Report of the Directors
Governance

Remuneration Report

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Section 1 – Summary of 2012/13 Remuneration Outcomes

This section seeks to make plain the quantum of directors’ earnings in the past year and to provide an explanation as to how bonuses and other elements of total pay were calculated.

The first element of this summary is the ‘single figure’ table, which seeks to make clear the total of all payments made to each director in the year.

Single Figure Table of Remuneration

The table below sets out the total remuneration and breakdown of the elements each director received in relation to 2012/13. An explanation of how the figures are calculated follows the table.

  Base salary / fees
£’000
Benefits
£’000
Pension1
£’000
Annual bonus
£’000
LTIP
£’000
Total
£’000
Executive directors            
Neil Carson 794 22 199 1,666 2,681
Robert MacLeod 431 19 108 722 1,280
Larry Pentz2 409 181 47 693 1,330
Bill Sandford 369 17 92 613 1,091
Non-executive directors            
Tim Stevenson (Chairman) 300 300
Alan Ferguson 65 65
Sir Thomas Harris3 18 18
Colin Matthews4 27 27
Michael Roney 68 68
Dorothy Thompson 55 55
1
The amounts shown are in respect of the cash supplements paid in lieu of pension only. The value of the increase in the defined benefit pension over the year, using a valuation factor of 20, was for Neil Carson an additional £260,000, for Robert MacLeod an additional £5,000, for Larry Pentz an additional £80,000 and for Bill Sandford an additional £180,000.
2
Larry Pentz repatriated to the United States in 2012/13 and received specialist tax and pension advice and a one-off contractual relocation allowance.
3
Retired on 25th July 2012.
4
Appointed on 4th October 2012.

Explanation of Figures

Base salary / fees: Salary paid in year for executive directors and fees paid in year for non-executive directors.

Benefits: All taxable benefits.

Pension: Cash supplements paid to directors. The footnote also shows the increase in the value of any defined benefit pension schemes.

Annual bonus: Annual bonus awarded for the year ended 31st March 2013. The figure includes any amounts deferred and awarded as shares.

LTIP: Shares vesting as a result of achievement of performance conditions over the three years to 31st March 2013. Shares will vest in July 2013 and the value is calculated using the average share price from 1st January 2013 to 31st March 2013, which was 2,301 pence.

Variable Pay – Additional Disclosures, Including Bases of Calculation and Outcomes

1

Annual Bonus for the Year Ended 31st March 2013

The annual bonus for 2012/13 is based on the performance against budgeted underlying profit before tax (PBT). An annual bonus of 75% of base salary (prevailing as at 31st March 2013) is paid to the Chief Executive and 62.5% of base salary is paid to executive directors if the group meets the annual budget. This bonus may rise on a straight line basis to a maximum of 150% of base salary for the Chief Executive and 125% for executive directors if 110% of budgeted underlying PBT is achieved. Underlying PBT must reach 95% of budget for the minimum threshold bonus of 15% to be payable to both the Chief Executive and the executive directors.

The annual budget target is set when budgets are approved in March, immediately prior to the new financial year. Budgets are built from the bottom up and are subject to a rigorous process of challenge before final proposals are considered by the board. Further information is used in the determination, including a consensus of industry analysts’ forecasts, provided by Vara Research. The Vara consensus as at March 2012 (immediately prior to the financial year) was for an underlying PBT in the region of £425 million.

In line with the setting of challenging and stretching targets, the annual budget was set at a higher figure than the consensus. The outcome was that threshold levels of PBT (95% of budget) were not reached and therefore no bonus is payable to the Chief Executive or executive directors for 2012/13.

Commercial sensitivity precludes the advance publication of bonus targets but we reproduce below the targets for 2012/13 and the previous year.

Year Budgeted
underlying PBT1
£ million
Actual
underlying PBT
£ million
% of budget Chief
Executive’s
bonus
%
Executive
directors’
bonus
%
Vara
consensus
£ million
Actual
underlying
PBT
growth
%
2011/12 406.0 426.0 105 112 93 382 23
2012/13 464.6 389.2 84 425 -9
1
For bonus purposes budgeted PBT for 2012/13 was later reduced by £8.0 million to £456.6 million to take account of net finance cost associated with the special dividend payment of £212.1 million paid in August 2012. This had no effect on bonus outcomes, as the threshold was not reached.

In the event that a bonus is paid then the following rules of deferral apply:

  • For the Chief Executive, 33.3% of the bonus payable is awarded as shares and deferred for a period of three years.
  • For other executive directors, 20% of the bonus payable is awarded as shares and deferred for three years.
  • The MDRC is entitled to claw back the deferred element in the case of misstatement or misconduct or other relevant reason as determined by the MDRC.
  • There is no entitlement to dividends on the shares during the period of deferral.

The MDRC retains discretion in awarding annual bonuses and seeks to ensure that the incentive structure for senior management does not raise environmental, social and governance risks by inadvertently motivating irresponsible behaviour. No discretion was applied to the above outcomes.

2

LTIP for the Three Year Performance Period Ended 31st March 2013

Shares allocated under the terms of the LTIP are released on the third anniversary of the allocation date, with the release being subject to targets based on compound annual growth in the company’s underlying earnings per share (EPS). Current rules require that to achieve a maximum release of allocated shares, a compound annual growth rate (CAGR) in underlying EPS of 15% must be achieved over the three year period. The minimum release of 15% of the allocated shares requires a CAGR of 6% in underlying EPS. The number of allocated shares released will vary on a straight line basis between these points. There is no retesting of the performance target and so allocations will lapse if underlying growth fails to reach the 6% CAGR threshold over the three year period.

The table below sets out the normal opportunity for the LTIP allocated in July 2010 with a three year performance period ended 31st March 2013.

Required underlying
EPS performance
Proportion of award vesting Vesting as % of base salary at time of award
    Chief Executive Executive directors
Threshold 6% CAGR 15% 22.5% 18%
Maximum 15% CAGR 100% 150% 120%

In addition to the EPS performance condition, the MDRC considers the performance of return on invested capital (ROIC) over the performance period to ensure that earnings growth is achieved in a sustainable and efficient manner. ­­The MDRC may, at its discretion, scale back vesting where ROIC has not developed appropriately over the period. ­­The MDRC assessed the ROIC performance over the period and considered it to be satisfactory.

Readjustment of Targets Following the Share Consolidation

During the year the company carried out a share consolidation associated with the payment of a special dividend as described in the Other Statutory Information section. The share consolidation took place in August 2012. The MDRC therefore considered the impact of the ­­share consolidation on the EPS performance targets for outstanding incentives, where those performance targets were agreed by the MDRC before the consolidation was announced.

The MDRC agreed to adjust the vesting requirements for executive directors’ outstanding LTIP awards so as to reflect the impact of the consolidation and therefore any resultant numerical enhancement of EPS. The MDRC also took into account the mitigating effect of the cost associated with increased borrowings as a result of the associated special dividend and concluded that the LTIP performance range should be increased from 6 to15% CAGR in underlying EPS to 7 to 16% for the three relevant awards whose performance periods spanned the consolidation. These are the awards allocated in 2010, 2011 and 2012.

LTIP Outcomes

The compound annual growth rate in underlying EPS achieved over the three year performance period ended 31st March 2013 was 20.2%. Therefore, having taken into account the increased performance range of 7 to 16%, 100% of the shares allocated in 2010 will be released in July 2013. The table below provides details of LTIP awards, performance and vesting over the last six years.

  Years of
allocation
Years of
vesting
% salary
allocated
Shares
allocated
Compound
annual growth
in underlying
EPS in the
period
% of award
vesting
Shares
released
Value at time
of release
£
Neil Carson                
  2007 2010 150 56,704 1.7%
  2008 2011 150 56,239 10.0% 52.42 29,480 614,233
  2009 2012 120 71,611 19.7% 100 71,611 1,468,537
  2010 2013 150 72,393 20.2% 100 72,393 1,665,7631
  2011 2014 175 69,096 n/a n/a    
  2012 2015 175 62,737 n/a n/a    
Robert MacLeod                
  2007 2010 n/a 1.7%
  2008 2011 n/a 10.0% 52.42
  2009 2012 1702 55,072 19.7% 100 55,072 1,129,36
  2010 2013 120 31,397 20.2% 100 31,397 722,4451
  2011 2014 140 29,979 n/a n/a    
  2012 2015 140 27,222 n/a n/a    
Larry Pentz                
  2007 2010 120 22,327 1.7%
  2008 2011 120 21,853 10.0% 52.42 11,455 238,672
  2009 2012 100 31,116 19.7% 100 31,116 638,100
  2010 2013 120 30,115 20.2% 100 30,115 692,9461
  2011 2014 140 28,744 n/a n/a    
  2012 2015 140 26,100 n/a n/a    
Bill Sandford                
  2007 2010 120 15,268 1.7%
  2008 2011 120 15,318 10.0% 52.42 8,029 167,289
  2009 2012 100 25,575 19.7% 100 25,575 524,470
  2010 2013 120 26,640 20.2% 100 26,640 612,9861
  2011 2014 140 25,429 n/a n/a    
  2012 2015 140 23,427 n/a n/a    
1
The value of the 2010 allocation (which will vest in July 2013) is calculated using the average share price for the period 1st January 2013 to 31st March 2013, which was 2,301 pence.
2
In 2009 there was a one-off allocation of 170% of base salary to the then newly appointed Group Finance Director to ensure alignment of his objectives with those of shareholders.
3

Variable Pay Awarded During the Year Ended 31st March 2013 (New LTIP Allocations Subject to Future Performance)

In addition to providing detailed outcomes regarding annual bonus and LTIP, the new UK government draft regulations will require that full details are disclosed regarding any new awards under existing long term incentive plan rules or under any new scheme, or any other share-based awards. The LTIP awards described below are all in line with the policy as described in last year’s remuneration report.

LTIP Allocated in 2012/13

In August 2012 an LTIP allocation was made to the executive directors for the three year performance period to 31st March 2015. ­­The table below sets out the details of this award.

Item Detail
Type of award Share-based long term incentive plan (LTIP).
Basis of award Incentivise senior executives over the long term.
Face value of award
(% of base salary)
Chief Executive – 175%.
Other executive directors – 140%.
Threshold vesting
(as % of maximum opportunity)
15% of the award will vest at threshold performance.
Performance period 1st April 2012 – 31st March 2015.
Performance conditions
  • 100% of the award is based on underlying EPS performance targets.
  • Threshold performance is set at a 6% compound annual growth rate (CAGR) in underlying EPS over the performance period and maximum performance is set at a 15% CAGR in underlying EPS. Vesting is on a straight line basis between these two points. However, as referred to above, the target has been readjusted to take into account the share consolidation in August 2012 and therefore the target for the relevant period is set at 7 to 16% CAGR in underlying EPS.
  • Although growth in underlying EPS is the primary financial measure, it is also a key objective of the company to achieve earnings growth only in the context of a good performance on return on invested capital (ROIC). Accordingly, the MDRC is required to make an assessment of the group’s ROIC over the performance period to ensure underlying EPS growth has been achieved with ROIC in line with the group’s planned expectations. The MDRC may scale back vesting to the extent that ROIC has not developed appropriately.
4

Statement of Executive Directors’ Shareholding

Executive directors are encouraged to build up over time, and hold, a shareholding in the company equal to at least their base salary with a view to ensuring that their interests remain fully aligned with those of shareholders. Further statutory information on shareholdings including current holdings, is shown in the addendum at the end of this report.

  Number of
shares held as
at 31st March
2013
Shareholding as
at 31st March
2013
(% of salary)
Neil Carson 213,243 611%
Robert MacLeod 16,072 85%
Larry Pentz 25,270 139%
Bill Sandford 14,627 90%

Value of shares as a percentage of salary is calculated using a share value of 2,301 pence, which was the average share price prevailing between 1st January 2013 and 31st March 2013.

5

Loss of Office Payments

No loss of office payments were made in 2012/13.

6

Relative Importance of Spend on Pay

The table on the right shows the absolute and relative amounts of total pay in the company, directors’ pay, and other key financial metrics, for 2012/13.

7

Statement of Shareholder Voting

The table below shows the results of the poll taken on the resolution to receive and approve the Directors’ Remuneration Report at the July 2012 Annual General Meeting.

Number of votes cast For Against Votes withheld
151,093,979 149,479,470 1,614,509 2,912,416
  98.9%1 1.1%1  
1
Percentage of votes cast, excluding votes withheld.

The MDRC believes the 98.9% vote in favour of the Remuneration Report showed very strong shareholder support for the group’s remuneration arrangements at that time.

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