TION REPOR T: Implementation R eport PRODUC TION, RESER
VES AND OPERA
TIONS
ADDITIONAL INFORMA
TION
Remuneration Report: Implementation Report continued
STIP individual measures for 2013
Individual measures were set by the chairman for the chief executive and by the chief executive for other executives based on the following categories: 1. Business transformation
2. Cost reduction 3. Performance delivery 4. Leadership and engagement
Details of the outcomes against the individual measures are provided in the following pages.
Discretionary adjustments for 2013
Discretionary downward adjustments of ten per cent of the overall 2013 STIP award have been applied to the chief executive and the current and former chief financial officer for the project cost overrun in relation to the Kitimat modernisation project. Downward adjustments of 40 per cent have been applied to the former Group executive, Technology & Innovation and 20 per cent to the chief executive, Aluminium.
Performance and impact on LTIP vesting outcome for the period ended 31 December 2013
The performance shares under the PSP awarded in 2010 had a four-year performance period that ended on 31 December 2013. This award has an indicative vesting of 75 per cent of face value (50 per cent of maximum). Share options under the SOP granted in 2011 had a performance period that ended on 31 December 2013. This award had an indicative vesting of 100 per cent of face value. Options can be exercised from 6 May 2014 until 6 May 2021. The Committee considered the Group’s overall performance in the context of the LTIP awards that were due to vest at the end of 2013 and concluded that the vesting of awards based upon the achievement of the TSR measures set by shareholders was justified.
Further details of the LTIP outcomes for the period ended 31 December 2013 and in prior years are provided on page 95.
Sam Walsh (chief executive)
Single total figure of remuneration
The table below provides a summary of actual remuneration in respect of 2013 and prior years in accordance with UK legislation, stated in Australian dollars, the currency of Sam’s arrangements. This is in addition to the Australian statutory disclosure requirements set out in US dollars in table 1a on pages 98 and 99. The remuneration details set out in table 1a include theoretical accounting values relating to various parts of the remuneration packages, most notably LTIP arrangements, and require a different methodology for calculating the superannuation value. Accordingly, the figures below are not directly comparable with those in table 1a.
(stated in A$‘000) 2013 2012 2011
Base salary paid (a) 1,889 1,643 1,571
STIP payment – cash 1,371 1,075 1,196
STIP payment – deferred shares (b) 1,370 1,075 1,196
Total short-term pay 4,630 3,793 3,963
Value of LTIP awards vesting (c) 3,121 2,225 1,383
Superannuation (d) 1,322 745 657
Other benefits (e) 997 232 92
Single total figure of remuneration 10,070 6,995 6,095
Percentage change in total remuneration (2013 versus 2012;
2012 versus 2011) 44.0% 14.8% –
Percentage of total remuneration provided as performance-related
pay (STIP and LTIP) 58.2% 62.5% 61.9%
Percentage of total remuneration provided as non-performance- related pay (base salary,
pension and other benefits) 41.8% 37.5% 38.1%
Percentage of maximum STIP
awarded (f) 72.1% 65.0% 75.2%
Percentage of maximum STIP forfeited 27.9% 35.0% 24.8%
Percentage of target STIP awarded 120.2% 108.3% 125.4%
Percentage of PSP award vesting 75% 92.5% 0%
Percentage SOP award vesting – 100% 100%
(a) Salary paid in the financial year to 31 December. Salaries are reviewed with effect from 1 March. However, in 2013 Sam received a salary increase on appointment with effect from 17 January 2013 and no further increase in 2013. The salary and single figure of remuneration for 2012 and 2011 relates to his position as PGCEO, Iron Ore. (b) Value of STIP deferred under the BDP.
(c) Based on the value of the LTIP awards which vested in respect of the performance period that ended 31 December. The Rio Tinto Ltd share price used to calculate the value of the award vesting on 17 February 2014 of A$69.54 was sourced from Investis Ltd. The performance conditions for awards vesting for the period ending 31 December 2013 are detailed in the notes to table 3 on pages 106 to 108.
(d) Superannuation reflects the value of the superannuation accrued during the year assuming that it was to come into payment immediately. This differs from the value reported in table 1a which is calculated using an IAS19 methodology and assumptions on rates of investment return, inflation and salary increases. The figures disclosed for prior years have been restated in accordance with the new UK reporting requirements. The previous figures disclosed for 2012 and 2011 were A$410,000 and A$372,000 respectively.
(e) Includes international assignment benefits of A$786,000 for 2013 of which A$206,000 are considered one-off costs associated with Sam’s relocation from Perth, Australia to London, allowance for professional tax services, car allowance, Company provided transport, other contractual payments and for 2012, activities in relation to Rio Tinto’s sponsorship of the medals for the 2012 London Olympics.
(f) The maximum potential STIP award is 200 per cent of base salary.
Base salary
The Committee has increased Sam’s base salary by 2.5 per cent with effect from 1 March 2014, consistent with the salary budget for other Australian contracted employees in the Group.
2014 2013 % change
Base salary (stated in A$‘000) 1,948 1,900 2.5
STIP individual objectives for 2013
Sam’s performance against his individual objectives is summarised below: Category Performance
Business transformation
– Refocused the business on pursuing greater value for shareholders.
– Reshaped the Executive Committee.
– Initiated a review of the Group capital allocation processes.
– Set a clear framework for the organisation and asked every employee to act like an owner.
Cost reductions – Exceeded the publicly committed operating cash cost reductions of US$2 billion.
– Reduced Exploration & Evaluation expenditure by US$1 billion, again exceeding the US$750 million target.
– Exceeded reductions in support costs. – Reduced net debt and capital expenditure. Performance
delivery
– Delivered five major projects during the year. – Oversaw the closure, sale or curtailment of six
businesses.
– Delivered first shipment of concentrate from Oyu Tolgoi in July.
– Delivered the Pilbara 290 million tonnes per annum (Mt/a) US$400 million ahead of budget and four months ahead of schedule.
– Announced the breakthrough pathway for the Pilbara 360Mt/a expansion.
Leadership and engagement
– Met with key stakeholders, including investors, employees, governments, international organisations, customers, suppliers, and civil society representatives. – Actively promoted the values of the business. The Committee, with input from the chairman of the board, assessed Sam’s performance against his individual objectives as 160 per cent (out of 200 per cent) for his individual contribution to the business during the year. STIP outcomes for 2013
The following table summarises the STIP outcomes for 2013.
Measures Weight (%)
Score (out of
200%) Weighted score
Group safety and financial 70 122.3 85.6
Individual 30 160.0 48.0
Sub-total 100 – 133.6
Discretionary adjustment (a) (13.4)
Total (% of target out of 200%) 120.2
(a) The Committee decided that the overall STIP outcome would be reduced by ten per cent for the project cost overrun in relation to the Kitimat modernisation project.
As a result, Sam received a STIP award of 120.2 per cent of target, equivalent to 144.3 per cent of base salary, 50 per cent to be delivered in cash in March 2014, and the remainder to be delivered in deferred shares, vesting in December 2016.
LTIP outcome for the period ended 31 December 2013
Sam received 41,881 shares in Rio Tinto Limited on 17 February 2014 from the vesting of the PSP awarded in 2010. He also received a cash payment of A$208,735 equal to the aggregate net dividends that would have been paid on the shares that vested had he owned them during that four-year period. No dividends were paid in respect of the shares that lapsed.
In 2011, Sam elected to receive his full LTIP award under the PSP and as a result he has no options under the SOP that were granted in 2011 and which had a performance period that ended on 31 December 2013.
Further details of the awards vesting in 2014 and in prior years are provided on page 95 and in table 3 on page 103.
LTIP award granted in 2013
The details of Sam’s 2013 LTIP award are summarised in the following table.
Type of
award Grant date
Face value of award (% of base salary) Face value of award
(A$’000)(a) % vesting at threshold performance End of the performance period over which the performance conditions have to be fulfilled(b)(c) PSP 27 May 2013 420% 7,980 22.5% 31 Dec 2017
(a) The face value represents the maximum value of the award and resulted in an award of 133,255 conditional shares based on the average share price over 2012 of A$59.885. The expected value of the award is 50 per cent of the face value or A$3,990,000.
(b) As a transitional measure, for the 2013 PSP award, half of the award may vest after four years in 2017, and half the award may vest after five years in 2018. (c) The full performance conditions for the award are set out in detail on page 108. LTIP award for 2014
Sam’s PSP award in 2014 will have a face value of 420 per cent of base salary and an expected value of 210 per cent of base salary. The award may vest after five years in 2019, subject to the Group’s relative TSR and relative EBIT margin performance. The performance conditions for the award are unchanged from 2013 and the full performance conditions are set out in detail on pages 89 and 90. As with other participants, Sam’s award in 2014 may be subject to pro-rating depending on the date of his retirement from Rio Tinto. Shareholding
Sam’s shareholding for the purposes of the share ownership policy, calculated using the market price of Rio Tinto shares on the latest practicable date each year before the date of publication of this report was:
31 December 2013 31 December 2012 Increase in shareholding/ value of options
Holding of ordinary shares 94,444 46,950 101.2%
Value of vested but
unexercised options (‘000) A$1,073 A$1,115 (3.8%)
Multiple of base salary 4.0 2.3 1.7
The value of vested but unexercised options is calculated based on the share price as at the relevant date in February each year less the exercise price and with a 50 per cent discount for the effects of taxation.
Superannuation
Sam is provided with superannuation through an employer funded plan as provided to Australian-based employees.
In line with Australian-based employees with defined benefit provision who remain in service beyond age 62, Sam’s benefit is calculated as the greater of: (a) 20 per cent of basic salary, averaged progressively over the three years
from age 62 to age 65, for each year of service and proportionate month with the Company to date of retirement; or
(b) (i) his accrued benefit at age 62 of 4.05 times final basic salary; plus (ii) Company contributions at the Superannuation Guarantee rate,
currently nine per cent of basic salary, less tax; plus
(iii) investment earnings at the rate the trustee of the superannuation fund may determine from time to time for the period from age 62 to the date of retirement.
In line with typical market practice in Australia, Sam continues to receive an additional Company contribution on a defined contribution basis of 20 per cent of the lesser of:
(i) 50 per cent of the annual STIP award; or (ii) 20 per cent of base salary.
This benefit can be taken without employer or trustee consent and without actuarial reduction on cessation of employment on or after age 62. The accrued lump sum benefit as at 31 December 2013 was A$8,454,000 (31 December 2012: A$7,145,000). The 2012 figure has been restated to include the impact of the investment earnings on Sam’s accrued benefit under the superannuation fund for the period from age 62 as set out in (b)(iii) above. The figure disclosed previously for 2012 was A$6,836,000, being the accrued lump sum benefit calculated by reference to Sam’s base salary as set out in (a) above. As the increase to the benefit arose due to investment earnings, there was no additional cost to the Company resulting from this restate and the disclosure in table 1a is therefore unchanged. The 2013 figure also reflects the impact of the investment earnings under the superannuation fund; the accrued lump sum benefit as at 31 December 2013 calculated by reference to Sam’s base salary as set out in (a) above was A$7,811,427. The additional Company contribution on a defined contribution basis for 2013 was A$66,000 (2012: A$64,000).
Fees received from external appointments
In 2013 Sam received A$27,282 (2012: A$161,011) in respect of his position as a non-executive director of Seven West Media Limited from which he stood down in January 2013.
Service contract
Sam’s employment concludes, without the need for either party to give notice, on 31 December 2015. The Company may also terminate his employment for any reason on 31 December 2014, provided it gives notice of this decision by 31 October 2014. The Company or Sam may terminate this employment at any time by giving written notice of 12 months or such lesser period as may exist between the date on which the notice is given and 31 December 2014.
Other
The Company paid for various standard relocation costs associated with Sam’s move from Perth, Australia to London of approximately A$206,000. He also receives a housing allowance and other assignment benefits during his secondment to London. His remuneration is not subject to tax equalisation or cost of living adjustments, both of which are standard provisions for other international assignees in the Group. The amounts are included in note (e) under the table on page 82.
Sam will be eligible to receive the value of unused annual leave and long service leave at the conclusion of his employment in accordance with Australian legislation and applicable practice applying to all employees in Australia; the value of this leave as at 17 February 2014 was A$787,000 and A$1,592,000 respectively.
Chief executive’s pay and employee pay
The table below compares the changes from 2012 to 2013, in salary, benefits and annual incentives paid for the chief executive and the Australian workforce. We chose the comparison to the Australian workforce because it is the country where 40 per cent of the total workforce is based. This comparator group has been selected due to the availability of comparative data and to remove the impacts of year-on-year exchange rate fluctuations. The underlying elements of the chief executive’s pay are based on the values reported in the single total figure of remuneration table.
Sam’s base salary was increased by 14.9 per cent with effect from 17 January 2013 to reflect his promotion to chief executive. The increase in his benefits is primarily due to international assignment benefits and one-off costs associated with his relocation from Perth, Australia to London.
Percentage change in salary paid Percentage change in other benefits paid Percentage change in annual incentive paid(b) Chief executive 14.9% 329.7% (10.1%)
Australian workforce (a) 4.2% 2.7% (7.3%)
(a) The percentage change in each element of remuneration for the workforce is calculated on a per capita basis using average employee numbers.
(b) The percentage change in annual incentive compares amounts paid in 2013 with respect to the 2012 performance year, to amounts paid in 2012 with respect to the 2011 performance year. Annual incentives for the workforce comprise a number of different short-term incentive arrangements.
T FINANCIAL S TA TEMENT S DIREC TORS’ REPOR T: REMUNERA TION REPOR T: Implementation R eport PRODUC TION, RESER
VES AND OPERA
TIONS
ADDITIONAL INFORMA
TION