# Dear Shareholder

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-e-p/LSE_GKP.L_2017/LSE_GKP.L_2017.mmd` · pages 48-54_

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Dear Shareholder,

As Chairman of Gulf Keystone's Remuneration Committee, I am pleased to present our Directors' Remuneration Report for 2017.

Despite the uncertain regional environment, caused by the war with Daesh and the aftermath of the referendum on Kurdistan's independence, the executive management and staff are to be congratulated on the good performance that was recorded against the Key Performance Indicators ("KPIs") related to HSSE, financial and operational objectives. However, only limited progress could be made during the year with the strategic KPIs. After the year end, the execution of the Crude Oil Sales Agreement delivered a very significant milestone in the Company's development and positions the Company to achieve excellent progress in 2018.

During the year, the Remuneration Committee continued to apply the Directors' Remuneration Policy that was approved at the 2016 AGM. Nevertheless, we continued to review the Remuneration Policy to ensure that it remained effective and aligned with strategy and with the interests of shareholders. Remuneration packages were benchmarked against our peers in the oil and gas sector as well as the wider market.

The revised Executive Bonus Plan, which focuses on the achievement of objectives within the calendar year, was implemented. This plan reduced the maximum bonus award for the achievement of Stretch targets from 200% to 125% for the CEO and from 150% to 100% for the CFO. The Value Creation Plan focuses Executive Directors on the achievement of absolute shareholder returns. The first measurement date will be 11 May 2018 when, providing the performance conditions have been achieved, the Executive Directors will be granted nil-cost options equivalent to their share of the performance pot. Subject to continued achievement of the performance requirements, 50% of these options will vest after the end of the third plan year and 50% after the end of the fourth plan year.

It is the Committee's intention to exercise its discretion (included within the current Directors' Remuneration Policy) to reduce the Directors' shareholding requirement from 300% to 150% for the CEO and from 200% to 100% for the CFO and to extend the time limit for achieving this target to five years from the date of change. These levels have been reduced to ensure that Executive Directors are able to realistically achieve the targets within the given timeframe, particularly as they have not been recipients of LTIP awards, which, under normal circumstances, would have enabled them to build up their shareholding. Any vested VCP awards will be included in their shareholding thresholds.

In voluntary compliance with section 439A of the Companies Act 2006 as revised in 2013, the Directors' Remuneration Policy is due for further shareholder approval in 2019. A full review will be undertaken later in 2018 to ensure that the policy submitted will be appropriate and based on best practice.

Full details of the policy are provided in the Directors' Remuneration Policy table in Part 2 of this report. Part 3 contains our Annual Report on Remuneration, which explains how the Directors' Remuneration Policy has been implemented during the year ended 31 December 2017.

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## Remuneration Policy objectives
Specific objectives of the Directors'
Remuneration Policy are to motivate
Executive Directors and other key
executives to:

• achieve share price growth and return value to shareholders;

• deliver outstanding HSSE; financial and operational results, and

• ensure retention and motivation of Executive Directors.

Amendments to the Policy are designed to help fulfil those goals and to ensure that overall levels of remuneration are aligned with the delivery of our strategy, remain competitive and are consistent with Company's performance and returns to shareholders.

## Remuneration summary for 2017

The Committee's key decisions relating to remuneration in 2017 are described in more detail in the Annual Report on Remuneration contained on pages 52 to 57 and can be summarised as follows:

## Base salary increases

The Committee agreed that no salary increases would be applied to either of the Company's Executive Directors.

## Annual bonus

Based on an assessment of KPIs achieved in 2017, payments made under the annual bonus scheme to both CEO and CFO was set at 50% of base salary. Details of the way in which these awards were determined are set out on page 55 of the Annual Report on Remuneration.

## Long-term incentive – Value Creation Plan ("VCP")

The first award, if any, for the initial performance period will be made 30 days following the disclosure of financial results. Therefore, we are unable to include details of any VCP award in this publication.

## Non-Executive Directors' fees and Chairman's fee

During 2017, benchmark data including fees and time commitments for non-executive roles was reviewed by the Board, with the Non-Executive Directors recused, and for the Chairman by the Remuneration Committee. It was determined that no changes to fees would be made.

## Part 2: Directors' Remuneration Policy

## Introduction

This Part 2 provides an overview of the Directors' Remuneration Policy. It describes the elements of remuneration and summarises the approach the Remuneration Committee will adopt in certain circumstances such as the exercise of discretion, the recruitment of new Directors and the making of any payments for loss of office.

Gulf Keystone Petroleum is not governed by the Large and Medium-sized Companies and Groups Regulations 2013 (the "Regulations"), but chooses to comply.

## Purpose and role of the Remuneration Committee

The Remuneration Committee determines and agrees with the Board the overall remuneration policy for the Executive Directors and other key employees. Within the terms of this agreed policy, the Committee is responsible for:

• individual remuneration packages for the Chairman, each Executive Director and the Chief Operating Officer as designated by the Board;

• approving the design of performance related pay schemes, recommending targets and award levels; and

• agreeing pension arrangements, service agreements and termination payments for Executive Directors and ensuring that any termination payments are fair to the individual and the Company.
The Committee also reviews and approves overall remuneration levels for employees below executive level, but does not set individual remuneration levels for such individuals. This oversight role allows the Committee to take into account pay policies and employment conditions throughout the Group when designing packages for the Executive Directors and other key employees. The Committee considers any standard increase applied to basic pay across the Group when reviewing Executive Directors' base salaries.

The Committee operates within written terms of reference agreed by the Board. These are reviewed periodically to ensure that the Committee remains up-to-date with best practices appropriate to Gulf Keystone, its strategy and the business and regulatory environment in which it operates. The terms of reference of the Remuneration Committee are available on the Company's website.

## Consultation with stakeholders

The Remuneration Committee values and has taken account of comments from major shareholders on matters concerning executive remuneration. From time to time, the Chairman of the Committee consults with major shareholders on executive remuneration policy and will continue to consult on any proposed policy changes. The Remuneration Committee has not carried out a formal consultation with employees, the majority of whom are based in Kurdistan, on matters concerning executive remuneration. The Committee is, however, mindful of proposed changes to the UK Corporate Governance Code in relation to consultation with employees and other stakeholders.

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## REMUNERATION COMMITTEE REPORT continued

Part 2: Directors' Remuneration Policy continued

<table><tr><td>Remuneration element</td><td>Link to strategy</td><td>Operation</td><td>Opportunity</td><td>Remuneration Committee discretion</td></tr><tr><td>Base salary</td><td>Essential to attract and retain key executives.</td><td>Reviewed annually as at 1 January based on:·role, experience and individual performance;·pay awards elsewhere in the Group;·external market; and·general economic environment.</td><td>Policy is to benchmark to the relevant market median.Normally, salary increases for Executive Directors will be in line with the average employee increase.</td><td>The Committee retains discretion to:·award above median increases in exceptional circumstances and in consultation with shareholders where necessary to retain or attract high calibre candidates;·select the appropriate market comparator group; and·increase salaries above the general employee average to reflect significant additional responsibilities.</td></tr><tr><td>Benefits</td><td>Helps attract and retain key executives.</td><td>Directors are entitled to private medical insurance; CEO receives car allowance.</td><td>Benefit levels reflect those typically available to senior managers within Gulf Keystone. The CEO receives an allowance to cover private medical insurance and car allowance of £25,000.</td><td>If a Director is recruited from overseas, the Committee may provide additional benefits tailored to the circumstances (e.g. relocation expenses).</td></tr><tr><td>Pension</td><td>Helps executives provide for retirement and aids retention.</td><td>Up to 15% of salary; may be provided as a cash allowance.Pension allowances are not included in base salary for annual bonus or other executive rewards.</td><td>15% of base salary.</td><td></td></tr><tr><td>Annual bonus</td><td>Rewards achievement of annual key performance indicators.</td><td>Targets and weightings are set annually; performance is measured over a single year.Bonus awards are determined after the year end based on achievement of targets.Clawback provisions apply.</td><td>Maximum bonus opportunity is 125% of annual salary for the CEO and 100% for other Executive Directors.</td><td>The Committee may in exceptional circumstances, change performance measures and targets and their respective weightings part way through a performance year, if there is a significant event which causes the Committee to believe the original measures, weightings and targets are no longer appropriate.Discretion may also be exercised if the Committee believes the bonus outcome is not a fair and accurate reflection of business performance.Safety is of central importance to the business and the Committee may reduce bonus awards if there is a serious safety event.</td></tr></table>

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<table><tr><td>Remuneration element</td><td>Link to strategy</td><td>Operation</td><td>Opportunity</td><td>Remuneration Committee discretion</td></tr><tr><td>Value Creation Plan ("VCP")</td><td>Provides an incentive to reward the successful implementation of the Company's strategy. Helps motivate and retain high performing executives.</td><td>Participants, who are selected at the discretion of the Committee, are awarded performance units representing their share in a "Performance Pot" equivalent to 8% of the increase in value of the Company in excess of a minimum compound annual TSR of 8% (the "hurdle"), which is measured annually. Provided the hurdle is achieved, participants will be granted nil-cost options each year for five years, starting one year after the initial award of units. The number of shares subject to each option depends on the individual's share of the Performance Pot and the market price of a share on the measurement date. Provided the Company continues to generate returns in excess of the hurdle, 50% of nil-cost options vest after the third measurement date and 50% vest after the fourth measurement date. If, by the fifth measurement date, GKP has failed to generate the hurdle rate TSR, all unvested nil-cost options will lapse.</td><td>The maximum value of shares received by an individual following the exercise of nil-cost options will depend on the rate of returns generated for shareholders and the market price of a share in the Company at the relevant time. The 2016 AGM Notice contains an illustration of the potential benefits to participants at different levels of achieved shareholder return. The VCP will operate within the guidance for listed companies in respect of dilution levels.</td><td>The Committee has discretion to make the exercise of nil-cost options subject to additional conditions.</td></tr><tr><td>Shareholding requirements</td><td>Aligns the interests of executives and shareholders.</td><td>Formal requirements apply to Executive Directors. Participation in long-term incentives may be scaled back or withheld if the requirements are not met or maintained.</td><td>At least 150% salary holding required for the CEO and 100% salary holding required for all other Executive Directors.</td><td>The Committee has discretion to change the shareholding requirements.</td></tr></table>

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## REMUNERATION COMMITTEE REPORT continued

## Part 2: Directors' Remuneration Policy continued

Remuneration scenarios for Executive Directors based on current policy

The graphs below illustrate the relationship between the elements of remuneration for the current Executive Directors in 2018 for "Minimum", "Target" and "Stretch" scenarios.

![](images/52_0.jpg)

![](images/52_1.jpg)

The above illustrations are based on a number of assumptions:

1) the Minimum scenarios show the fixed level of remuneration, assuming there is no performance-related pay;

2) the Target scenarios illustrate the amounts receivable if performance is in line with expectations. Bonus awards are 90% of base salary for the CEO and 75% of base salary for the CFO. As the VCP does not include a Target (or Stretch) amount and awards are not based on a percentage of salary, the Target levels of VCP are based on an estimation of the number and value of nil-cost options which would be granted if GKP achieves a compound annual rate of TSR of 10%; and

3) the Stretch scenarios illustrate the levels of remuneration which would be payable if maximum bonus awards are made (125% of base salary for the CEO and 100% for the CFO). Stretch levels of VCP and are based on an estimation of the number and value of nil-cost options which would be granted if Gulf Keystone achieves a compound annual rate of TSR of 12%.

## Executive Directors' recruitment policy

Remuneration packages for new Executive Directors are designed in accordance with the policy described in Part 1. Relocation packages are assessed on their individual merits. It is not our policy ordinarily to buy-out executives from pre-existing incentive arrangements, but the Committee will consider compensating a new Executive Director for the loss of incentives awarded by a previous employer, if it believes such compensation is warranted. We seek to avoid paying more than necessary to secure a candidate and will have regard to current remuneration policy, shareholder guidance and market practice when formulating remuneration for a new Executive Director.

Where an existing employee is promoted to the Board, the policy described above will apply from the date of promotion, but there will be no retrospective application of the policy. Existing remuneration, including incentives, will continue, even if inconsistent with the policy above, until such time as they expire or vest. Full disclosure will be made to shareholders in the annual remuneration report for the relevant financial year.

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## Terms of the Executive Directors' service contracts

Executive Directors are engaged on rolling service contracts, which provide for 12 months' written notice of termination from the CEO and six months' notice from other Executive Directors, with the same notice periods required from the Company. In exceptional circumstances, the Committee may agree to a longer notice period initially, reducing to 12 or six months, as appropriate, after one year.

## Non-Executive Directors' letter of appointment

Non-Executive Directors are engaged by letter of appointment terminable on one month's written notice from either the individual or the Company.

The Non-Executive Chairman and Non-Executive Directors receive an annual fee paid in monthly instalments. The fee for the Chairman is set by the Remuneration Committee and the fees for the Non-Executive Directors are approved by the Board, on the recommendation of the Chairman and CEO.

Fees are set at a level required to attract and retain individuals with the necessary experience to advise and assist with establishing the Company's strategy and monitoring its progress towards the successful implementation of that strategy. Fees are reviewed regularly to ensure they keep pace with market practice and the demands of the role. Each Non-Executive Director receives a basic fee. Additional fees are paid to the Chairman and the Chairman of the Board Committees. Non-Executive Directors do not participate in any of the Company's benefits or incentive plans.

## Inspection of documents and re-election of Directors

Directors' service contracts and appointment letters will be available for inspection for 15 minutes prior to and during the 2018 AGM.

All Directors are required to stand for re-election annually in accordance with the Company's Byelaws.

## Termination payment policy

Any compensation payment made to an Executive Director for termination of employment will be determined with reference to the terms of the individual's service agreement and the rules of any incentive plan in which the individual is a participant. Those rules may differentiate between "good" and "bad" leavers. The Company's policy is summarised in the table below:

<table><tr><td>Remuneration element</td><td>Policy summary</td></tr><tr><td>Salary and benefits</td><td>A payment equivalent to monthly salary as if the executive had continued to be employed throughout the contractual notice period. A lump sum may be paid in lieu of notice. Benefits will cease on termination of employment.No compensation if termination is owing to misconduct or voluntary resignation.The Committee will determine such mitigation as it considers fair and reasonable in each case.</td></tr><tr><td>Annual bonus</td><td>The Committee may make such payment as it deems appropriate taking into account the period up to the date on which employment ceases and the level of performance achieved up to that date.If the individual is deemed to be a "bad" leaver (for example, if dismissed owing to misconduct) no bonus is payable for the year in which employment terminates.</td></tr><tr><td>VCP</td><td>"Good" leavers (which includes those who leave owing to ill-health, death, redundancy or other reason considered to justify treatment as a good leaver) may continue to hold options until the next TSR measurement date.If the performance condition has been fulfilled, all vested options may be exercised within the periods specified in the VCP rules. Options granted to a "bad" leaver lapse on cessation of employment.</td></tr></table>

Service contracts do not contain liquidated damages clauses. There is no provision in an Executive Director's service agreement providing for compensation for loss of office or employment that occurs because of a takeover bid.

The Committee reserves the right to make additional payments, where such payments are made in good faith in discharge of an existing legal obligation (or by way of damages for breach of such an obligation) or by way of settlement or compromise of any claim arising in connection with the termination of an Executive Director's office or employment.

When deciding on the amount of any payment for loss of office, the Committee will seek to minimise the cost to the Company to the extent permitted by the circumstances of the particular case.

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## REMUNERATION COMMITTEE REPORT continued

## Part 3: Directors' Remuneration Report

## Introduction

GKP's auditor has reported on those sections (highlighted below) which the Regulations require to be audited.

## Remuneration Committee membership during 2017

Throughout the year, the Committee members were:

• Philip Dimmock (Chairman);

• Garrett Soden; and

• David Thomas.

The members had no personal financial interest, other than as shareholders, in the decisions made by the Committee. There were no conflicts of interests arising from cross-directorships and no involvement in the Company's day-to-day operations. Details of members' attendance at Committee meetings are shown on page 37.

## Statement of shareholder voting

At the 2017 AGM held on 16 June 2017 no changes were made to the previously approved Directors' Remuneration Policy and the votes cast were as follows:

<table><tr><td></td><td></td><td>Votes for %</td><td>Votes against %</td><td>% of issued share capital</td><td>Votes withheld</td></tr><tr><td>Resolution to approve Directors&#x27; Remuneration Report for year to 31 December 2016</td><td>70.66</td><td>29.34</td><td>59.74</td><td>634</td><td></td></tr></table>

## Payments to past Directors during the year (audited)

No payments were made to past Directors during the financial year ending 31 December 2017.

## Single total figure of remuneration table for the year (audited)

<table><tr><td>2017</td><td>Salary €&#x27;000</td><td>Pension €&#x27;000</td><td>Benefits €&#x27;000</td><td>Cash bonus €&#x27;000</td><td>Other €&#x27;000</td><td>Total €&#x27;000</td></tr><tr><td>Executive Directors</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Jón Ferrier</td><td>450</td><td>68</td><td>25</td><td>225</td><td>—</td><td>768</td></tr><tr><td>Sami Zouari</td><td>350</td><td>53</td><td>3</td><td>175</td><td>—</td><td>581</td></tr><tr><td>Non-Executive Directors</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Keith Lough</td><td>180</td><td>—</td><td>—</td><td>—</td><td>—</td><td>180</td></tr><tr><td>Philip Dimmock</td><td>100</td><td>—</td><td>—</td><td>—</td><td>—</td><td>100</td></tr><tr><td>Garrett Soden</td><td>81</td><td>—</td><td>—</td><td>—</td><td>—</td><td>81</td></tr><tr><td>David Thomas \( ^{(1)} \)</td><td>91</td><td>—</td><td>—</td><td>—</td><td>—</td><td>91</td></tr><tr><td>Jaap Huijskes \( ^{(2)} \)</td><td>7</td><td>—</td><td>—</td><td>—</td><td>—</td><td>7</td></tr><tr><td>Cuth McDowell \( ^{(3)} \)</td><td>6</td><td>—</td><td>—</td><td>—</td><td>—</td><td>6</td></tr><tr><td>Total</td><td>1,265</td><td>121</td><td>28</td><td>400</td><td>0</td><td>1,814</td></tr></table>

(1) Includes a payment from 2016.

(2) Jaap Huijskes joined on 29 November 2017.

(3) Cuth McDowell final salary payment in January 2017.