This part of the directors' remuneration report sets out the remuneration policy for the company and has been prepared in accordance with the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. The policy in this report will be put to a binding shareholder vote at the 2017 AGM on 28 July 2017 and will take formal effect from that date, subject to shareholder approval. It is intended that the policy will formally apply for the three years beginning on the date of approval.
Overview of remuneration policy
The company's remuneration arrangements are designed to promote the long-term success of the company. The company does not pay more than is necessary for this purpose. The committee recognises that the company operates in the North West of England in a regulated environment and therefore needs to ensure that the structure of executive remuneration reflects both the practices of the markets in which its executives operate, and stakeholder expectations of how the company should be run.
The committee monitors the remuneration arrangements to ensure that there is an appropriate balance between risk and reward and that the long-term performance of the business is not compromised by the pursuit of short-term value. There is a strong direct link between incentives and the company's strategy and if the strategy is delivered within an acceptable level of risk, senior executives will be rewarded through the annual bonus and long-term incentives. If it is not delivered, then a significant part of their potential remuneration will not be paid.
Considerations when determining remuneration policy
The committee understands that listening to the views of the company's key stakeholders plays a vital role in formulating and implementing a successful remuneration policy over the long term. The committee thus actively seeks the views of shareholders and other key stakeholders to inform the development of the remuneration policy, particularly where any changes to policy are envisaged. Although employees are not consulted directly on executive remuneration policy, employee engagement surveys are carried out annually and regular discussion takes place with union representatives on matters of pay and remuneration for employees covered by collective bargaining or consultation arrangements. The committee takes into account the general base salary increase and remuneration arrangements for the wider employee population when determining remuneration policy for the executive directors.
Changes to the remuneration policy
As described in the annual statement from the remuneration committee chair, during the year the committee undertook a review of the current executive directors' remuneration policy to ensure that it remains aligned with business strategy, reflects best practice expectations of investors and is appropriately positioned relative to the market. In doing so, the committee engaged with institutional shareholders as well as the leading shareholder advisory organisations. The changes proposed are minor and relate principally to the introduction of further flexibility in the policy and the strengthening of recovery/withholding provisions. In summary, the key proposed changes include:
- increasing the maximum award limit under the Long Term Plan to 200 per cent of salary. However, the normal maximum remains unchanged at 130 per cent of salary for 2017 and any increase to this over the term of this policy for current executive directors will be subject to consultation with major shareholders;
- additional flexibility in the weightings and measures for the Long Term Plan;
- strengthening of the withholding and recovery provisions in the annual bonus and Long Term Plan; and
- limiting the notice period the company must give to executive directors when terminating their employment to a maximum of 12 months in any circumstances.
Future policy table for directors
|Purpose and link to strategy: To attract and retain executives of the experience and quality required to deliver the company's strategy.|
Normally reviewed annually, typically effective 1 September.
Significant increases in salary should only take place infrequently, for example where there has been a material increase in:
- the size of the individual's role;
- the size of the company (through mergers and acquisitions); or
- the pay market for directly comparable companies (for example, companies of a similar size and complexity).
On recruitment or promotion to executive director, the committee will take into account previous remuneration, and pay levels for comparable companies, when setting salary levels. This may lead to salary being set at a lower or higher level than for the previous incumbent.
Current salary levels are shown in the annual report on remuneration.
Executive directors will normally receive a salary increase broadly in line with the increase awarded to the general workforce, unless one or more of the conditions outlined under 'operation' is met.
Where the committee has set the salary of a new hire at a discount to the market level initially, a series of planned increases can be implemented over the following few years to bring the salary to the appropriate market position, subject to individual performance.
|Purpose and link to strategy: To provide market competitive benefits to help recruit and retain high calibre executives.|
Provision of benefits such as:
- health benefits;
- car or car allowance;
- relocation assistance;
- life assurance;
- group income protection;
- all employee share schemes (e.g. opportunity to join the ShareBuy scheme);
- travel; and
- communication costs.
Any reasonable business related expenses can be reimbursed (and any tax theron met if determined to be a taxable benefit).
Executives will be eligible for any other benefits which are introduced for the wider workforce on broadly similar terms and additional benefits might be provided from time to time if the committee decides payment of such benefits is appropriate and in line with emerging market practice.
|As it is not possible to calculate in advance the cost of all benefits, a maximum is not pre-determined.|
|Purpose and link to strategy: To provide a broadly mid-market level of retirement benefits.|
Executive directors are offered the choice of:
- a company contribution into a defined contribution pension scheme;
- a cash allowance in lieu of pension; or
- a combination of a company contribution into a defined contribution pension scheme and a cash allowance.
External hires will not be eligible to join a defined benefit pension scheme.
Internal promotees who are active members of an existing United Utilities defined benefit scheme will be offered the choice of staying in that scheme or of choosing one of the above options.
Under the defined benefit schemes, a maximum future accrual of 1/80th pension plus 3/80ths lump sum of final pensionable salary for each year of service.
- up to 25 per cent of salary into a defined contribution scheme;
- cash allowance of broadly equivalent cost to the company (up to 25 per cent of salary less employer National Insurance Contributions at the prevailing rate, i.e. up to 22 per cent of base salary for 017/18); or
- a combination of both, such that the cost to the company is broadly the same.
|Purpose and link to strategy: To incentivise performance against personal objectives and selected financial and operational KPIs which are directly linked to business strategy. Deferral of part of bonus into shares aligns the interests of executive directors and shareholders.|
A maximum of 50 per cent of bonus awarded paid as cash.
A minimum of 50 per cent of bonus awarded deferred into company shares under the Deferred Bonus Plan (DBP) for a period of at least three years.
DBP shares accrue dividend equivalents.
Bonuses are subject to withholding and recovery provisions in certain negative circumstances; for example, in the event of a material misstatement of audited financial results, an error in the calculation or gross misconduct.
|Maximum award level of up to 130 per cent of salary, for the achievement of stretching performance objectives.|
Payments predominantly based on financial and operational performance, with a minority based on achievement of personal objectives.
Targets and weightings set by reference to the company's financial and operating plans.
Target bonus of up to 50 per cent of maximum bonus potential and bonus of up to 25 per cent of maximum for threshold performance.
|Long Term Plan (LTP)|
|Purpose and link to strategy: To incentivise long-term value creation and alignment with longer term returns to shareholders.|
Awards under the Long Term Plan are rights to receive company shares, subject to certain performance conditions.
Each award is measured over at least a three-year performance period.
An additional two-year holding period applies after the end of the three-year performance period.
Vested shares accrue dividend equivalents.
Shares under the LTP are subject to recovery and withholding provisions in certain negative circumstances; for example: material misstatement of audited financial results, an error in the calculation or gross misconduct.
The normal maximum award level will be up to 130 per cent of salary per annum.
The overall policy limit will be 200 per cent of salary. It is not anticipated that awards above the normal level will be made to current executive directors and any such increase on an ongoing basis will be subject to prior consultation with major shareholders.
The current performance measures are relative total shareholder return (TSR), sustainable dividends and customer service excellence. The weighting of any one of these single measures will not exceed 40 per cent.
Any vesting is also subject to the committee being satisfied that the company's performance on these measures is consistent with underlying business performance.
The committee retains discretion to set alternative performance measures for future awards but will consult with major shareholders before making any changes to the currently applied measures.
100 per cent of awards vest for stretch performance, up to 25 per cent of an award vests for threshold performance and no awards vest for below threshold performance.
|Non-executive directors' fees and benefits|
|Purpose and link to strategy: To attract non-executive directors with a broad range of experience and skills to oversee the development and implementation of our strategy.|
The remuneration policy for the non-executive directors (with the exception of the Chairman) is set by a separate committee of the board. The policy for the Chairman is determined by the remuneration committee (of which the Chairman is not a member).
Fees are reviewed annually, taking into account the salary increase for the general workforce and the levels of fees paid by companies of a similar size and complexity. Any changes are normally effective from 1 September.
Additional fees are paid to the chairs of certain board sub-committees and to the senior independent non-executive director.
In exceptional circumstances, if there is a temporary yet material increase in the time commitments for non-executive directors, the board may pay extra fees on a pro rata basis to recognise the additional workload.
No eligibility for bonuses, long-term incentive plans, pension schemes, healthcare arrangements or employee share schemes.
The company repays any reasonable expenses that a non-executive director incurs in carrying out their duties as a director, including travel, hospitality-related and other modest benefits and any tax liabilities thereon, if appropriate.
Current fee levels are shown in the annual report on remuneration.
The value of benefits may vary from year to year according to the cost to the company.
|Non-executive directors are not eligible to participate in any performance-related arrangements.|
Notes to the policy table
Selection of performance measures and targets
Performance measures for the annual bonus are selected annually to align with the company's key strategic goals for the year and reflect financial, operational and personal objectives. 'Target' performance is typically set in line with the business plan for the year, following rigorous debate and approval of the plan by the board. Threshold to stretch targets are then set based on a sliding scale on the basis of relevant commercial factors. Only modest rewards are available for delivering threshold performance levels, with rewards at stretch requiring substantial outperformance of the business plan. Details of the measures used for the annual bonus are given in the annual report on remuneration.
The current Long Term Plan (LTP) measures were selected by the committee following an extensive review and shareholder consultation in 2012/13. These measures were reviewed again as part of the wider review of the remuneration policy in 2016/17 and are considered to continue to align with the company's key strategic goals and be closely linked to the creation of long-term shareholder value as follows:
|Relative total shareholder return||Direct measure of delivery of shareholder returns, rewarding management for outperformance of a comparator group of companies.|
|Sustainable dividends||Direct measure of return to shareholders through dividend payments, whilst focusing on the creation of strong earnings that ensure the sustainability of dividends.|
|Customer service excellence||It is a key strategic objective to provide the best service to customers. This is fundamental to delivering our vision of being the best UK water and wastewater company, providing great service to our customers. This measure has a direct financial impact on the company as our regulator can apply financial incentives or penalties depending on our customer service performance.|
The policy provides for committee discretion to alter the LTP measures and weightings to ensure they continue to facilitate an appropriate measurement of performance over the life of the policy (taking into account any evolution of the strategic goals of the company). LTP targets are set taking into account a number of factors, including reference to market practice, the company business plan and analysts' forecasts where relevant. The LTP will only vest in full if stretching business performance is achieved.
Annual bonus and long-term incentives – flexibility, discretion and judgement
The committee will operate the company's incentive plans according to their respective rules and consistent with normal market practice, the Listing Rules and HMRC rules where relevant, including flexibility in a number of regards. These include making awards and setting performance criteria each year, dealing with leavers, and adjustments to awards and performance criteria following acquisitions, disposals, changes in share capital and to take account of the impact of other merger and acquisition activity. The committee also retains discretion within the policy to adjust the targets, set different measures and/or alter weightings for the annual bonus plan, pay dividend equivalents on vested shares up to the date those shares can first reasonably be exercised and, in exceptional circumstances, under the rules of the long-term incentive plans to adjust targets to ensure that the awards fulfil their original purposes (for example, if an external benchmark or measure is no longer available). All assessments of performance are ultimately subject to the committee's judgement.
Any discretion exercised (and the rationale) will be disclosed in the annual remuneration report.
All historic awards that were granted under any current or previous share schemes operated by the company and remain outstanding, remain eligible to vest based on their original award terms.
Differences in policy for executive directors compared to other employees
The remuneration approach is consistently applied at levels below the executive directors. Key features include:
- market competitive levels of remuneration, incentives and benefits to attract and retain employees;
- employees at all levels participate in a bonus scheme with the same corporate performance measures as for executive directors; and
- all employees have the opportunity to participate in the HMRC approved share incentive plan, ShareBuy.
At senior levels, remuneration is increasingly long-term, and 'at risk' with an increased emphasis on performance related pay and share-based remuneration.
Scenarios for total remuneration
The charts below show the pay-out under the remuneration policy for each executive director under three different scenarios.
Steve Mogford CEO
Long Term Plan
Russ Houlden CFO
Long Term Plan
Notes on the scenario methodology:
- fixed pay is base salary effective 1 September 2016 plus cash allowance in lieu of pension of 22 per cent of salary and the value of benefits as shown in the single total figure of remuneration table for 2016/17;
- target performance is the level of performance required for the bonus and Long Term Plan to pay out at 50 per cent of maximum;
- maximum performance would result in 100 per cent vesting of the bonus and Long Term Plan (i.e. 260 per cent of salary in total);
- annual bonus includes amounts compulsorily deferred into shares;
- Long Term Plan is measured at face value, i.e. no assumption for dividends or changes in share price; and
- amounts relating to all-employee share schemes have, for simplicity, been excluded from the charts.
The committee believes that it is important for a significant investment to be made by each executive director in the shares of the company to provide alignment with shareholder interests. Shareholding guidelines are therefore operated and the details of how these are currently applied are provided in the annual report on remuneration.
The company recognises that its executive directors may be invited to become non-executive directors of other companies outside the company and exposure to such non-executive duties can broaden experience and knowledge, which would be of benefit to the company. Any external appointments are subject to board approval (which would not be given if the proposed appointment was with a competing company, would lead to a material conflict of interest or could have a detrimental effect on a director's performance). Directors will be allowed to retain any fees received in respect of such appointments.
Service contracts and letters of appointment
Executive directors' service contracts are subject to up to one year's notice period when terminated by the company and at least six months' notice when terminated by the director.
The policy on payments for loss of office is set out in the next section.
The Chairman and other non-executive directors have letters of appointment rather than service contracts. Their appointments may be terminated without compensation at any time. All non-executive directors are subject to re-election at the AGM.
Copies of executive directors' service contracts and non-executive directors' letters of appointment are available for inspection at the company's registered office during normal hours of business and will be available at the company's AGM. Copies of non-executive directors' letters of appointment can also be viewed on the company's website.
Approach to recruitment remuneration
The remuneration package for a new executive director would be set in accordance with the terms of the company's approved remuneration policy in force at the time of appointment.
In addition, the committee may offer additional cash and/or share-based elements (on a one-time basis or ongoing) when it considers these to be in the best interests of the company (and therefore shareholders). Any such payments would be limited to a reasonable estimate of value of remuneration lost when leaving the former employer and would reflect the delivery mechanism (i.e. cash and/or share-based), time horizons and whether performance requirements are attached to that remuneration. Shareholders will be informed of any such payments at the time of appointment.
Maximum level of variable pay
The maximum level of long-term incentives which may be awarded to a new executive director will be limited to the maximum Long Term Plan limit of 200 per cent of salary per annum on an ongoing basis. Therefore, the maximum level of overall variable pay that may be offered will be 330 per cent of salary (i.e. 130 per cent annual bonus plus 200 per cent Long Term Plan) per annum on an ongoing basis. These limits are in addition to the value of any buy-out arrangements which are governed by the policy above.
In the case of an internal appointment, any variable pay element awarded in respect of the prior role would be allowed to pay out according to its terms, adjusted as relevant to take into account the appointment. In addition, any other previously awarded entitlements would continue, and be disclosed in the next annual report on remuneration.
Base salary and relocation expenses
Base salary levels for new recruits will be set in accordance with the policy, taking into account the experience of the individual recruited. The committee has the flexibility to set the salary of a new appointment at a discount to the market level initially, with a series of planned increases implemented over the following years to bring the salary to the appropriate market position, subject to individual performance in the role.
For external and internal appointments, the committee may agree that the company will meet certain relocation and/or incidental expenses as appropriate.
Annual bonus performance conditions
Where a new executive director is appointed part way through a financial year, the committee may set different annual bonus measures and targets for the new executive director from those used for other executive directors (for the initial year only).
Appointment of non-executive directors
For the appointment of a new Chairman or non-executive director, the fee arrangement would be set in accordance with the approved remuneration policy in force at that time. Non-executive directors' fees are set by a separate committee of the board; the Chairman's fees are set by the remuneration committee.
Payment for loss of office
The circumstances of the termination, including the individual's performance and an individual's duty and opportunity to mitigate losses are taken into account in every case. Our policy is to stop or reduce compensatory payments to former executive directors to the extent that they receive remuneration from other employment during the compensation period. A robust line on reducing compensation is applied and payments to departing employees may be phased in order to mitigate loss. Our policy is shown in the table below:
|Compensation for loss of office|
- An executive director's service contract may be terminated without notice and without any further payment or compensation, except for sums earned up to the date of termination, on the occurrence of certain contractually specified events such as gross misconduct.
- No termination payment if full notice is worked.
- Otherwise, a payment in respect of the period of notice not worked of basic salary, plus pension and car allowance for that period.
- Half of the termination payment will be paid within 14 days of date of termination.
- The other half will be paid in monthly instalments over what would have been the second half of the notice period. This will be reduced by the value of any salary, pension contribution and car allowance earned in new paid employment in that period.
|Treatment of annual bonus on termination|
- A time prorated bonus may be payable for the period of active service; however, there is no automatic entitlement to payments under the bonus scheme. Any payment is at the discretion of the committee and is subject to recovery and withholding provisions as detailed in the policy table.
- Performance targets would apply in all circumstances.
|Treatment of deferred bonus on termination|
- Determined on the basis of the relevant plan rules. Full details can be found on the company's website.
- Deferred bonuses are subject to recovery and withholding provisions as detailed in the policy table.
- The default treatment is that any outstanding awards will vest in full on the normal vesting date with no time prorating applying.
- On a change of control, awards will generally vest on the date of a change of control, unless the committee permits (or requires) awards to roll over into equivalent shares in the acquirer.
|Treatment of unvested long-term incentives on termination|
- Determined on the basis of the relevant plan rules. Full details can be found on the company's website.
- Normally, any outstanding awards will lapse on date of cessation of employment (if that occurs during the performance period).
- However, under the rules of the plans, in certain prescribed circumstances, such as death, disability, mutually agreed retirement or other circumstances at the discretion of the committee, 'good leaver' status can be applied. In these circumstances, a participant's awards vest on a time prorated basis subject to the satisfaction of relevant performance criteria, with the balance of awards lapsing. The committee retains the discretion not to time prorate if it is inappropriate to do so in particular circumstances. The committee will take into account the individual's performance and the reasons for their departure when determining whether 'good leaver' status can be applied.
- On a change of control, awards will generally vest on the date of a change of control taking in to account the extent to which any performance condition has been satisfied at that point. Time prorating will normally apply unless the committee determines otherwise.
|Treatment of pensions on termination|
- On redundancy, an augmentation may apply to active members of a United Utilities defined benefit pension scheme in line with the trust deed and rules of the appropriate section.
Outplacement services, reimbursement of legal costs and any other incidental expenses may be provided where appropriate. Any statutory entitlements or compromise claims in connection with a termination of employment would be paid as necessary. Outstanding savings/shares under all-employee share plans would be transferred in accordance with the terms of the plans as approved by HMRC.