KPMG s guide to directors remuneration reporting quoted companies. kpmg.co.uk

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1 KPMG s guide to directors remuneration reporting quoted companies kpmg.co.uk

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3 CONTENTS 1 Introduction 1.1 Companies within the regime 1.2 Voting on remuneration 1.3 Reporting on remuneration 1.4 The GC100 and Investor Group materials 1.5 Source materials and other guidance 2 Annual Statement 3 Annual Report on Remuneration 3.1 General matters 3.2 Single total figure table 3.3 Scheme and share interests 3.4 Exit and ex-directors 3.5 Other disclosures not auditable 4 Schedule 5 disclosures 5 Remuneration policy 5.1 When required 5.2 Disclosures 2013 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative,

4 1 Director s Executive Remuneration 1 INTRODUCTION 1.1 Companies within the regime The statutory regime for the control and reporting of directors remuneration, to which this guidance relates, applies to quoted companies. Is my company quoted? A quoted company (s385 CA2006) means a company whose equity share capital: has been included in the official list in accordance with the provisions of Part 6 of the Financial Services and Markets Act 2000(c8); is officially listed in an EEA State; or is admitted to dealing on either the New York Stock Exchange or the exchange known as NASDAQ. The official list is as defined by the Financial Services and Market Act 2000 (s103(1)), being the list as maintained by the FCA. Simply put, this is a list of companies in the London Stock Exchange s Main Markets which are the: Premium Listing Segment; Standard Listing Segment; and High Growth Segment. Official lists are also maintained by other EEA countries, e.g., the EU plus Iceland, Norway and Liechtenstein. It is common to speak of an AIM company as being AIM listed but in law this is neither listed nor quoted as the AIM is not specified in s385 s definition, nor are companies on the PLUS market. Companies becoming quoted or unquoted during the year A company is a quoted company if it meets the definition immediately before the end of the accounting reference period [s385(1) CA 2006]. A company becoming quoted during the financial year will be within the scope of the additional disclosure requirements (it will have to prepare a directors remuneration report covering the whole financial year); a company becoming unquoted during the financial year will not be within the scope of these additional disclosure requirements. Companies becoming unquoted after the year end If a company becomes unquoted, e.g., delisting due to a takeover, after the financial year end but before the financial statements are signed, a directors remuneration report is still required. This is because the definition of quoted is based on the status of the company at the balance sheet date. 1.2 Voting on remuneration A quoted company s directors remuneration policy must be approved by shareholders resolution (i.e., a binding vote) at least every three years [s439a CA 2006] (see 5.1 below). The actual remuneration continues to be subject to an advisory vote. However, if this advisory vote is lost, the policy must be brought to a binding vote at the next AGM. No directors or shadow directors 1 remuneration or loss of office payment may be made unless it is in accordance with that approved policy or has been specifically approved by a shareholders resolution [ss226b, 226C CA 2006]. Payments (purportedly) made in contravention of this are void; the recipient holds the money as trustee for the company; and the directors who authorised the payment are treated as (each) indemnifying the company for any loss [s226e CA 2006]. The remuneration policy must first be put to a shareholders vote at the first AGM at which a set of reports and financial statements, for a year ending on or after 30 September 2013, are laid before shareholders [SI 2013/2227, s82 Enterprise and Regulatory Reform Act 2013]. Although the policy must be put to the vote every three years, the company can do so more frequently, for example if it wishes to change the policy sooner. In such a case the company need not wait for the next AGM at which a set of reports and financial statements are laid, but may convene an additional general meeting; a policy report, identical to the one otherwise required in a directors remuneration report, would be put before that meeting; naturally there would be considerable inconvenience and cost involved in such a case. The decision tree opposite illustrates the process. 1 A shadow director is a person in accordance with whose directions or instructions the directors of the company are accustomed to act (s251(1)), such as a substantial shareholder who is not a director. It does not include individuals who offer advice to a director in a professional capacity.

5 Director s Executive Remuneration 2 Every year Every three years Advisory vote on annual report Against a Binding vote on policy For Against For No further action required Is there a previously approved policy in place? Has the company specified a date at which the policy becomes effective (e.g., beginning of the next financial year)? No Yes No Yes For All payments must be made in accordance with this policy Must hold a General Meeting to get a revised policy approved Against Revert to this policy report. All payments must be made in accordance with this policy Default position applies the new approved policy is effective from the date of the AGM. Payments made from this date forward must be made in accordance with this policy b Policy report effective from this date. Payments made before this date forward must be made in accordance with previous policy a If the advisory vote on the annual report is lost, the directors remuneration policy must be brought to a binding vote at the next AGM. This may result in a vote on remuneration policy outside the three year period. b 1 October 2013, e.g., for 31 December year ends this is 31 December 2014 [Sch 8 para 24(5), s226d(6) CA 2006, s82(2)enterprise and Regulatory Reform Act 2013].

6 3 Director s Executive Remuneration 1.3 Reporting on remuneration Policy report To facilitate the binding voting on policy, the directors remuneration report includes a statement of the policy in those financial years reports that will be laid at the AGM at which the vote will take place; in other years it must be available for public inspection but need not be included in the directors remuneration report. Annual report on remuneration In all financial years the directors remuneration report includes details of the actual remuneration of the directors (the Annual report on remuneration ). These disclosure requirements are located in sections 420 to 421 of the Companies Act 2006 and of Schedule 8 of SI 2008/410 Large and medium-sized companies and groups (Accounts and Directors Report) Regulation 2008 (see 3 below). As noted above, AIM companies do not meet the definition of a quoted company and therefore are not required to prepare a directors remuneration report. That said, an AIM company may voluntarily produce a directors remuneration report as if it was subject to the Companies Act requirement. They may also ask their auditor to report on the remuneration report as would be required for a quoted company. Quoted companies are also subject to the somewhat limited disclosure requirements of paragraph 1 of Schedule 5 of SI 2008/410 (see 4 below). If such a company is on the UK official list (as above) it will also be subject to the disclosure requirements of the Listing Rules. These requirements have been substantially reduced for periods ending on or after 30 September Annual Statement In addition to the directors remuneration policy requirements, Schedule 8 also requires a form of executive summary (the Annual statement ). This guidance starts by looking at this disclosure requirement (see 2 below). 1.4 The GC100 and Investor Group materials The GC100 and Investor Group (the association for the general counsel and company secretaries of companies in the FTSE 100) and the Corporate Governance Forum (which is an informal network whose members comprise leading UK institutional investors who are committed to best practice principles of governance and stewardship) have issued materials setting out their initial views on the directors remuneration reporting requirements. This guidance refers to these materials where considered appropriate, using GC100, [page number] as the reference. 1.5 Source materials and other guidance 2 Schedule 5 Information about benefits of directors Schedule 8 Quoted Companies Directors remuneration report 3 GC100 and Investor Group Directors remuneration reporting Guidance The Main official list 2 Third-party links are provided as a convenience to our users. KPMG LLP, the UK member firm, does not control and is not responsible for any of these sites or their content. The electronic version of KPMG s Guide to Directors Remuneration Reporting contains hyperlinks to websites that are independent of KPMG LLP (UK) and over which KPMG LLP (UK) has no control. To the fullest extent permitted by English law, KPMG LLP (UK) will not accept any responsibility or liability for the content of any such other websites or for any consequences. 3 New Schedule 8 has been brought into force by Statutory Instrument 2013 No The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013

7 Director s Executive Remuneration 4 2 ANNUAL STATEMENT The Annual Statement is the introduction to the directors remuneration report, similar to an executive summary, or chairman s letter setting out key events in the period relating to remuneration. The GC100 and Investor Group, for example, says the following about the annual statement: The remuneration committee chairman s statement is an important opportunity to set the tone for the whole of the remuneration report. [GC100, 7] The annual statement is made by either the chair of the remuneration committee or by a person nominated by the directors. The annual statement includes: major decisions on directors remuneration; any substantial changes relating to director s remuneration made during the year; and the context in which those changes occurred and decisions have been taken [Sch 8 para 3]. The GC100 and Investor Group, however, suggest that companies go further and also include a summary of discretion applied by the remuneration committee during the year and a comment on any stakeholder engagement conducted during the year [GC100, 7].

8 5 Director s Executive Remuneration 3 ANNUAL REPORT ON REMUNERATION The annual report on remuneration is the section of the report that details the remuneration and other numerical disclosures for the financial year. The required information is given through disclosures including: the so-called single total figure table giving details of amounts earned by or paid to directors, including details of salaries, fees, bonus arrangements and long-term incentive schemes (see 3.2 below); information about future earning potential arising from scheme interests and about share interests generally (see 3.3 below); payments to departing directors or otherwise to past directors (see 3.4 below); and comparisons of the performance of the company s share price, the CEO s pay, the employees pay and distributions to shareholders, together with sundry other matters (see 3.5 below). 3.1 General matters Directors A director includes any person occupying the position of director, by whatever name called [s250 CA 2006]. The information to be included in the report is for any person that was a director (but not a shadow director 4 ) at any point in time during the financial year, e.g., this includes directors that have been appointed during the year or resigned during the year. Each director for which information needs to be given must be identified by name (e.g., Mr Smith, Mr Doe rather than Director 1, Director 2) [Sch 8 para 2] Executive vs. non-executive directors The requirements of Schedule 8 apply equally to executive and non-executive directors. Where information is not applicable to/for non-executive directors it may be omitted or modified. However, in those circumstances the disclosures omitted or modified and the reason for doing so are disclosed [Sch 8 para 2(4)]. EXAMPLE DISCLOSURE No detailed disclosure has been provided for non-executive directors other than for that relating to their fee, as this is the only form of remuneration the non-executive directors receive Commercial sensitivity exclusion Performance measures and targets that would result in the publication of commercially sensitive information do not need to be given. The fact that such information has not been provided, and the reason for that, need to be disclosed. That disclosure also needs to indicate when (if at all) this information will be published [Sch 8 para 2(5) and 2(6)] What is remuneration? The Act states that disclosure is required for remuneration relating to services [Sch 8 para 44(1)] provided by a director both to the company and to its subsidiary undertakings and is included irrespective of who paid it (the company, the subsidiary undertaking or a third party) [Sch 8 para 46]. The amounts included are for qualifying services (see definition below) provided in the relevant financial year or for an agreement to provide such services, e.g., signing on bonus [Sch 8 para 11(2)]. The amounts include all relevant sums paid by or receivable from the company, the company s subsidiary undertakings and any other person [Sch 8 para 46]. The amounts further include amounts paid to or receivable by a person connected [ss252 to 255 CA2006] with the director (for example a family member) or payments to a body corporate controlled by the director (for example where the director provides his services through a company set up by him). Qualifying services is defined in Schedule 8 and means, in relation to any person, his services as a director of the company, and his services at any time while he is a director of the company: as a director of an undertaking that is a subsidiary undertaking of the company at that time; as a director of any other undertaking of which he is a director by virtue of the company s nomination (direct or indirect); or otherwise in connection with the management of the affairs of the company or any such subsidiary undertaking or any such other undertaking [Sch 8 para 44(1)]. 4 A shadow director is a person in accordance with whose directions or instructions the directors of the company are accustomed to act (s251(1)), such as a substantial shareholder who is not a director. It does not include individuals who offer advice to a director in a professional capacity.

9 Director s Executive Remuneration 6 EXAMPLE Mr Smith became a director of a parent and subsidiary company on 1 July. Prior to this date Mr Smith was not a shadow director. Mr Smith was paid 100,000 by the parent and 50,000 by the subsidiary. His salary did not change during the year. The parent will include 75,000 in the directors remuneration report for the financial year to 31 December in respect of Mr Smith Transition In the first year of applying the requirements in Schedule 8, e.g., in the year a company first becomes a quoted company, comparatives are still required. These comparatives can be an estimate with a note of explanation of that estimate [Sch 8 para 2(7)]. 3.2 Single total figure table Schedule 8 requires what it calls the single total figure table to be given [Sch 8 para 4]. It is the main disclosure, bringing together all elements of each director s remuneration. In particular, it now includes defined benefit pensions and longterm incentives and similar arrangements for each director. Is there any discretion over how the information in the single figure table can be presented? Schedule 8 allows only limited adaption of the table format. Possible adaptations include: additional columns to capture additional remuneration forms not included in the other columns; a different order of the columns, e.g., if a sub-total was required; and switching the columns and rows, i.e., the directors are presented as columns rather than rows [Sch 8 para 5-6]. Other than that,we believe that a summary table is required which includes all directors, rather than providing, say, one table per director. However, due to the different remuneration arrangements in place for non-executives, companies may wish to present one table for executive directors and one table for non-executive directors [Sch 8 para 4(2)]. The GC100 and Investor Group suggests that separate tables for executives and non-executives might be clearer for investors than combining the information into one table [GC100, 8]. The table does not need to be headed up Single total figure table. Comparative information is required for each of the columns (as shown below). We believe this information must be presented in the same single total figure table [Sch 8 para 9(1)]. The table is supplemented by additional disclosure, outside of the table, in relation to certain elements. ILLUSTRATIVE DISCLOSURE Fees and Taxable Annual Fees and Taxable Annual Salary benefits Incentives LTIP Pension Clawback Salary benefits Incentives LTIP Pension Clawback 000 [A] [B] [C] [D] [E] [G] TOTAL [A] [B] [C] [D] [E] [G] TOTAL Executive J Doe , , ,230 M Smith (200) 1, , ,660 B White , , , ,675 Non- Executive B Britten P Glass E Elgar J Bach

10 7 Director s Executive Remuneration Schedule 8 does not prescribe the name to be used for each of the columns, but only the nature of the remuneration that must appear in each column. Given the nature of the remuneration required to be separately disclosed we suggest headings along the lines of the above. Throughout the guidance we have used the short-hand A, B, C etc. for easier cross-referencing Salaries and fees (A) What type of remuneration goes into this caption? As the name suggests, it covers salaries paid to executive directors and it covers fees paid to non-executive directors [Sch 8 para 7(1)(a)]. How are the amounts measured? Amounts are the cash paid or receivable [Sch 8 para 10(1)(a)], i.e., disclosure is made on an accruals basis. What are the supplementary narrative disclosure requirements? No further disclosures are required Taxable benefits (B) What goes into this caption? Taxable benefits include non-cash benefits paid to directors, e.g., company car. Schedule 8 defines taxable benefits as also including: sums paid by way of expense allowance that are chargeable to UK income tax; and emoluments other than salary [Sch 8 para 11(1)(b)]. The definition of emoluments [Sch 8 para 44(1)], however, causes a problem. It is defined to include some annual incentives that would also fall within column C. We believe that such amounts should be included in column C. EXAMPLES Company car, medical insurance, one-off relocation costs and other transactions not at market value (for example, below market rate loans or subsidised housing). How are the taxable benefits measured? They are measured at their gross value, i.e., before deduction of tax [Sch 8 para 10(1)(b)]. In our view, employers national insurance contributions are not included, as these are only costs to the company but not a benefit to the director. What are the supplementary narrative disclosure requirements? Additional disclosure is required of the nature or types of taxable benefits; e.g., company car, medical benefits etc. If the value of any individual benefit is significant then this value must be disclosed. In other words, subject to materiality considerations, an analysis is required of the amount included in the table [Sch 8 para 12(1)]. In our view, unless certain types of benefits are given to all directors then the nature of the benefits need to be presented separately for each director, for example where only one director makes use of a company car, this fact should be stated. EXAMPLE In its 2013 annual report, an entity has included 545,000 (2012: 40,000) in column B for its CEO, Mr Doe. The narrative disclosure supplementing the table reads: In the period, Mr Doe received a one off 500,000 relocation subsidy Annual incentives (C) What goes into this caption? Annual incentives [Sch 8 para 7(1)(c)] captures money or other assets under awards granted in the current financial year and for which all performance conditions were met in the current financial year. As these amounts relate to the performance of one year we have called them annual incentives 5. The Act does not consider service conditions to be performance conditions (see Schedule 8 para 44(1) s definition of performance measures ). Therefore, the definition applies even if service conditions remain to be met. For example, a director receives a cash award dependent upon (i) meeting an EPS target in financial year one; and (ii) remaining in employment through financial year two. This is reported in column C in financial year one if the EPS target is met. 5 The definition refers to money or other assets received or receivable... as a result of the achievement of performance measures. Note that we read the reference to receivable to refer to being receivable subject to performance conditions rather than to service conditions. For example, the principle of disregarding service conditions would not be carried into effect.

11 Director s Executive Remuneration 8 Further, for awards that only have a service condition (even if spanning more than one year), we believe that the amount is included in the year of the grant of the award rather than in the year that the final service condition is met. This is because the principle is for inclusion once there are no performance conditions outstanding, which occurs on award for such arrangements. EXAMPLES Annual cash bonus; bonus or share-based payment arrangements that have performance conditions that can be met within a single financial year even if the final vesting depends on a further service period, or where the entitlement to the award is dependent on service only; annual profit-sharing agreements; bonus that is earned by meeting an EPS target for the current financial year. For the avoidance of doubt, an award is only ever included once in the single figure table, and that is in the financial year in which the last performance condition is met or, where there aren t any performance conditions, in the year of the award. Refer to the clawback section (see below) for the disclosure consequences if the service condition is not subsequently met. EXAMPLE Mr Doe, the CEO, is participating in the group wide share incentive scheme. He has been awarded 20,000 shares provided he remains in service for three years; it is shown in column C in the year the award is given. Finally, companies are permitted to also include amounts where the performance conditions are substantially (but not fully) met by the end of the financial year. Where amounts have been included in the current financial year they must not be included in any subsequent period. It is not apparent as to the type of arrangements that the government had in mind when drafting this part of Schedule 8. However, it might be useful for annual schemes whereby the scheme year does not coincide with the financial year, provided that the mismatch is not too great and at the financial year end the performance conditions are substantially met. How are the annual incentives measured? The amounts included here are required to be the cash equivalent, but this is not defined [Sch 8 para 10(1)(c)]. For a cash bonus the amount included is the cash paid in the period, or where the amount is not yet paid, either because it has been deferred or it is dependent upon future service conditions, the best estimate of the cash payable. We do not believe that the Act allows discounting. The requirement is, it appears, simply to show the eventual amount for which performance conditions have now been met (or substantially met). When the award is given in shares the amount is based on the value of the shares given at the time. This appears to be the natural reading of cash equivalent in this straightforward case. If the share award is deferred, i.e., there is also a subsequent service condition attached, we believe that the cash equivalent is the value of the shares at the time that the performance conditions are met. We also believe that these measures are appropriate as Sch 8 para 44(1) defines value in relation to shares received or receivable by reference to the market price of the shares on the day they are receivable. For the purpose of Sch 8 para 7(1)(c) we believe the shares become receivable when all performance conditions are met (rather than service conditions), which will be the award date where no further performance conditions are required. EXAMPLE Mr Doe, the CEO is participating in the group wide share incentive scheme. He has been awarded 10,000 shares, when the share price was 4.50, provided he remains in service for three years. Ms White will receive 10,000 shares if the company meets an EPS target at the end of the financial year and she remains in service for three years. The EPS condition is met at the end of the year and the share price increased from 4.50 (at grant date) to 5.00 (on date when EPS target is met). 45,000 is included in column C in respect of Mr Doe as no further performance conditions were required to be met after the grant date; 50,000 is included in column C in respect of Ms White.

12 9 Director s Executive Remuneration Finally, as noted above, companies are permitted also to include amounts where the performance conditions are substantially (but not fully) met by the end of the financial year. In such cases the measurement basis requires further consideration. We believe that the measurement is permitted to be based on cash equivalent at the date when the performance conditions are likely to be met (rather than the financial year end value). This will require an element of estimation. Schedule 8 requires disclosure of the basis of the calculation [Sch 8 para 8(1)(c)]. Where this facility is used and the out turn is different from the initial estimate included in the period we believe that it falls within the requirement in Schedule 8 para 9(2) to adjust the comparative figures in the following year. A note is added to the table that explains the revision. What are the supplementary narrative disclosure requirements? Performance thresholds To supplement the amounts included in the table, a significant level of detail is asked for by the legislation [Sch 8 para 12(3)]. Putting it simply, it asks for: the performance metrics that are used (e.g., EPS or TSR); the targets set (e.g., EPS growth of 3% in the year) with corresponding awards achievable when meeting the targets (e.g., 20% of salary on meeting the target); the performance actually achieved; a comparison between the final award achieved and the original targets set; and when discretion has been exercised, how the discretion was exercised in the level of the award [Sch 8 para 12(2)]. If there are two metrics, e.g., EPS and TSR, disclosure is required of their weightings. EXAMPLE DISCLOSURE All of the amounts in the annual incentive column relate to the company s Group share plan, under which the executive directors become entitled to free shares. A director is due shares to the value of 20% of base salary (for the year to 31 December 2013) if total shareholder return (TSR) exceeds the TSR of the FTSE 350 Index for the year to 31 December 2013 by 3% or more. The TSR achieved was 4.5% higher than the FTSE 350 Index and therefore each director received a bonus of 20% of base salary. Deferral arrangements For each component included in column C disclosure is required if any amount was deferred, the percentage deferred, whether deferral is in cash or shares and whether there are further conditions, e.g., service conditions [Sch 8 para 12(4)]. EXAMPLE DISCLOSURE Of the bonus included in the table above one third is compulsorily deferred in shares for three years and is subject to forfeiture. Scheme and share interests Depending on the nature of the award (long-term/shortterm, cash or shares) an award falling into this category may also require disclosure as a scheme interest or a share interest (see 3.3 below). For example, if the amount is payable in shares it will be a share interest (disclosed as such in all years in which it subsists). If the award (whether of shares or otherwise) is conditional on performance or also has a service condition that, taken together with the performance condition, means that all of the conditions cannot be met in a single financial year, then it is a scheme interest (disclosed as such in the year of award) Long-term incentives (D) What goes into this caption? This includes awards of money or other assets for which performance conditions span more than one financial year (refer above when a performance condition spans a financial year but is substantially met in a single period) [Sch 8 para 7(1) (d)] commonly called, long-term incentives. As above, it is based on performance conditions only, i.e., it excludes service conditions that remain to be met [Sch 8 para 44(1)] 6. When an award has been made in share options the classification, i.e., as an annual incentive or as a long-term incentive, is determined by the performance conditions attached to the share options. Measurement and disclosure is determined based on the time of meeting the performance conditions. The timing of the eventual exercise of the options is irrelevant. Refer to the clawback section (see below) 6 As above, the definition refers to money or other assets received or receivable*... as a result of the achievement of performance measures.... * we read the reference to receivable to refer to being receivable subject to performance conditions rather than to service conditions. If this were not so the principle of disregarding service conditions would not be carried into effect.

13 Director s Executive Remuneration 10 for the disclosure consequences if the service condition is not subsequently met. EXAMPLE A director will receive a given number of shares if a TSR target is met at the end of year two and he is still in employment at the end of year five; it is shown in column D in financial year two if the TSR target is met. EXAMPLE Mr Smith has been awarded 10,000 share options in 2011 which he will receive if a specified TSR target is met at the end of The exercise price is 2. At the end of 3 years the TSR target was met and the share price was 15. As the award included performance conditions spanning more than one year 130,000 is included in column D (LTIP) in respect of Mr Smith s award in Finally, companies are permitted to also include amounts where the performance conditions are substantially (but not fully) met by the end of the financial year. Where amounts have been included in the current financial year they must not be included in any subsequent period. How are the amounts measured? For monetary awards, the amount disclosed in the table is the cash value [Sch 8 para 10(1)(d)(i)]. Although the cash sum may not be receivable until a future year, i.e., if service conditions remain the requirement to report the cash value does not seem to encompass any discounting for the time value of money. It is, it appears, simply the amount for which performance conditions have now been met. Share or share-option awards are measured by multiplying the number of shares by the market price of shares at the date on which the performance conditions were met [Sch 8 para 10(1)(d)(ii)]. If an exercise price is to be paid by the director, that amount is deducted from the total [Sch 8 para 10(3)]. The legislation applies the same principles to share options. When the cash to be received or the market price of the shares as at that date cannot be ascertained by the date on which the remuneration report is approved, then an estimate is included. For share awards the estimate is determined on the basis of an average market value of the shares over the last quarter of the relevant financial year [Sch 8 para 10(3)]. The GC100 and Investor Group states: Measurement includes the value of any additional cash or shares receivable in respect of dividends that accrued during the performance period [Sch 8 para 10(1)(d)(iii)]. Where the out-turn is different from the initial estimate included in the period we believe that it falls within the requirement in Schedule 8 para 9(2) to adjust the comparative figures in the following year. A note is added to the table that explains the revision. When market-priced or discounted options are used, companies may also wish to consider disclosing a fair value for these options, as the face value may overstate the underlying value of the options. (Any fair value statement will require a clear explanation of the methodology used). [GC100, 19]

14 11 Director s Executive Remuneration EXAMPLE Ms White is a member of a long-term profit sharing plan which will provide her with an amount of cash at the end of 5 years if the company s share price is 13 at the end of year 3 and she remains in employment for a further 2 years. The cash amount will be computed based on the average EBITDA over the 5 year service period. As all performance conditions have been met at the end of 3 years the amount earned is included in the single figure table in year 3. However, as the cash amount will be based on the average of 5 years EBITDA an estimation of the expected outcome must be made. At the end of year 3 an estimate based on actual results and forecasts suggests that the award will be 350,000. At the end of year 4 following a dip in the company s performance the estimate is revised to 320,000. The final payout in year 5 is 330,000. Illustration of column D (LTIP) for each of the final 3 years of the award. Year 3 Column D LTIP 000 Year 3 Year 2 Ms White Year 4 Column D LTIP 000 Year 4 Year 3 Ms White The amount payable to Ms White included in column D for year 3 is based on the average EBITDA of the 5 year service period ending in year 5. Based on current expectations the amount included in the prior year of 350,000 has now been re-estimated to be 320,000. Year 5 Column D LTIP 000 Year 5 Year 4 Ms White - - The annual remuneration report in year 5 includes neither an amount in the single figure table nor any disclosures relating to the actual payment to Ms White. As this is a cash bonus and not a share award there are no disclosures required relating to directors shareholding. Finally, companies are permitted to also include amounts where the performance conditions are substantially (but not fully) met by the end of the financial year. In such cases the measurement basis requires further consideration. We believe that the measurement is based on cash equivalent at the date when the performance conditions are likely to be met. This will require an element of estimation. Schedule 8 requires disclosure of the basis of the calculation [Sch 8 para 8(1)(c)]. As above, where the out-turn is different from the initial estimate the comparatives are adjusted. EXAMPLE The company has a financial year ending December An annual share-incentive scheme is in place which runs from March of each year to the March three years later. In March 2011 Mr Doe is granted an award over 10,000 shares if a cumulative profit target is met in March 2014 and he is still in employment. Management believe in December 2013 that the cumulative profit target has been substantially met and does not expect any decline in trading. The share price in December 2013 is 17. The Directors remuneration report was approved on 15th February when the share price was ,000 is included in column D for Mr Doe in the year ended December 2013 as 18 is the best estimate of what the share price will be at the end of March The share price as at 31 March 2014 was 19. Illustration of column D for the financial year ended December 2013 and December 2014 Column D LTIP Mr Doe * Column D LTIP Mr Doe * * The amount for the share-incentive scheme has been revised to 2014 when all the performance conditions were met. The amount included in the prior year of 180,000 has now been re-estimated to be 190,000.

15 Director s Executive Remuneration 12 Supplementary disclosures Performance thresholds To supplement the amounts included in the table, a significant level of detail is asked for by the legislation [Sch 8 para 12(3)]. Putting it simply, it asks for: the performance metrics that are used (for example EPS or TSR); the targets set (e.g., EPS growth of 3% in the year) with corresponding awards achievable when meeting the target (e.g., 20% of salary on meeting the target); the performance actually achieved; a comparison between the final award achieved and the original targets set; and where discretion has been exercised how the discretion was exercised in the level of the award. EXAMPLE DISCLOSURE All of the amounts in the LTIP column above relate to the company s performance share plan (PSP). The PSP delivers free shares to the Executive Directors subject to the company s total shareholder return (TSR) against that of the FTSE 250 Index over the three years after the award, as follows: matching the Index, shares worth 25% of the third year s salary; 25%+ outperformance of the Index, shares worth 100% of that salary; and pro-rata in between. In the three years to 31 December 2013TSR outperformance was 10% and, accordingly, 55% of 2013 salaries was due. If there are two metrics, it asks for their weightings. It also asks for these data for every component of each number in the column of the table. So, for example, if the director gets benefits from two schemes. Deferral arrangements There is no disclosure requirement for long-term incentives that are deferred, i.e., have a service condition period after the performance condition period. However, the GC100 and Investor Group states in this instance: However, there is no similar express requirement in respect of the deferral of any long-term incentive, although investors generally expect that any such deferral would be explained. [GC100, 10] Scheme and share interests Depending on the nature of the award (long-term/ shortterm, cash or shares) an award falling into this category may also require disclosure as a scheme interest or a share interest (see 3.3 below). For example, if the amount is payable in shares it will be a share interest (disclosed as such in all years in which it subsists). If the award (whether of shares or otherwise) is conditional on performance or also has a service condition that, taken together with the performance condition, means that all of the conditions cannot be met in a single financial year, then it is a scheme interest (disclosed as such in the year of award) Pension related benefits (E) What goes into this caption? This caption includes benefits from participating in company pension schemes or personal pension schemes to which the company contributes 7, whether defined contribution or defined benefit, as well as payments received by the director (whether in cash or otherwise) in lieu of retirement benefits [Sch 8 para 7(1)(e)]. How are the amounts measured? With respect to participation in pension schemes, Schedule 8 s requirements are set out in a complex way. It applies a modified version of s229 and related provisions of the Finance Act However, in most cases they reduce to this: defined contribution schemes the company s contributions on an accruals basis; and defined benefit schemes that year s increase in the director s accrued benefits (i.e., increase in his annual pension), disregarding inflationary increases and after deducting the directors contributions (known as the pension input amount [Sch 8 para 10(1)(e)(ii)]) multiplied by 20. The factor 20 is determined by Schedule 8 and replaces the factor 16 that is included in s234 Finance Act The pension input amount would be calculated by the scheme administrator in accordance with their procedures for these calculations. Payments in lieu of retirement benefits are included at their cash value. Companies must be wary of double counting, for example, if a director chose to put his annual bonus into his pension scheme as an additional employee s contribution, then the amount would be disclosed in column C as an annual incentive rather than in column E as a pension benefit. 7 Sch 8 para 44(1) definition of pension scheme means a retirement benefits scheme within the meaning given by s150(1) of the Finance Act 2004 which is (a) one in which the company participates or (b) one to which the company paid a contribution during the financial year. 8 The way in which schedule 8 achieves this is by applying a modified version of s229 and related provisions of the Finance Act 2004.

16 13 Director s Executive Remuneration Supplementary disclosures When directors have entitlement in respect of qualifying services to: defined benefits; cash balance benefits, in essence a money purchase arrangement; or benefits under a hybrid arrangement which includes the above. The following are disclosed for each type of pension benefit included in column E [Sch 8 para 13]: details of those entitlements as at the end of that year; a description of any additional benefit that will become receivable by a director in the event that that director retires early [see s152 of Finance Act]. In order to meet the details requirement, disclosures may include: the accrued annual pension (defined benefit schemes); the transfer value (defined benefit schemes); the normal retirement date 9 ; whether early retirement is available and if so whether and how much benefits are reduced by; and/or whether on death the benefits pass to dependants Other remuneration (F) What goes into this caption? Schedule 8 requires additional columns to be included if any director receives any other remuneration not covered by the above captions [Sch 8 para 6(1)(a)]. EXAMPLE Signing on bonus. A signing on bonus is a payment or other benefit received in advance of a director commencing qualifying services, but in anticipation of performing qualifying services. It is to be treated as if received on the first day of performance of the qualifying services [Sch 8 para 11(2)]. How are the amounts measured? Schedule 8 does not provide a particular measurement basis for this column. The measurement basis will depend on the facts and circumstances. The legislation requires an explanation of the basis used [Sch 8 para 12(5)]. Supplementary disclosures In addition to the basis on which the amounts have been calculated, disclosure is required of an explanation of the nature and details necessary to understand the numbers included, together with details of performance measures if any. If there are no performance measures, an explanation is required [Sch 8 para 12(5)] Clawback 10 (G) As noted above, remuneration is included in the table in periods before the service conditions are met. Remuneration may also be included in the table when performance conditions are substantially met. Schedule 8 recognises that if amounts subject to such further conditions have previously been reported in the single figure table but ultimately are not received, it is right that their reversal or clawback (up to the same amount) should be reported too. Hence it requires a separate column where amounts recognised in previous financial years reverse. The column will include a negative amount reversed, withheld or recovered with a description of the basis of the calculation and an explanation of the reason [Sch 8 para 8(2)(b)]. Any clawback is included in the current financial year column. In actual cash terms this is often achieved through withholding or deferring payments or making any payments subject to repayment criteria. For example, a director receives a cash award dependent upon (i) meeting an EPS target in financial year one; and (ii) remaining in employment through financial year two. If the EPS target is met in year one but the director leaves part way through year two then this is reported in column C in financial year one and an equal negative amount in column G the following year. In our view, where a deferred bonus or a share-based payment lapses due to the director s leaving before the service conditions are fulfilled then the amount included as a negative number in a separate column in the year of 9 Sch 8 para 13(3) normal retirement age means an age specified in the pension scheme rules (or otherwise determined) as the earliest age at which, while the individual continues to accrue benefits under the pension scheme, entitlement to a benefit arises (a) without consent (whether an employer the trustees or manager of the scheme or otherwise) and (b) without an actuarial reduction, but disregarding any special provision as to early repayment on grounds of ill health, redundancy or dismissal. 10 This guidance uses clawback as short-hand for all forms of recovery and withholding of remuneration including as a result of not meeting all performance and service conditions.

17 Director s Executive Remuneration 14 leaving is the same amount initially recognised. However, in cases where share options have been received the amount recognised would not be reversed if the director chose not to exercise the options. EXAMPLE Ms White will receive 10,000 shares if the company meets an EPS target at the end of the financial year and she remains in service for a further two years. The EPS condition is met at the end of the year and the share price increased from 4.50 (at grant date) to 5.00 (at the end of the financial year). During the third year in 2015 the share price had increased to 6 but Ms White left the company. The award did not vest. Illustration of column C (Annual incentives) and column G (clawback) for each of the 3 years of the award. Year 1 Column C Column G Annual Incentives 000 Clawback Ms White Year 2 Column C Column G Annual Incentives 000 Clawback Ms White Year 3 Column C Column G Annual Incentives 000 Clawback Ms White * - - (50) - * Ms White left the company during the year. As set out in the terms of the share-incentive scheme, the award is forfeited upon termination of service. The amount included in column G is based 3.3 Scheme and share interests Scheme interests awarded in the year In addition to the single-figure table and its supplementary disclosures, Schedule 8 further requires disclosure of details about awards that span more than one financial year, referred to in the legislation as scheme interests [Sch 8 para 14(1)]. The definition in Schedule 8 is of an interest in a scheme in which, money or other assets may become receivable by a person and which includes one or more qualifying conditions with respect to service or performance that cannot be fulfilled within a single financial year [Sch 8 para 44(1)]. Note, first of all, the definition does not appear to be aligned with the principles underlying the single figure table. The latter focuses solely on the period for performance conditions. This scheme interest definition, on the other hand, catches cases where performance or service conditions cannot be met within a single financial year 11. Thus whilst all awards falling into column D will also be scheme interests, it appears that some of those falling into column C will be too i.e., those where the service conditions extend the period to cover more than one financial year, such as a share-based payment arrangement that has a two year service period and no performance conditions. Second, although in practice interests in shares will be the main thing caught, a scheme interest is not restricted to interests in shares. A cash scheme can be caught. Timing of disclosure Disclosure is required only in the financial year of making the award. Where there are performance conditions this will usually precede the year in which the arrangements fall into the single figure table, because the latter is based on the year of meeting the performance conditions. EXAMPLE Mr Doe is awarded a cash bonus of 50,000 provided TSR conditions are met in year two and he remains in employment for four years. Ms White is awarded a bonus to be settled in shares to the value of 50,000 subject to the same performance and service conditions. (continued overleaf) 11 The definition goes on to say the following, but this does not appear to change the meaning: the following must be disregarded, namely, (a) any payment the amount of which falls to be determined by reference to service or performance within a single financial year.

18 15 Director s Executive Remuneration EXAMPLE (CONTINUED) Scheme interest disclosures are required for both of the above in the year of award even though the amounts will be liable to be included in the single figure table only in year two and one award is in cash and the other is in shares. In the following years, however, other disclosures will, if the interest is in shares, be required in the tables on directors shareholdings and share interests (see below). Details to be disclosed Disclosure is required in a tabular form, covering each director and each interest, of the following: the type of the interest, e.g., cash or shares; the basis on which the award was made e.g., whether the level of the award was linked to salary or if a fixed number of shares how that number was determined; the face value (see below) [Sch 8 para 14(2)]; the percentage of the scheme interest receivable for minimum performance; for a share option 12, an explanation of any difference between the exercise price per share and the face value ; the end of the period for achieving all performance targets; and a summary of the performance measures and targets if not set out elsewhere in the report. The face value is essentially the value of the shares in question without any deduction for the option exercise price. It is stipulated by Schedule 8 as: the maximum number of shares (i.e., if all performance targets were met); multiplied by either: - the share price at date of grant (and that price and date should be disclosed); or - the average share price used to determine the number of shares awarded (and that price and averaging period should be disclosed). EXAMPLE ILLUSTRATIVE DISCLOSURE Scheme interests awarded during the financial year Name Mr Smith Mr Doe Ms White Ms White Type of interest awarded a Long-term Bonus Scheme Matching Shares Options Cash award Performance conditions a TSR target lower quartile (nil vesting); upper quartile (100% vesting) and pro rata in between EPS target cumulative EPS growth of 7%. Nil vesting below target No performance conditions. Three year service condition. No performance conditions. Three year service condition. Face value in 000 Performance period end 500 b 31/12/2015 1,640 c 31/12/2015 2,520 d 30/06/ /06/2016 a Detailed performance conditions and description of the basis of the awards are set out on pages x y [remuneration policy table]. b 100,000 shares (being the maximum that can be earned) multiplied by 5 (the share price at date of grant). c 328,000 shares (being the maximum that can be earned) multiplied by 5 (the share price at date of grant). d 420,000 options (being the maximum that can be earned) multiplied by 6 (the share price at date of grant). The exercise price is 2. See policy on pages x y for pricing of options. The fair value of the award (Black-Scholes valuation model) is 1,780,000*. * This additional disclosure has been recommended by GC100 and Investor Group. 12 Sch 8 para 44(1) a share option means a right to acquire shares this does not necessarily need to be in the legal form of an option.

19 Director s Executive Remuneration 16 The GC100 and Investor Group suggests that, as the face value does not take into consideration any exercise price payable, the amounts presented might be overstating the value of the award. The GC100 and Investor Group states: When market-priced or discounted options are used, companies may also wish to consider disclosing a fair value for these options, as the face value may overstate the underlying value of the options. (Any fair value statement will require a clear explanation of the methodology used). [GC100, 19] Statement of directors share interests Directors often have three types of interests in the company s shares: scheme interests, as defined above, in shares, i.e., rights to shares that remain conditional because of outstanding performance or service conditions. Here the holder is interested in shares notwithstanding that the interest is conditional on meeting criteria in the future; share options that have vested. Although they are not actual holdings of shares, they do represent an interest in shares, i.e., they are entitled to hold shares in the future; and shares that they hold outright. Note also that the definition of a share option is wide: any right to acquire shares [Sch 8 para 44(1)]. Timing and details of disclosure Disclosure is required in respect of each director. The disclosure is required to be in one or more tables. The disclosure requirements can be thought of in four layers: the total number of scheme interests 13. The table should distinguish between interests in shares and in share options 14. It should distinguish between those with and those without performance conditions. Details (undefined see below) of all of these interests should be given. Disclosures are given in all financial years for which the interest subsists; for share options that are vested, i.e., where all performance and service conditions have been met, details of those as yet unexercised and details of those exercised in the year. This applies, naturally, in all financial years for which the vested share option is held; the total number of shares in which the director (or his connected persons 15 ) is interested. This is disclosed in all financial years for which the share interest subsists; and a total of scheme interests in shares, vested unexercised share options and direct holdings at the year end, representing the total share interests. EXAMPLE ILLUSTRATIVE DISCLOSURE Statement of directors shareholding and share interests Name Mr Smith b Mr Doe b Ms White b Share options with 100, ,000 performance conditions Share options without 420,000 performance conditions a Share awards with 20,000 40,000 performance conditions Share awards without 40,000 performance conditions a Scheme interests in 120, , ,000 shares Vested but unexercised 20, share options Shares beneficially 2,500,000 1,200,000 3,200,000 owned c Total Interest in shares 2,640,000 1,568,000 3,660,000 Share options exercised during the year 20,000-40,000 a Awards without performance conditions include awards subject only to service conditions. b The directors are each in compliance with the company s requirements that they hold at least 2,000,000 shares directly. Mr Doe was only appointed a director in 2011; he has three years to build up to this required shareholding. c Beneficially owned shares include those held by connected persons 13 Sch 8 para 17 seems to require disclosure of the total number of all scheme interests, i.e., cash and share awards. However, given that it would be difficult to add together a number of shares to an amount of cash in any meaningful way and given that this disclosure requirement falls under the heading of Statement of directors shareholding and share interests and that all other disclosures in this paragraph are about shares and share interests, it is arguable that this disclosure is intending to only capture share interests. 14 Given the width of the definition of share options it is difficult to see what might fall as a scheme interest in shares that is not also a share option. 15 See s96b(2) Financial Services and Markets Act 2000 for the definition of connected person for this purpose.

20 17 Director s Executive Remuneration A director s interest may fall under more than one heading at a time and move between headings over the years. For example, suppose a director is awarded an interest in shares conditional on service and performance conditions spanning more than one financial year. In all years in which it subsists it is an interest in shares. However, whilst the conditions remain unfulfilled it is also a scheme interest. When the conditions are fulfilled it becomes a vested share option. At this point it ceases to be a scheme interest but always remains an interest in shares. When exercised, it is within the disclosure of exercise of options. As noted above details of share interests must be disclosed. The disclosure requirement does not define what it means by details of share interests. However, it permits the omission from these tables of any details included elsewhere in the directors remuneration report [Sch 8 para 17(b)(iii)], e.g., in the scheme interest disclosures. Thus, in the year of award the details requirement might be met by cross-referring to the details given in the scheme interests awarded table (see above). However, as these disclosures are only included in the year of award, in later years there will be no details of the award ready-made to refer to, unless the disclosures are repeated to satisfy this requirement. It may also be feasible to combine the two tables scheme interest awards and holdings of scheme interests. Note, however, that companies may find the face value disclosure required in the scheme interest awards table to be unsatisfactory (for the reasons given above i.e., no deduction of exercise price), and so may not want to repeat the complete, unadjusted disclosures. Alternatively, some reduced version of the scheme interest awards details may be sufficient. Under the previous version of Schedule 8 an LTIP movement table was required. This table is no longer required. However, it can of course be provided as additional information if companies believe it to be useful. Directors shareholding requirements There must also be disclosed any company policy or guideline for the director to hold shares in the company, and, if so, whether it has been met.

21 Director s Executive Remuneration 18 The table below illustrates the timing and nature of all disclosures required for an award of share options to a director from award date through to the ultimate sale of the shares arising from Schedule 8 only, i.e., it does not include requirements from other parts of the Companies Act. The table is based on an award with a three year performance condition and a five year service condition. The director then decides to exercise the share option during year 7 and sells the shares during year 10. Award Performance condition met Service condition met Exercised Shares sold TYPE OF DISCLOSURE AND REFERENCE Scheme interest awarded [Sch 8 para 14] Single figure table and supplementary disclosures [Sch 8 para 7 and 12] Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Scheme interest held [Sch 8 para 17(b)(ii),(iii)] Share options vested but unexercised [Sch 8 para 17(b)(iv)] Share options exercised [Sch 8 para 17(b)(iv)] Interest in shares [Sch 8 para 17(b)(i)]

22 19 Director s Executive Remuneration 3.4 Exit and ex-directors Payments on loss of office Detailed loss of office disclosures are required outside of the single figure table [Sch 8 para 16]. This applies irrespective of whether the person was a director in the current or a previous financial year. It applies irrespective of whether the amounts are for loss of office of the director or for termination of qualifying services [Sch 8 para 16(c)]. It applies irrespective of whether the payments are contractual or a negotiated sum for damages for severance or an ex-gratia sum. The disclosure analyses the amount by component, explaining how each was calculated; the treatment of outstanding incentive awards that vest at termination must be covered; and it must be explained how any discretion was exercised. A de-minimis threshold for disclosure can be set in the remuneration policy for such payments. If such a threshold is in place then it should be disclosed. Any confidentiality agreement within a settlement arrangement does not override the requirements in Schedule 8. Further, note the requirement in s420(2b) of Companies Act 2006 for web publication of certain information upon a director leaving office such as for example: name of the director, particulars of any remuneration payment to be made to him after ceasing to be director and particulars of payments for loss of office. The GC100 and Investor Group states in its guidance: Provided that the remuneration committee has remained within the approved remuneration policy, the explanation of how discretion was used should not come as a surprise to investors. In addition to explaining how discretion was exercised, remuneration committees may wish to consider explaining why any use of discretion is in the best interests of the company. To avoid concerns about rewards for failure, especially where discretion has been exercised in favour of a director, investors would find it helpful if companies give as complete an explanation as possible of the circumstances surrounding the departure of the director. [GC100, 14] EXAMPLE This example illustrates the interaction between clawback and loss of office disclosures. Ms White is member of a share-incentive scheme under which she will receive 10,000 shares provided she remains in service for 3 years. The share price at grant date in 2012 was 5. As there were no performance conditions attached to the award, 50,000 was recognised in column C in the year of award (2012). Ms White leaves the company during 2013 before the award vests and therefore forfeits the shares upon leaving. As part of the termination negotiations the company exercises discretion allowed for in the remuneration policy and offers Ms White the shares (in addition to a contractually agreed settlement amount). The share price was 8 at the settlement date. As the original award did not vest 50,000 is included as a negative amount in column G in the single figure table as clawback. 80,000 is included in the total amount of payments for loss of office. An explanation of the discretion exercised is required Payments to past directors This section covers amounts paid to individuals who are not directors when they receive the payments (money or other assets), but have in the past been a director. Details of payments made to past directors must be given in the report (outside of the single figure table). To avoid double-counting, these details do not need to include: any payments covered in the loss of office disclosure (see above); any amounts that are included in the current financial year s single total figure table; any amounts that were included in a previous financial year s directors remuneration report, e.g., a deferred bonus that fell into the report two years ago but for which the deferral period is now complete and the cash is paid; dividends received from scheme interests (see 3.3 above) that the individual retained; pension payments commenced in previous periods; and salaries or fees received for ongoing services once the individual is no longer a director but remains an employee or consultant to the company [Sch 8 para 15].

23 Director s Executive Remuneration 20 Regarding the last bullet above, in our view the employment or consultancy services must be bona fide. A de minimis threshold for disclosure can be set for such payments. If such a threshold is in place, then it should be disclosed. 3.5 Other disclosures not auditable Performance graph and table The remuneration report is required to include a line graph that plots the total shareholder return (TSR) of the company against that of a comparator index over a ten year period [Sch 8 para 18(1)(a)]. This is not a new requirement, although previously companies were only required to include five years. It is not entirely clear from the legislation whether the ten year graph applies immediately or whether transitional relief is available (other than to newly quoted companies). The GC100 and Investor Group material suggests that in the first remuneration report prepared under the revised legislation five years of TSR graph are included, rising in one year increments to a ten-year period over the following five years [GC100, 16]. The name of the index used and the reason for using that index require disclosure [Sch 8 para 18(1)(b)]. In addition to the line graph, and covering the same periods, a table should be presented showing for the chief executive only: the single figure of total remuneration [Sch 8 para 18(2)(a)]; and the annual incentive scheme (column C ) and amount relating to the long-term incentives (column D ) from the single figure table both expressed as a percentage of the maximum opportunity [Sch 8 para 18(2)(b),(c)]. The aim here is to allow a three way comparison: CEO remuneration including variable elements (in a table), against company TSR and against a comparator TSR (in the graph). When a table has been prepared in previous years, the numbers previously presented are included as comparatives. Alternatively, and if no such table was previously presented, then a suitable sum should be included [Sch 8 para 18(5)(b)]. EXAMPLE DISCLOSURE TSR Comparator Total CEO 950 1, ,575 1,600 remuneration 000 Annual variable 80% 80% 25% 100% 100% element award rates against maximum opportunity Long-term 50% 60% 30% 75% 65% incentive vesting rates against maximum opportunity The comparator group is the FTSE Real Estate Index. This comparator has been chosen as this is the market in which the group operates Percentage change in remuneration of director undertaking the role of chief executive officer The directors remuneration report must include: the percentage change, from the prior year, of the chief executive s remuneration included in each of columns A, B and C, namely salaries, taxable benefits and annual incentives; and the percentage change, from the prior year, of the remuneration of the employees taken as a whole that would be included in each of columns A, B and C [Sch 8 para 19]. The comparison may be made against a sub-set of the employees of the group, if the employees as a whole would be inappropriate, and the reason for choosing the particular sub-set should be disclosed [Sch 8 para 19(2)].

24 21 Director s Executive Remuneration EXAMPLE DISCLOSURE The table below shows the percentage change in remuneration between the years ended 31 December 2013 and 31 December 2012 for the CEO and for all employees of the group: Salaries Taxable Annual and fees benefits incentives CEO 2% 0% Increase of 3% Average pay 2.5% 0% 3% based on all employees Relative importance of spend on pay The directors remuneration report must set out in a graphical or tabular form the following amounts and changes therein compared with the previous financial year: remuneration paid to or receivable by all employees of the group (a figure that should be easily available from the financial statements as it is a required disclosure); distributions to shareholders by way of dividend and share buyback; and any other significant distributions and payments (or cash flows) considered by the directors to assist in understanding the importance of expenditure on pay [Sch 8 para 20(1)]. In effect the directors can chose further categories that they believe should be compared to total expenditure on pay [Sch 8 para 20(1)(c)]. Examples of other categories that companies may want to present include [GC100, 26]: profits retained within the business; investment for future growth such as capital expenditure or research and development costs; debt repayments; and/or expenditure related to wider, societal distribution such as tax payments. An explanation must be provided as to why those other categories have been chosen and how the amounts were calculated [Sch 8 para 20(2)]. Where the company decides to change the categories it uses for comparison year-on-year this needs to be explained [Sch 8 para 20(3)]. EXAMPLE DISCLOSURE The difference in actual spend between 2012 and 2013 on remuneration for all employees in comparison to distributions (dividends and share buy-back) and other significant spend are set out in the tabular graphs below: Relative spend on pay Total employee pay (+9%) Dividends and share buy-back (-17%) Research and development (-5%) OR The table below shows the total pay for all of the Company s employees compared to distributions and other significant spend %Change Employee costs % Dividends and % share buy-back Other significant spend % Statement of implementation of remuneration policy in the following year The annual remuneration report should include an explanation as to how the approved remuneration policy is going to be implemented in the next financial year [Sch 8 para 21(1)]. Where the remuneration policy had been in place in previous years, significant changes as to how the company intends to implement the policy in the next year, compared with the current year, should be disclosed [Sch 8 para 21(3)]. The statement must include, where applicable, performance measures and their relative weighting, performance targets determined and details of how the awards will be calculated. This information is only required if it is not given elsewhere in the report (including in the remuneration policy) [Sch 8 para 21(4)].

25 Director s Executive Remuneration 22 For the first financial year that the amended Schedule 8 (effective years ending on or after 30 September 2013) is applied these disclosures are not relevant, as during the first year of application of the amended requirements a company would not yet have an approved remuneration policy based on the requirements of new Schedule 8. Companies may wish to disclose that fact. The remuneration policy will be voted upon during the first AGM after 1 October Consideration by the directors of matters relating to directors remuneration When a committee considers matters relating to directors remuneration during the financial year, a number of disclosures are required including: the names of the committee members; the names of any persons who provided advice or services to that committee (including other directors not on the committee); and if the advisors are not directors then detailed information about the appointment, independence and remunerations of those persons is also required [Sch 8 para 22(1)(c)]. This will shine a light on remuneration consultants. No disclosures are required if the advice or service has been provided by an employee [Sch 8 para 22(3)] Statement of voting at general meeting The revised regulations introduce shareholder votes. An advisory vote is required in respect of the annual remuneration report. A binding vote is required in respect of the remuneration policy [s439a CA2006] (see 1.2 above). Disclosures are required about the outcome of both of those votes, viz percentage of votes for and against as well as the number of votes withheld [Sch 8 para 23(a),(b)]. Where a significant number of votes were cast against either, Schedule 8 asks for disclosure of a summary of the reasons (where known by directors) and any actions taken by the directors in response [Sch 8 para 23(c)]. The GC100 and Investor Group states: Companies will need to use their judgement, regarding the level of votes against, that they consider to be significant. Although each resolution will be passed if votes in favour exceed 50% of those cast, a significant number of votes against indicates investor dissatisfaction. As a guideline, companies may wish to consider votes against in excess of 20% as being significant, although there may be reasons why, for some companies, a higher or lower level might be more appropriate. Many investors withhold their vote to indicate their lack of support for management. [GC100, 22] EXAMPLE ILLUSTRATIVE DISCLOSURE Statement of voting at general meeting Directors remuneration policy Directors remuneration report Number of votes % of votes cast Number of votes % of votes cast In favour 85,687, % 105,689, % Against 57,698, % 37,685, % Total votes cast 143,385, % 143,374, % Votes withheld 385, ,188 In relation to voting at our 2014 AGM, 26.3% of the available votes were cast against the resolution to approve the directors remuneration report. 40.2% of the available votes were cast against the resolution to approve the remuneration policy. Through our on-going series of investor relations meetings, the directors understand that the reasons include [...]. The directors took the following actions in response to the concerns raised: [...].

26 23 Director s Executive Remuneration 4 SCHEDULE 5 DISCLOSURES In addition to complying with the disclosure requirements in Schedule 8 quoted companies also need to provide the disclosures required by Schedule 5 (also of SI 2008/410) Information about benefits of directors. The information required by Schedule 5 is given in a note to the financial statements. The specific requirements of Schedule 5 are as follows: aggregate amount of remuneration (defined as: all salary, fees and bonuses, sums paid by way of expense allowance and money value of other non-cash benefits 16, except for the following items which are given separately); aggregate of the amount of gains made by directors on the exercise of share options; aggregate amounts of money or assets received or receivable under scheme interests 17 (other than share options); the cash amounts paid into pension schemes for defined contribution schemes; and number of directors in defined contribution schemes and the number in defined benefit schemes. Although Schedule 5 does not require the note to be in a specific format and it specifically states that if the information required to be given under Schedule 5 can be obtained from elsewhere in the financial statements it need not be given again, we believe that it will be difficult for companies to meet the requirements under Schedule 5 by merely lifting figures from the directors remuneration report. This is because the above categories do not always match the categories in the single figure table or their measurement. 16 Schedule 5 remuneration disclosure excludes the value of share options, pension schemes and long-term incentive amounts. 17 Schedule 5 uses the term long-term incentive schemes, but its definition is not the same as Schedule 8 s scheme interest. It does not, therefore, equate to Schedule 8 s column D.

27 Director s Executive Remuneration 24 5 REMUNERATION POLICY 5.1 When required The remuneration policy part of the report must be set out as a separate section of the report. It constitutes the policy of the company and is required to be put to a shareholders vote at least every three years [s439a CA2006]. The information is not auditable. The policy disclosure is required in the directors remuneration report only for the financial year preceding the shareholders vote (i.e., in the reports and financial statements to be laid before members and voted on). For other financial years it may be included in the directors remuneration report or be made available for inspection by shareholders (e.g., on a website). In the latter case the directors remuneration report must disclose where the policy can be found (e.g., on a website) and must give the date of the last general meeting at which the policy was approved [Sch 8 para 1(3)]. Whilst Schedule 8 provides the framework for the content of a policy, the detailed drafting will require significant judgement by companies with regard to how they will remunerate directors, how much flexibility they seek and what is likely to attract support from shareholders. Where the policy allows the directors to use discretion, that fact needs to be stated as well as the extent of that discretion [Sch 8 para 24(4)]. The GC100 and Investor Group [GC100, 3-4] discusses flexibility, discretion and judgement and particularly provides some insight into how much discretion investors would expect to be included in the drafting of the policy. 5.2 Disclosures Future policy table The directors remuneration report must contain in tabular form a description of each of the components of the remuneration package for the directors of the company which are comprised in the directors remuneration policy of the company. Components 18 means at least those that would be separately disclosed in the single figure table. Where an individual director has specific arrangements these must be disclosed individually. Otherwise the table may address all directors together. It will be readily apparent from what follows that a considerable level of detail is required. The description of each of the components (such as salary and fees, taxable benefit, annual incentive) covers the following: how that component supports the short and long-term strategic objectives of the group; an explanation of how that component of the remuneration package operates; the maximum that may be paid in respect of that component (expressed in monetary terms, or otherwise); where applicable, a description of the framework used to assess performance including: a description of any performance measures which apply and, where more than one performance measure applies, an indication of the weighting of the performance measure or group of performance measures; details of any performance period; and the amount (which may be expressed in monetary terms of otherwise) that may be paid in respect of: - the minimum level of performance that results in any payment under the policy; and - any further levels of performance set in accordance with the policy; and an explanation as to whether there are any provisions for the recovery of sums paid or the withholding of the payment of any sums. The table is accompanied by notes detailing, e.g., why particular performance measures were chosen, and how the policy differs from that appropriate to the group s employees generally [Sch 8 para 27]. In recognition of the fact that the above will often be irrelevant to non-executive directors, the regulations allow a separate table for those, showing the policy for: fee payable to such directors; any additional fees payable for any other duties to the company; and such other items as are to be considered in the nature of remuneration. The policy will further need to include information about what principles the company follows in negotiating remuneration for new directors [Sch 8 para 29]. 18 Defined in Sch 8 para 25(3) as component parts of the remuneration package including but are not limited to, all those items which are relevant for the purposes of the single total figure table.

28 25 Director s Executive Remuneration Policy on payment for loss of office The policy must include certain information relating to the directors termination of office, including among other information the methodology of how the components of the loss of office payments are calculated and whether and how discretion will be used. Disclosure is also required of any contractual terms included in the directors service contracts relating to termination, for example about liquidated damages [Sch 8 para 36]. The policy must also disclose a description of any obligations contained in the directors service contracts. The report must state where the directors contracts are available for inspection Bar chart illustrations of application of policy The directors remuneration report must, in respect of each executive director, set out in the form of bar charts an indication of the level of remuneration that would be received by the director in accordance with the policy in the first year to which the policy would apply [Sch 8 para 33 and 34]. One chart is required for each director, and each chart will show three bars setting out the minimum, expected and maximum remuneration. Each of the bars must be comprised of three parts: salaries, fees, taxable benefits and pension; annual incentives; and long-term incentives. Each bar must be annotated to show: percentage of the total comprised by each of the parts; and total value of remuneration represented by each bar. EXAMPLE DISCLOSURE The table below represents the variations in remuneration at different levels of performance for the first year of application of the remuneration policy for the executive directors. Mr Doe 2,000 1,800 1,600 1,400 1,200 1, % 35% 100% 53% Fixed only On-target Max LTIP Annual Bonus Fixed 27% 41% 32% Base Benefit Pension Total Fixed ( 000s) On-target On-target is assumed to be an annual bonus equal to 50% of maximum and an LTIP award of 25% of maximum Maximum Full payout of annual variable pay i.e. 150% of base salary Maximum vesting of LTIP award i.e. 100% of base salary

29 Director s Executive Remuneration 26 Ms White 2,000 Mr Smith 2,000 1,800 1,800 1,600 1,400 27% 1,600 1,400 33% 1,200 1, % 33% 43% 1,200 1, % 30% 38% % 55% 30% Fixed only On-target Max % 48% 29% Fixed only On-target Max LTIP Annual Bonus Fixed LTIP Annual Bonus Fixed Base Benefit Pension Total Fixed ( 000s) On-target On-target is assumed to be an annual bonus equal to 50% of maximum and an LTIP award of 15% of maximum Maximum Full payout of annual variable pay i.e. 150% of base salary Maximum vesting of LTIP award i.e. 100% of base salary Base Benefit Pension Total Fixed ( 000s) On-target On-target is assumed to be an annual bonus equal to 50% of maximum and an LTIP award of 20% of maximum Maximum Full payout of annual variable pay i.e. 150% of base salary Maximum vesting of LTIP award i.e. 200% of base salary Schedule 8 provides no guidance as to the measurement of the components. For both salaries and annual incentives we expect that it would be straight-forward to include the number expected to be included in the single figure table for the next year. For long term incentives there is a difficulty. The disclosure requirement is for the amount to be received next year. However, any new long-term incentive under the new policy will, of course, not be receivable in the next year (as the definition requires performance extending beyond one financial year). However, it seems self-evident that the legislation intends something to be included, and it should not be forgotten that the obvious aim here is to show shareholders the potential effect of the long-term incentives that they are being asked to approve. So, for example, if the company intends annual grants with a five year performance/ service condition, it seems reasonable to include the expected and maximum ultimate out-turn of the next year s grant. Disclosure of the basis of calculation is required [Sch 8 para 35(1)] Consideration of employment conditions elsewhere in the group The policy must disclose how pay and employment conditions of employees (other than directors) were taken into consideration when setting the directors remuneration policy. The statement must also set out whether, and if so how, the employees were consulted when drawing up the policy and whether any remuneration comparison measurements were used [Sch 8 para 38] Consideration of shareholders views A statement is required as to whether, and if so how, shareholders views on directors remuneration have been taken into consideration [Sch 8 para 40].

30 27 Director s Executive Remuneration

31 Director s Executive Remuneration 28 NOTES

32 Contact us David Ellis Partner T: + 44 (0) E: [email protected] Caroline Johnson Senior Manager T: + 44 (0) E: [email protected] Rupal Patel Director T: + 44 (0) E: [email protected] Jessica Sales Manager T: + 44 (0) E: [email protected] The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. Oliver Marketing for KPMG OM A December 2013