Directors’ remuneration report

Dear Shareholder

I am pleased to present the remuneration report for the 2009 financial year.

The unprecedented global economic downturn has created an unusually challenging economic environment over the past year. The business has nevertheless delivered a resilient set of results while taking significant measures to protect sustainability and to promote long term growth.

The most important objective of our remuneration policy is to reward Diageo’s people, at all levels and in all countries, fairly and competitively, in line with performance, to enable your company to attract and retain the very best talent available. The strength and stability of the executive team at Diageo and the company’s impressive operating performance over the last decade testify to the robustness of the remuneration policies in place.

The remuneration committee has been mindful of the uncertain environment both in assessing performance outcomes for this year and in seeking to ensure that remuneration policies remain appropriate. This process, supported by Deloitte LLP as the remuneration committee’s appointed independent adviser, has led the remuneration committee to conclude that the remuneration levels and the mix between fixed and variable compensation continue to be appropriate for the context in which the company is operating and, following the implementation of two new long term incentive plans in 2008, no changes to the overall remuneration mix are proposed this year.

The tougher environment is reflected in the reward outcomes for the year ended 30 June 2009; total direct compensation delivered to the executive directors is significantly lower compared to 2008 (bonus payments are substantially lower than last year and performance share awards due to vest in September 2009 lapsed in full) demonstrating a clear alignment between company performance, shareholder interests and the executive remuneration arrangements that are in place. In addition, the remuneration committee has made some adjustments to remuneration arrangements for the forthcoming year that reflect the changed environment in which the company is currently operating. These include:

• no salary increases for executive directors and senior management in 2009;
• the recalibration of the adjusted EPS growth targets together with a reduction in the proportion of grant delivered for threshold performance for new options to be granted under the SESOP in September 2009, so that the plan continues to incentivise participants to deliver stretching business performance in the current climate; and
• increasing individual accountability through the introduction of an additional measure in the annual bonus plan that will provide focus on specific measurable business objectives that support the long term growth of the business.

The remuneration committee will closely monitor developments in the external environment over the months ahead with a view to maintaining remuneration programmes that continue to be competitive and stretching. During the last year the remuneration committee has consulted with major shareholders on a number of aspects of remuneration policy and is committed to an ongoing dialogue with shareholders. In this regard, I am pleased to note that the new long term incentive plans for executive directors, which were put to shareholders at last year’s AGM, received strong support.

The substantial increase in the transfer value of executive pensions reflects changes in the calculation methodology adopted by the pension trustees during the year as well as the impact of changing market conditions, interest rates and increases to pensionable pay, age and service. The remuneration committee has made no changes to pension policy nor made any enhancement to the executive directors’ pension benefits during the year.

The following report provides further explanation of the current remuneration arrangements for executive directors and the reward outcomes for the 2009 performance year.

Finally, we will be submitting several resolutions relating to share plans for shareholder approval at the company’s October 2009 AGM. Details are included in the Notice of Meeting.

We look forward to receiving your support at the AGM in October.

Lord Hollick of Notting Hill
Senior non-executive director and
chairman of the remuneration committee

Remuneration Summary for the year ended 30 June 2009

Base salary

Base salaries for the executive directors were increased in October 2008 as part of the normal annual review. With effect from 1 October 2008, the annual salaries payable to the chief executive and the chief financial officer were £1,155,000 and £673,000, respectively. In light of current economic conditions, no annual review for executive directors and senior management will occur in October 2009 and salaries will therefore remain at 2008 levels.

Summary of salary reviews for executive directors

Short term incentive plans

The committee set stretching performance targets based on a mix of profit, net sales and free cash flow measures for the performance year ended 30 June 2009. The business delivered a resilient set of results in the context of the current economic climate, and the challenges presented by this changing environment are reflected in the level of bonus payout achieved. In the year ended 30 June 2009, profit and sales were below target, but the free cash flow targets were exceeded, therefore the executive directors received payments under the annual incentive plan that were equivalent to 44% of their 2008 base salary. No discretionary adjustments were made for individual performance or the exceptional circumstances in which the business was operating.

Long term incentive plans

In 2008, the remuneration committee implemented two new long term incentive plans following shareholder approval obtained at the October 2008 AGM. The first awards under the new share option and performance share plans were made in October 2008. The executive directors received option grants and were awarded shares in the range of 300% to 375% of their salaries. The vesting of these awards is subject to the achievement of stretching relative and absolute performance conditions over a three-year period.

The performance shares awarded in 2005 vested at 35% of the initial award in September 2008 based on a relative total shareholder return (TSR) ranking of ninth position (median) in the peer group of 17 companies at the end of the performance cycle (the peer group was reduced to 16 companies for subsequent performance cycles following a peer group company acquisition during the year).

Share options granted in 2005 vested in full in September 2008 upon exceeding the required performance condition of adjusted EPS growth of RPI plus 15 percentage points.

Shareholding requirements

The executive directors are required to hold a minimum shareholding in order to participate fully in the long term incentive plans. The status of that requirement as at 30 June 2009 for NC Rose and PS Walsh is shown below:

This information is based on the share interests disclosed in the table ‘Share and other interests’ in this report, base salary earned in the year ended 30 June 2009, and an average share price for the same period of 891 pence.

Pensions

The executive directors participate in a final salary pension scheme. Accrued annual pension as at 30 June 2009 is £369,000 per annum for NC Rose and £637,000 per annum for PS Walsh. The executive directors contribute 6% of their pensionable pay to the scheme.

Non-executive directors’ remuneration for the year ended 30 June 2009

An increase of £5,000 per annum was applied to the base fee and committee chairman fees for non-executive directors, effective from 1 January 2009. At the same time, the £3,000 overseas travel allowance was removed. The previous review of fees and allowances took place in January 2007.

Governance

The remuneration committee

The committee’s principal responsibilities are:

• making recommendations to the board on remuneration policy as applied to the executive directors and the executive committee;
• setting, reviewing and approving individual remuneration arrangements for the chairman, executive directors and executive committee members including terms and conditions of employment;
• determining arrangements in relation to termination of employment of each executive director and other designated senior executives; and
• making recommendations to the board concerning the introduction of any new share incentive plans which require approval by shareholders.

The remuneration committee consists of Diageo’s non-executive directors, all of whom are independent: PB Bruzelius (appointed 24 April 2009), LM Danon, Lord Hollick, M Lilja, PG Scott, HT Stitzer and PA Walker. WS Shanahan retired from the remuneration committee on 30 April 2009. Lord Hollick is chairman of the remuneration committee. The chairman of the board and the chief executive may, by invitation, attend remuneration committee meetings except when their own remuneration is discussed.

The remuneration committee met five times during the year to consider, and approve, amongst other things:

• the annual incentive plan, share-based grants and vesting for executive directors and the executive committee;
• approach to salary reviews for the executive directors and executive committee;
• the composition and calibration of the TSR comparator group for the performance share plan;
• an analysis of pay versus performance, supported by Deloitte LLP as the committee’s independent adviser; and
• the directors’ remuneration report for the year ended 30 June 2009.

Further information on meetings held and director attendance is disclosed in the corporate governance report. The remuneration committee’s terms of reference are available at www.diageo.com and on request from the company secretary.

Advice

During the year ended 30 June 2009, the remuneration committee appointed the following independent consultants:

• Deloitte LLP – who provided advice on remuneration best practice and senior executive remuneration. Deloitte LLP also provided a range of tax, accounting, consulting and risk management services during the year.
• Kepler Associates – who reviewed and confirmed the TSR of Diageo and the peer group companies for the award under the September 2005 TSR plan (for which the performance cycle ended on 30 June 2008), provided periodic performance updates on all outstanding performance cycles and reviewed the TSR comparator group and TSR calibration for future awards. They provided no other services to Diageo during the year.

Additional remuneration survey data published by Hewitt Associates, Towers Perrin and Monks (part of PricewaterhouseCoopers LLP), were presented to the remuneration committee during the year.

Diageo’s human resources director and director of performance and reward were also invited by the remuneration committee to provide their views and advice.

Executive remuneration philosophy and principles

The plans in which Diageo’s executive directors and senior management participate are designed to reflect the principles detailed below:

Pay for performance

The board of directors sets stretching performance targets for the business and its leaders. To achieve these targets and deliver performance requires exceptional business management and strategic execution. This approach to target setting reflects the aspirational performance environment that Diageo wishes to create.

The annual incentive plan aims to reward the delivery of short term performance goals with commensurate levels of remuneration. Long term incentive plans aim to reward long term sustained performance. Under both sets of plans, if the demanding targets are achieved, high levels of reward may be earned. All incentives are capped in order that inappropriate business risk-taking is neither encouraged nor rewarded.

Fixed and variable remuneration

The balance between fixed and variable elements of remuneration changes with performance. The anticipated normal mix between fixed and variable remuneration for executive directors is that for £100 of remuneration earned, £32 will be fixed remuneration and £68 will be performance-related remuneration, excluding pensions and other benefits. This mix is illustrated in the ‘Executive directors’ remuneration mix’ chart. In some years, the variable element may be higher or lower depending on the performance of the business.

Summary of current remuneration policy for executive directors

A breakdown of the reward programmes in which Diageo’s executive directors participate, the remuneration strategy that they support and the policy governing their execution is detailed in the table below:

Base salary

The summary table above sets out the policy on base salary for the executive directors. Base salaries are generally set around the median of the relevant market for each role and take account of level of experience, performance and the external market. The remuneration committee also has regard to pay conditions throughout the company when deciding annual salary increases for the executive directors.

The table ‘Summary of salary reviews for executive directors’ in the remuneration summary at the beginning of this report shows the salary increases that were applied during the performance year. In light of current economic conditions and focus on cost constraint, no salary increases will be made in calendar year 2009.

Annual performance bonus

The annual bonus plan is designed to incentivise year on year delivery of short term performance goals that are determined by pre-set stretching targets and measures agreed by the remuneration committee with reference to the annual operating plan. The remuneration committee determines the level of performance achieved based on Diageo’s overall financial performance at the financial year end. The business results for the year ended 30 June 2009 are described in the Business review.

The targets for the year ended 30 June 2009 were a combination of measures including profit before exceptional items and tax, net sales and free cash flow. Profit and sales were below target but free cash flow targets were exceeded, therefore the overall level of performance achieved resulted in an actual performance bonus paid equating to 44% of base salary. The actual bonus payments received by the executive directors are shown in this report in the table ‘Directors’ remuneration for the year ended 30 June 2009’.

For the year ending 30 June 2010, the remuneration committee has introduced specific individual business objectives as a weighted measure in addition to the existing financial measures. This new measure will focus on business objectives, derived from a set of collective business goals, that are specific to the executive’s particular area of accountability and will be focused on supporting the long term growth of the business.

Long term incentive plans (LTIPS)

Current long term incentives comprise a combination of share options under the SESOP and performance share awards under the PSP and are designed to incentivise executive directors and senior managers to strive for long term sustainable performance. These awards are made on an annual basis with the level of award considered each year in light of individual and business performance. Awards made under both sets of plans are subject to performance conditions normally measured over a three-year period. The regular review of the performance measures and the vesting schedule used in each plan are designed to ensure that the LTIPs continue to support the business objectives and are in line with current best practice. All of Diageo’s share plans are operated within the ABI dilution guidelines for share-based remuneration.

Senior executive share option plan 2008 (SESOP 2008)

Options granted under SESOP 2008 are subject to a performance condition based on compound annual growth in adjusted EPS over a three-year period, with growth targets set by the company’s remuneration committee for each grant. For the purpose of the SESOP, an underlying measure of EPS is used to ensure that items such as exceptional items and movements in exchange rates are excluded from year on year comparisons of performance. Options will only vest when stretching adjusted EPS targets are achieved. Vesting is on a pro rata basis currently ranging from a threshold level of 25% to a maximum level of 100%.

Given the recent changes in the external environment and their impact on global growth rates, the adjusted EPS growth targets for the awards to be made in September 2009 have been set at a range of 3% compound annual growth for threshold vesting to 7% compound annual growth for maximum vesting, equivalent to 9% growth and 23% growth over a three-year period for threshold and maximum vesting, respectively. In light of these adjusted targets, threshold vesting was reduced from 30% to 25% of grant for the 2009 award.

The adjusted EPS growth target for the 2008 grant of options to vest in full is 10% per annum compound which is equivalent to 33% growth over a three-year period. The threshold when options start to vest is when adjusted EPS grows by an average of 6% compound per annum, equivalent to 19% over a three-year period, at which point 30% of the award would vest.

The maximum annual grant under the plan is 375% of base salary. However, the remuneration committee has the discretion to grant awards in excess of the maximum limit in exceptional circumstances.

In the year ended 30 June 2009, the adjusted EPS measure used in the SESOP 2008 has grown by 2.6%. This represents the first year’s growth of the three-year performance cycle for the SESOP award made in October 2008 and is significantly below target, reflecting the challenging economic conditions of the last year.

Senior executive share option plan 1999 (SESOP 1999)

The executive directors currently hold unvested options granted under an expired SESOP 1999 with the final grant under this plan due to vest in September 2010. These options are subject to satisfying a performance condition based on adjusted EPS growth relative to RPI over a three-year period. The vesting schedule is shown in the table below:

Performance share plan (PSP 2008)

Under this plan, participants are granted a discretionary, conditional right to receive shares. All conditional rights awarded vest after a three-year period subject to achievement of two performance tests. The primary performance test is a comparison of Diageo’s three-year TSR – the percentage growth in Diageo’s share price (assuming all dividends and capital distributions are reinvested) – with the TSR of a peer group of international drinks and fast moving consumer goods (FMCG) companies. TSR calculations are converted to a common currency (US dollars). The second performance test requires that there has been an underlying improvement in Diageo’s three-year financial performance, typically measured by an adjusted EPS measure, for the remuneration committee to recommend the release of awards. The maximum annual award under the plan is 375% of salary. However, the remuneration committee has discretion to grant awards in excess of this maximum in exceptional circumstances. Notional dividends accrue on awards and are paid out either in cash or shares in accordance with the vesting schedule shown in the table below.

Total shareholder return plan (TSR 1998)

The executive directors hold unvested performance shares awarded under the expired TSR plan with the final award under this plan due to vest in September 2010. As with the current PSP, the proportion vesting is subject to TSR performance relative to the selected peer group. Outstanding awards under this expired plan are subject to the vesting schedule below. Notional dividends do not accrue on awards made under the expired TSR plan.

Vesting schedules and TSR peer group for the PSP and the TSR plan

Notes
(a) An adjustment was made to grant levels to ensure that broadly the same payout as a percentage of salary would be achieved under both old and new schedules.
(b) The TSR peer group was reviewed during the year following the takeover of Anheuser-Busch. Following this review, the remuneration committee concluded that the three-year TSR performance for current and future awards would be measured on the basis of a reduced peer group of 16 companies including Diageo.

Long-term incentive plans and change of control

In the event of a change of control and at the remuneration committee’s discretion, outstanding PSP and TSR plan awards would be released and outstanding share options would become exercisable based on the extent to which the relevant performance conditions had been met since the initial award or grant respectively.

All employee share plans

The executive directors are eligible to participate in the UK HM Revenue &Customs approved share incentive and sharesave plans that Diageo operates on the same terms for all eligible employees.

Share ownership

Senior executives are currently required to build up significant holdings of shares in Diageo from their own resources over a defined period of time. Full participation in the share option and share award plans is conditional upon meeting this requirement. This policy reflects Diageo’s belief that its most senior leaders should also be shareholders. With effect from 1 January 2009, the chief executive and chief financial officer are required to hold company shares equivalent to 300% and 250% of their base salary, respectively. The current status of their shareholding requirement is shown in the shareholding table in the remuneration summary at the beginning of this report.

Pension provision

NC Rose and PS Walsh are members of the Diageo Pension Scheme. They currently accrue pension rights at the rate of one-thirtieth of pensionable pay each year. Bonus payments and other benefits are not included in pensionable pay. The pension at normal retirement age (NRA) may not exceed two-thirds of final remuneration minus retained benefits. Subject to the consent of the company, no actuarial reduction is currently applied upon early retirement on or after age 57. Pensions in payment are increased each year in line with increases in the RPI, subject to a maximum of 5% per year and a minimum of 3% per year.

On death in service, a lump sum of four times pensionable pay becomes payable, together with a spouse’s pension of two-thirds of the executive director’s prospective pension. Upon death after retirement, a spouse’s pension of two-thirds of the executive director’s pension before commutation is payable.

The executive directors make employee contributions of 6% of pensionable pay.

As a result of changes introduced by the UK Finance Act 2004 affecting the taxation of pensions from 6 April 2006, executive directors were offered the option of having benefits in excess of their lifetime allowance (LTA) provided by an unfunded non-registered arrangement. Both executive directors have opted to have part of their benefits provided from this unfunded arrangement, if appropriate. Total pension benefits remain subject to the HM Revenue & Customs limits that were in force on 5 April 2006.

Service contracts

The executive directors have rolling service contracts which provide for six months’ notice by the director or 12 months’ notice by the company and contain non-compete obligations.

In the event of early termination by the company without cause, the agreements provide for a termination payment to be paid, equivalent to 12 months’ base salary for the notice period and an equal amount in respect of all benefits. The remuneration committee may exercise its discretion to require half of the termination payment to be paid in monthly instalments and, upon the executive commencing new employment, to be subject to mitigation. If the board determines that the executive has failed to perform his duties competently, the remuneration committee may exercise its discretion to reduce the termination payment on the grounds of poor performance. PS Walsh’s service contract with the company is dated 1 November 2005. NC Rose’s service contract with the company is dated 14 February 2006.

External appointments

Executive directors may accept external appointments as non-executive directors of other companies and retain any related fees paid to them, subject to the specific approval of the board in each case.

During the year ended 30 June 2009, PS Walsh served as a non-executive director of Centrica plc (resigned 11 May 2009), Unilever PLC (appointed 14 May 2009), and FedEx Corporation and retained the fees paid to him for his services. The total amounts of such fees paid to him in the year ended 30 June 2009 are set out in the table below.

Note
(a) Fees paid in currencies other than sterling are converted using average exchange rates for the year ended 30 June 2009.

In line with the FedEx Corporation policy for outside directors, PS Walsh is eligible to be granted share options. During the year ended 30 June 2009, he was granted 4,400 options at an option price of $80.045. PS Walsh did not exercise any FedEx options in the year ended 30 June 2009.

Chairman and non-executive directors – policy, terms, conditions and fees

Diageo’s policy on chairman’s and non-executive directors’ fees is as follows:

• The fees should be sufficient to attract, motivate and retain world-class talent.
• Fee practice should be consistent with recognised best practice standards for such positions.
• The chairman and non-executive directors should not participate in any of the company’s incentive plans.
• Part of the chairman’s fees should be used for the purchase of Diageo shares.
• Fees for non-executive directors should be within the limits set by the shareholders from time to time, currently £1,000,000, as approved by shareholders at the October 2005 Annual General Meeting. The limit excludes remuneration paid for special services performed by directors.

The chairman of the board, Dr FB Humer, commenced his appointment on 1 July 2008. Dr FB Humer has a letter of appointment for an initial five-year term from 1 July 2008. It is terminable on six months’ notice by either party or, if terminated by the company, by payment of six months’ fees in lieu of notice. The annual fee payable to Dr FB Humer is £400,000.

The chairman’s fee is normally reviewed every two years and any changes would normally take effect from 1 January. Fees are reviewed in the light of market practice in large UK companies and anticipated workload, tasks and potential liabilities. As recommended by the Combined Code on Corporate Governance, any changes will be approved by the remuneration committee. In line with Diageo’s policy, a proportion of the annual fee is used for the monthly purchase of Diageo ordinary shares, which have to be retained until the chairman retires from the company or ceases to be a director for any other reason.

All non-executive directors have letters of appointment. A summary of their terms and conditions of appointment is available at www.diageo.com.

The fees paid to the non-executive directors have historically been reviewed every two years with any changes normally taking effect from 1 January. The last scheduled review of fees was undertaken in December 2008 with changes taking effect from 1 January 2009. At this time, fees were benchmarked against market practice in large UK companies and reviewed in light of anticipated workload, tasks and potential liabilities.

As a result of this review the non-executive director fees were increased as shown in the table below. At the same time, it was agreed to remove the £3,000 travel allowance payable each time an overseas based non-executive director travels to attend board and committee meetings, also effective from 1 January 2009. In line with current market practice, fees for non-executive directors will now be reviewed annually.

The emoluments received by the non-executive directors in the year ended 30 June 2009 are shown in the table ‘Directors’ remuneration for the year ended 30 June 2009’.

Share and other interests

The beneficial interests of the directors in office at 30 June 2009 in the ordinary shares of the company are shown in the table below.

Notes
(a) At 30 June 2008, Lord Blyth (retired 30 June 2008) held 161,137 shares and WS Shanahan (retired 30 April 2009) held 29,155 shares.
(b) At 30 June 2009, there were 3,129,355 shares (30 June 2008 – 3,262,709; 10 August 2009 – 3,129,355) held by trusts to satisfy grants made under Diageo incentive plans and savings-related share option schemes, and 109,834 shares (30 June 2008 – 109,834; 10 August 2009 – 109,834) held by a trust to satisfy grants made under ex-GrandMet incentive plans. NC Rose and PS Walsh are among the potential beneficiaries of these trusts and are deemed to have an interest in all these shares.

Performance graph

The graph below shows the total shareholder return for Diageo and the FTSE 100 Index since 30 June 2004. The FTSE 100 Index reflects the 100 largest UK quoted companies by market capitalisation and has been chosen because it is a widely recognised performance benchmark for large UK companies.

Total shareholder return – value of hypothetical £100 holding (based on spot share prices)

Source: Bloomberg
Notes: TSR based on end of year prices. FTSE100 dividends based on the average 12-month dividend yield of constituents.

Additional information

Emoluments and share interests of senior management

The total emoluments for the year ended 30 June 2009 of the executive directors, the executive committee members and the company secretary (together, the senior management) of Diageo comprising base salary, annual performance bonus, share incentive plan and other benefits were £12,097,780 (2008 – £12,079,987). (Note that the executive committee increased in membership during the year.)

The aggregate amount of gains made by the senior management from the exercise of share options and from the vesting of awards during the year was £6,737,903. In addition, they were granted 2,665,917 options during the year at a weighted average share price of 879 pence, exercisable by 2018. They were also initially awarded 1,845,542 shares under the PSP in October 2008, which will vest in three years subject to the performance tests described above. Two members of the executive committee were also awarded an exceptional grant of 164,952 deferred shares under the Discretionary Incentive Plan (DIP) in October 2008. There are performance conditions attached to the release of this award and it will vest, subject to achievement of the performance conditions, in three equal instalments in September 2011, 2012 and 2013.

Senior management options over ordinary shares

At 10 August 2009, the senior management had an aggregate beneficial interest in 2,734,243 ordinary shares in the company and in the following options over ordinary shares in the company:

*Other members of the executive committee and the company secretary.

Key management personnel related party transactions

Key management personnel of the group comprises the executive and non-executive directors, the members of the executive committee and the company secretary. As previously disclosed, Lord Hollick, PS Walsh, NC Rose and G Williams have informed the company that they have purchased seasonal developments at Gleneagles from a subsidiary of the company, Gleneagles Resort Developments Limited. The transactions were priced on the same basis as all the external seasonal development transactions and were at arm’s length. The values of the transactions at the date of purchase were as follows: Lord Hollick – £25,000, PS Walsh – £43,000, NC Rose – £11,600 and G Williams – £19,400. Each director continued to hold these seasonal developments at 30 June 2009.

Diageo plc has granted rolling indemnities to the directors and the company secretary, uncapped in amount, in relation to certain losses and liabilities which they may incur in the course of acting as directors or company secretary (as applicable) of Diageo plc or of one or more of its subsidiaries. These indemnities continue to be in place at 30 June 2009.

Other than disclosed in this report, no director had any interest, beneficial or non-beneficial, in the share capital of the company. Save as disclosed above, no director has or has had any interest in any transaction which is or was unusual in its nature, or which is or was significant to the business of the group and which was effected by any member of the group during the financial year, or which having been effected during an earlier financial year, remains in any respect outstanding or unperformed. There have been no material transactions during the last three years to which any director or officer, or 3% or greater shareholder, or any relative or spouse thereof, was a party. There is no significant outstanding indebtedness to the company from any directors or officer or 3% or greater shareholder.

Compliance

This report was approved by the remuneration committee, which is a duly appointed and authorised committee of the board of directors, on 25 August 2009 and was signed on its behalf by Lord Hollick who is senior non-executive director and chairman of the remuneration committee. As required by the Companies Act 2006, a resolution to approve the directors’ remuneration report will be proposed at the AGM and will be subject to an advisory shareholder vote.

The board has followed and complied with the requirements of the Companies Act 2006 with reference to Schedules 5 and 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and section 1 of the Combined Code on Corporate Governance in preparing this report and in designing performance-related remuneration for senior executives.

KPMG Audit Plc has audited the report to the extent required by the Regulations, being the sections headed ‘Directors’ remuneration for the year ended 30 June 2009’, ‘Long term incentive plans’, ‘Directors’ share options over ordinary shares’, ‘Directors’ interests in PSP and TSR plan awards’ and ‘Executive directors’ pension benefits’. In addition, the following sections form part of the audited financial statements: ‘Share and other interests’ and ‘Key management personnel related party transactions’.

Terms defined in this remuneration report are used solely herein.

Definitions

AGM – annual general meeting of shareholders

EPS – earnings per share

Adjusted EPS – for the purpose of the SESOP, an underlying measure of EPS is used to ensure that items such as exceptional items and movements in exchange rates are excluded from year on year comparisons of performance.

NRA – the normal retirement age for pension purposes is age 62.

RPI – the retail prices index is a UK government index that measures changes in cost of living.

TSR – for the purpose of the PSP and TSR plan, total shareholder return is the percentage growth in Diageo’s share price assuming all dividends and capital distribution are reinvested.