Lord Turnbull
Chairman of the
Remuneration Committee
Dear shareholder, I am pleased to present the Remuneration Committee’s report for the year to 31 December 2014.
This will be the last report that I present as Chairman of the Remuneration Committee before I step down from the Board at the AGM. I am pleased that Anthony Nightingale, who has served the Remuneration Committee since June 2013, has agreed to undertake this role going forward.
The Committee’s report is presented in the following sections:
—An ‘at a glance’ summary of the Group’s remuneration arrangements on pages 96 to 97;
—A summary of our Directors’
Remuneration Policy on pages 98 to 100, this describes how we pay directors and the rationale for these arrangements. This Policy was approved by shareholders at the 2014 AGM; —Our annual report on remuneration on
pages 101 to 115 which describes how the Committee applied the Remuneration Policy in 2014 and the decisions it has made in respect of 2015; and —Supplementary information on pages
116 to 120.
This letter shares the Committee’s thinking on a number of the key decisions that we took about rewarding the performance achieved in 2014 and about remuneration arrangements for 2015.
Rewarding 2014 Performance
As set out in the Business Review section earlier in this Annual Report, the Group’s fi nancial performance in 2014 was strong:
Strategic priority Group performance £m
IFRS operating profi t
Prudential’s primary measure of profi tability and a key driver of shareholder value CAGR +15% 2010 2011 2012 2013 2014 1,823 2,017 2,520 2,954 3,186
EEV new business profi t
A measure of the future profi tability of the new business sold during the year and indicates the profi table growth of the Group CAGR +10% 2010 2011 2012 2013 2014 1,433 1,536 1,791 2,082 2,126
Business unit remittances
Cash fl ows across the Group balance these net remittances (which support dividend payments) with the retention of cash for profi table reinvestment
CAGR +12% 2010 2011 2012 2013 2014 935 1,105 1,200 1,341 1,482
D ir e c to rs ’ rem un er a tio n r e po rt A nn u al s ta tem en t fr o m th e C h ai rm an o f t h e R em un er a tio n C o m m it te e
All businesses reported strong performance in 2014, notwithstanding the challenges the Group faced which included the decline in long-term interest rates and the UK budget changes announced in March 2014. These results were achieved while maintaining appropriate levels of capital and operating within the Group’s risk appetite and framework. The Committee believes that the bonuses it awarded to executive directors for 2014 appropriately reflect this strong performance.
The Group achievements in 2014 built on the strong results achieved in recent years. Over the longer term, the Group has created substantial value for shareholders through share price rises and by increasing dividend payments. £100 invested in Prudential on 1 January 2012 was worth £257 on 31 December 2014. This performance outstripped that of other international insurance companies; this measure of total returns was the performance condition attached to the Group Performance Share Plan awards made in 2012, therefore the Committee determined that these awards should be released in full in Spring 2015.
Executives’ community of interest with other shareholders is fostered by annual and long-term incentive plans and is underscored by their personal shareholdings. Many of the executive directors have shareholdings which far exceed the guidelines that they are asked to meet. For instance, on 31 December 2014, Tidjane Thiam had a beneficial interest in shares with a value of almost 1,000 per cent of his salary.
Implementing the Policy approved by shareholders
The Committee was pleased with the level of support which shareholders gave the Company’s Directors’ Remuneration Policy at the 2014 AGM. The Committee believes that the Policy remains appropriate and does not intend to present the Policy to shareholders for their approval in 2015. The Committee will implement two refinements to executive pay arrangements in 2015 within the current Policy:
—Economic capital measure – as the Group prepares for the implementation of Solvency II, it is increasingly using economic capital as a key measure of capital adequacy. To reflect this change, part of executive directors’ 2015 bonuses will be determined by the achievement of economic capital targets; and
—Power to recover incentive payments
– the Committee has determined that it is appropriate for it to have the power to recover (‘clawback’) incentives after they are received by executives. Clawback provisions will apply to 2015 bonuses and long-term incentive awards, and may be applied in certain circumstances including the mis- statement of financial results. Reflecting the growth of the Group Recent years have seen significant increases in the complexity and scale of the Group. The Company’s geographic footprint and range of products have continued to grow in response to customers’ savings and protection needs. While these developments have delivered real and sustained value to shareholders, they have also required the organisation to operate in a more complex regulatory environment and to build effective relationships with new and more diverse groups of stakeholders. As a result, leadership roles have become more demanding and time consuming.
It was in this context that the Committee reviewed the Chairman’s fee during 2014. Paul Manduca’s fee has been fixed since his appointment as Chairman in July 2012. On his appointment, Mr Manduca agreed that Prudential would be his principal focus but his actual time commitment has been significantly higher than we anticipated at that time. The Committee has decided to increase the Chairman’s fee from £600,000 to £700,000 with effect from 1 July 2015 to recognise the increased demands of the role.
In determining executive directors’ packages for 2015, the Committee was conscious to balance restraint with the need to recognise particular changes in the scope of some roles. All executive directors received a 2015 salary increase of 3 per cent. These increases are in line with those awarded to other Group employees. The exception was the Chief Executive of PCA, who received a 5 per cent increase to reflect inflation and employee salary increases in the Asian market. Changes were made to the maximum bonus opportunities and long-term incentive awards of the Chief Executives of PCA and of UK & Europe, as described in the Annual Report on Remuneration. These changes reflect the growing scale and strategic impact of these roles, and the personal contribution made by the incumbents. A number of the Company’s largest shareholders were consulted on these changes.
External pay data does not drive the level of executive directors’ salaries or non-executive directors’ fees. When the Committee has resolved on planned increases, we reference data as a sense check to ensure that the remuneration paid by the Company remains fair, competitive and within the range of that offered by similar organisations.
In conclusion
I trust that you will find this report a clear account of the way in which the Committee has implemented the Directors’
Remuneration Policy during 2014. I look forward to your continued support for the Company’s remuneration arrangements.
Lord Turnbull
Chairman of the
Remuneration Committee 9 March 2015
Directors’ remuneration report
Our remuneration strategy and principles
Our remuneration strategy remains unchanged from that previously approved by shareholders:
To attract and retain the high-calibre executives required to lead and develop the Group
Reward must be:
—Valued by executives; and
—Competitive, to engage executives who are in demand in the global talent market, and, if required, support hiring the best external talent.
To reward executives for delivering our business plans and generating sustainable growth and returns for shareholders
Reward must be:
—Determined by delivery of the Group’s annual and longer term business objectives; —Aligned with shareholder value creation; and
—Consistent with the Group’s risk appetite so that the delivery of the business plan can be sustained.
Our executive remuneration
at a glance
Our remuneration architecture
Stretching IFRS profi t ranges set with reference to business plans approved by the Board. TSR vesting schedule relative to insurance peers. Salary Cash bonus Deferred bonus Prudential Long Term Incentive Plan ( ‘PLTIP ’) Share ownership guidelines
Key elements1 Key features of our policy How we implemented the policy
Broadly aligned with pay review budgets for other employees.
— Salary increases of 3% in 2014. — Salary increases of 3% in 20152.
The maximum opportunity is up to 200% of salary.
A signifi cant proportion, currently 40%, of bonus is deferred into shares for three years.
Award is subject to malus and clawback provisions.
Maximum award under the Plan is 550% of salary.
Aligned with our long-term business strategy and delivery of shareholder value, vesting is currently subject to: Relative TSR; and
Group IFRS Profi t; or Business unit IFRS profi t Measured over the three fi nancial years from year of award.
We have signifi cant share ownership guidelines for all executives3 as follows:
— 350% of salary for the Group Chief Executive; and — 200% of salary for other Executive Directors.
The Group Chief Executive has a maximum AIP opportunity of 200% of salary. For other executives the maximum is 180%.
2014 bonuses were paid based on performance measures related to profi t, cash fl ow and capital adequacy, as well as personal objectives.
Awards in 2014 and 2015 are below plan limits:
— Group Chief Executive: 400% of salary
— CEO JNL: 460% of salary — Other PLTIP awards were 250%
of salary, or less.
For business unit CEOs, awards vest based on TSR and business unit IFRS profi t. For other executives, awards are subject to TSR and Group IFRS profi t targets. The Committee keeps the performance conditions under review to ensure that future awards remain aligned with strategy. Financial and
personal objectives set with reference to business plans approved by the Board.
Notes
1 CEO, JNL also shares in the JNL bonus pool; and CEO, M&G retains separate arrangements. 2 The CEO, PCA received an increase of 5%.
3 Progress against the share ownership guidelines is detailed in the “Statement of directors’ shareholdings” section of the Annual Report on Remuneration.
Key
Fixed pay
Short-term variable pay Long-term variable pay Share ownership guidelines
20 15 2 0 16 2 0 17 2 0 18 2 0 19
Dir e c to rs ’ re mu n e rat io n re p o rt O ur e x e c u tiv e r em un er a tio n a t a g lan c e
What this performance means for executive directors’ pay
At Prudential, the remuneration packages are designed to ensure a strong alignment between pay and performance. As you can see from the charts on page 94, sustained growth across all of our key performance metrics has delivered substantial value to our shareholders. This has been refl ected in both the annual bonuses paid and the release of long-term incentive awards, as set out in the Annual Report on Remuneration.
In particular, the long-term incentives awarded to executive directors in 2012 had stretching performance conditions attached to vesting and were denominated in shares. The value generated for shareholders through share price growth and dividends paid over the last three years is therefore refl ected in the value of the 2014 long-term incentive plan (‘LTIP’) releases, as illustrated in the chart below.
Value of LTIP releases
0 9,000 6,000 4,500 1,500 On grant (2012) Pierre-Olivier Bouée On vesting (2015) On grant (2013) On vesting (2015) On vesting (2015) On vesting (2015) On vesting (2015) On vesting (2015) On vesting (2015) On grant (2012) On grant (2012) On grant (2012) On grant (2012) On grant (2012)
Jackie Hunt Michael McLintock Nic Nicandrou Barry Stowe Tidjane Thiam Mike Wells
Share price growth Dividends Award size £000 319 743 1,124 1,420 1,272 2,715 1,256 2,925 1,257 2,929 3,546 8,254 2,701 6,292 3,000 7,500
The value of these performance-related elements of remuneration are added to the fi xed packages provided to executive directors to calculate the 2014 ‘single fi gure’ of total remuneration. These are outlined in the table below:
Fixed pay Performance-related
Executive director Role
2014 salary Pension & benefi ts 2014 bonus LTIP vesting 2014 ‘Single Figure’ 2013 ‘Single Figure’ Pierre-Olivier Bouée1 Group Chief Risk Offi cer 473 193 752 743 2,161 n/a
John Foley2 Group Investment Director 162 65 255 3,147 3,629 4,040
Jackie Hunt Chief Executive, UK & Europe 644 324 1,016 1,420 3,404 3,564
Michael McLintock CEO, M&G 382 190 2,292 2,715 5,579 6,491
Nic Nicandrou Chief Financial Offi cer 682 267 1,186 2,925 5,060 4,160
Barry Stowe CEO, PCA 665 879 1,046 2,929 5,519 4,959
Tidjane Thiam Group Chief Executive 1,061 397 2,122 8,254 11,834 8,702
Mike Wells President & CEO, JNL 676 77 4,348 6,292 11,393 11,883
Notes
1 Pierre-Olivier Bouée was appointed to the Board on 1 April 2014. The remuneration above was paid in respect of his service as an executive director. 2 John Foley stepped down from the Board on 1 April 2014. The remuneration above was paid in respect of his service as an executive director.
Aligning 2015 pay to performance
The Remuneration Committee awarded 2015 salary increases to all executive directors in line with the budget for the wider workforce. Some changes have been made to incentive opportunities to refl ect the growing scope and impact of these roles. As stated above, no changes have been made to the remuneration architecture. We believe remuneration packages remain strongly aligned with performance over both the short and the long term.
The resultant remuneration packages for 2015 are set out in detail in the Annual Report on Remuneration and summarised in the table below:
Maximum AIP (% salary)
Executive director Role
2015 salary increase 2015 salary Maximum bonus Bonus deferred LTI Award (% salary)
Pierre-Olivier Bouée Group Chief Risk Offi cer 3% £649,000 160% 40% 250%
Jackie Hunt Chief Executive, UK & Europe 3% £664,000 175% 40% 250%
Michael McLintock1 CEO, M&G 3% £394,000 600% 40% 450%
Nic Nicandrou Chief Financial Offi cer 3% £703,000 175% 40% 250%
Barry Stowe CEO, PCA 5% HK$8,920,000 180% 40% 250%
Tidjane Thiam Group Chief Executive 3% £1,093,000 200% 40% 400%
Mike Wells2 President & CEO, JNL 3% US$1,148,000 160% 40% 460%
Notes
1 The bonus opportunity for the CEO, M&G remains at the lower of 0.75 per cent of M&G’s IFRS profi t or six times salary. He continues to receive awards under the Prudential LTIP and the M&G Executive LTIP, which are both included in the above LTI award.
The Company’s Directors’ Remuneration Policy was approved by shareholders at the 2014 AGM. This Policy came into effect following the AGM on 15 May 2014 and will apply for a period of three years unless shareholders approve a revised Policy within that time.
The pages that follow present a summary of the Remuneration Policy. The complete Policy can be found on our website at www.prudential.co.uk/site-services/governance-and-policies/directors-remuneration-policy
Remuneration for executive directors Fixed pay
Element Operation Opportunity
Salary The Committee reviews salaries annually, considering
factors such as:
—Salary increases for all employees;
—The performance and experience of the executive; —Group or business unit fi nancial performance; —Internal relativities; and
—Economic factors such as infl ation.
Market data is also reviewed so that salaries remain a competitive range relative to each executive director’s local market.
Annual salary increases for executive directors will normally be in line with the increases for other employees across our business units. However, there is no prescribed maximum annual increase.
Benefi ts Executive directors are offered benefi ts which refl ect their
individual circumstances and are competitive within their local market, including:
—Health and wellness benefi ts; —Protection and security benefi ts; —Transport benefi ts;
—Family and education benefi ts;
—All employee share plans and savings plans; and —Relocation and expatriate benefi ts.
The maximum paid will be the cost to the Company of providing benefi ts. The cost of benefi ts may vary from year to year but the Committee is mindful of achieving the best value from providers.
Provision for an income in retirement
Current executives have the option to:
—Receive payments into a defi ned contribution scheme; and/or
—Take a cash supplement in lieu of contributions. Jackson’s Defi ned Contribution Retirement Plan has a guaranteed element (6 per cent of pensionable salary) and additional contributions (up to a further 6 per cent of pensionable salary) based on the profi tability of JNL.
Executive directors are entitled to receive pension contributions or a cash supplement (or combination of the two) up to a total of 25 per cent of base salary.
In addition, the Chief Executive, PCA receives statutory contributions into the Mandatory Provident Fund.