Executive remuneration (excluding pension)
This directors’ remuneration report complies with the Companies Act 2006 (‘the Companies Act’), Schedule 8 of the Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008 and the Listing Rules of the Financial Services Authority. The company also followed the requirements of the Combined Code on Corporate Governance (June 2008) (‘the Combined Code’). This report will be subject to an advisory vote at the AGM of the company to be held on 5 May 2010.
5 The remuneration committee
The remuneration committee consists of three non-executive directors, each of whom is, in the opinion of the board, independent when assessed against the criteria set out in the Combined Code. The attendance of each member at meetings of the remuneration committee is shown below and the terms of reference of the remuneration committee are available on the company’s website at www.providentfinancial.com.
|Remuneration committee meetings|
|Total number of meetings in 2009||7|
|Robert Hough (Chair) 1||7/7|
|Rob Anderson 2||5/5|
|John Maxwell 3||1/2|
Pursuant to its terms of reference, the committee considers the framework of executive remuneration and makes recommendations to the board. It determines the specific remuneration packages and conditions of service of the Chairman, the executive directors and the Company Secretary, including their service agreements. It also monitors the level and structure of the remuneration of the most senior management below board level within the company. No director is involved in determining his/her own remuneration.
The committee keeps itself fully informed of developments and best practice in the field of remuneration and it seeks advice from external advisers when it considers it appropriate. With effect from 1 June 2009, the committee appointed Hewitt New Bridge Street as its remuneration consultant in place of Towers Perrin to advise on aspects of executive director and senior management pay, including advice in relation to the 2009 remuneration policy and advice in relation to the 2010 remuneration policy which incorporated benchmark pay reports. Hewitt Associates Limited provide investment advice in respect of the company’s UK pension scheme and actuarial services in respect of its Irish pension schemes. Towers Perrin has also provided advice to the committee in 2009 in respect of the 2009 remuneration policy. The committee has, in addition, been advised by Eversheds LLP (who have advised the company on various employment and commercial matters) on the operation of the company’s share schemes. In all cases the advisers were instructed by the secretary on behalf of the committee. The Chairman and Chief Executive of the company normally attend and speak at meetings of the committee (other than when their own remuneration or any matter relating to them is being considered). Ken Mullen, General Counsel and Company Secretary, is secretary to the committee and attended all the meetings of the committee in 2009. He also provided legal and technical support to the committee.
6 Remuneration policy
The committee considers it very important that there should be an appropriate proportion of fixed and variable pay. The remuneration policy operated by the committee during the year and, subject to ongoing review by the remuneration committee, to be applied for the following financial year and for future financial years, is based on the need to attract, reward, motivate and retain executive directors in a manner consistent with the long-term accumulation of value for shareholders and achievement of the company’s strategic objectives. The committee is also conscious of the need to avoid paying more than is reasonable for this purpose and therefore the policy of the committee is to pay remuneration which is competitive, with a significant proportion subject to performance.
The executive directors’ remuneration consists of a basic salary, an annual cash bonus (subject to performance conditions) and other benefits including participation in the company’s pension scheme. Additionally, they may participate in a performance share plan (which necessitates the waiver of a minimum of 25% of the annual cash bonus award), a long-term incentive scheme, both of which are subject to performance conditions, and an employee savings-related share option scheme which is not subject to performance conditions (executive directors participate on the same terms as other eligible employees of the group). In 2009, they also received a one-off exceptional bonus (which was deferred and paid in the form of shares) in recognition of the company’s exceptional performance in 2008. The remuneration policy is designed to ensure that a significant proportion of the executive directors’ remuneration is linked to performance, through the operation of the annual cash bonus and the share incentive schemes. For 2009, variable remuneration accounted for over half of the fair value of executive remuneration (excluding pension) based on the policy that was operated and in 2010 the revised remuneration policy is expected to ensure that approximately two thirds of the incentive opportunity is variable as it is based on the long-term performance of the company which the committee considers appropriate. The committee also considers the pay and conditions elsewhere in the group when setting pay by reviewing the remuneration proposals and budgets of the divisions at its meeting in January of each year.
The committee normally reviews the executive directors’ remuneration annually. This review takes into account individual performance, experience and market competitiveness. Following the AGM in May 2009, the committee reviewed the salaries and annual cash bonus entitlements of the executive directors and the committee agreed not to implement the proposed increase in the annual cash bonus which was set out in the Annual Report and Financial Statements 2008. Accordingly, the maximum bonus opportunity in respect of 2009 and 2010 is restricted to 120% of salary for the Chief Executive and 100% of salary for the other executive directors. Following a benchmarking exercise carried out by Hewitt New Bridge Street in November 2009, the committee also agreed that the executive directors’ salaries for 2010 would remain at the same level as in 2009:
The fees for the non-executive directors, other than the Chairman, are fixed by the board and are designed both to recognise the responsibilities of non-executive directors and to attract individuals with the necessary skills and experience to contribute to the future growth of the company. In January 2010 the board requested Hewitt New Bridge Street to carry out a benchmarking exercise and as a consequence decided to defer any increase in the fees for the non-executive directors for a year. Full details of fees for non-executive directors in 2009 and details of their business expenses, which are reimbursed by the company, with 2008 comparative figures where relevant, are set out in the table of directors’ remuneration in paragraph 7.
The fees for the Chairman are fixed by the remuneration committee, and in January 2010 the committee requested Hewitt New Bridge Street to carry out a benchmarking exercise and as a consequence decided to defer any increase in the Chairman’s fees and benefits for a year. Full details of the Chairman’s fees in 2009, with 2008 comparative figures, are set out in the table of directors’ remuneration in paragraph 7.
An annual cash bonus is payable, subject to the satisfaction of performance conditions. The bonus is calculated as a percentage of salary. The purpose of the bonus scheme is to provide a meaningful cash incentive for executive directors which is clearly focused on improving the company’s performance and aligns, so far as is practicable, shareholder and executive director interests. The committee considers corporate performance on environmental, social and governance (‘ESG’) issues when setting the performance conditions for cash bonuses and will use its discretion to ensure that where appropriate, the management of ESG risks are reflected in the rewards granted to directors and senior management and that they do not inadvertently promote irresponsible behaviour.
Executive directors are eligible for annual cash bonuses by reference to the company’s audited earnings per share (as defined in the bonus scheme) and divisional profits (where appropriate) which cannot exceed 80% of the maximum bonus opportunity, and achievement of specific personal objectives, which cannot exceed 20% of the maximum bonus opportunity. In exceptional circumstances, the committee may make such adjustments to the calculation of earnings per share as it considers fair and reasonable. The committee carries out a detailed review of the computations involved and ensures that the rules are applied consistently. The company’s auditors are asked to perform agreed-upon procedures on behalf of the committee on the calculations. The committee recognises that the group has achieved a good profit performance in an extremely challenging environment in which many lenders have struggled. Nonetheless, profits are slightly short of the stretching targets set under the 2009 annual cash bonus scheme and as a consequence no bonus has been awarded to the executive directors in respect of 2009.
The performance targets to apply for 2010 will be as follows:
|Measure||Maximum bonus opportunity|
|Group EPS 1||80%|
EPS is the key internal measure of financial performance as it is the broadest measure of the company’s financial performance and is aligned to the shareholder base which is weighted towards longer-term income investors.
For 2010, the personal objectives percentage of the annual cash bonus entitlement will only become payable if 95% of the 2010 budgeted EPS is achieved. Personal objectives are set to reflect the roles and responsibility of each executive director.
The 2010 EPS targets are set as a challenging sliding scale. The actual proportion of 2010 budgeted EPS that needs to be delivered for any bonus to be earned is 95% of budgeted EPS with the full group EPS bonus becoming payable at 105% of budgeted EPS. Bonus is earned on a straight line basis from 0% being payable for delivery of 95% of budgeted EPS to 60% of the group EPS element of the annual cash bonus at budgeted EPS with a straight line also operating between budgeted EPS and the maximum at 105% of budgeted EPS. A similar principle applies to the divisional financial target set for Chris Gillespie.
Bonuses do not form part of pensionable earnings.
Share incentive schemes
The grant of awards under share incentive schemes to executive directors and senior management is normally considered once in each year after the announcement of the company’s results in accordance with a formula determined by reference to salary. The company has three schemes: the Provident Financial Executive Share Option Scheme 2006 (‘the ESOS’), the Provident Financial Long Term Incentive Scheme 2006 (‘the LTIS’) and the Provident Financial Performance Share Plan (‘the PSP’). No further options can be granted under the Provident Financial plc Senior Executive Share Option Scheme (1995) or the Provident Financial plc Unapproved Senior Executive Share Option Scheme (1996). The committee reviewed the long-term incentives for the executive directors and senior management in 2007, and as a consequence, decided to simplify the share incentive schemes by ceasing to grant options and instead making conditional share awards to executive directors and senior management under the LTIS and PSP, in line with prevailing market practice and in recognition that conditional share awards (linked to a deferral of annual bonus in the case of the PSP), provide greater alignment with shareholders’ interests.
For conditional share awards made in 2009, the committee set a performance target based on absolute TSR and real earnings per share growth, whereby 50% of the award vests if the company’s annualised growth in earnings per share is equal to or greater than annualised growth in RPI plus 8% over a period of three consecutive financial years (12.5% of the award will vest if the company’s annualised growth in earnings per share over a period of three consecutive financial years is equal to annualised growth in RPI plus 3% with vesting on a straightline basis in between these levels) and the remaining 50% of the award vests if the company’s annualised TSR is at least 15% over a period of three consecutive financial years (12.5% of the award will vest if the company’s annualised TSR is at least 10% over a period of three consecutive financial years, with vesting on a straight-line basis in between these two levels).
Participation is currently limited to executive directors, certain members of senior management and other employees by invitation. Following approval at the 2009 AGM, the committee removed the discretion of the committee to grant conditional share awards pursuant to the LTIS in exceptional circumstances up to a maximum of 200% of a participant’s basic salary and increased the normal limit from a maximum of 150% to a maximum of 200% of a participant’s basic salary irrespective of whether there are exceptional circumstances.
Consistent with the recent shareholder consultation exercise, in 2010, the performance targets for the LTIS will remain unchanged with 50% vesting based on challenging EPS targets and 50% dependent on absolute TSR targets.
The actual range of the EPS targets is as follows:
|Annualised growth in EPS||Percentage vesting (of EPS part of award)|
|Below RPI + 3%||0%|
|RPI + 3%||25%|
|RPI + 8%||100%|
The actual range of TSR targets is as follows:
|Annualised TSR||Percentage vesting (of TSR part of award)|
EPS and TSR are felt to provide an appropriate balance between internal and external performance measures.
EPS is the key internal long-term financial measure used by the company and, with regard to TSR, delivering returns to shareholders remains the company’s key, overarching, long-term objective.
While some investors have a preference for relative TSR, absolute TSR was only adopted by the company in 2009 and the committee did not therefore believe it was appropriate to change the performance measures this year. Additionally, the committee continues to believe that there are doubts as to the suitability of the constituents of the FTSE 250 as an appropriate benchmark at the current phase of the cycle (this being the reason for the change to absolute TSR made in 2009) and the general financial sector is a myriad of companies, none of whom are considered to be directly comparable to the company and many of whom continue to experience above average historic levels of volatility. However, the committee will continue to keep this measure under review.
In terms of the degree of stretch in the target ranges, the committee believes that the current EPS range remains demanding, particularly in light of general economic conditions.
In relation to the absolute TSR targets for 2009 and 2010, three year annualised median TSR performance delivered from FTSE 250 companies since 1 January 1997 has been 9.8%. Given the current economic uncertainty, setting a target range of 10% to 15% is considered by the committee to be a challenging target.
The graph above shows the total shareholder return for Provident Financial plc against the companies comprising the FTSE 250 Index for the last five years. This index was chosen for comparison because the company has been a member of this index for the five-year period.
Offshore employee benefit trust
The rules of the LTIS, approved by shareholders previously, allows the LTIS to be operated in conjunction with any employee trust established by the company. Accordingly, the company established the Provident Financial plc 2007 Employee Benefit Trust (‘EBT’) in Jersey on 11 September 2007 with Kleinwort Benson (Jersey) Trustees Limited acting as the first trustee of the trust. Paragraph 9.7 gives details of share subscriptions made by the trust for the purposes of satisfying awards made under the LTIS during the course of the year.
The ESOS contains both an HMRC approved and unapproved section. All options are subject to a performance target. For options granted in 2006 the target required the company’s annual growth in earnings per share to be equal to or greater than RPI plus 3% measured over a period of three consecutive financial years, the first of which was the financial year starting immediately before the grant date. At that level 25% of the shares under option became exercisable with the option becoming fully exercisable if the company’s annual growth in earnings per share was equal to or greater than RPI plus 6% measured over the three-year period. A sliding scale for vesting applied between these levels. Although basic earnings per share is generally used for the performance calculation, for 2006 awards earnings per share before Yes Car Credit closure costs was used as the starting point to avoid participants benefiting from a low start point due to the impact of the closure of the Yes Car Credit business. Earnings per share was considered to be an appropriate measure of the company’s financial performance, aligned the interests of the participants with shareholders and complemented the use of TSR in the LTIS. Maximum awards were normally limited to 100% of salary. No executive options have been granted at a discount and no options were granted in 2009.
Participation in the PSP includes executive directors who may elect to defer up to 50% (with a minimum of 25%) of their annual cash bonus, and other eligible employees who waive up to 50% or 30%, depending on their level of seniority, of their annual cash bonus for a period of three years. In return, participants receive a basic award of shares equal to the value of their waived bonus, together with an equivalent matching award (on the basis of one share for each share acquired by a participant pursuant to their basic award) which is subject to a performance condition. Historically, matching awards vested if the company’s average annual percentage growth in earnings per share was equal to or greater than the average annual increase in RPI plus 3% measured over a period of three consecutive financial years, the first of which was the financial year starting immediately before the grant date of the matching award. The performance conditions were selected by the committee after consideration of other possible types of condition. The committee took the view that the use of this earnings per share target aligned, so far as is practicable, the interests of the directors and senior management with those of the shareholders. Following shareholder approval at the AGM on 6 May 2009, the committee amended the rules of the PSP to allow the grant of matching awards on the basis of up to two shares for each share acquired by a participant pursuant to their basic award. As a result, the 2009 awards to executive directors on the basis of up to two shares for each share acquired pursuant to that basic award were subject to more stretching performance targets and will only vest in full if the company’s average annual percentage growth in earnings per share is equal to or greater than the average annual percentage growth in RPI plus 7% measured over a period of three consecutive financial years. If the company’s average annual percentage growth in earnings per share is equal to RPI plus 3% measured over a period of three consecutive financial years, then a matching award granted on a two-for-one basis (as described above) will only vest as to 50% of the shares subject to the award (which will be the equivalent of receiving a matching award on a one-for-one basis (as described above). A sliding scale of vesting (on a straight-line basis) will apply between these lower and upper targets.
In 2010, EPS will be retained as the sole measure but the range of targets will be stretched to provide consistency with the EPS targets under the LTIS. Coupled with the greater stretch required to achieve the full annual cash bonus as described in paragraph 6.10, the PSP is now subject to more challenging performance conditions.
The actual range of targets is as follows:
|Average annual percentage growth in EPS||Matching shares vesting|
|Below RPI + 3%||No vesting|
|RPI + 3%||One matching share|
|RPI + 8%||Two matching shares|
Separate to the annual cash bonus referred to in paragraph 6.6, Peter Crook, Andrew Fisher and Chris Gillespie received an additional bonus in respect of the company’s performance during 2008 with a value of £200,000, £150,000 and £140,000 respectively. These bonuses are deferred until March 2012 and have taken the form of an award of ordinary shares in the company which have been acquired by the trustee of the EBT, who will hold the legal title to the shares until they vest. These shares will only vest in the event that the director is still employed by the group in March 2012 (although the committee will have the discretion to allow a departing director to retain some or all of these shares). The dividends payable on the shares subject to this deferred bonus award have been waived, but an amount equal to the dividends that would have been paid on these shares had the right to receive them not been waived will also be payable in cash or in the form of additional ordinary shares in March 2012. The committee believed that a deferred bonus satisfied with shares in the company in the manner set out aligned the interests of the management with those of shareholders, recognised the company’s exceptional performance in 2008 and reflected the need for such performance to be sustained in the medium-term. During the meetings with major institutional shareholders following the AGM in 2009, the inappropriateness of the deferred bonus award to the executive directors was raised. In light of these comments, the committee has agreed that this type of payment will not be made at any time in the future without prior consultation with, and agreement of, our major shareholders.
Achievement of performance targets
Assessment of the achievement of the performance targets under the company’s share incentive schemes is calculated by the company, confirmed by PricewaterhouseCoopers (as required) and approved by the remuneration committee.
Savings-Related Share Option Scheme
The executive directors (together with other eligible group employees) may participate in the Provident Financial plc Employee Savings- Related Share Option Scheme (2003). Participants save a fixed sum each month for three or five years and may use these funds to purchase shares after three, five or seven years. The exercise price is fixed at up to 20% below the market value of the shares at the date directors and employees are invited to participate in the scheme. Up to £250 can be saved each month. This scheme does not contain performance conditions as it is an HMRC approved scheme designed for employees at all levels.
The executive directors are provided with company-owned cars and fuel (or a cash alternative), long-term disability cover under the company’s permanent health insurance policy and medical cover for them and their immediate families. Benefits in kind are not pensionable.
Share ownership policy
The company has a share ownership policy for executive directors which requires them to retain half of vested shares, net of tax and exercise costs, until a beneficial shareholding equivalent to one times annual salary has been met. The committee reviews the shareholdings of the executive directors in the light of this policy once a year. All three executive directors comply with this policy.
The current policy is for executive directors’ service agreements to provide for both the company and the director to give one year’s notice. No director has a service agreement containing a liquidated damages clause on termination. In the event of the termination of an agreement, it is the current policy to seek mitigation of loss by the director concerned and to aim to ensure that any payment made is the minimum which is commensurate with the company’s legal obligations.
The company will normally permit an executive director to hold one non-executive directorship and to retain the fee from that appointment. However, any proposed appointment will require the approval of the board. In accordance with the Combined Code, the board would not permit an executive director to take on the chairmanship of a FTSE 100 company.
Senior management remuneration
The committee considers the structure and level of pay for the most senior level of management within the group and at its meeting in January 2010 reviewed the company wide remuneration and incentive policy.
Full details of salaries, bonus earnings and other benefits for 2009 (with 2008 comparative figures) for the executive directors and full details of the fees and benefits paid to non-executive directors are set out in the table of directors’ remuneration in paragraph 7.1. Full details of share options are set out in the tables in paragraphs 8.1 and 9.1. Full details of conditional share awards under the LTIS are set out in the table in paragraph 9.2. Full details of awards under the PSP are set out in the table in paragraph 10.1.