortage of executives with a track record of delivering outstanding performance in the financial sector, particularly during the recent challenging economic conditions. Set out below is a summary of our proposed 2010 remuneration policy:

  • Basic salary: No increases are to be awarded to executive directors for 2010;
  • Annual cash bonus: Maximum annual bonus opportunity will be restricted to 120% of salary for the Chief Executive and 100% of salary for other executive directors. These opportunities are significantly below the new policy communicated to investors in our directors' remuneration report last year (150% of salary for the Chief Executive and 125% of salary for other executive directors) and reflect a continuation of the scaled back bonus opportunity that was introduced for 2009.

    The performance targets for the annual cash bonus plan are also to be toughened for 2010 at the top end of the performance range, resulting in a greater out-performance of budget being required for a maximum bonus award.

    25% of any annual cash bonus earned will continue to be compulsorily deferred into shares for three years with the continuing option to defer a further 25% for the purposes of receiving an award under the Performance Share Plan ('PSP').

  • Long-term incentives: Awards will continue to be made under the Long-Term Incentive Scheme ('LTIS') and PSP, with PSP awards being subject to a personal investment in shares through a deferral of any annual cash bonus.

    PSP awards will continue to be made on the basis of up to two matching shares for each deferred share with vesting subject to earnings per share ('EPS') targets, where the range of targets has been toughened so that it is consistent with the EPS targets set for LTIS awards.

    LTIS awards will continue to be made at 200% of salary to executive directors subject to an equal split of EPS and total shareholder return ('TSR') targets.

In terms of total target quantum, the above policy, for example, places the Chief Executive slightly above median in terms of base pay, around median in terms of total cash (by virtue of a bonus opportunity that, when expressed as a multiple of salary, is below median) and around upper quartile in relation to the total package opportunity. This upper quartile total remuneration positioning is considered appropriate since the package is heavily weighted towards long-term performance and is contingent on a significant personal investment in shares. Furthermore, the long-term element of the package is subject to what are considered demanding earnings growth and total return targets given current market conditions. The peer groups against which Provident Financial has been benchmarked comprise a group of financial companies and a general group of companies of broadly similar size.

In considering the overall positioning of the package, the committee also took into account the calibre and experience of the Chief Executive and other executive directors, and the financial performance delivered by the company under his leadership. In particular, the committee recognised that since his appointment, the company's TSR has been in the upper quartile when compared to the FTSE All Share Financial Services Sector and the FTSE 250.

Finally, during the year, the committee considered the company's remuneration practices in light of the recommendations set out in the Financial Services Authority Code and in the Walker Review. The committee was satisfied that: (i) the weighting on long-term performance (through the requirement to defer part of any annual cash bonus award and participation in the PSP and LTIS) that exists in the current remuneration packages for the executive directors is appropriate for a financial company with our current risk profile; and (ii) does not encourage undue risk-taking given the internal controls operated by the company and the balanced approach that is taken to target setting. The committee intends to keep the company's remuneration policy under review in light of further best practice requirements and, indeed, will reappraise the current policy in light of any revisions to the Combined Code that take place in 2010.

Robert Hough
Chairman of the remuneration committee
2 March 2010