What was the response to shareholder feedback on the directors’ remuneration policy?
Shareholder voting and shareholder engagement
The table below shows the votes cast at the AGM in May 2014 on remuneration-related matters.
For Against Withheld
Advisory vote on the 2013 Directors’ remuneration report 422,353,752
(95%) 24,164,622
(5%) 5,888,574 Binding vote on the remuneration policy (applies for three years) 266,680,576
(59%) 184,008,107
(41%) 1,664,073 Binding vote to make the maximum variable compensation ratio 200% of fixed remuneration
(applies indefinitely) 441,361,419
(98%) 9,480,365
(2%) 1,502,695 The Committee was clearly disappointed with the level of support for the 2014 remuneration policy and has acted to address shareholders’ concerns. Although shareholders and investor bodies have a range of views, some common concerns were clear, and the table below summarises the feedback received and how it has been addressed.
Shareholder concerns Action
There was a lack of transparency in how the Committee
determined the TVC awards of executive directors A balanced scorecard will be introduced in 2015 to provide a clear and objective assessment of executive performance and used to determine TVC awards levels. The scorecard balances both key financial measures and strategic measures
The measures and weightings for 2015 have been disclosed in this report. Details of the targets and the Committee’s assessment of performance will be disclosed in the 2015 Directors’ remuneration report
The proportion of TVC that has long-term performance
conditions is too low Twenty-five per cent of TVC will continue to be delivered in the form of performance share awards vesting after five years. This award is subject to stretch long-term performance conditions
A further 25 per cent of TVC will vest only if, after three years, a threshold level of financial performance has been achieved.
The underpin is a pass or fail condition
How the executive directors’ 2014 TVC will be delivered and the remuneration policy will be implemented in 2015
Statement of implementation of remuneration policy for executive directors in 2015
There will be no changes in how the remuneration policy is implemented in 2015 compared to 2014 in respect of base salary, fixed pay allowances, benefits and pensions. Changes in how TVC will be determined and delivered in 2015 are explained below.
●
●How will TVC be determined? Decisions will be made by reference to a balanced scorecard, the performance measures of which are disclosed on page 179
●
●How will awards be delivered? TVC will be delivered in shares over a five-year period. Fifty per cent of the TVC (rather than 25 per cent currently) will vest only if additional long-term performance conditions are met. This will be achieved through the introduction of a financial underpin that applies to 25 per cent of TVC
●
●Why? The combination of how the Committee will now determine and deliver TVC will support execution of the Group’s strategic priorities and will lead to better alignment with shareholder interests. A significant part of all executive directors’ awards will pay out only if the strategic actions taken now translate into future financial performance
16%
15%
15%
12.5%
12.5%
25%
4%
2016 2017 2018 2019 2020 2021 2022
Potential claw-back
up until 7th year TVC award
determined by the Committee
by reference
to the scorecard
in March 2016
Deferred share award
subject to long-term performance
conditions (50%)
Performance share award
Underpin share awards
Upfront and deferred share award
(50%) 200% of
fixed pay
0% of fixed pay
Maximum TVC
Year of vesting
2023
1 2 3 4
Illustration of how 2015 TVC will be delivered
Notes
1. The 2015 scorecard measures and weightings have been disclosed on page 179
2. A financial underpin will be attached to 25 per cent of the TVC award. Together with the existing performance share award, long-term performance conditions will therefore apply to 50 per cent of TVC
3. Awards will be paid in shares over five years. Awards will be disclosed on a face value basis, consistent with the expected value proportions in the existing policy 4. Awards will be subject to malus and claw-back for seven years from the date of award
As a result of the changes, from 2015 executive directors’ remuneration at the maximum will be divided equally between a) fixed pay, b) upfront and deferred share awards, and c) share awards subject to long-term performance conditions.
Use of the new balanced scorecard
The business has been reorganised during the year and has refreshed its strategy. The Group needs to incentivise both the right strategic actions and delivery of financial performance. The new balanced scorecard reinforces this by linking TVC to the Group’s five strategic priorities.
The measures and weighting of the performance measures that apply to 2015 TVC for executive directors and the proposed criteria for assessing the executive directors’ annual progress against the financial performance (50 per cent weighting) and other strategic priorities (50 per cent weighting) are set out on page 179. The four financial-related measures have equal weighting to ensure an appropriate focus on capital and returns.
The specific scorecard targets take into account the Group’s 2015 financial plan and its priorities for the next few years. The Committee considers such targets to be commercially sensitive and that it would be detrimental to the interests of the Group to disclose them before the end of the financial year. Targets will be disclosed in the 2015 Directors’ remuneration report alongside the actual level of performance achieved.
The Committee will review the scorecard annually and may vary the measures, weightings and targets each year.
Directors’ remuneration report 2014 report on remuneration
Directors’report 2015 scorecard
Measure Weighting % 2015 target range1
Financial performance Underlying pre-tax
operating profit2 12.5 To be disclosed retrospectively Normalised earnings
per share growth 12.5 To be disclosed retrospectively Return on risk-weighted
assets (RoRWA)3,4 12.5 To be disclosed retrospectively Common Equity Tier 1
ratio4 12.5 Maintain prudent buffer over regulatory capital requirements
Other strategic measures Client relationships 20 Deepen, broaden and selectively grow client relationships, as evidenced by an increase in average multi-product or multi-market ratios Evidence that the network is more effectively leveraged
Organisational effectiveness and efficiency
20 Deliver productivity improvements of at least
$400 million
Deliver transformation in the Retail Clients segment by delivering retail branches plan and growth in retail liabilities
People, culture and
conduct 10 Satisfactory progress has been made on the 2015
conduct agenda, including any commitments made to regulators
Successful execution of the 2015 milestones under the Group’s financial crime risk mitigation and remediation programmes
Notes
1. There will be retrospective disclosure of financial target ranges and the outcomes against both financial and strategic measures
2. Profit will be measured on an underlying basis (with adjustments to such items as disposals, other acquisition and corporate-related activity, goodwill and own credit adjustment). Although underlying profit would ordinarily exclude the cost of any regulatory fines, for the purposes of the scorecard, such fines would be fully taken into account 3. RoRWA will be measured on a post-tax basis
4. RoRWA and CET1 are defined based on regulatory definitions and modelling assumptions as at 1 January 2015. In addition, the Committee has the discretion to take into account at the end of the performance period any changes in regulatory capital and risk-weighted asset requirements that might have been announced and implemented after the start of the performance period
At the end of the year the Committee will follow a three-step process:
1. Consider eligibility for TVC
Confirmation that the Group’s financial performance has been achieved within the Group’s risk appetite and the forward-looking capital position, and therefore nothing prevents TVC awards being made. In addition, each executive director had achieved a minimum standard in terms of living the Group’s values.
2. Evaluate performance against the Group’s priorities
If each of the scorecard targets are met, then, subject to any further adjustment, 50 per cent of the maximum TVC would be the outcome. If performance is below target for any of the measures, the Committee will use its judgement to determine an amount below 50 per cent of the maximum. Superior performance (that is, in excess of the target) of any of the measures may receive a payout above 50 per cent. Retrospective disclosure of its assessment of annual performance against both the financial measures and other strategic priorities will be made, together with any overriding discretion exercised by the Committee.
3. Assess personal performance and finalise TVC for each executive director
The payout under the Group scorecard can be adjusted by the Committee positively and negatively for an individual director’s performance and for factors such as the risk and control environment in an individual director’s area of responsibility.
Taking into account the combination of the initial scorecard and the long-term performance conditions, 75 per cent of TVC will be linked to financial or shareholder-return performance measures and 50 per cent of TVC will be subject to a double hurdle of annual scorecard measures and long-term performance conditions.
The long-term performance conditions for the 2014 TVC awards
Details on the long-term performance conditions for awards to be made in 2015 in respect of 2014 performance Given the financial performance for 2014 and the refreshed financial priorities for the next three years, the Committee determined it would be appropriate to review the target levels of performance for the performance share awards alongside setting the targets for the new underpin share awards.
The current intention of the Committee is that the measures for awards in 2016 will be similar to those awards to be granted in 2015. However, the Committee will review the measures and targets again in advance of making awards in 2016 in respect of 2015 performance, including an assessment against continued alignment with the Group’s priorities.
Performance share awards
For awards in respect of 2014 performance, the Committee concluded that the current performance measures (earnings per share (EPS) growth, RoRWA and relative total shareholder return (TSR)) continue to provide a balanced set of metrics with an equal weighting between performance, investor interests and prudent risk-taking. There will therefore be no change to the measures or weightings.
The target levels for performance share awards are designed to be challenging but realistic. The Committee’s starting point for determining target levels was to review the financial plan and the Group’s priorities. The Committee then considered the ability of any targets to incentivise executive directors to get back to improved returns. Clearly, in the context of current performance, combined with the impact of risk-weighted asset (RWA) model changes, the starting point for returns is now lower.
The RoRWA target has therefore been changed to ensure it remains stretching yet realistic over the next three years. In contrast, the EPS growth target has been increased at the top end of the performance target range, reflecting the reduced EPS in 2014.
No change to the TSR targets will be made for the forthcoming year.
The adjustment to the RoRWA targets also reflects changes in regulation regarding RWA measurement and alterations to capital requirements, which have made the existing RoRWA targets no longer realistic over the time horizon of performance share awards.
However, to acknowledge shareholder feedback, there will be a reduction in the level of vesting for threshold performance, from 30 to 25 per cent across each of the three performance measures.
Performance share awards will vest on the fifth anniversary of grant, subject to meeting the following performance conditions, measured after the third anniversary of award:
Performance measure Weighting Threshold (25% vesting) Maximum vesting (100% vesting)
EPS growth¹
(over 3 years) One-third 15% 35% or higher
RoRWA²
(average over 3 years) One-third 1.2% 1.4% or higher
Relative TSR against peer group
(see page 189)
One-third Median Upper quartile or higher
Straight-line vesting applies between the threshold and maximum points for EPS growth, RoRWA and TSR.
Underpin share awards
In total, 25 per cent of a TVC award will be delivered as an underpin share award. These awards will vest on either the third or fifth anniversary of the award, subject to sustained financial performance between the date of award and the third anniversary of award.
Underpin share awards are intended to provide investors with assurance that should a certain level of performance not be met, then the relevant awards will not vest.
The underpin conditions are as follows:
Performance measure Weighting Vesting
EPS growth¹
(over 3 years) One-half The portion of the award subject to the EPS growth underpin will be forfeited if EPS growth after three years has not equalled or exceeded 10%
RoRWA²
(average over 3 years) One-half The portion of the award subject to the RoRWA underpin will be forfeited if the average RoRWA after three years has not equalled or exceeded 1.1%
Notes to above tables on performance share awards and underpin share awards 1. Earnings per share growth is measured on a normalised basis
2. RoRWA is calculated by reference to the three-year average normalised post-tax earnings over the four-year average of risk-weighted assets. RoRWA is defined based on regulatory definitions and modelling assumptions as at 1 January 2015. In addition, the Committee has the discretion to take into account at the end of the performance period any changes in regulatory risk-weighted asset requirements that might have been announced and implemented after the start of the performance period
Directors’ remuneration report 2014 report on remuneration
Directors’report How much is being awarded in TVC this year?
2014 total variable compensation Determining 2014 TVC
The Committee views the determination of TVC in a holistic way, reviewing a number of factors (both financial and strategic) to determine an appropriate Group TVC.
An automatic risk adjustment is applied in determining Group TVC. This is calculated by using a risk-adjusted, profit-based funding mechanism (known as risk capital adjusted profit or RCAP). The Committee then quantifies other adjustments for specific risk and control matters that are not already taken into account through automatic risk adjustment. In 2014, this included consideration of the cost of the settlements with the US authorities¹, in addition to the automatic risk adjustment.
The Committee also exercises its judgement to ensure that the overall payout appropriately balances Group performance, and any other factors, such as return to investors, the strength of the Group’s forward-looking capital position, performance relative to peers, investors’ views, political sentiment on compensation, and regulatory requirements.
In recent years the Committee has progressively reduced the share of profits paid in TVC. Between 2010 and 2013 Group TVC fell 20 per cent, compared to a reduction in profit of less than 1 per cent. Competitors in the Group’s markets have continued to pay aggressively for scarce talent. This has created significant competitive pressures in some of the Group’s key markets:
the annualised voluntary attrition rate continued to be high in 2014, particularly at more junior levels. The Committee is mindful of the external sentiment in some markets on bankers’ pay, and is particularly conscious of the Group’s disappointing financial performance, but it operates in a competitive global marketplace for talent. This requires the Committee to make, and justify, difficult decisions to ensure the Group attracts and retains the talent needed across its footprint of Asia, Africa and the Middle East to deliver its business strategy.
The final decision made by the Committee was that Group TVC for 2014 should be $1,098 million, 9.1 per cent lower than in 2013, as shown below. The Committee concluded that a lower pool would present a material risk to the ability of the Group to make appropriate and competitive awards. The 2014 Group TVC is 27.6 per cent lower than in 2010, while over the same period dividends paid grew by 51 per cent. Between 2010 and 2014 underlying profits fell by 15.0 per cent. Total staff costs as a percentage of income is 37.2 per cent in 2014, higher than in 2013 but lower than 37.6 per cent in 2011.
$million2014 2013
$million
Non-deferred awards 897 955
Deferred awards and share awards subject to long-term performance conditions 201 253
Total TVC pool 1,098 1,208
As always, the Group rewards businesses and markets that perform more strongly year-on-year. Differentiation remains critical so the Group can reward those who have contributed significantly. Performance is assessed on both what the Group achieves and how it is achieved. The Group continues to focus on culture, conduct and values, with performance decision-making appropriately considering risk and control issues, behaviours and effective supervision. Regulation in relation to pay continues to evolve rapidly, and the Group will comply with the rules and remain supportive of the underlying sentiment behind them.
1. The US authorities comprise the New York Department of Financial Services (NYDFS), the Board of Governors of the Federal Reserve System (FED), the New York County District Attorney’s Office (DANY), the United States Department of Justice (DOJ) and the Office of Foreign Assets Control (OFAC)
Relative expenditure on pay and allocation of earnings
When considering Group TVC the Committee is sensitive to shareholders’ concerns about relative expenditure on pay compared to the expenditure on dividends, and considers the allocation of earnings carefully. The Committee concluded that the Group had approached this allocation in a disciplined way over the past five years. As the table below illustrates, the Group TVC as a percentage of income decreased from 9.4 per cent to 6 per cent from 2010 to 2014.
Allocation of the Group’s earnings between stakeholders
Actual Allocation
$million2014 2013
$million 2012
$million 2011
$million 2010
$million 2014
% 2013
% 2012
% 2011
% 2010
%
Staff costs 6,788 6,570 6,492 6,630 5,765 63 61 62 64 65
Corporate taxation including levy 1,896 2,099 2,040 2,007 1,708 18 20 20 19 19
Paid to shareholders in dividends 2,095 2,062 1,866 1,675 1,385 19 19 18 17 16
TVC pool as a % of income
2014 2013 2012 2011 2010
TVC pool ($million) 1,098 1,208 1,425 1,499 1,518
TVC pool as % of income 6.0% 6.4% 7.6% 8.5% 9.4%
The Committee has included the amount of corporate tax, including the bank levy, because it is a significant payment and illustrates the Group’s direct contribution to society through the tax system.
How much is being awarded in TVC to executive directors in 2014?
Executive directors’ TVC awarded in respect of 2014 (Audited) Approach to determining individual TVC awards
The Committee’s performance management framework was outlined in the 2013 Directors’ remuneration report. At the end of 2014, the Committee agreed its overarching approach to quantum and structure. Then at its meetings in February, the Committee considered Group performance, the performance assessments for each executive director (including both their personal objectives and their contribution to the agreed Group collective agenda) and risk- and control-related matters (with input from Risk and other control functions), and made its determinations.
The Committee followed a three-step process for determining TVC awards:
Step 1: Consider eligibility for TVC
Step 2: Evaluate performance against the Group’s priorities
Step 3: Assess personal performance and finalise TVC for each executive director 1. Consider eligibility for TVC
The Committee concluded that the Group remained within its risk appetite and, from a forward-looking capital position, the Committee was able to approve TVC awards. In relation to each individual executive director, the Committee considered individual performance and the performance in areas of personal responsibility. The Committee considered whether each executive director had achieved a minimum standard in terms of living the Group’s values and associated behaviours, and concluded this was the case.
2. Evaluate performance against the Group’s priorities
At the end of 2014, the Committee reviewed both financial performance and achievement against the Group’s strategic priorities outlined at the start of the year, as a means of determining executive directors’ TVC awards. In relation to financial performance, the Committee concluded that the financial performance did not meet the expectations set at the start of the year, notwithstanding the challenging market environment. The Committee noted that significant progress was made against the strategic aspirations and the other Group priorities.
Directors’ remuneration report 2014 report on remuneration
Directors’report
Directors’report