membership of the Group’s cash balance pension arrangement known as the Morrisons Retirement Saver Plan. Individuals contribute 5% of capped base salary and all new eligible employees are automatically enrolled into this arrangement. A 10% cash salary supplement in lieu of Company pension contributions applies on base salary above the capped amount.
A cash alternative to pension provision is provided where the Group’s standard pension provision is not appropriate, for example, where an Executive Director has reached the Lifetime Allowance. Executive Directors may elect to receive this cash salary supplement in lieu of pension of broadly the same value as would accrue on an annual basis in the pension plan.
The Morrisons Retirement Saver Plan guarantees a value of the cash balance in the plan of 24% of pensionable pay (assuming retirement at age 65 years) adjusted for inflation capped at 2% p.a.
A maximum 10% cash salary supplement applies above capped base salary. Where an Executive Director receives a cash salary supplement only, the maximum supplement payable is 25% of salary.
Not applicable Not applicable
The Company provides a market competitive retirement provision for Executive Directors which is aligned with retirement benefits available throughout the Group.
ANNUAL BONUS Bonus awards are made annually subject to a mix of financial and non-financial performance measures. Achievement of each performance element is assessed independently and the level of payout is determined by the Committee after the end of the relevant financial year. 50% of any bonus payable is paid in cash with the other 50% deferred in shares under the deferred share bonus plan, normally for a period of three years. The Committee has discretion to allow a higher level of deferral.
Dividend equivalents accrue over the vesting period and are paid at the time of vesting on the number of shares that vest.
The maximum bonus potential for Executive Directors is 200% of base salary. The number of shares subject to the deferred award is determined by reference to the bonus and the share price on the date of award.
Annual bonus awards are subject to the following performance measures:
Ö60% is based on underlying profit before tax performance;
Ö20% is linked to achievement of a number of strategic corporate scorecard measures; and
Ö20% is linked to achievement of personal objectives.
The measures and weightings are set by the Committee on an annual basis and each element is assessed independently at the end of each year. Achievement of threshold performance will result in a payout of 20% of the underlying profit element (i.e., 12% of the maximum bonus potential). Achievement of one of the strategic corporate scorecard measures or one of the personal objectives is regarded as threshold performance for that element.
Deferred share awards are not subject to any further performance conditions. Awards will normally vest three years after the date of award but may be forfeit if the individual leaves employment before the vesting date.
Not applicable to the cash element of annual bonus. Malus provisions apply to outstanding deferred share awards allowing the Committee to reduce the level of vesting in the event of financial misstatement or similar acts by the Executive Directors that could bring the business into disrepute.
Annual bonus awards are designed to incentivise and reward achievement of the Group’s short term financial and strategic objectives and personal performance objectives. Compulsory deferral is designed to encourage retention and further align the interests of the Executive Directors with shareholders.
REMUNERATION POLICY TABLE – CONTINUED
EXECUTIVE DIRECTORSStrategic r epor t Go vernance Financial st atements
Element and how
it supports strategy Operation Opportunity Performance measures and period Recovery/ withholding
LTIP Awards are made annually subject
to performance measures set by the Committee which are aligned with business strategy and the Group’s stated KPIs.
Achievement of each element is assessed independently.
Awards will normally vest three years after the award is made. The Committee retains discretion to introduce a holding period which would apply after the award has vested.
Dividend equivalents accrue over the performance period and are paid at the time of vesting on the number of shares that vest.
The maximum annual individual award level under the plan is 300% of salary.
The current annual award level for Executive Directors is 240% of salary.
LTIP awards are subject to the following performance measures:
Ö50% is based on cumulative free cash flow;
Ö30% is based on underlying earnings per share (EPS); and
Ö20% is based on total sales.
Achievement of threshold performance will ordinarily result in vesting of 25% of each element with 100% vesting for maximum performance. However, the Committee has discretion to reduce the level of vesting at threshold.
A return on capital employed (ROCE) underpin applies to the vesting of the total LTIP award.
LTIP awards granted prior to 2014 are subject to the following performance measures:
Ö75% is based on growth in underlying EPS relative to RPI; and
Ö25% is based on like-for-like non-fuel sales relative to the Institute of Grocery Distribution (IGD) index.
Achievement of threshold performance will result in vesting of 25% of each element with 100% vesting for maximum performance.
No award can vest under the like-for-like sales element unless the threshold EPS target has been met.
For all awards, the Committee has the discretion to adjust the vesting calculations as set out in the notes to the policy table below.
Malus provisions apply to outstanding LTIP awards allowing the Committee to reduce the level of vesting in the event of financial misstatement or similar acts by the Executive Directors that could bring the business into disrepute.
Awards under the LTIP are designed to incentivise and reward achievement of the Group’s long term strategic objectives and creation of value for shareholders through execution of the strategy.
NOTES TO THE POLICY TABLE:
DETAIL ON PERFORMANCE MEASURES AND COMMITTEE DISCRETION
Annual bonus/Deferred share bonus plan (DSBP)
The Committee sets financial performance targets for threshold, on target and stretch performance against budgeted underlying profit before tax. Underlying profit is widely recognised in the market as a measure of financial performance and is audited. The Committee has the discretion to adjust the calculation for material exceptional events or actions which were not in the contemplation of the Committee at the time the targets were set (and which might otherwise materially distort the outcome), in order to ensure that vesting of this element is an accurate and fair reflection of performance.
Strategic corporate scorecard measures are set annually by the Committee to align with key strategic objectives for the financial year. The Committee typically sets three to six measures and uses its judgement to assess the outcome of each (independently) at the end of the year.
Personal objectives for the CEO are set by the Chairman. The CEO sets personal objectives for the other Executive Director(s). The Committee assesses performance and the outcome against each objective (independently) at the end of the year.
The weighting of the three elements of the annual bonus is reviewed each year by the Committee. Whilst the Committee expects the weightings contained in the table above to be broadly unchanged from year to year, the Committee has the flexibility to adjust the weightings (either from year to year or between individuals) as it believes is appropriate. Weightings for the various elements will be disclosed each year in the statement of implementation of policy.
Deferred awards under the DSBP are not subject to further performance conditions as they are awarded based on performance against annual bonus plan targets.
REMUNERATION POLICY TABLE – CONTINUED
EXECUTIVE DIRECTORSDIRECTORS’ REMUNERATION POLICY CONTINUED
Directors’ remuneration report
LTIP
The Committee believes that the combination of performance measures for the LTIP set out in more detail below represents the appropriate mix to incentivise management to achieve the Group’s long term objectives (which are set out in our strategy section) whilst delivering long term value for shareholders.
ÖCumulative free cash flow is operating cash flow plus net proceeds from the sale of properties less capital expenditure over the performance period.
ÖUnderlying EPS will be as referred to in note 1.5 to the Group financial statements.
ÖTotal sales is reported sales from all activities and channels excluding fuel and VAT.
Target ranges for cumulative free cash flow, underlying EPS and total sales are determined by the Committee at the time of grant. When setting targets, the Committee will take into account internal plans for the business, external expectations and the need to ensure that the LTIP rewards the delivery of long term value creation for shareholders. The Committee has discretion to adjust these calculations for material exceptional events or actions (which may include strategic changes to capital expenditure approved by the Board and material acquisitions or disposals) which were not in the contemplation of the Committee at the time the targets were set and which might otherwise materially distort the outcome, in order to ensure that vesting of the LTIP is an accurate and fair reflection of performance.
For the free cash flow measure, the Committee will set maximum and minimum ‘guardrails’ for maintenance expenditure and cumulative net proceeds from property sales over the performance period. When considering vesting against the free cash flow measure, the Committee will review and adjust as appropriate in the event of operation outside the agreed parameters. The Committee will disclose these parameters and any decision taken to adjust outcomes retrospectively in the relevant Annual report on remuneration. It should be noted that decisions in relation to material property sales and expenditure on maintenance and infrastructure are taken by the Board as a whole. If the Committee exercises its discretion to amend the calculation, a full disclosure of the reason for the amendment and an explanation of the impact will be given in the relevant Annual report on remuneration. The Committee uses a target ROCE in excess of the Group’s weighted average cost of capital over the performance period, as an underpin for the payout of the LTIP. For these purposes, ROCE is calculated as described on page 46. If the Committee is not satisfied with ROCE performance over the period it will retain discretion to adjust vesting outcomes downwards. Any application of discretion by the Committee will be explained in the relevant Annual report on remuneration.
Whilst the Committee expects the weighting between measures to remain broadly unchanged from year to year, the Committee has the flexibility to adjust the weighting from grant to grant in order to reflect the balance of priorities for the Company over time.
Details of outstanding share awards held by current Executive Directors are set out on pages 69 and 70. These awards were granted under a previous remuneration policy and so are subject to prior performance measures and terms. These awards remain capable of vesting in due course subject to the terms and performance targets set at grant.
REMUNERATION POLICY FOR THE WIDER GROUP
Certain managers in the Group participate in the annual bonus plan subject to broadly the same underlying profit before tax and strategic corporate scorecard measures as the Executive Directors with personal objectives set on an individual basis. The weighting attached to each element may differ from the Executive Directors for this management population.
The management tier immediately below Executive Director level (the Management Board) currently participates in the LTIP on the same basis as the Executive Directors.
Certain managers also receive awards under the LTIP but they are not subject to financial performance measures. Their awards vest subject to a requirement to remain in employment throughout the three year vesting period. Approximately 1,100 managers are currently eligible for these awards at an approximate cost to the Company of £11m.
Remuneration for employees below manager level is more heavily weighted towards fixed pay.
CONSIDERATION OF PAY AND CONDITIONS IN THE WIDER GROUP
In applying its policy and setting remuneration for the Executive Directors, the Committee takes into account pay structure and the general level of pay increases throughout the Group.
Employee views on pay generally form part of the Group’s annual and quarterly colleague engagement surveys. The results of the surveys are communicated to the Board. Employee views on Executive Director remuneration are not sought directly.
CONSIDERATION OF SHAREHOLDER VIEWS
The Committee has an ongoing dialogue with key institutional shareholders and the institutional investor representative bodies. An extensive consultation was undertaken in late 2013/early 2014 on the changes to the LTIP performance measures to apply from 2014 onwards with the views expressed by shareholders taken into account in developing the remuneration policy. In the event of any major changes to Executive remuneration in the future, the Committee will seek the views of key institutional shareholders and the representative bodies as appropriate at the relevant time.
Strategic r epor t Go vernance Financial st atements
ILLUSTRATIONS of remuneration policy
CEO
CFO
Salary, benefits and pensions
Maximum 23 35 42 44 35 21 100 £4,828,500 £2,448,500 £1,088,500 On Target Minimum Bonus LTIP Maximum 23 35 42 45 35 21 100 £2,787,844 £1,416,964 £633,604 On Target Minimum 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000
POLICY ON REMUNERATION FOR NON-EXECUTIVE DIRECTORS
The remuneration arrangements for the Chairman and the Non-Executive Directors are set out in the table below.
Element Approach to determination
Fees Fees for the Non-Executive Directors are determined by the Chairman and the Executive Directors and are reviewed from time-to-time with regard to the time commitment required and the level of fees paid in comparable companies. The remuneration of the Chairman is determined by the Remuneration Committee and the Board and is reviewed on the same basis.
Fees for the Non-Executive Directors comprise a base fee plus additional fees for Committee chairmanship, Committee membership and for the appointed Senior Independent Director. The Chairman receives one fee. Fee levels are disclosed on page 67.
Additional fees for other duties to the Company Not applicable. Benefits and other items in the nature of remuneration
The Chairman has use of a car and driver for Company business and receives private health provision. The Chairman and Non-Executive Directors are entitled to normal staff discount. Neither the Chairman nor any of the Non-Executive Directors participate in any Company incentive scheme.
ILLUSTRATIONS OF REMUNERATION POLICY FOR 2014/15
A substantial proportion of the Executive Directors’ pay is performance- related. The charts above right, illustrate the remuneration that would be paid to each of the Executive Directors under the remuneration policy set out in the table above, in three different performance scenarios:
Öminimum (performance below threshold) – fixed pay only with no vesting under annual or long term incentives;
Öon target – fixed pay plus 50% of maximum annual bonus potential (including the value of any bonus deferred in shares under the DSBP) and 25% vesting under the LTIP; and
Ömaximum – fixed pay plus maximum annual bonus and maximum vesting under the LTIP.
Fixed pay comprises salary (as at 3 February 2014), benefits (received during the 2013/14 financial year) and pension cash salary supplement (based on salary as at 3 February 2014). The scenarios do not take into account share price appreciation.
APPROACH TO REMUNERATION ON RECRUITMENT
The Committee will determine the remuneration of any new Executive Director (whether an internal appointment or external hire) following the same principles as for the current Executive Directors (set out elsewhere
in the Directors’ remuneration report). The standard elements that would be considered by the Company for inclusion are:
Ösalary (including arrangements to provide staged increases where appropriate);
Öbenefits, including pension arrangements, relocation expenses and legal or other professional fees where appropriate;
Öparticipation in annual bonus plan with 50% payable in cash and 50% deferred in shares pro-rata for the year of recruitment to reflect the proportion of the year for which the new recruit was in post; and
Öparticipation in LTIP.
For internal promotions any existing incentive awards will continue under their existing terms.
The maximum level of variable remuneration that may be granted to a newly appointed Executive Director would be in line with that for existing Executive Directors as set out in the policy table above. This excludes any remuneration that constitutes compensation for forfeited awards. The Committee would take into account both market practice and any relevant commercial factors in considering whether any award was necessary on recruitment, to compensate the new Executive Director for incentives which would be forfeited on leaving a previous employment. If the Committee considers it appropriate to make awards by way of compensation for incentives which are forfeited, such awards would be made on a comparable basis, taking account of performance conditions, the proportion of the performance period remaining and the form of the award (cash or shares). Compensation in the form of share awards will, where possible, be under the Company’s existing share plans in order to immediately align a new recruit with the Company’s performance. Where necessary and in exceptional circumstances, such awards may also be made under the provisions of Listing Rule 9.4.2. Where awards foregone were subject to ongoing performance conditions, the
Committee would generally expect a replacement award to be subject to appropriate performance conditions.
A new Chairman or Non-Executive Director will receive fees determined in line with the policy set out above.
DIRECTORS’ REMUNERATION POLICY CONTINUED
Directors’ remuneration report
DIRECTORS’ SERVICE CONTRACTS, NOTICE
PERIODS, TERMINATION PAYMENTS AND CHANGE OF CONTROL
Service contracts and notice periods
The Committee’s policy is for all Executive Directors to have rolling service contracts with a notice period of 12 months, unless, on an exceptional basis, to complete an external recruitment successfully, a longer initial period reducing to 12 months is used.
The Company may at its discretion pay in lieu of that notice. Payment in lieu of notice could potentially include up to 12 months’ base salary, benefits and pension (which will be payable in instalments and subject to mitigation).
Termination payments
The table below sets out the treatment of outstanding elements of remuneration that would normally apply for Executive Directors whose service with the Company terminates.
Circumstances of termination Salary and contractual benefits Annual bonus plan awards Unvested DSBP awards Unvested LTIP awards
Resignation or gross
misconduct Paid to date of termination. No bonus paid for year of termination. Award lapses on cessation of employment. Award lapses on cessation of employment.
Injury, disability or death/ retirement, redundancy or ill health (with agreement of the Company)
Paid to date of termination. Eligible to be considered for a bonus payment which would be calculated on a time pro-rata basis (subject to satisfaction of performance targets) for period of service completed in the relevant