Remuneration policy
In this section:
- Remuneration policy
- Remuneration policy for non-executive directors
- Remuneration policy for executive directors
4 Remuneration policy
To deliver its objective of creating real increases in shareholder value relative to its peers, the Company needs to attract and retain the most talented and committed people in the industry, and create the right employment conditions and reward opportunities for them.
The Company’s remuneration policy is designed to support the recruitment, motivation and retention of such high calibre employees. Remuneration is considered within the context of the sector of which the Company is a part, and the wider FTSE 350 community where the Company competes for talent. The sector includes companies operating as fast moving consumer goods (FMCG) companies.
The committee regularly monitors and reviews the Company’s remuneration policy to ensure that the policy adopted continues to ensure that the remuneration of executive directors and senior managers is directly linked to, and supports the delivery of strategic objectives closely aligned to the interests of shareholders. This is achieved by the delivery of differentiated rewards dependent on performance. The measurement of an individual’s personal performance and delivery is determined by a set of rigorous individual performance measures aligned to the delivery of these strategic objectives, clearly linking pay to performance.
A significant proportion of an executive’s remuneration package is dependent on the attainment of demanding performance objectives, both short and long term. The annual bonus scheme is designed to incentivise and reward the achievement of demanding financial and business related objectives. Long term share based incentives are designed to align the interests of executive directors and other senior managers with the longer term interests of shareholders by rewarding them for delivering sustained increased shareholder value.
In agreeing the level of base salaries and the performance related elements of the remuneration package, the committee considers the potential maximum remuneration that executives could receive. The committee reviews the packages and varies individual elements when appropriate from year to year. The policy continues to reward senior managers at the relevant mid-market level for on target performance, whilst delivering highly competitive rewards for outstanding performance.
5 Remuneration policy for non-executive directors
Non-executive directors are appointed for an initial term of three years with the expectation that, subject to satisfactory performance, they will be invited to serve a second and third three year term.
The dates of the chairman’s and current non-executive directors’ letters of engagement, the dates on which their appointment took effect and the current expiry dates are as follows:
|
Date of commencement |
Effective date of current term |
Expiry date of current term |
|---|---|---|---|
R J S Bell |
1 Sep 05 |
1 Sept 08 |
31 Aug 11 |
A J Hobson |
28 May 02 |
28 May 08 |
27 May 11 |
A K Illsley |
2 Oct 06 |
2 Oct 06 |
1 Oct 09 |
O G Ni-Chionna |
28 May 02 |
28 May 08 |
27 May 11 |
D T Nish |
1 Jul 05 |
1 Jul 08 |
30 Jun 11 |
A K Illsley, whose letter of engagement expires on 1 October 2009, will be offered a further three year term of engagement, subject to confirmation by the Board that his performance continues to be effective.
The appointments of the chairman and the non-executive directors may be terminated by the Company on six months’ notice and by the relevant non-executive directors on three months’ notice. No compensation is payable by the Company on termination of an appointment with due notice.
Northern Foods’ policy regarding non-executive directors’ fees takes into account the need to attract individuals of the right calibre and experience and reflects the responsibilities and time commitments of the role. Fees for the non-executive directors are reviewed annually on the recommendation of the executive directors and the chairman and are then subject to approval by the Board. Fees are set with regard to a range of external information for equivalent companies. There are no other emoluments for non-executive directors, except where the Company meets authorised expenses incurred on the Company’s activities. They are not eligible for pension scheme membership and do not participate in any of the Company’s annual or long term incentive schemes.
Fees were reviewed in 2008 and a decision was taken to increase the basic fees of the non-executive directors to £38,500 per annum and to increase the chairman’s fee to £150,000 per annum. These fee increases were implemented effective 1 June 2008, and fees will remain unchanged in 2009.
6 Remuneration policy for executive directors
The remuneration committee aims to ensure that the Company’s executive directors are fairly rewarded for their individual contributions to the Group’s performance. The committee’s policy is to offer differentiated remuneration packages, clearly linked to both individual and business performance, which are capable of attracting, retaining and motivating executive directors of high calibre, providing both short and long term focus for the business. The approach is designed to ensure that the Company is managed effectively for the benefit of shareholders and will create real increases in shareholder value.
The committee seeks to align the remuneration of executive directors with that of the wider Northern Foods senior management team. The committee’s objective is to achieve a structured and balanced remuneration package.
The committee believes that a significant proportion of the total remuneration of an executive director should be performance related. Accordingly, a rigorous approach has been adopted to the assessment of individual performance, whereby significant emphasis is placed upon the individual’s contribution to the Group’s overall performance. This is to ensure that the remuneration package for executive directors is aligned closely with shareholder interests and individual performance.
The four main components of the ongoing remuneration package for executive directors and senior management in 2009/10 are:
- basic annual salary, targeted at market median within the sectors where we compete for talent, although it is recognised that it may occasionally be necessary to pay above this to attract sufficiently high calibre executives;
- an annual incentive plan, based upon the delivery of annual operating plans for the Group and individual strategic objectives described in performance contracts;
- participation in long term incentive plans based upon the delivery of sustainable high performance;
- pension and other benefits.
The balance of the fixed and variable pay at current value for 2009/10, exclusive of pension and benefits, is illustrated below for the two executive directors. The table is a theoretical model and assumes that on target Group performance is achieved for short term incentives and the director’s individual performance, and that long term incentive awards under the PSP, with an initial value at the time of grant of 150% of salary, are valued at an expected value of 55% of the initial value.
|
Performance |
Basic |
Annual |
Long term |
|---|---|---|---|---|
S Barden |
On Target |
44.0% |
19.7% |
36.3% |
|
Maximum |
28.6% |
28.6% |
42.9% |
A M Booker |
On Target |
44.0% |
19.7% |
36.3% |
|
Maximum |
28.6% |
28.6% |
42.9% |
6.1 Salary
Salaries of executive directors are reviewed annually taking into account information from independent sources for comparable roles in the industry and in other selected quoted companies. Reviews also reflect the individual’s responsibilities, performance and development, and the Group’s performance. Basic salary is the only pensionable remuneration.
The executive directors’ current salaries effective as at 1 April 2009 (before salary sacrifice in relation to Northern Foods Employees’ Self Invested Pension Plan (‘the SIPP’) membership) are:
|
Basic salary as at 1 April 2009 |
|---|---|
| S Barden | £486,400 |
A M Booker |
£291,840 |
For S Barden and A M Booker this represents an increase of 2.4% over the prior year and is the average increase awarded to other members of senior management, consistent with the general salary awards for the rest of the Company’s workforce.
6.2 Annual incentive plan
The remuneration committee believes that achieving annual performance targets is a high priority for the executive directors. Incentive targets for executive directors are set each year by the committee to take account of current business plans.
The Company continues to be committed to driving a high performance culture at all levels in the business. To support this aim, the annual incentive plan drives differentiation in the level of award based upon the individual’s contribution to the delivery of Group performance. The target incentive for an executive director remains at 45% of basic salary for on target performance. In line with the Group’s ethos of pay for performance, in the case of exceptional individual performance and Group results significantly above operating plan, the executive can continue to expect to receive an incentive payment up to a maximum of 100% of basic salary representing a significant increase in reward in return for over performance.
Under the annual incentive plan, 80% of annual bonus opportunity is linked to Group financial targets in the form of profit before tax and restructuring items. The other 20% is directly related to the committee’s assessment of the directors’ individual performances against their personal performance contracts. These contracts are set at the start of the financial year and contain six individual performance targets, achievement of which is integral to the performance of the business. These are considered appropriately stretching by the committee.
The level of profit before tax and restructuring items achieved in 2008/09 was £47.5m, which was below that required to trigger payment under the profit element of bonus. The committee determined that the individual performance measures had been satisfactorily met to trigger payment under the personal element of bonus. A payment equivalent of 15% of salary was awarded to S Barden. A M Booker received a payment equivalent of 10% of salary pro-rated to reflect length of service in the performance period.
The targets set for 2009/10 continue to be made up of financial, business and individual performance measures. The financial element is set in terms of the Group’s performance based on profit before tax and restructuring items, and performance versus operating plan. The business and individual elements comprise a number of commercially sensitive strategic objectives for each individual and the executive team, encompassing both financial and non-financial targets such as economic, environmental and social targets.
The performance targets selected are considered appropriately stretching by the committee.
6.3 Long term incentive share plans
The Company’s long term incentive policy has been developed to provide long term management focus and motivation, creating a clear link between sustainable business performance and an executive’s reward. The committee believes that a significant element of executive remuneration should be linked to the delivery of long term returns for shareholders.
During 2007 the committee introduced, and shareholders approved, the PSP (details set out under section 6.3.1) to act as the primary vehicle for the delivery of long term incentives across the Group.
6.3.1 Performance share plan 2007
As part of the development of the Group’s senior executive incentive strategy and in order to further align the interests of executives and shareholders through the use of greater variable reward, the committee introduced the PSP in 2007/08.
In terms of quantum, participants may be granted annual awards over shares in the Company worth no more than 200% of base salary. In practice, the committee intends to operate within a limit of 150% of salary for awards made under the PSP.
The committee believes that the performance conditions for the PSP reinforce the alignment of the interests of senior executives with those of shareholders. The benefits available to participants of the PSP only accrue to them when the Company has delivered significant benefits to shareholders over a fixed three year period. Awards vest three years after grant, subject to the extent to which demanding performance conditions have been achieved by the end of a single three year period. Two performance conditions determine the vesting of awards. These are based on growth in the Company’s return on invested capital (ROIC) and its absolute total shareholder return (TSR) performance. Each determines the vesting of one half of each award.
6.3.1.1 Return on invested capital
The proportion of the award that will vest is assessed by reference to a vesting scale, as follows:
Growth in ROIC over the |
Percentage of the total number |
|---|---|
Less than 100 basis points |
0% |
100 basis points |
7.5% |
Between 100 basis points |
Straight line vesting between |
200 basis points or more |
50% |
For the purpose of determining any reward, ROIC is defined as profit from operations before restructuring items (adjusted to exclude any non-service charge element of pension costs), divided by average invested capital. Average invested capital is calculated as the sum of net equity (adjusted to exclude retirement benefit obligation, net of deferred tax thereon), net debt and accumulated goodwill previously written off.
In response to any significant events, including material trading events, the committee may at its discretion amend the performance conditions to reflect these changes. In addition, the ROIC element will only vest if the committee is satisfied that the investment level over the performance period was appropriate for ensuring the business’ long term growth.
6.3.1.2 Total shareholder return
In order to focus executives on delivering outstanding returns to shareholders, the committee has decided to set the TSR targets in terms of improvement measured from the Company’s share price normally averaged over the three months immediately prior to the beginning of the financial year.
The proportion of the award that will vest is assessed by reference to the following scale:
TSR at the end of the |
Percentage of the total number |
|---|---|
Less than 30% growth |
Nil |
30% growth |
7.5% |
Between 30% growth and 80% growth |
Straight line vesting between 7.5% and 50% |
Growth of 80% or more |
50% |
The base prices, threshold and maximum TSR for each award (expressed as share price plus dividends) are as follows:
|
2007/08 |
2008/09 |
2009/10 |
|---|---|---|---|
Base price |
£1.24 |
£0.6591 |
£0.531 |
Threshold (30% growth) |
£1.61 |
£0.857 |
£0.690 |
Maximum (80% growth) |
£2.23 |
£1.186 |
£0.955 |
1 The awards made in July 2008 were subject to a TSR performance condition requiring growth from the one month average share price at the date of awards of 65.9p which was above the actual share price at grant. The committee had originally contemplated using a base figure calculated at the end of the preceding financial year but, in view of delays in making the award because the Company was in a prohibited period and the turbulent state of the Stock Market at the time, it concluded that it was more appropriate to use the average share price over the month prior to the actual award.
The TSR will be calculated using the closing return indices over the final three months of the performance period.
In addition, the TSR element will only vest to the extent that the committee is satisfied that the Company’s TSR over the period is reflective of the underlying financial performance of the Company.
Awards vest on a change of control or cessation of employment under ‘good leaver’ provisions, subject to the performance conditions having been met pro-rata, and are normally reduced to reflect the shortened performance period.
The committee intends to make further awards in 2009 in accordance with its policy of awarding shares worth around 150% of salary to executive directors with similar performance conditions to those set out above. A proportion of PSP awards will be made using HMRC approved options in order to secure potential tax and national insurance savings available for such awards within the HMRC limit of £30,000.
6.4 Savings-related share option scheme
The Company introduced an HMRC approved Savings-related share option scheme (the ‘Scheme’) for all employees during 2007/08. This Scheme is open to all employees (subject to eligibility), including executive directors. Options are normally exercisable after either three or five years from the date of grant. In accordance with HMRC requirements, there are limits on the number of shares which could be issued under the Scheme. In addition, the use of new issue shares under the Scheme is limited to 10% of the issued share capital of the Company, taking account of shares issued or to be issued under any other Company employee share schemes over the previous ten year period.
A grant was made under the Scheme in December 2007. The price at which options were offered was not less than 80% of the middle market price on the dealing day immediately preceding the date of invitation. To date no further invitations have been offered under this Scheme.
6.5 Executive shareholding
Executives’ interest in both relative and absolute share price performance is important, and this is facilitated by share schemes and the encouragement to build a significant personal shareholding in the Company.
The Company has introduced a policy requiring the executive directors to build a significant level of shareholding. It is the view of the committee that the act of building and maintaining a substantial shareholding in the Company creates a strong alignment of interest between shareholders and executives.
6.5.1 Minimum shareholding requirements
The Company’s minimum shareholding policy requires the retention of a value of shares as follows:
- 300% of basic salary for the chief executive;
- 200% of basic salary for other executive directors.
Executives are expected to retain all shares acquired through share option plans, long term incentive plans or deferred share plans (other than those sold to meet income tax and national insurance contribution (NIC) liabilities) until the required minimum shareholding is achieved.
The number/value of shares required as the minimum share holding is fixed for each year. No purchases are required to respond to share price falls during the year.
6.6 Benefits
In addition to basic salary, all the executive directors receive certain benefits, principally a car or car allowance, private medical insurance and a pension.
6.6.1 Pensions
Prior to 1 April 2009, the executive directors were members of Northern Foods Pension Builder (‘Pension Builder’). Their dependents were eligible for dependents’ pensions and the payment of a lump sum in the event of death in service.
For all employees, including the executive directors, appointed after 22 March 2005, the pension arrangements provided by Pension Builder for pension on retirement at age 65 are based upon a career average accrual of either:
- 1.25% of annual salary per annum revalued, before retirement, by inflation up to 5.0%, with an employee contribution of 6.0%; or
- 1.0% of annual salary per annum revalued, before retirement, by inflation up to 5.0%, with an employee contribution of 4.5%.
In January 2009, the Company entered into a consultation process with the leadership population whereby the Company proposed a move from the established defined benefit pension arrangements to an alternative pension plan, the Northern Foods Employees’ Self Invested Personal Pension Plan (‘the SIPP’), a defined contribution pension arrangement operated by Legal and General (Portfolio Management Services) Ltd. Following completion of the consultation process, the Company took the decision to implement the proposal and the leadership population was offered membership of the SIPP in respect of service from 1 April 2009. Whether or not an individual accepts membership of the SIPP, no further accruals will be made under Pension Builder.
For all eligible employees, including the executive directors, participating in the SIPP, the Company supplements a core employee contribution of 5% of pensionable earnings with a Company contribution of 10% of pensionable earnings.
Members of the SIPP are also eligible to join the Northern Foods Life Assurance Scheme where, subject to the terms of the Life Assurance Scheme, their dependants are eligible for a lump sum payment in the event of a member’s death in service.
The design of the new SIPP serves to strengthen further the link between an executive’s performance and reward. Executives have the opportunity to invest any awards received through the Northern Foods Short Term Incentive Plan into the SIPP, potentially, subject to the investment performance of the scheme, increasing their fund value. Executives also receive the benefit of the National Insurance savings made by the Company (currently 12.8% of the total award), which are invested into the SIPP on their behalf.
The SIPP has an optional salary sacrifice arrangement.
Following the removal of the pension’s earnings cap and the introduction of the lifetime allowance under the Finance Act 2004, with effect from 6 April 2006, the Company provides executives who hold pension benefits in excess of the lifetime allowance with the following options:
- continue to accrue pension under the SIPP (previously Pension Builder) subject to the recovery charge; or
- a cash alternative, paid on a monthly basis, reflecting the Company’s contribution rate to the SIPP (previously Pension Builder). The cash alternative for executive directors who are members of the SIPP will be 10% of basic salary.
6.7 Directors’ contracts
It is the Company’s policy that executive directors should have secure agreements, providing for a maximum of one year’s notice. The contracts of A M Booker and S Barden are terminable upon six months’ notice by the executive director and one year’s notice by the Company.
In the event of early termination, the contracts of S Barden and A M Booker provide for compensation up to a maximum of basic salary, together with continued provision or payment of a sum equal to the fair value of the car allowance, private medical insurance, permanent health cover and outstanding Working Time Regulation holiday.
The details of the contracts are summarised in the table below:
Table 1 |
Date of contract |
Notice period |
|---|---|---|
S Barden |
30 May 2007 |
12 months by the Company |
A M Booker |
13 October 2008 |
12 months by the Company |
J K Maiden |
5 September 2005 |
12 months by both parties |
To protect the interests of the Company and its shareholders, the executive directors’ contracts contain restrictive covenants, the principal terms of which prevent the executive directors:
- undertaking work for direct competitors, either during their employment with the Company or within nine months of their employment terminating, without the express permission of the Board;
- enticing away from the Group individuals or customers with whom the executive directors had material contact with or responsibility for in the 12 months prior to termination; and
- enticing away from the Group or employing senior or middle managers from within the business with whom the executive directors had direct contact or knowledge in the 12 months prior to termination.
J K Maiden gave the Company his notice of resignation on 22 June 2008 and continued to work full time until 14 November 2008, being responsible for the finance function throughout this period as well as a number of strategic initiatives, including the significant changes to the Company’s pension arrangements. He continued to receive his salary and contractual benefits until his departure but received no compensation for loss of office or other termination payment and all unvested share awards lapsed on his departure. He remained eligible to be considered for an annual bonus for the period he worked. Consistent with the other executive directors, he received no payment in respect of the financial targets and was awarded £40,631 in relation to his personal element.