Introduction

This part of the Directors' Remuneration Report sets out the implementation of the Directors' Remuneration Policy for 2019.

Summary of Changes for Executive Directors

This table briefly summarises the proposals for the Directors' remuneration arrangements for 2019 when compared to the arrangements for the previous period, subject to shareholder approval.

Base Salary and BenefitsPensionAIPLong-term IncentivesAll-employee Schemes
Base salary will be subject to annual review.Reduction in maximum pension contribution from 30% of salary to 8% of salary, to bring this fully in line with the level currently offered to all employees and Executive Directors.Simplification via replacement of LTIP and AIP with a single new AIP, leading to reduction in total annual variable remuneration opportunity. Mandatory deferral of at least 50% of any bonus earned.No future LTIP awards to be made. A new VCP, subject to shareholder approval, to replace the GIP, which gives Executive Directors the opportunity to share in 2.75% of the total value created for shareholders above a Threshold TSR.Ongoing participation in the SIP and Sharesave.

Base Salary and Benefits

The Remuneration Committee expects to finalise its annual review of the Executive Directors' base salaries later in 2019, in line with the timing of pay reviews for all of the Group's employees.

The benefits in kind offered to the Executive Directors are expected to remain unchanged.

Pensions

Pension contributions for Executive Directors will continue to be 8% of salary in 2019.

2019 AIP

The 2019 AIP will operate in line with the 2019 Policy, subject to shareholder approval.

The AIP potential is 275% of salary for the Chief Executive Officer, 215% of salary for the Chief Financial Officer, Chief Operating Officer, Chief Executive Officer of Solutions, and 190% of salary for the General Counsel and Company Secretary. Any payout is subject to mandatory deferral of at least half of any AIP award into shares. The maximum amount of AIP award that can be paid in cash is 100% of salary. Shares vest after three years but are subject to a further two-year holding period, during which they cannot be sold.

There will be four measures in the 2019 AIP, with the weighting for each element as detailed below:

  • Retail revenueA (20%): a measure concerning the reported revenue for the Retail segment of the Group.
  • Retail profitability (20%): a measure concerning the reported EBITDAA for the Retail segment of the Group.
  • Solutions commitments (40%): a measure concerning the number of new commitments from Solutions partners for the Solutions offer, weighted according to a pre-determined scale linked to the size of the commitment.
  • Operational and strategic objectives (20%): as agreed between the Executive Director and the CEO or the Chairman and reviewed by the Remuneration Committee, which will be in relation to, for example, growth in client bases, platform costs, capacity and productivity targets, and technology developments.

The Remuneration Committee has agreed "threshold" and "maximum" conditions that must be achieved. A bonus is not payable unless a "threshold" level of the performance condition has been achieved. At "threshold" performance for a financial performance measure, 5% of total bonus is payable and at "maximum" performance, 20% of total bonus is payable (except for the Solutions commitments target, which is 10% and 40%, respectively). A straight-line sliding scale will apply in relation to the intermediate points between the "threshold" and "maximum". Each target is discrete and can be earned separately.

The actual performance targets are not disclosed due to their commercial sensitivity on the basis that if disclosed it would likely damage the Company's commercial interests. The Company expects to disclose achievement against the targets after the end of the performance period.

Value Creation Plan (VCP)

The new VCP will operate in line with the 2019 Policy, subject to shareholder approval.

The award has no value on grant but gives the Executive Directors the opportunity to share in a proportion of the total value created for shareholders above a hurdle ("Threshold Total Shareholder Return") at the end of each year ("Measurement Date") over a five-year VCP period. At each Measurement Date, 2.75% of the value created above the hurdle will be "banked" in the form of share awards which will be released in line with the vesting schedule.

The 2.75% will be allocated as follows:

  • Chief Executive Officer: 1% of share capital,
  • Other Executive Directors: 0.25% each of share capital; and
  • 0.75% of share capital in total unallocated for potential future participants.

The initial price for the VCP will be the average share price over the 30-day period prior to the Annual General Meeting (the “Initial Price”). The Executive Directors will receive the right at the end of each year of the performance period to the share awards with a value representing the level of the Company’s total shareholder return (“Measurement Total Shareholder Return”) above the Threshold Total Shareholder Return at the relevant Measurement Date. The share price used at the Measurement Date will be the 30-day average following the announcement of the Company’s results for the relevant financial year plus the value of any dividends in respect of that year.

The Threshold Total Shareholder Return or hurdle which has to be exceeded before share awards can be earned by the Executive Directors is the higher of:

  • The highest previous Measurement Total Shareholder Return; and
  • The Initial Price compounded by 10% p.a.

If the value created at the end of a given year does not exceed the Threshold Total Shareholder Return, nothing will accrue in that year under the VCP.

The vesting schedule provides that 50% of the cumulative number of share awards will vest following the third Measurement Date, 50% of the cumulative balance following the fourth Measurement Date, with 100% of the cumulative number of share awards vesting following the fifth Measurement Date. At each vesting date, vesting of awards is subject to:

  1. A minimum Total Shareholder Return underpin of 10% Compound Annual Growth Rate being maintained:
    • Where the Total Shareholder Return underpin has been achieved at the third Measurement Date, 50% of the cumulative balance will vest. If the underpin has not been achieved no share awards will vest at this point but they will not lapse;
    • Where the Total Shareholder Return underpin has been achieved at the fourth Measurement Date, 50% of the cumulative balance will vest. If the underpin has not been achieved no share awards will vest at this point but they will not lapse; and
    • Where the Total Shareholder Returnunderpin has been achieved at the fifth Measurement Date, 100% of the cumulative balance will vest. If the underpin has not been achieved no share awards will vest at this point and the remaining cumulative balance will lapse;
  2. Any shares vesting cannot be sold prior to the fifth anniversary of the date of the implementation of the VCP; and
  3. An annual cap on vesting of £20 million for the Chief Executive Officer and a proportionate limit for other Executive Directors. In the event that in any year vesting as described above would exceed the annual cap, any share awards above the cap will be rolled forward and allowed to vest in subsequent years provided the cap is not exceeded in those years, until the VCP is fully paid out or after five years after the fifth Measurement Date when any unvested share awards will automatically vest. Rolled forward share awards will not be subject to further underpins, performance conditions or service conditions.

In addition, the Remuneration Committee will adjust VCP vesting levels if it believes they are not reflective of underlying business or personal performance or any other factors it considers appropriate. As part of this, the Remuneration Committee will consider the operational and strategic performance under the AIP as part of its consideration each year when calculating the VCP banked share awards and on vesting.

The table below shows indicative figures of the value delivered to shareholders and the Executive Directors under the VCP, for three different Total Shareholder Return performance scenarios:

Scenario 1:
10% p.a. growth
Scenario 2:
12% p.a. growth
Scenario 3:
15% p.a. growth
End share price (after five years)£13.69£14.98£17.00
Additional value created for shareholders over the five years£3,624m£4,525m£5,935m
Chief Executive Officer payoutNil£26m£55m
Other Executive Director payouts (each)Nil£6m£14m
  1. These figures are based on an Inital Price of £8.50 and linear growth.

By using linear growth, the maximum likely value that could be received by the Executive Directors is modelled to ensure shareholders are given a clear indication of the total that could be earned. If share price growth is not linear the actual level of benefits to the Executive Directors are likely to be less.

The Executive Directors in the VCP may choose to purchase linked jointly owned equity (“JOE”) awards. Under a JOE award the Executive Directors acquire shares jointly with the Employee Benefit Trust (the “EBT”) trustee where the Executive Directors have an interest in the growth in value of the jointly-owned shares above a hurdle price. The Executive Directors may only realise value from the JOE award at the same time and to the same extent as from a linked nil-cost option, and any value the Executive Directors receive from the JOE award will be offset against the value that the Executive Directors may receive under the linked nil-cost option. Therefore acquisition of a JOE award does not increase the gross value that the Executive Directors may obtain under the VCP, nor does it allow the Executive Directors to obtain this any earlier. JOE awards are forfeitable in certain circumstances, in particular, where no value will be delivered to the Executive Directors under the VCP.

SIP

The Executive Directors are expected to continue their participation in the SIP scheme in 2019.

Sharesave

The Executive Directors will be invited to participate in the next offer of Sharesave, expected to be made in 2019.

Changes for Non-Executive Directors and Chairman

The review of remuneration of the Non-Executive Directors and the Chairman will be finalised in line with the timing of pay reviews for all of the Group's employees.

The Remuneration Committee reviewed the Chairman remuneration arrangements and have proposed some changes. Upon appointment as Chairman, Lord Rose received a one-off award of 452,284 shares (the “Matching Shares”), which was approved by shareholders at the 2013 annual general meeting. Prior to joining the Board, the Chairman had purchased 750,000 shares on his own account (the “Acquired Shares”). The Matching Shares vested in May 2016.

The terms of the award prevent the Chairman from disposing of the Acquired Shares whilst he remains a director of the Company and prevent the Chairman from disposing of the Matching Shares until the first anniversary of his ceasing to be a director of the Company. The proposal is to seek shareholder approval to amend the terms of this arrangement to release the Chairman from the disposal restriction in relation to the Acquired Shares.

The Matching Shares vested in May 2016. At this point in line with normal market practice, the restrictions on the sale of the Acquired Shares would usually be expected to fall away. However under the terms of the award, the removal of the sale restrictions on the Acquired Shares purchased by Lord Rose requires shareholder approval. The Remuneration Committee believes that since the Matching Shares would remain subject to an ongoing restriction that prevents sale of these shares, these arrangements alone provide sufficient alignment of interests between the Company and its shareholders and Lord Rose.

Shareholder Approval and Votes at AGM

The 2018 Directors' Remuneration Report will be subject to a shareholder vote at the AGM. Entitlement of a Director to remuneration is not made conditional on this resolution being passed.

The Remuneration Committee Chairman is committed to ongoing shareholder dialogue on Directors' remuneration and takes an active interest in voting outcomes. In the event of a substantial vote against a resolution in relation to the Directors' Remuneration Report, the 2019 Directors' Remuneration Policy or a new share scheme, the Company would seek to understand the reasons for any such vote and would detail in the announcement of the results of voting any actions it intends to take to understand the reasons behind the vote result and also note this in the next annual report. The Remuneration Committee considers that a vote against that exceeds 20% should be considered significant and requires explanation.

The table below sets out the actual voting in respect of resolutions regarding remuneration at the three previous annual general meetings.

Resolution TextVotes For% ForVotes Against% AgainstTotal VotesVotes Withheld
2018 AGM
Approve the 2018 Directors' Remuneration Report
439,218,28583.53586,597,69616.475525,815,98194,803
2017 AGM
Approve the 2017 Directors' Remuneration Policy
416,068,30693.7527,747,6476.25448,607,4794,791,526
Approve the 2016 Directors' Remuneration Report413,472,81293.1630,342,0206.84448,607,4794,792,647
2016 AGM
Approve the 2015 Directors' Remuneration Report
314,587,37191.4829,304,8198.52345,048,7691,156,579