Committee membership
During 2013 the Committee was chaired by Eva Lindqvist. The Committee also comprised J.A. Biles, A.M. Thomson and Dr K. Rajagopal.
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
During 2013 the Committee met five times to consider amongst other matters:
| Theme | Agenda items |
|---|
| Best practice | - The Company's Remuneration Policy in light of the new Regulations, discussions and feedback from the Company's AGM in 2013 and the revised Corporate Governance Code and ABI guidelines on Executive Remuneration
- Review of the current UK corporate governance environment and the implications for the Company
|
| Pay Policy | - Consideration and approval of the Pay Policy to be put to shareholders and as summarised in Section A of the Remuneration Report for 2013
|
| Implementation Report | - Consideration and approval of the Implementation Report to be put to shareholders and as summarised in Section B of the Remuneration Report for 2013
|
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 2013
- The annual bonus structure and performance targets for the financial year ended 31 December 2014
- The conditional awards and vestings made under the Bodycote Incentive Plan ('BIP') and Co-investment Plan ('CIP') during the year
- Pension arrangements for senior executives
|
| Reporting | - Consideration and approval of the Remuneration Report for 2013
|
Advisers to the Committee
During the year the Committee undertook a review of the Remuneration Committee adviser and appointed Towers Watson to provide independent advice relating to remuneration matters. During the year, Towers Watson provided advice on matters under consideration by the Committee and updates on good practice, legislative requirements and market practice. Towers Watson's fees for this work amounted to £26,575. Up until 1 June 2013, Ernst & Young provided advice to the Remuneration Committee. Ernst & Young's fees for these services amounted to £14,376. Legal advice was provided by Eversheds and fees amounted to £915. The Remuneration Committee is satisfied that the advice provided on executive remuneration is objective and independent and that no conflict of interest arises as a result of these other services.
The Committee also received assistance from the Chief Executive and Company Secretary, although they do not participate in discussions relating to the setting of their own remuneration. The Committee in particular consulted with the Chief Executive and received recommendations from him in respect of his direct reports.
Statement of shareholder voting
The table below displays the voting results on the remuneration resolutions at the 2013 AGM:
| 2012 remuneration report (% votes) |
|---|
| Votes cast | 76% |
| For | 94% |
| Against | 3% |
| Number of abstentions | 4,678,767 |
Remuneration for 2013
This section of the report explains how Bodycote's Remuneration Policy has been implemented during the financial year.
Base salary
The base salaries of the Executive Directors are reviewed on an annual basis. As described in Section A, a number of factors are taken into account when salaries are reviewed, principally market level salaries payable in FTSE 250 companies and other companies of similar size and complexity and the individual's role, experience and performance. The 2013 base salary increases and comparative figures can be found in the Remuneration Committee Chairman's letter.
Base salaries are reviewed in January every year.
| Name | Position | Salary from 1 January 2013 | Salary from 1 January 2014 |
|---|
| S.C. Harris | CEO | £470,200 | £484,306 |
| D.F. Landless | FD | £300,300 | £309,312 |
Pension
Stephen Harris is entitled to a salary supplement in lieu of pension at a rate of 22% of basic salary, of which £103,444 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, David Landless ceased to participate in the Group's UK contributory defined benefit and defined contribution pension schemes due to his prospectively reaching the lifetime limits. 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 £61,840 was waived during the year.
Taxable benefits
The Company provides other cash benefits and benefits in kind to Directors as well as sick pay and life insurance. These include the provision of company car (or allowance) and family level private medical insurance.
| Name | Car/car allowance | Fuel | Healthcare | Salary supplement |
|---|
| S.C. Harris | £13,600 | £2,400 | £1,364 | £103,444 |
| D.F. Landless | £18,759 | £1,200 | £1,706 | £61,840 |
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, vary year-on-year and are made in lieu of other elements of pay and therefore are cost neutral to the Company and any risk in relation to the value of investments made in the plan is borne entirely by participants.
Annual performance-related bonus
The annual bonus potential for the period to 31 December 2013 for Executive Directors was split 70% in respect of Group operating profit, 10% Group operating cash flow and 20% on personal strategic objectives. The choice of these performance conditions, and their respective weightings reflected the Committee's belief that any incentive compensation should be tied both to the overall performance of the Group and to those areas of the business that the relevant individual can directly influence.
The performance of the Company during the year included headline operating profit of £107.4m (a 10.2% increase on the previous year) and operating cash flow of £104.6m (a 1.6% increase on last year).
In light of the above performance, the Committee concluded that 50.6% of maximum bonus is payable to the Chief Executive and 48.8% of maximum bonus is payable to the Finance Director. As described in Section A, 100% of annual bonus is payable in cash.
The Board has considered whether to include targets which applied to the bonus arrangements for Executive Directors in 2013 and which will apply for 2014 but determined that these figures are commercially sensitive. It is the Committee's intention to include the 2013 targets in next year's Remuneration Report. Personal objectives for the Chief Executive broadly cover driving growth, improving customer service, safety and implementation of major projects.
Bodycote Incentive Plan (BIP)
Awards with performance periods ending in the year
BIP awards made in 2011 had a three-year performance period ending on 31 December 2013 with 50% of the award subject to satisfaction of a ROCE target and 50% subject to an EPS target. The threshold and maximum targets along with the vesting schedule are set out in the tables below:
| ROCE | | EPS |
|---|
| Performance target | Vesting of element
(% of maximum) | | Performance target | Vesting of element
(% of maximum) |
|---|
| Threshold performance | 14.6% | 0% | | 28.3p | 0% |
| Maximum performance | 20.0% | 100% | | 39.8p | 100% |
| Performance achieved | 19.9% | 96.9% | | 41.2p | 100% |
In addition, if EPS at the end of the performance period was below 16p then no awards would vest.
Over the period, ROCE was 19.9% and the EPS figure for the year of 41.2p represented growth of 9.9%. This performance resulted in the ROCE and EPS targets being achieved at a level of 96.9% and 100% respectively. This resulted in an overall vesting level of 98.5%. The number and value of shares which vested to each of the Executive Directors is set out in the Board report on remuneration.
Awards made in the year
BIP awards of face value of 175% of salary were made to both Executive Directors in February 2013 and will vest in March 2016, subject to the achievement of ROCE and EPS growth performance targets. The performance period will end on 31 December 2015. The vesting of these awards will be based on ROCE and EPS targets summarised in the table below. The Committee has reviewed the performance targets and these have altered accordingly to ensure that they remain stretching and underpin the Company objectives.
| ROCE | | EPS |
|---|
| Performance target | Vesting of element
(% of maximum) | | Performance target | Vesting of element
(% of maximum) |
|---|
| Threshold performance | 18.7% | 0% | | 42.0p | 0% |
| Maximum performance | 23.0% | 100% | | 61.3p | 100% |
In addition, if EPS at the end of the performance period were to be below 42p then no awards would vest.
The Committee has decided that the ROCE figure of 23% is a good aspiration for the Group and is 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. As of 2013 dividend equivalents are payable in respect of the shares which vest.
The number and value of shares which were awarded to the Executive Directors during the year is set out in the Auditable section of this report.
Co-investment Plan (CIP)
Awards with performance periods ending in the year
As described in Section A of this report, CIP awards are subject to an absolute TSR target. The CIP awards made in 2010 had a three-year performance period ending on 30 April 2013. The absolute TSR performance targets applicable to this award are set out below:
| Absolute TSR performance | Vesting level |
|---|
| 4% CAGR + CPI | 50% (0.5:1 match) |
| 10% CAGR + CPI | 100% (1:1 match) |
Over the three-year period, the Company achieved absolute TSR growth of 37%. This performance resulted in the TSR targets being achieved at a level of 100%. The number and value of shares which vested to each of the Executive Directors is set in the Auditable section of this report.
Awards made in the year
CIP awards were made to both Executive Directors in May 2013 and will vest in May 2016, subject to the achievement of absolute TSR targets summarised in the table below. The Committee has reviewed the performance targets and felt that they remain appropriately stretching. Therefore, no change has been made to the absolute TSR performance targets used in the previous year. As of 2013 dividend equivalents are payable in respect of the shares which vest.
| Performance target | Threshold | | Maximum |
|---|
| Target | Vest | | Target | Vest |
|---|
| Absolute TSR | CAGR TSR CPI + 4% | 50% (0.5:1 match) | | CAGR TSR CPI + 10% | 100% (1:1 match) |
The number and value of shares which were awarded to the Executive Directors during the year is set out in the Auditable section of this report.
Implementation of policy in 2014
Base salary is reviewed on an annual basis. The 2014 base salary increases for the Directors from 1 January 2014 were 3% for the Chief Executive and 3% for the Finance Director. As 2014 base salary increases for the Group take place after the publication of this report, the comparative figure for 2014 can only be provided in next year's report.
As described in the Committee Chairman's introduction, following a contractual review of pension provision during 2013, the Committee decided that the level of salary supplement in lieu of pension for Stephen Harris should be adjusted to 25% of salary. For David Landless, the level will be adjusted to 25% up to the defined benefit pension scheme cap. Above that amount up to his actual base salary, the salary supplement in lieu of pension remains at 16%. Both of these changes will come into effect as of April 2014. The Committee does not intend to change the benefit arrangements for the Executive Directors in 2014. For 2014 the Committee has determined that the annual 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. The Committee has reviewed targets for the year to ensure they remain appropriately stretching and relevant for the Company's business strategy.
The Committee will review the performance measures for awards under the CIP and the BIP in 2014 to ensure they remain appropriately stretching in light of the Company's expectations of performance and those of external analysts.