The Remuneration Committee
This report sets out the policy and disclosures on Directors' remuneration as required by the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 issued under the Companies Act 2006 (the 'Act'). In accordance with the Act, a resolution to approve this report will be proposed at the forthcoming Annual General Meeting of the Company.
The Remuneration Committee (the 'Committee') determines the remuneration of Executive Directors and senior executives, and the terms of the service contracts and all other terms and conditions of employment of the Executive Directors.
Committee membership
The members of the Remuneration Committee during 2012 were:
J. Vogelsang (Chairman, until 14 December 2012)
J.A. Biles
A.M. Thomson
Dr K. Rajagopal
E. Lindqvist (from date of appointment of 1 June 2012 and Chairman as of 14 December 2012)
The Committee's full terms of reference are available on the Group's website. None of the Committee members has any personal financial interest (other than as a shareholder), conflict of interest, cross-directorships or day-to-day involvement in the running of the business.
Committee activities
The Committee met seven times during 2012, and again in February 2013, to consider amongst other matters:
| Theme | Agenda items |
|---|
| Best practice | - The Company's remuneration policy in light of discussions during the Bodycote AGM and newly published best practice guidelines
- Review of the current UK corporate governance environment and the implications for the Company, including the Government's reforms and draft regulations to replace Schedule 8 of the Act
- Implementation of a clawback policy in respect of Executive Directors' performance based remuneration
|
Executive Directors'
and senior executives'
remuneration | - Basic salaries payable to each of the Executive Directors
- The annual bonus and payments for the financial year ended 31 December 2012
- The annual bonus structure and performance targets for the financial year ended 31 December 2013
- The vesting of Bodycote Incentive Plan (BIP) awards and those made under the Bodycote Share Match Plan (now operating as the Co Investment Plan (CIP)) made in 2009 which had a performance period ending during the year
- The vesting of the joining award made to Mr Harris under the Bodycote Share Match Plan (as mentioned, now operating as the CIP)
- The conditional awards made under the BIP and CIP during the year
- Pension arrangements for senior executives
|
| Reporting | - Consideration and approval of the remuneration report for 2012
|
Remuneration policy and structure
The Committee is responsible for remuneration policies that are consistent with the Group's overall business strategy and thereby attract and retain high calibre executives at the same time as delivering value for shareholders. Remuneration includes both fixed and variable elements of pay, variable pay being clearly linked to superior performance. The charts below demonstrate the balance between fixed and variable performance based pay for each Executive Director based on the maximum entitlements.
When the package is reviewed this is done in the context of individual and Company performance, internal relativities, criticality of the individual to the business, experience and the scarcity or otherwise of talent with the relevant skill set. Currently reward for the Executive Directors is structured as shown opposite:
| Element of pay | Component | Purpose/details |
|---|
| Fixed | | - To ensure competitiveness, attracting and retaining talent
- To reflect individual skills and experience
|
| | - In line with market practice
- Provision of Company car (or allowance in lieu of), private medical insurance and long-term disability insurance
|
| | - In line with market practice
- To ensure competitiveness, attracting and retaining talent
|
| Variable | | - To incentivise delivery of corporate objectives and strategy
- To provide opportunity for enhanced reward in return for challenging performance targets
|
| | - To incentivise delivery of long-term shareholder value and provide opportunity for enhanced reward for superior performance
|
| - Bodycote Co-Investment Plan
| - To align Executive Directors with shareholders, demonstrate individual commitment and satisfy minimum shareholding requirements
|
Each of the above components is discussed in greater detail in the following sections of this report. The sections dealing with Directors' emoluments paid, pensions and incentives have been audited.
Fixed elements of pay
Base salary
The Committee reviews base salaries for each Executive Director and senior executives annually taking into account the responsibilities and performance of the individual, current market practice, pay in similar engineering businesses and companies of a comparable size and scale of operations. The Committee was also mindful of pay levels amongst the employee population.
The Executive Directors received inflationary salary increases for 2012 and 2013. The salaries of the Executive Directors are as follows:
| Name | Position | Salary from 1 January 2012 | Salary from 1 January 2013 |
|---|
| S.C. Harris | Group Chief Executive | £457,800 | £470,200 |
| D.F. Landless | Group Finance Director | £292,400 | £300,300 |
Pension
The Committee reviews the pension arrangements for the Executive Directors to ensure that the benefits provided are consistent with those provided by other similar companies.
Mr Harris is entitled to a salary supplement in lieu of pension at a rate of 22% of basic salary, of which £82,000 was waived during the year. In addition, in the event of death, a death in service benefit of eight times basic salary will become payable.
From April 2012 Mr Landless ceased to participate in the Group's UK contributory defined benefit pension scheme due to him prospectively reaching the lifetime limit. Instead Mr Landless receives a salary supplement of 22% of basic salary up to the defined benefit scheme cap and 16% of base salary above the cap, of which £35,000 was waived during the year.
The defined benefit scheme is closed to new members and provides increases in pensionable salary capped at 3% per annum. The scheme also provides lump sum death-in-service benefits and pension benefits based on final pensionable salary. For Mr Landless death in service under the defined benefit scheme changed when he ceased to be a contributory member of the defined benefit scheme from four times basic salary with spousal pension to eight time's basic salary without spousal pension.
An analysis of the accrued pension entitlements for Mr Landless under the defined benefit pension scheme during 2012 is given in the Directors' Pensions - audited table.
Variable elements of pay
Clawback policy
During the year the Committee introduced a formal clawback policy for Executive Directors in respect of annual bonuses and long-term incentive awards. This clawback policy is to come into effect from 1 January 2013 and has been introduced to provide the Committee with discretionary powers to clawback performance based remuneration should exceptional circumstances occur. Such circumstances would include:
- Fraud;
- Misconduct;
- Significant misstatement of financial results; or
- Miscalculation of performance conditions.
Should the Committee, in its opinion, consider such circumstances to have occurred during a performance period from 2013 onwards then the clawback policy will provide the Committee discretion to determine that any amounts paid or awards vested by reference to the relevant period shall be clawed back. Clawback will start to apply to awards made from 2013 and the Committee expects that the mechanism to clawback any such amounts will be to reduce future annual bonus payments, reduce the value of subsisting awards that have, at the relevant time, not yet vested or by reducing the level of award to be made at the following grant date.
Annual bonuses
The annual bonus provides the Executive Directors and other senior executives with the opportunity to receive an annual bonus wholly payable in cash based on achievement of certain performance targets. Recognising that despite an increase, the Group Chief Executive remained behind many of his peers in terms of base salary in 2011, the maximum annual bonus opportunity for the Group Chief Executive was increased to 130% of base salary to ensure comparability in terms of total reward on achievement of superior performance. The structure of the annual bonus scheme in 2012 for Executive Directors was as follows:
| Maximum | Profit | | Cash flow | | Personal objectives | Actual |
|---|
| % salary | % weight | % achieved | | % weight | % achieved | | % weight | % achieved | % salary |
|---|
| S.C. Harris | 130 | 70 | 48 | | 10 | 10 | | 20 | 15 | 95 |
| D.F. Landless | 100 | 70 | 48 | | 10 | 10 | | 20 | 15 | 73 |
The Committee also has discretion to reduce the awards by up to 10% if the safety performance is less than targeted.
For 2013 the Committee has determined that the bonus opportunity for Executive Directors and senior executives will again be contingent on meeting targets relating to safety, operating profit, cash management and personal objectives. No bonus will be paid for the cash management element unless the level of operating profit achieved is at least 95% of target. The target is based on budget exchange rates and acquisitions are excluded. In addition, future annual bonus payments will be subject to the Committee's clawback policy as outlined previously.
Bodycote Incentive Plan (BIP)
The Company operates the BIP under which Executive Directors and senior executives received a conditional award of Bodycote shares up to a maximum of 175% of base salary. Vestings of awards are based upon two performance measures, over a three year period.
50% of the award is subject to a return on capital employed (ROCE) performance condition and 50% of the award is subject to an earnings per share (EPS) performance condition. The Committee, in determining the performance targets attached to awards, takes into account the current and forecasted performance for the business and its sector along with broker consensus to ensure stretch targets are set.
| ROCE | | EPS |
|---|
| Award year | Threshold performance | Maximum performance | | Threshold performance | Maximum performance |
|---|
| 2010 | 11.1% | 16% | | 19.8p | 31.0p |
| 2011 | 14.6% | 20% | | 28.3p | 39.8p |
| 2012 | 18.7% | 23% | | 36.2p | 62.15p |
| 2013 | 18.7% | 23% | | 42.01p | 61.31p |
- The 2012 EPS targets restated at exchange rates on 31 December 2012 correspond to 33.8p at threshold and 58.08p at maximum performance with the result that 2013 targets in real terms are ahead of those for 2012.
In the event that threshold performance for both EPS and ROCE is not achieved none of the conditional awards will vest. Regardless of ROCE performance, should EPS at the end of the performance period be below 16p for any BIP awards made between 2010 and 2011, below 31.1p for awards made in 2012 and below 42p for awards made in 2013, then no award shall vest. Awards commence vesting progressively from zero on achievement of threshold performance with maximum performance resulting in awards vesting in full. In addition, the 2013 and future BIP awards will be subject to the Committee's clawback policy as outlined previously.
The Committee has decided that the ROCE figure of 23% is a good aspiration for the Group and are cognisant of the fact that overdriving incentives on capital employed can lead to unintended consequences in terms of short term capital starvation for the business.
The Committee intends to use the ROCE and EPS measures in combination for BIP Awards made in 2013. Details of the awards made under the BIP are provided in the Directors' interest under the Bodycote Incentive Plan - audited table. Following completion of the performance period the Remuneration Committee has determined that 175% of the BIP awards made in 2010 shall vest (2009: 175%) as the level of ROCE and EPS performance was 87.5% and 87.5% respectively. In reaching this conclusion, the Remuneration Committee took into account certain review procedures carried out by the external auditor.
Bodycote Co-investment Plan (CIP)
The CIP provides a link between the Company's short and long-term incentive arrangements and permits executives to invest in shares up to a value equivalent to 40% of net basic salary. The CIP provides for the grant of awards of matching shares to participants on an annual basis in a maximum ratio of 1:1 to the gross investment made in deferred shares. Deferred shares must be held for three years and matching shares are subject to an absolute Total Shareholder Return (TSR) target. The threshold target for CIP matching awards is TSR growth of not less than 4% per annum compound in excess of growth in the Consumer Prices Index (CPI) for a threshold matching ratio of 1:2. 10% per annum compound growth in excess of growth in the CPI will be required for a vesting matching ratio of 1:1. In addition, the 2013 and future CIP awards will be subject to the Committee's clawback policy as outlined previously.
As the performance period for the 2010 CIP award commenced on 1 May 2010 and ends on 30 April 2013, the outcome will be reported in next year's report.
Advisors
During the year the Committee has taken independent advice from Ernst & Young LLP on remuneration together with legal advice from Eversheds. Fees relating to the Ernst & Young LLP services were £70,000, which included amongst other things, benchmarking of executive salaries, advice relating to the vesting of awards made under the Bodycote Incentive Plan both in the UK and overseas and advice regarding the proposed changes to the reporting of remuneration by the Department for Business Innovation & Skills. Ernst & Young LLP also advises the Company on tax matters and provides the internal audit service. Other fees included £2,000 paid to Eversheds in respect of Remuneration Committee advice.
Total Shareholder Return
The Total Shareholder Return graph illustrates the Company's TSR performance since 2007 relative to the FTSE All Share Industrial Index of which the Company is a component part. This sector is considered the most appropriate comparator group over the five-year period to 31 December 2012. In line with market practice the calculation for TSR assumes reinvestment of dividends and is based on data provided by Datastream.
Service contracts
It is the Company's policy that Executive Directors have service contracts with a one-year notice period. All the Executive Directors have service agreements which are terminable by one year's notice by the employer at any time, and by payment of one year's remuneration in lieu of notice by the employer. One year's remuneration does not include any BIP or CIP payments (which would be subject to the normal leaver provisions) or, by default, payment of any projected bonuses, instead any bonus payment due will be calculated by reference to the average of the previous three years. With the exception of David Landless, the Executive Directors do not have a change of control clause. David Landless' service contract was agreed in accordance with what was considered best practice at the time of its execution in 2001 and provides for one year's remuneration on a change of control if his employment is terminated. To the extent that executive contracts are renewed, or new appointments made, the Committee will continue to adopt a policy of best practice when entering into service contracts. In any case legally appropriate factors would be taken into account to mitigate any compensation payment, covering basic salary, annual incentives and benefits, which may arise on the termination of employment of any Executive Director, other than payments made on a change in control or for payments in lieu of notice. Mr Harris' service agreement is dated 6 October 2008 and Mr Landless' contract is dated 26 September 2001.
Long-term savings vehicle
During the financial year the Company made discretionary contributions into the Bodycote Investment Incentive Plan. The plan is entirely cash based to provide an alternative long-term savings vehicle for senior executives. The Committee considers the plan an essential tool to aid retention while recognising the need for executives to have flexibility in long-term financial planning. Company contributions are discretionary and vary year on year and are made in lieu of other elements of pay and therefore the Company remains cost neutral and any risk in relation to the value of investments made in the plan is borne entirely by participants. Contributions for the Executive Directors are shown in the Directors' Pensions - audited table.
Shareholding policy
In 2005, the Committee introduced a shareholding retention policy under which Executive Directors and other senior executives are expected, within five years of that date or commencement of employment if later, to build up a shareholding in the Company. In respect of Executive Directors the expectation is to hold at least 100% of basic salary. As at 31 December 2012, the Committee is satisfied that Executive Directors have fulfilled this requirement.
Fees retained for external Non-Executive Directorships
Executive Directors may hold positions in other companies as Non-Executive Directors. Stephen Harris was the only Executive Director with such a position held at Mondi plc from 1 March 2011 and in accordance with Group policy he retained fees for the year of £77,765.
Non-Executive Directors
The remuneration of Non-Executive Directors is determined by the Chairman and the Executive Directors. Remuneration for the Chairman is determined by the whole Board (excluding the Chairman). Remuneration for the Chairman and Non-Executive Directors takes into account the time commitments and duties and responsibilities involved. The Chairman and each Non-Executive Director hold letters of appointment which have been agreed in accordance with best practice which set out the terms of their appointment, including membership of Board committees, the fees to be paid and the time commitment expected from the Director. The letter also covers such matters as the confidentiality of information and Bodycote's share dealing code. During 2011 the letters of appointment for the Chairman and each Non-Executive Director were renewed, each for a period of no longer than three years. Each is terminable under the Company's Articles of Association, the Act, by the Director's resignation or otherwise on six months' notice if termination occurs before expiry of the term. To determine the fees it pays to Non-Executive Directors, the Board takes into account the need to attract individuals of appropriate calibre and expertise, the fees paid to Non-Executive Directors by other companies of a similar size and scale of operations and the time commitment attached to each appointment. The Board keeps fees under review. The Chairman and Non-Executive Directors are not entitled to any pension or other employment benefits or to participate in any incentive scheme.
Approved by the Board:
E. Lindqvist
Chairman of the Remuneration Committee
27 February 2013
Emoluments during the year – audited
| Basic salary
and fees
£000 | Benefits
£000 | Annual
bonus
£000 | Total
2012
£000 | Total
2011
£000 |
|---|
| Executive Directors | | | | | |
| S.C. Harris | 458 | 29 | 435 | 922 | 1,000 |
| D.F. Landless | 292 | 29 | 214 | 535 | 566 |
| 750 | 58 | 649 | 1,457 | 1,566 |
| | | | | |
| Non-Executive Directors | | | | | |
| A.M. Thomson | 150 | – | – | 150 | 140 |
| J. Vogelsang | 57 | – | – | 57 | 51 |
| J.A. Biles | 58 | – | – | 58 | 51 |
| K. Rajagopal | 46 | – | – | 46 | 43 |
| E. Lindqvist * | 27 | – | – | 27 | n/a |
| 1,088 | 58 | 649 | 1,795 | 1,851 |
* Appointed on 1 June 2012
Directors' interests – audited
The beneficial interest of the Directors and their families in the ordinary shares of the Company are detailed below.
| Ordinary shareholdings | 31 December
2012
Number of Ordinary Shares | 31 December
2011
Number of Ordinary Shares |
|---|
| Executive Directors | | |
| S.C. Harris | 542,983 | 160,730 |
| D.F. Landless | 377,986 | 136,284 |
| Non-Executive Directors | | |
| A.M. Thomson | 42,719 | 41,841 |
| J. Vogelsang | – | – |
| J.A. Biles | 23,798 | 23,157 |
| K. Rajagopal | 22,368 | 22,368 |
| E. Lindqvist | – | n/a |
None of the Directors has a beneficial interest in the shares of any other Group Company, or non-beneficial interest in the Company or any other Group Company.
Directors' interests under the Bodycote Incentive Plan – audited
| Interests as at
1 January 2012 | Awarded
in year | Lapsed
in year | Vested
in year | Interests as at
31 December 2012 | Market price at
award date | Vesting date |
|---|
| S.C. Harris | 514,138 | – | – | 514,138 | – | £1.56 | February 2012 |
| 391,345 | – | – | – | 391,345 | £1.79 | February 2013 |
| 234,767 | | – | – | 234,767 | £2.98 | February 2014 |
| – | 193,653 | – | – | 193,653 | £3.94 | February 2015 |
| D.F. Landless | 344,215 | – | – | 344,215 | – | £1.56 | February 2012 |
| 262,004 | – | – | – | 262,004 | £1.79 | February 2013 |
| 157,176 | – | – | – | 157,176 | £2.98 | February 2014 |
| – | 123,698 | – | – | 123,698 | £3.94 | February 2015 |
Directors' interests under the Bodycote Co-Investment Plan (formerly Bodycote Share Match Plan) – audited
| Interests as at
1 January 2012 | Awarded
in year* | Vested
in year | As at
31 December
2012 | Market price at
award date | Vesting date |
|---|
| S.C. Harris | 142,747 | – | 142,747 | – | £1.40 | March 2012 |
| 23,437 | – | 23,437 | – | £1.87 | March 2012 |
| 82,942 | – | – | 82,942 | £1.93 | May 2013 |
| 10,608 | – | – | 10,608 | £3.75 | May 2014 |
| – | – | – | – | – | May 2015 |
| | | | | | |
| D.F. Landless | 4,480 | – | 4,480 | – | £1.87 | March 2012 |
| 8,010 | – | – | 8,010 | £1.89 | May 2013 |
| 2,783 | – | – | 2,783 | £3.75 | May 2014 |
| – | 8,187 | – | 8,187 | £3.79 | May 2015 |
* Shares acquired via investment of the net of tax annual bonus under the Co-investment Plan are eligible for a matching award by reference to the gross amount invested.
Directors' Pensions – audited
| Director | Accrued annual pension at
01/01/12
£000 | Transfer value at
01/01/12
£000 | Real increase in accrued annual pension
£000 | Inflation
£000 | Increase in accrued annual pension
£000 | Transfer value of real increase in accrued annual pension (less members' contributions)
£000 | Real increase in transfer value (less members' contributions)
£000 | Members' contributions
£000 | Accrued annual pension*
at
31/12/12
£000 | Transfer value at
31/12/12
£000 |
|---|
| D.F. Landless | 45 | 933 | – | 1 | 1 | (6) | 39 | 4 | 46 | 997 |
* Calculated as at 31 December 2012 but only covers up to 5 April 2012 when D.F. Landless left the pension scheme.
Total Shareholder Return
This graph looks at the value, by 31 December 2012, of £100 invested in Bodycote plc on 31 December 2007 compared with that of £100 invested in the FTSE All Share Industries. The points plotted are the values at financial year ends.