- Board of Directors
- Executive Committee
- Corporate Governance report
- Directors’ report on remuneration
- Notes to the Directors’ report on remuneration
- Other statutory information
This report complies with Regulation 11 and Schedule 8 of the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 and other relevant requirements of the FSA Listing Rules. The Remuneration Committee believes that the Company has complied with the provisions regarding the remuneration matters contained within the Code.
Details of those who served on the Remuneration Committee (the Committee) during the year and information on Kepler Associates, who acted as remuneration consultants during the year, can be found in the Remuneration Committee Report.
Over the last few years, the Group’s remuneration policy has evolved to ensure it supports the business strategy. During the downturn, the Committee took a number of measures to reduce costs and conserve cash:
As the Group moves into the recovery cycle, it is equally important to use the remuneration policy to drive recovery and growth. Our strategy has now shifted towards a balanced focus between commercial initiatives to grow revenue ahead of the competition and cash initiatives to grow profit and operating cash faster than revenue. With this in mind, and as we committed to our shareholders last year, the Committee undertook a comprehensive review of its remuneration arrangements during 2010. In conducting its review, the Committee had regard to the following objectives:
Over the last few months, the Committee has consulted with shareholders and shareholder representative bodies to explain the developments in the business strategy and the changes proposed to the remuneration policy to support this. The revised incentives are consistent with the Group’s strategic focus described earlier: to grow revenue ahead of the competition and to grow profit and operating cash faster than revenue.
We discussed four key principles for remuneration design:
We also discussed the detailed proposals for the new performance share plan, and the specific changes proposed for the annual bonus and co-investment plan.
The key changes proposed to the remuneration structure for 2011 are as follows:
The chart below shows the relative importance of each element of the package for Executive Directors.
In summary, performance-related remuneration arrangements for our most senior executives are shown below and in the Pay Mix Chart above:
|Performance share plan||
The Committee considered the UK Corporate Governance Code requirement regarding remuneration incentives being compatible with the Group’s risk policies and systems. The Committee is satisfied that the approach to setting the structure of remuneration packages for senior executives underpins the effective and proper management of risk by rewarding executives fairly for sustainable profit growth and long term returns to shareholders and delivering a significant proportion of senior executive remuneration in shares.
The Committee has no current intentions to make significant changes to the remuneration design for 2012, although it will of course keep this under review, with reference to both the business strategy and external market developments.
Our policy is to pay competitive salaries (i.e. at or around median) when compared with those organisations of similar size, complexity and type, that are sufficient to attract and motivate talent. Salaries are reviewed annually and salaries for members of the Executive Committee were frozen for a second consecutive year in 2010. The Committee considered this decision was in keeping with the need for the Company to continue its focus on costs and margins.
For 2011, the Committee will review executive salaries prior to the normal review date of 1 April, taking into account pay and conditions elsewhere across the Group, and relevant market data. Benchmarking is carried out on a total remuneration basis.
For 2010, the annual bonus was based on stretching operating profit targets, but with 35% of the bonus also subject to achieving working capital targets and a further 30% subject to achieving targets for NPS. During 2010, the Group delivered operating profit growth of 22.2% over the prior year, which resulted in meeting the stretch target in full. Strong performances were also achieved on both working capital targets and NPS so no reductions were applied to the bonus. Overall, Executive Directors therefore received bonuses for 2010 of 120% of salary.
The review of remuneration during 2010 identified that while operating profit and NPS remain core to the Group’s strategy, the strategic focus moving forward has now shifted from cash management, during an unprecedented global downturn, to revenue and profit growth as the Group moves into the recovery business cycle.
To help drive this growth, the Committee felt it would be appropriate to increase the targets and amend the measurement criteria. The Committee also identified the opportunity to encourage ownership and alignment with shareholders by re-instating the co-investment plan and requiring partial payment of the annual bonus in shares.
Additionally, the Committee is aware that bonus opportunities have fallen below market for companies of similar size.
The Committee has therefore made the following changes to annual bonus arrangements for 2011:
The Committee is proposing to replace the current executive share option plan with a new performance share plan. The Committee believes this change would provide a more robust and motivating long term incentive as well as reflect changes in market practice since the introduction of the executive share option plan. The Committee is therefore seeking approval at the 2011 Annual General Meeting for the adoption of the Inchcape Performance Share Plan (‘PSP’). The proposal to adopt the PSP has the full support of the Committee and the Board as a whole and the Committee intends to make grants pursuant to this plan following the 2011 Annual General Meeting, subject to shareholder approval.
The key features of the PSP are as follows:
For 2011 awards, targets will be as follows:
|3 year EPS growth p.a.||Vesting Percentage|
|Less than 7%||0%|
|Between 7% and 15%||Straight line basis|
|3 year average ROCE||Vesting Percentage|
|Less than 18%||0%|
|Between 18% and 21%||Straight line basis|
|3 year EPS growth p.a.||Vesting Percentage|
|Less than 15%||0%|
|Between 15% and 20%||Straight line basis|
EPS has been retained as the primary long term incentive measure as the Committee continues to believe that this is the best measure of long term performance for the Group. It provides strong line of sight for executives, who are familiar with the existing basis of EPS performance measurement and is consistent with our long term strategy focusing on sustainable profit growth. The introduction of ROCE, combined with EPS, is intended to provide a balance between growth and returns.
The 2011 targets have been set taking into account a range of reference points including the strategic plan and broker forecasts both for the Group and other sector peers. The Committee believes that these targets are very stretching, and that the maximum overall award of 200% of salary for the CEO (150% of salary for the CFO) is appropriate given that it will only be available for truly outstanding performance. The Committee feels that fixing the award sizes as a number of shares provides strong alignment with shareholders, as the face value of awards will fall if the share price falls and vice versa. In order to provide flexibility to follow this policy, while recognising our shareholders desire for a cap on potential awards, the PSP rules contain an individual limit of 300% of salary. However, the Committee will continue to review award sizes prior to each grant to ensure they are appropriate in light of market data and individual and company performance.
The co-investment plan (COIP) was introduced during 2008 after receiving shareholder approval in 2007. In 2010, it was recommended that the COIP be suspended since the performance conditions were not felt to be stretching enough when viewed in the context of the recovery phase, and to address any shareholder concerns around the opportunity for windfall gains. However, the Committee intends to re-instate the COIP for 2011, but replace the Economic Profit performance condition with a combination of EPS and ROCE, as these measures are better understood by participants whilst continuing to recognise the benefits of balancing growth and returns. For simplicity and alignment, the performance targets against each of these measures will be exactly the same as for the normal PSP awards, as previously described. This represents a reduction in vesting at threshold from a 1:1 match under the previous arrangements to a 0.5:1 match under the proposed scheme.
The maximum investment opportunity in 2011, with respect to bonuses earned for 2010, will remain at 50% of post-tax salary for the CEO, but will increase from 40% to 50% of salary for the CFO. The maximum matching opportunity will remain at 2:1, based on performance over 3 years.
For annual bonuses earned in respect of 2011 onwards, any amounts above 100% of salary will automatically be paid in shares and invested in the COIP. If this amount is less than the maximum investment opportunity allowed under the COIP, Executive Directors may make further voluntary investments up to the 50% of salary limit. Invested shares can be withdrawn at any time, but would lose any entitlement to a match if withdrawn before the end of the relevant 3 year performance period.
The Committee is asking shareholders to approve the renewal of the COIP at the 2011 Annual General Meeting.
No changes to the existing rules are being proposed.
During 2010, Executive Directors received grants of executive share options at half of the normal levels (100% of salary) with a view to reducing operating costs for the Company. These options vest on 3 year EPS growth, as follows:
|EPS growth per annum||Vesting Percentage|
|Less than RPI+3%||0%|
|Between RPI+3% and RPI+8%||Straight line basis|
There will be no retesting of performance. This vesting schedule also applies to all options granted prior to 2009. However, for executive share options granted in 2009, CFOA was selected as the performance measure, rather than EPS, to provide better alignment with the Company’s business strategy during the period. These options vest according to the following sliding scale:
|Less than 70% of target||0%|
|70% to 99% of target||25%|
|100% of target||100%|
|Between 70% and 100%||Straight line basis|
The cumulative CFOA for 2009 and 2010, for the purposes of the 2009 executive share option grant, is £651.7m which is 74.2% higher than target.
Details of options granted to Executive Directors are shown in the Notes to the Board report on Remuneration.
Subject to gaining approval for the PSP, the Committee currently has no intention to grant any further options to Executive Directors under this plan.
Executive Directors are eligible to participate in the Company’s save as you earn (SAYE) scheme on the same terms as other employees. Participants make monthly savings, to a maximum of £250 per month, over a three year period. At the end of the savings period the funds are used to purchase shares under option. The acquisition of shares under this scheme is not subject to the satisfaction of a performance target.
To emphasise the importance the Committee places on executive share ownership, Executive Directors are required to hold a fixed number of shares equivalent to 200% of base salary. Each Executive Director has five years from 2007, or date of appointment (if later), to reach this shareholding target. As at 31 December 2010, André Lacroix and John McConnell held 217% and 142% respectively of base salary in shares.
Our policy is to provide market competitive pension benefits. The Inchcape Group (UK) Pension Scheme (UK Scheme) provides benefits for Executive Directors and certain senior executives at normal retirement age of 65, equal to a maximum of two thirds of final base salary, where salary has a scheme specific ceiling of £123,600 in the 2010/11 tax year, subject to completion of between 20 and 40 years’ service. Pensions in payments are guaranteed to increase in line with the lesser of 5% and the increase in the RPI. The UK Scheme requires members who join after March 2005 to contribute 7% of base salary up to the scheme specific ceiling of £123,600 in the 2010/11 tax year.
Executive Directors, whose base salary is higher than £123,600, are paid a monthly cash supplement to enable them to make additional pension arrangements. John McConnell received such supplements in 2010. Details of the amounts paid are shown in the Notes to the Board report on Remuneration. André Lacroix received a cash supplement of 40% of his base salary in lieu of a formal pension provision. He is not a member of the UK Scheme except in respect of the life assurance benefit for death in service.
A lump sum life assurance benefit of four times full base salary is provided on death in service. For pension scheme members, a spouse’s pension of either half or two thirds of the prospective member’s pension may also be payable. Children’s pensions may also be payable, up to half of the member’s pension.
These include items such as company cars, medical care and life assurance premiums. These benefits are in line with the remuneration policy framework outlined in this report. These benefits are non-pensionable.
The total shareholder return (TSR) graph is shown in the investor relations section of the Corporate Governance Report.
The Company’s policy is for Executive Directors’ service contract notice periods to be no longer than 12 months, except in exceptional circumstances. All current contracts contain notice periods of 12 months. In the event of termination the Company will seek fair mitigation of contractual rights. Within legal constraints, the Committee tailors its approach, in the event of early termination, to the circumstances of each individual case.
Non-Executive Directors are appointed for an initial period of three years, which may be extended by agreement with the Board.
No Non-Executive Director is engaged on a service contract with the Company.
|Name||Date of contract||Notice period||Unexpired term|
|André Lacroix||1 September 05||12 months from
12 months from
|To normal retirement age|
|John McConnell||1 October 09||12 months from
12 months from
|To normal retirement age|
By order of the Board
Chairman of the Remuneration Committee
7 March 2011