Company on remuneration matters, and is
grateful for the high level of engagement
from shareholders.”
SIR JOHN HOOD |CHAIRMAN OF THE REMUNERATION COMMITTEE
As the Chairman noted in his introduction to this Corporate Governance report, the Company’s approach to executive remuneration came under close scrutiny in 2014.
Over the past 18 months, BG Group has renewed the executive management of the Company, and our remuneration approach has reflected the need to bring new leaders into the business. In the lead up to our AGM in May, we engaged with shareholders about a parallel share award made to Simon Lowth, the Group’s new Chief Financial Officer, in respect of our agreement to buy out the value of the awards he had forfeited on leaving his previous employer.
In the autumn, we proposed a conditional share award to Helge Lund, the Group’s new Chief Executive, and consulted widely with shareholders in the run-up to the General Meeting specially convened to approve that award. Following feedback from our shareholders regarding the conditional share award, the Board revised the original package, with the agreement of Helge, to bring all elements of his remuneration within the Company’s Directors’ Remuneration Policy approved by shareholders in May 2014.
In both cases, the Board and the Remuneration Committee’s major consideration was to act in the best interests of shareholders by securing executive talent of the appropriate calibre and to promote the long-term success of the Company. In the case of Simon, our objective was to retain the services of a proven and highly capable Chief Financial Officer to provide essential stability in the financial leadership of the Company after three changes in that position within a three-year period. Simon is making a major contribution to the future success of the Company. While the Directors’ Remuneration Policy received strong support at the 2014 AGM (93.7% for and 6.3% against), a significant proportion of shareholders voted against the implementation report (67.2% for and 32.8% against). Through consultations with shareholders, both before and since the AGM, the Committee understands that this relatively low level of support arose primarily as a result of the parallel award that was made to the Chief Financial Officer to honour the value of the original buy-out of the awards forfeited on leaving his previous employer. The Committee recognises that the
parallel award was unusual and understands the concerns expressed by shareholders. Further detail on the rationale for the parallel award is set out in the main body of the report. In the case of Helge, our objective was to offer remuneration that was competitive in the international market for oil and gas executives. There is a difficult balance to be struck between meeting that objective and taking appropriate account of shareholder and public concern in the UK about the level of executive pay. The Board recognises that, in designing the original package for Helge, it did not strike the correct balance. The Board is grateful to Helge for working actively and constructively with us to find a timely solution, and to shareholders for the support received for the revised package. A summary of the remuneration arrangements of the new Chief Executive is set out to the right of this letter.
Both these cases have underlined how important it is that the Board and the Remuneration Committee are engaged with, and attentive to, the views of shareholders, and we will redouble our efforts in that regard in 2015 and beyond. During the 10-month period following the resignation of Chris Finlayson as Chief Executive and Helge starting in the position, Andrew Gould served as interim Executive Chairman of BG Group. Despite taking on significant additional responsibilities, the Committee determined that the Chairman should not receive any additional remuneration or fees for this period; a decision with which the Chairman agreed. During 2014, the Committee had several opportunities to consult widely with our shareholders on remuneration matters, both generally and on specific issues. In response to feedback received and to reflect developing market trends, the Committee introduced the following changes during 2014: ● Reducing the level of vesting at threshold
Company performance for annual Long Term Incentive Plan (LTIP) Performance Share Awards from 25% to 15% (which results in a reduction of the threshold vesting level from 150% to 90% of base salary for the Chief Executive), which, at the time of the revision, was beneath the median threshold vesting level for the non-financial services FTSE 30 constituents; and
● Extending the application of the two-year holding period for LTIP Performance Share Awards from 50% to 100% of net vested shares after the three-year performance period, so that the performance period and holding period of five years in total applies to the whole award.
Through consultation with a number of our shareholders during 2014, it was also evident that certain shareholders favoured a basket of Company performance metrics applying to the LTIP Performance Share Awards, rather than a single metric dependent solely on relative total shareholder return (TSR). The single TSR metric was well-suited to the first phase of BG Group’s development, during which the Company was judged principally on its ability to add value through discovering resource. However, as we now shift the Company’s focus to improving return on capital and delivering earnings and cash flow growth, the Board believes it is appropriate that the Company performance metrics for the BG Group LTIP reflect this.
Following an extensive consultation exercise with major shareholders during February 2015, we have revised the LTIP performance conditions for future awards so that they are based on a basket of metrics comprising 50% relative TSR, 25% cash flow (earnings before interest, tax, depreciation and amortisation (EBITDA)) and 25% return on capital (return on average capital employed (ROACE)) and that appropriately challenging targets are set at threshold and stretch. The expected value of the BG Group LTIP awards will be broadly unchanged. These changes are all within the Directors’ Remuneration Policy approved by shareholders in May 2014 and the Remuneration Committee considers that the structure for future LTIP awards, using a basket of metrics that are clearly linked to the evolving strategic priorities of the Group, will serve to incentivise the senior management of the Company to achieve exceptional financial and business performance, and will thereby promote the long-term success of the Company. Further details are set out in the following report.
During 2014, as highlighted by the Chairman in his review, the Company made strong progress, particularly at our key growth assets in Australia and Brazil, and posted a solid year in terms of operating performance and delivered E&P and LNG volumes, while also improving the Company’s safety performance. The Committee reviewed the outcome of the 2014 annual bonus scorecard for senior management in this context. After careful consideration, the Committee determined that the business performance scorecard outcome of 69.9% (compared to 42.5% at target and a maximum of 85%) should apply, before considering individual performance for the remaining 15%. Further details of the targets and performance for each of the metrics are set out in the following report.
For the LTIP award granted in 2011 that was due to vest in 2014, the threshold level of performance was not attained and no award vested.
As the markets in which we operate change, and Helge reviews the strategy for the Group with the Board, the Remuneration Committee will keep the Company’s remuneration arrangements under review to ensure that they continue to incentivise the senior management of the Company to achieve exceptional financial and business performance over the longer term. We look forward to continuing our dialogue on remuneration matters and will provide updates in this report as these matters evolve. The Committee recognises that 2014 has been a particularly important year for the Company on remuneration matters, and is grateful for the high level of engagement from shareholders.
SIR JOHN HOOD
CHAIRMAN OF THE
REMUNERATION COMMITTEE
CHIEF EXECUTIVE – HELGE LUND
The Company announced on 15 October 2014 that Helge Lund would be appointed as Chief Executive. On 1 December 2014, following consultation with shareholders, the key elements of Mr Lund’s reward arrangements were announced. These arrangements, which are summarised below, will apply from the date of his employment as Chief Executive on 9 February 2015 and are consistent with BG Group’s Directors’ Remuneration Policy, which was approved by shareholders at the May 2014 AGM.
BASE SALARY
£1.5 million, fixed for the first five years of employment.
PENSION
A cash payment in lieu of pension and equivalent to 30% of salary, also fixed for the first five years of employment.
BONUS (ANNUAL INCENTIVE SCHEME)
Target 100% of base salary. Maximum 200% of base salary.
LONG-TERM INCENTIVE PLAN
An initial grant with an EPV on award of approximately £4.6 million, and a face value of approximately £10.6 million. An annual grant with a face value on award of up to £9 million (six times salary) and, for 2015, an EPV of up to £4 million. A one-off buy-out of forfeited variable Statoil pay in BG Group shares valued at approximately £750 000.
OTHER
A one-off relocation allowance up to a maximum net value of £480 000. Mr Lund has indicated that he intends to hold all shares that vest to him (net of tax) for the duration of his employment with BG Group.
These terms or acronyms are used in the following report:
Acronyms
AGM Annual General Meeting
AIS Annual Incentive Scheme, the Group’s annual bonus plan
CSOS Company Share Option Scheme, a legacy plan under which share options were previously granted
DBP Deferred Bonus Plan
EBITDA Earnings before interest, tax, depreciation and amortisation EPS Earnings per share
EPV Estimated present value, a measure of the economic or fair value of a share award GLT Group Leadership Team
HMRC HM Revenue & Customs
HSSE Health, safety, security and environment LTIP Long-Term Incentive Plan
PSA Performance Share Award, an award granted under the LTIP which is subject to performance conditions other than in exceptional circumstances ROACE Return on average capital employed
REMUNERATION REPORT – GLOSSARY OF TERMS
STR A TE G IC R EP O R T C O R P O R A TE GO V ER N A N C E FI N A N C IA L S TA TE M EN TS SH A R EHOL D ER IN FOR M A TION