This part of the Directors' Remuneration Report sets out the remuneration policy for the company and has been prepared in accordance with The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. The policy in this report will be put to a binding shareholder vote at the 2014 AGM on 25 July 2014 and will take formal effect from that date, subject to shareholder approval. It is intended that the policy will formally apply for the three years beginning on the date of approval.
The committee considers the remuneration policy annually to ensure that it remains aligned with business strategy and is appropriately positioned relative to the market. However, we do not anticipate that the policy will be revised more frequently than once every three years.
The company's remuneration arrangements are designed so that the overall level of remuneration (including salary and benefits, together with the short and long-term incentive opportunities) is sufficient to attract, retain and motivate executives of the quality required to run the company successfully. The company does not pay more than is necessary for this purpose. The committee recognises that the company operates in the North West of England in a regulated environment and therefore needs to ensure that the structure of executive remuneration reflects both the practices of the markets in which its executives operate, and stakeholder expectations of how the company should be run.
A significant proportion of senior executives' remuneration is performance related. Senior executives are incentivised to achieve stretching results which are delivered with an acceptable level of risk. There is a strong direct link between incentives and the company's strategy and if the strategy is delivered, senior executives will be rewarded through the annual bonus and long-term incentives. If it is not delivered, then a significant part of their potential remuneration will not be paid.
|Non-executive directors' fees and benefits|
|Purpose and link to strategy: To attract non-executive directors with a broad range of experience and skills to oversee the development and implementation of our strategy.|
|The remuneration policy for the non-executive directors (with the exception of the Chairman) is set by a separate committee of the board. The policy for the Chairman is determined by the remuneration committee (of which the Chairman is not a member).|
Fees are reviewed annually taking into account the levels of fees paid by companies of a similar size and complexity. Any changes are effective from 1 September.
Additional fees are paid to the chairs of certain board sub-committees and for the senior independent non-executive director.
No eligibility for bonuses, long-term incentive plans, pension schemes, healthcare arrangements or employee share schemes.
The company repays any reasonable expenses that a non-executive director incurs in carrying out their duties as a director. In addition, travel, hospitality-related and other modest benefits will be payable on occasion.
|Current fee levels are shown in the annual report on remuneration.|
The value of benefits may vary from year to year according to the cost to the company.
|Non-executive directors are not eligible to participate in any performance-related arrangements.|
Notes to the policy table
Selection of performance measures and targets
Performance measures for the annual bonus are selected annually to align with the company's key strategic goals for the year and reflect financial, operational and personal objectives. 'Target' performance is typically set in line with the business plan for the year, following rigorous debate and approval of the plan by the board. Threshold to Stretch targets are then set based on a sliding scale on the basis of relevant commercial factors. Only modest rewards are available for delivering Threshold performance levels, with rewards at Stretch requiring substantial outperformance of the business plan. Details of the measures used for the annual bonus are given in the annual report on remuneration.
The Long Term Plan (LTP) measures were selected by the committee following an extensive review and shareholder consultation in 2012/13. The performance measures are aligned with the company's key strategic goals and linked to the creation of long-term shareholder value as follows:
|Relative Total Shareholder Return||One-third||Direct measure of delivery of shareholder returns, rewarding management for outperformance of a comparator group of companies.|
|Sustainable dividends||One-third||Direct measure of return to shareholders through dividend payments, whilst focusing on the creation of strong earnings that ensure the sustainability of dividends.|
|Customer service excellence||One-third||It is a key strategic objective to provide the best service to customers. This is fundamental to delivering our vision of becoming a leading North West service provider and one of the UK's best water and wastewater companies. This measure has a direct financial impact on the company as our regulator can apply financial incentives or penalties depending on our customer service performance.|
LTP targets are set taking into account a number of factors, including reference to market practice, the company business plan and analysts' forecasts where relevant. The LTP will only vest in full if stretching business performance is achieved.
Annual bonus and long-term incentives - flexibility, discretion and judgement
The committee will operate the company's incentive plans according to their respective rules and consistent with normal market practice, the Listing Rules and HMRC rules where relevant, including flexibility in a number of regards. These include making awards and setting performance criteria each year, dealing with leavers, and adjustments to awards and performance criteria following acquisitions, disposals, changes in share capital and to take account of the impact of other merger and acquisition activity.
The committee also retains discretion within the policy to adjust the targets, set different measures and/or alter weightings for the annual bonus plan, pay dividend equivalents on vested shares up to the date those shares can first reasonably be exercised and, in exceptional circumstances, under the rules of the long-term incentive plans to adjust targets to ensure that the awards fulfill their original purposes (for example, if an external benchmark or measure is no longer available). All assessments of performance are ultimately subject to the committee's judgement.
Any discretion exercised (and the rationale) will be disclosed in the annual remuneration report.
All historic awards that were granted under any current or previous share schemes operated by the company and remain outstanding, remain eligible to vest based on their original award terms.
Differences in policy for executive directors compared to other employees
The remuneration approach is consistently applied at levels below the executive directors. Key features include:
- market competitive levels of remuneration, incentives and benefits to attract and retain employees;
- employees at all levels participate in a bonus scheme with the same corporate performance measures as for executive directors; and
- all employees have the opportunity to participate in the HMRC approved share incentive plan, 'ShareBuy'.
At senior levels, remuneration is increasingly long-term, with an increased emphasis on performance related pay and share based remuneration.
Illustrations of application of the executive directors' remuneration policy
The charts below show the payout under the remuneration policy for each executive director under three different scenarios:
In developing the scenarios the following assumptions have been made:
|Fixed||Consists of base salary, benefits and pension (£'000)|
|Base salary is latest known salary|
|Benefits measured at benefits figure shown in single figure table in the Annual Report on Remuneration|
|Pension measured by applying cash in lieu rate against latest known salary|
|Base salary||Benefits||Pension||Total fixed|
|Target||Annual bonus element pays out at 50% of maximum|
|Long Term Plan element vests at 50% of maximum|
|Maximum||Based on what a director would receive if the maximum level of performance was achieved:|
|Annual bonus element pays out in full (at 100% of maximum)|
|Long Term Plan element vests in full (at 100% of maximum)|
Annual bonus includes amounts compulsorily deferred into shares.
Long Term Plan is measured at face value i.e. no assumption for changes in share price or dividends.
Service contracts and letters of appointment
Executive directors' service contracts are subject to up to one year's notice period when terminated by the company and at least six months' notice when terminated by the director. A company notice period longer than one year may be provided if necessary for recruitment, but reducing to a rolling one-year period after the initial period has expired.
The policy on payments for loss of office is set out in the next section.
The Chairman and other non-executive directors have letters of appointment rather than service contracts. Their appointments may be terminated without compensation at any time. All non-executive directors are subject to re-election at the AGM.
Copies of executive directors' service contracts and non-executive directors' letters of appointment are available for inspection at the company's registered office during normal hours of business and will be available at the company's AGM. Copies of non-executive directors' letters of appointment can also be viewed on the company's website.
The committee believes that it is important for a significant investment to be made by each executive director in the shares of the company to provide alignment with shareholder interests. Executive directors are encouraged to build up and retain a targeted shareholding of at least 100 per cent of base salary, normally within five years of appointment. There is an expectation that executive directors will continue to build a shareholding throughout their period of employment with the company, after the target shareholding is reached.
Approach to recruitment remuneration
The remuneration package for a new executive director would be set in accordance with the terms of the company's approved remuneration policy in force at the time of appointment.
In addition, the committee may offer additional cash and/or share-based elements (on a one-time basis or ongoing) when it considers these to be in the best interests of the company (and therefore shareholders). Any such payments would be limited to a reasonable estimate of value of remuneration lost when leaving the former employer and would reflect the delivery mechanism (i.e. cash and/or share-based), time horizons and whether performance requirements are attached to that remuneration. Shareholders will be informed of any such payments at the time of appointment.
Maximum level of variable pay
The maximum initial level of long-term incentives which may be awarded to a new executive director will be limited to the maximum Long Term Plan limit of 200 per cent of salary. Therefore the maximum initial level of overall variable pay that may be offered will be 330 per cent of salary (i.e. 130 per cent annual bonus plus 200 per cent Long Term Plan). These limits are in addition to the value of any buy-out arrangements which are governed by the policy above.
In the case of an internal appointment, any variable pay element awarded in respect of the prior role would be allowed to pay out according to its terms, adjusted as relevant to take into account the appointment. In addition, any other previously awarded entitlements would continue, and be disclosed in the next annual report on remuneration.
Base salary and relocation expenses
The committee has the flexibility to set the salary of a new appointment at a discount to the market level initially, with a series of planned increases implemented over the following few years to bring the salary to the appropriate market position, subject to individual performance in the role.
For external and internal appointments, the committee may agree that the company will meet certain relocation expenses as appropriate.
Appointment of non-executive directors
For the appointment of a new Chairman or non-executive director, the fee arrangement would be set in accordance with the approved remuneration policy in force at that time. Non-executive directors' fees are set by a separate committee of the board; the Chairman's fees are set by the remuneration committee.
Payment for loss of office
The circumstances of the termination (taking into account the individual's performance) and an individual's duty and opportunity to mitigate losses are taken into account in every case. Our policy is to stop or reduce compensatory payments to former executive directors to the extent that they receive remuneration from other employment during the compensation period. A robust line on reducing compensation is applied and payments to departing employees may be phased in order to mitigate loss. Our policy is shown in the table below:
|Compensation for loss of office|
- An executive director's service contract may be terminated without notice and without any further payment or compensation, except for sums earned up to the date of termination, on the occurrence of certain contractually specified events such as gross misconduct.
- No termination payment if full notice is worked.
- Otherwise, a payment in respect of the period of notice not worked of basic salary, plus pension and car allowance for that period.
- Half of the termination payment will be paid within 14 days of date of termination.
- The other half will be paid in monthly instalments between the 7th and 12th month anniversary from date of termination of employment. This will be reduced by the value of any salary, pension contribution and car allowance earned in new paid employment in that period.
|Treatment of annual bonus on termination|
- A time pro-rated bonus may be payable for the period of active service, however there is no automatic entitlement to payments under the bonus scheme. Any payment is at the discretion of the committee and is subject to clawback as detailed in the policy table.
- Performance targets would apply in all circumstances.
|Treatment of deferred bonus on termination|
- Determined on the basis of the relevant plan rules. Full details can be found on the company's website.
- Deferred bonuses are subject to both clawback and malus provisions as detailed in the policy table.
- The default treatment is that any outstanding awards will vest in full on the normal vesting date with no time pro-rating applying.
- On a change of control, awards will generally vest on the date of a change of control, unless the committee permits (or requires) awards to roll-over into equivalent shares in the acquirer.
|Treatment of unvested long-term incentives on termination|
- Determined on the basis of the relevant plan rules. Full details can be found on the company's website.
- Normally, any outstanding awards will lapse on date of cessation of employment (if that occurs during the performance period).
- However, under the rules of the plans, in certain prescribed circumstances, such as death, disability, mutually agreed retirement or other circumstances at the discretion of the committee, 'good leaver' status can be applied. In these circumstances, a participant's awards vest on a time pro-rated basis subject to the satisfaction of relevant performance criteria, with the balance of awards lapsing. The committee retains the discretion not to time pro-rate if it is inappropriate to do so in particular circumstances. The committee will take into account the individual's performance and the reasons for their departure when determining whether 'good leaver' status can be applied.
- On a change of control, awards will generally vest on the date of a change of control taking in to account the extent to which any performance condition has been satisfied at that point. Time pro-rating will normally apply unless the committee determines otherwise.
|Treatment of pensions on termination|
- On redundancy, an augmentation may apply to active members of a United Utilities defined benefit pension scheme in line with the trust deed and rules of the appropriate section.
Statement of consideration of employment conditions elsewhere in the company
The committee takes into account the general base salary increase and remuneration arrangements for the wider employee population when determining remuneration policy for the executive directors. Although employees are not consulted directly on executive remuneration policy, employee engagement surveys are carried out twice a year and regular discussion takes place with union representatives on matters of pay and remuneration for employees covered by collective bargaining or consultation arrangements.
Statement of consideration of stakeholder views
The committee understands that listening to the views of the company's key stakeholders plays a vital role in formulating and implementing a successful remuneration policy over the long-term. The committee thus actively seeks the views of shareholders and other key stakeholders to inform the development of the remuneration policy, particularly where any changes to policy are envisaged.