Remuneration Report

This report has been prepared in accordance with the Directors' Remuneration Report Regulations 2002 and the relevant requirements of the Listing Rules of the UK Listing Authority. The Board has given full consideration to the best practice provisions on Directors' remuneration as set out in the Combined Code. As required by the Directors' Remuneration Report Regulations, a resolution to approve the Remuneration Report will be proposed at the forthcoming Annual General Meeting of the Company at which the Financial Statements will be approved.

Part 1 of this report sets out the Group's policy on executive remuneration and explains the various elements of the Directors' remuneration packages. Part 2 of this report, which contains the information on which auditors are required to report to the Company's shareholders, sets out details of Directors' earnings and pension entitlements and fees paid to non-executive Directors in 2007. Directors' interests in shares, share incentive awards and share options, all of which are beneficial except as noted, are set out here.

Changes to the Board of Avis Europe plc

Details of changes to the Board in the period under review are set out in the Corporate Governance report.

On 31 December 2007, by mutual agreement, Murray Hennessy resigned as Chief Executive, and stood down from the Board. On 1 January 2008, Pascal Bazin was appointed Chief Executive. He was appointed on a base salary of €640,000 (equivalent to £440,000 at the date of appointment). He will participate in the executive Directors' annual incentive scheme which provides a bonus opportunity of up to 100% of salary with 50% payable for on target performance. He is eligible for annual awards under the Long Term Incentive Plan introduced in 2007, to a maximum of 150% of salary. He will remain in the local benefit programmes in France.

Part 1 (Unaudited)

Remuneration Committee

Scope
The Remuneration Committee is responsible for developing policy on remuneration for executive Directors and senior management and for determining specific remuneration packages for executive Directors and members of the Avis Executive Board. The Committee is constituted under terms of reference laid down by the Board. These terms are designed to enable the Company to comply with the requirements relating to remuneration policy contained in the Combined Code.

The full terms of reference are set out on the Company's website: www.avis-europe.com and are available upon request.

During 2007, the Remuneration Committee's activities included:

Membership
The Remuneration Committee is comprised of non-executive Directors. Members during the period 1 January 2007 to 27 February 2008 are listed below:

The Remuneration Committee is comprised of the Chairman of the Board and five non-executive Directors. All the non-executive Directors on the Committee are regarded as independent, with the exception of Roland D'Ieteren, as explained in the Corporate Governance report. The Committee met 10 times during the year and each member's attendance at these meetings is shown in the Corporate Governance report.

Advisers
During the period under review the Chief Executive and the Group HR and Corporate Affairs Director attended meetings by invitation and provided advice to the Committee to help it make informed decisions on matters relating to Directors' performance and remuneration. No Director was present when his or her own remuneration was being discussed. External advice was received from Kepler Associates (executive remuneration) and Freshfields Bruckhaus Deringer (share scheme rules). All advisers were appointed by the Company. Other than described above, no additional services were provided by the external advisers during the year.

Remuneration policy

Introduction
The Group's policy relating to the remuneration and benefits of executive and non-executive Directors is reviewed periodically. The executive remuneration policy for 2008 is designed to secure the skills and experience the Group needs to meet its objectives and satisfy shareholder expectations. In general, in determining its policy, the Remuneration Committee takes account of market practice, the Group's position relative to other companies and the pay and employment conditions of other Group employees.

In late 2005 the Remuneration Committee carried out a full review of executive remuneration designed to align rewards with delivery of the Group's recovery plan. As a result of this review, salaries were frozen for three years while incentive opportunities were increased. In line with the commitment made to shareholders, there will be no increases to executive Director salaries during 2008 for the final year of this three-year period.

Directors and members of the AEB have an annual incentive opportunity of up to 100% of salary and will receive a further grant under the Long Term Incentive Plan introduced in 2007 and described below.

Summary of executive Directors' potential direct remuneration
The Remuneration Committee believes that shareholder interests are best served by remuneration packages that have a large component of performance related pay. For 2008 the relationship between fixed and variable remuneration for achievement of maximum performance is: Chief Executive 29% fixed, 71% variable; other executive Directors 33% fixed, 67% variable.

The potential direct remuneration of executive Directors is illustrated below. The annual bonus is valued on a full payout basis and the benefit of the long-term incentives are calculated using the face value of the shares at the date of grant.

Remuneration Graph

Salary
The policy on base salary up to and including 2005 was to benchmark using general market external surveys against the median of similar sized companies relevant to the appropriate marketplace. In considering whether to make any increase to base salaries, the Remuneration Committee takes into account the performance of individual executives and the general increases for employees across the Group.

From 2006 to 2009 executive and senior management salaries are frozen. It is anticipated that from 2009 onwards base salaries will then be below the market median, with short and long-term incentives providing competitive total remuneration aligned to delivery of results.

Annual incentive bonus
Annual incentive bonus plans for executive Directors and key senior management are based on achievement of targets approved by the Remuneration Committee and related directly to the annual profit plan approved by the Board. Targets and performance measures are quantitative and there is a financial threshold below which no bonus payment is made.

In 2007 and 2008 the annual bonus opportunity is up to 100% of salary, with 50% of salary payable for on-target performance. In 2008, 80% of the bonus is based on stretching financial targets and 20% on achievement of quantitative functional objectives.

The base salary, bonus payments and value of benefits in kind for each Director are set out in the Directors' emoluments table. Bonus payments, benefits in kind and cash allowances do not form part of pensionable earnings for Directors.

Share incentive policy

The Remuneration Committee introduced a new long-term incentive plan during 2007 that is aligned with the Group's medium term plan and shareholders' interests.

Shareholding guidelines were implemented in 2005 that require the executive Directors to build up their personal holdings of shares in the Company. The guidelines are 150% of salary for the Chief Executive and 100% of salary for other executive Directors. The Remuneration Committee requires executives to retain 50% of any vested shares (net of tax and exercise costs) arising from any share or option plan until the shareholding requirement is achieved.

Outstanding share plans
Outstanding share plans are as follows: Long Term Incentive Plan (last award 2007); 2006 Deferred Bonus Share Plan (last award 2007); Performance Share Plan (last award April 2004) and Share Option Schemes (last award April 2004). A description of each of these plans is set out below. The assessment of whether performance conditions have been met is verified by the Remuneration Committee at the time of vesting.

Individual Directors' share incentive awards are set out here.

Long Term Incentive Plan
In 2007 the Remuneration Committee introduced a long-term incentive plan. It is intended that there will be annual grants of awards under this Plan which will vest three years after grant, providing certain performance conditions are met. These conditional awards take the form of nil cost options to acquire ordinary shares in the Company.

The performance conditions required for vesting purposes are based 50% on the Company's three-year growth in earnings per share (EPS) and 50% on return on capital employed (ROCE), based on the Group's results under the International Financial Reporting Standards.

The initial performance targets for awards granted under the Plan are set out below:

EPS tranche of Award  
Percentage growth in EPS Percentage of award that vests
Less than RPI + 20% per annum None
RPI + 20% per annum 20%
RPI + 40% per annum 100%
Between 20% and 40% per annum above RPI Straight-line basis between 20% and 100%
ROCE tranche of Award  
Percentage ROCE achieved Percentage of award that vests
Less than 10% None
10% 20%
12.5% 100%
Between 10% and 12.5% Straight-line basis between 20% and 100%

If one or both of the performance targets are not met at the end of the performance period, 50% or 100% (as appropriate) of the award will lapse immediately.

EPS will be calculated on an underlying basis ie excluding exceptional items, certain re-measurement items and economic hedge items. However, the Remuneration Committee has discretion to adjust for exceptional items it deems to be within management control, if appropriate, to ensure the outcome is fair to both shareholders and executives. ROCE will be calculated on a three-point annual average, to reflect the seasonality of the business, based upon the return for the particular year divided by the average capital employed of the previous closing, interim and prevailing closing positions. The return (operating profit) will be adjusted on the same underlying basis as EPS. ROCE and EPS are considered by the Remuneration Committee to be the most relevant all-encompassing long-term performance measures for Avis Europe. The business of the Group is fundamentally about achieving a good economic return on renting its fleet of vehicles. The fleet represents the substantial majority of capital employed, and the Remuneration Committee wishes management to be focussed on improving the return the Company achieves on this capital. Management will focus on the key drivers of ROCE - asset turn and operating margin. EPS in turn represents a complete measure of bottom-line performance, capturing both interest and tax, and is closely tracked by many of the Company's investors. The calculation of EPS and ROCE performance is taken from the Consolidated Financial Statements.

Participation is at the Remuneration Committee's discretion. In 2007 awards were made to all members of the AEB, which included four of the executive Directors. Maximum awards are capped at 100% of salary (150% for the Chief Executive) (see here). Dividends, as and when reinstated, will not accrue on these awards, but it is anticipated that for awards granted in future, dividends would accrue and be paid only on shares that vest. Outstanding awards will vest and become exerciseable on a change of control subject to the satisfaction of any performance conditions at that time.

2006 Deferred Bonus Share Plan
During 2006, the Avis Europe plc Deferred Bonus Share Plan was established as part of the Remuneration Committee's decision to enhance bonus opportunities for 2006 in order to maintain momentum on delivering short-term targets and make no long-term awards during that year. 50% of the bonus earned in respect of the year to 31 December 2006 was paid in cash after publication of the 2006 results and 50% was deferred into an award over Avis Europe shares to be released, subject to continued employment, in March 2008. The share award is in the form of a nil cost option to acquire ordinary shares in the Company, which were purchased on the market and are held in the Avis Europe Employee Share Trust. The participants are key senior managers, including four of the executive Directors. Outstanding share awards will vest and become exerciseable in full on a change of control.

Share Retention Plan
No awards under this Plan have been made since December 2004. The Share Retention Plan was established as a one off discretionary benefit to retain the services of Murray Hennessy (former Chief Executive) to January 2008. Therefore there were no performance conditions other than continued service to 1 January 2008. The award was in the form of a nil cost option to acquire ordinary shares in the Company that vested in three equal tranches on 1 January 2006, 1 January 2007 and 1 January 2008. In respect of the third tranche that would have vested on 1 January 2008, the Remuneration Committee exercised its discretion under the rules of the Plan to permit this award to vest on the date of Murray Hennessy's termination of employment on 31 December 2007.

Performance Share Plan
No awards under this Plan have been made since April 2004 and it is not anticipated that awards will be made in the future. The Performance Share Plan is a seven-year plan, and was designed to encourage executives to focus on longer-term performance and growth in shareholder value. A combination of performance targets was chosen for the measurement of the Company's performance, being total shareholder return (TSR) and earnings per share (EPS) in order to align the interests of executives with those of shareholders. EPS performance is calculated from the audited accounts and TSR is calculated by external remuneration consultants.

Awards were determined by the Remuneration Committee and could not be greater than 100% of the qualifying participant's total annual remuneration measured at the date of the award. No award granted to date has exceeded one times annual salary. Awards vest over a period of seven years from the date of the award. If the performance conditions are met at the third and fifth anniversary of the date of award, vesting accelerates to the extent of 25% of the award on each of these occasions. The extent to which an award vests is determined by the Group's medium and long-term performance measured in terms of TSR. TSR was measured against a broad comparator group from the Transport and Support Services sectors.

On a change of control the Remuneration Committee would take into account the performance conditions when determining the vesting of awards.

Share option schemes
No options have been granted under these schemes since April 2004 and it is not anticipated that awards will be made in the future. Further details of share options are set out in Note 31 to the Consolidated Financial Statements.

The Group operates Inland Revenue approved and unapproved share option schemes which have an EPS based performance condition. An EPS condition is considered appropriate, as it requires improvement in the underlying financial performance before options can be exercised. Employees may not normally exercise options earlier than three years nor more than 10 years after the grant (seven years for grants made before April 2000 for the unapproved scheme). Options lapse upon cessation of employment. However, special conditions apply if employment ceases because of death, injury, disability, redundancy, retirement or because the employing business or company is transferred outside the Group, or for any other reason at the discretion of the Board. Outstanding options will vest and become exerciseable on a change of control and with the exception of the UK Approved Share Option Scheme, any options vesting will, at the discretion of the Remuneration Committee, be subject to the satisfaction of any performance conditions at that time.

Options (all of which were granted prior to 2004) become exercisable when real growth in EPS exceeds 3% per annum during any period of three consecutive years following the date of grant. The rules of the share option schemes limit the number of options that can be granted over new issue shares in a rolling 10-year period to 5% of issued share capital under discretionary share schemes, and 10% of issued share capital under all share schemes. The total number of share options outstanding at 31 December 2007 is well within these dilution limits (share options).

Avis Europe Employee Share Trust
The Avis Europe Employee Share Trust was established in March 2000 to facilitate provision of shares for the Company's share incentive schemes. The Trust may hold up to 5% of the issued share capital of the Company at any one time.

At 31 December 2007, the Trust held 3,811,301 shares. It is intended that the shares in the Trust will be used to satisfy conditional share awards made under the Company's various share incentive schemes as and when these awards vest. The awards outstanding under each of the relevant Plans at 31 December 2006 and 31 December 2007 are set out below.

    Conditional share awards outstanding at   Conditional share awards outstanding at
Share Incentive Scheme   31 December 2006   31 December 2007
Performance Share Plan   702,727 shares   1,366,105 shares
Long Term Incentive Plan   4,908,092 shares   –
Share Retention Plan   238,600 shares   477,200 shares
Deferred Bonus Share Plan   3,124,452 shares   –
Total   8,973,871 shares   1,843,305 shares

The Company periodically reviews the number of shares held by the Trust in light of the anticipated vesting dates and performance conditions under the various plans. The Company also regularly reviews its hedging policy but does not currently hedge any of these awards against potential Social Security costs that may be incurred across the Group as and when the awards vest.

Total shareholder return (TSR)

The graph below illustrates the performance of Avis Europe plc and a “broad equity market index” over the past five years. As Avis Europe plc has been a constituent of the FTSE 350 Index throughout this five-year period, that index is considered the most appropriate form of “broad equity market index” against which the Group's performance should be graphed. As required by legislation, performance is measured by total shareholder return (share price plus dividends paid).

Total Shareholder Return
 
All dates at 31 December.
This graph shows the value, by the end of 2007, of £100 invested in Avis Europe on 31 December 2002 compared with the value of £100 invested in the FTSE 350 Index. The other points plotted are the values at intervening financial year ends.

Non-executive Directors

Non-executive Directors' fees are positioned to attract non-executives with broad business and commercial experience and to be competitive in the marketplace. The Chairman's fee is determined by the Remuneration Committee. The Chairman and the Chief Executive set the remuneration of non-executive Directors based on periodic review of current survey data. Policy is to pay an annual fee of £32,500 with an additional fee for chairmanship of a Committee. Non-executive Directors do not receive awards under the Company's share incentive schemes.

Service Contracts

Executive Directors
The Company's policy is to employ each executive Director under a service contract which is subject to 12 months' notice on either side and runs until terminated. The contract provides for salary to be paid for any unexpired period of notice in the event of termination by the Company. Compensation for contractual benefits and bonus for the unexpired period of notice is at the discretion of the Remuneration Committee. There is no compensation for loss of rights under the share and pension schemes. All contracts contain mitigation provisions. There are no special contractual payments associated with change of control.

All executive Directors have service contracts in line with policy as shown.

  Date of service contract   Notice period
Pascal Bazin 1 January 2008   12 months
Jean-Pierre Bizet* 25 May 2004   12 months
Lesley Colyer 18 April 2002   12 months
Simon Palethorpe 5 October 2004   12 months
Martyn Smith 11 September 2002   12 months
 
* The Deputy Chairman, who is also an executive Director, has a service contract with an annual fee only and his appointment is subject to the terms of the Relationship Agreement (see Corporate Governance report).

The Board believes that it can be of benefit to Avis Europe if its executive Directors serve as non-executive Directors of other companies, and, subject to individual review, the general policy is that an executive Director may hold one non-executive directorship with another company and may retain the fees. Martyn Smith was a non-executive Director of SMG plc until 28 February 2007. For the period 1 January 2007 to 28 February 2007 he received a fee of £7,550 plus a share purchase of £2,042.

Non-executive Directors
The Company's policy is to engage non-executive Directors on renewable three-year terms, which can be terminated by either party at any time without penalty (subject to the terms of the Relationship Agreement in respect of Directors appointed by s.a. D'Ieteren n.v.). Non-executive Directors are required to offer themselves for election at the next Annual General Meeting following their appointment and thereafter for re-election every three years.

    Date of appointment as a non-executive Director
Alun Cathcart*   25 May 2004
Les Cullen   25 May 2004
Roland D'Ieteren   3 February 1997
Benoit Ghiot   15 December 2004
Gilbert van Marcke de Lummen*   1 May 2002
Malcolm Miller   21 February 2001
Dr Axel von Ruedorffer   27 June 2001
Pierre Alain De Smedt   1 February 2007
 
* Both Alun Cathcart and Gilbert van Marcke de Lummen have previously served as executive Directors. Alun Cathcart served as an executive Director for the periods 3 February 1997 to 31 March 1999 and 1 May 2002 to 24 May 2004, having served as a non-executive Director for the period 1 April 1999 to 30 April 2002. Gilbert van Marcke de Lummen served as an executive Director from 3 February 1997 to 30 April 2002.

All non-executive Directors, including the Chairman, have letters of appointment in accordance with policy.

Retirement benefits

Executive Directors based in the UK can participate in the Avis UK Pension Plan. The Plan comprises two sections: the Final Salary section (defined benefit) and the Retirement Capital Plan section (cash balance). The non-contributory Final Salary section was closed to new entrants from 1 July 2003, and closed to future service accruals for active members from 1 April 2007. New members to the Plan since 1 July 2003 have joined the contributory Retirement Capital Plan section and, from 1 April 2007, active members of the Final Salary section accrue their future service benefits under the Retirement Capital Plan section.

Under the Retirement Capital Plan section, for those executive Directors who are members of the Plan, an allocation of 25% of their pensionable salary is made to a notional account. Each year the account balance is revalued by inflation up to 10%, although the Company may at its absolute discretion and subject to actuarial advice apply a greater rate of revaluation. At retirement the balance in the account will be used to purchase an annuity. Pensionable salary for executive Directors excludes bonus payments, taxable benefits and cash allowances.

From 6 April 2006, the HM Revenue & Customs legislation relating to tax-favoured retirement provisions took effect. From that date Avis introduced a scheme specific earnings cap for all members who joined the Plan on or after 1 June 1989. For the 2007-08 tax year, the cap is £112,800. Those executive Directors whose pensionable salary is subject to the cap receive a taxable cash allowance of 20% of base salary above the cap.

Four executive Directors accrue benefits under the Avis UK Pension Plan and as at 31 December 2007, the retirement benefits are as follows.

Lesley Colyer accrued benefits under the Final Salary section for pensionable service until 1 April 2007, and her pensionable service to that date will continue to be linked to her pensionable salary in the future in accordance with the rules of the Plan. From 1 April 2007 she accrues future service benefits in the Retirement Capital section. Her pensionable salary is not subject to the scheme specific earnings cap.

Simon Palethorpe is a member of the Retirement Capital section in respect of all his pensionable service. His pensionable salary is subject to the scheme specific earnings cap and he receives a taxable cash allowance as described above.

Martyn Smith withdrew from the Plan effective 5 April 2006 and has a preserved pension entitlement under the Final Salary section. From that date he receives a taxable cash allowance of 20% of base salary in lieu of Pension Plan membership.

Murray Hennessy left the Plan effective 31 December 2007 and has a preserved benefit entitlement under the Retirement Capital section.

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