Introduction

As Chairman of the Remuneration Committee ("Committee") I am delighted to present our Remuneration Report, based on the new policy and disclosure requirements on directors' remuneration, as required by the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the "Regulations"), for which we will be seeking your approval at our Annual General Meeting.

You will see that there are two main sections to the report. The first part (Section A) summarises the policy of the Board with regard to the remuneration of the Directors and is a re-statement of the existing policy using the new guidelines. The second part (Section B) describes how that policy has been implemented during the year and will be implemented in 2014.

In accordance with the Regulations, the policy section (Section A) will be put to a binding vote at, and will then be applicable immediately after, the forthcoming Annual General Meeting of the Company in April 2014. It is intended that the policy section will be put forward to shareholders every three years. The Annual Report on remuneration will continue to be put to the AGM each year on an advisory basis.

2013 performance and remuneration outcomes

Bodycote has made good and steady progress in 2013. Reported revenues increased by 5.4% (3.0% at constant exchange rates). Headline operating profit grew by 10.2% and our share price increased by 47.9% in 2013, compared to an increase of 28.8% in the FTSE 250 as a whole.

2013 base salary increases for the Executive Directors in the year were 2.7% for the CEO and 2.7% for the FD. These increases were in the context of average 2013 salary increases across the Group of around 3%.

Annual bonuses for the Executive Directors, which are based on a mix of Group operating profit, Group cash flow and personal strategic objectives, paid out at the level of 59.1% and 43.9% of base salary for the CEO and FD, respectively (equivalent to 50.6% and 48.8% of maximum opportunity).

Awards under the Co-investment Plan ('CIP') made in May 2010 vested in May 2013 at 100% of maximum based on absolute Total Shareholder Return (TSR) growth of the three financial years ending April 2013.

Awards under the Bodycote Incentive Plan ('BIP') made in February 2011 are due to vest in March 2014 at 98.4% of maximum based on a combination of ROCE and EPS growth over the three financial years ending December 2013.

Following a contractual review of pension provision during 2013, the Committee decided that the level of salary supplement in lieu of pension for Stephen Harris should be adjusted to 25% of salary. For David Landless, the level will be adjusted to 25%, up to the cap of the defined benefit pension scheme; above that amount to his actual base salary, the salary supplement in lieu of pension remains at 16%. Both of these changes will come into effect as of April 2014.

Changes to remuneration arrangements

From 2013, the Committee decided that participants receiving awards under the CIP and BIP will be eligible to receive dividend equivalents on vested shares. This change will more closely align the interests of Executives with those of shareholders as well as bringing this aspect of plan operation into line with typical market practice. The Committee consulted with key shareholders on this point and they were supportive of the change.

Apart from this, the Remuneration Committee decided not to make changes to the remuneration framework and policy this year. The decisions we have taken have been within the terms of our existing policies.