Aligning our remuneration philosophy to business strategy

Our remuneration philosophy is aligned to our purpose, vision and strategy, thereby incentivising great customer service and the creation of long-term value for all of our stakeholders.

The following table provides a summary of how our incentive framework in 2019/20 aligns with our business strategy and the results that it delivers. Many of the performance measures are key performance indicators (KPIs) for the regulatory period 2015–20 (see How we measure our performance).

Alignment to strategyLink to strategic themesA long-term approach to creating sustainable value
Annual bonus
Underlying operating profitKey measure of shareholder value.

 

Customer service in year
  • C-MeX ranking
  • Written complaints
Delivering the best service to customers is a strategic objective.

Ofwat can apply financial incentives or penalties depending on our customer service performance.

 

 

Maintaining and enhancing services for customers
  • Outcome delivery incentive (ODI) composite
  • Time, cost and quality of the capital programme (TCQi)
Delivering the best service to customers is a strategic objective.

There is a direct financial impact on the company of Ofwat incentives and penalties for delivery/non-delivery of customer promises.

Keeping tight control of our capital programmes ensures we can provide a reliable service to our customers at the lowest sustainable cost.

 

 

 

PersonalFocused on specific areas of individual contribution.

 

 

 

Compulsory deferral of bonusDeferral of part of bonus into shares aligns the interests of executive directors and shareholders.

 

Long Term Plan (LTP)
Relative total shareholder return (TSR)Direct measure of delivery of shareholder returns, rewarding management for the outperformance of a comparator group of companies.
Return on Regulated Equity (RoRE)Outperformance will result in an increase to RoRE which should translate into higher returns for investors through share price performance.

 

 

Customer service excellenceThis is fundamental to delivering our vision of becoming the best UK water and wastewater company.

This measure has a direct financial impact on the company as Ofwat can apply financial incentives or penalties depending on our customer service performance.

 

 

Additional two-year holding periodEnsures continued alignment with shareholder interests and provides an additional period over which withholding can be applied.

 

Shareholding guidelinesIt is important that each executive director builds and maintains a significant shareholding in shares of the company to provide alignment with shareholder interests.

 

Key:

The best service to customers

At the lowest sustainable cost

In a responsible manner

Executive directors' remuneration for the year ended 31 March 2020

Single total figure of remuneration for executive directors (audited information)

Year ended 31 MarchFixed payVariable pay
Base salary
£'000
Pension
£'000
Benefits
£'000
Annual bonus
£'000
Long-term incentives
£'000
Total
£'000
202020192020201920202019202020192020(1)2019(2)20202019
Steve Mogford76975416916635(3)287077748847072,5642,429
Russ Houlden48647610710524254464865584461,6211,538
Steve Fraser(4)1854404197921045201672351,177

(1) The long-term incentive amount is in respect of the Long Term Plan (LTP) award which was granted in June 2017 for which the outcome is based on performance over the three-year period from 1 April 2017 to 31 March 2020. The LTP amount is estimated as the vesting percentage for the one-third relating to customer service excellence will not be known until later in 2020, and the awards for Steve Mogford and Russ Houlden will not vest until the end of an additional two-year holding period. Steve Fraser's 2017 LTP award lapsed on his departure. For the purposes of this table, the value of LTP awards has been calculated using an average share price over the three-month period from 1 January 2020 to 31 March 2020 of 960.2 pence per share. This is higher than the share price at the time these awards were made to participants and accordingly some of the value shown is attributable to share price appreciation. See Annual report on remuneration for further details.

(2) The long-term incentive amount for the year ended 31 March 2019 is in respect of the LTP award that was granted in June 2016 and whose performance period ended on 31 March 2019. The figure stated in last year's report was based on a latest best estimate (LBE) for the customer service excellence measure which indicated an overall vesting outcome of 60 per cent. The final confirmed outcome for the measure was better than the LBE which meant the actual overall vesting outcome was 64.4 per cent. The figure for 2019 has been updated to reflect this. Additionally, dividend equivalents accrued to 31 March 2020 have been added. The awards for Steve Mogford and Russ Houlden are not due to vest until April 2021 following an additional two-year holding period and for the purposes of this table have been valued on the basis of the average share price over the three-month period from 1 January 2020 to 31 March 2020 of 960.2 pence per share. Steve Fraser's award was granted prior to his appointment to the board and so no holding period applied.

(3) The increase in the value of benefits for Steve Mogford relates primarily to his group income protection benefit. With effect from 1 April 2019 the cost of providing the benefit increased and so this is reflected in the value of benefits shown in the table above. The underlying value he would actually receive if he were to access the benefit did not change.

(4) Steve Fraser's final date of employment with the company was 31 August 2019 and therefore salary, benefits, pension and annual bonus figures for Steve Fraser in year ended 31 March 2020 reflect part-year earnings for the period from 1 April 2019 to 31 August 2019.

Base salary

Executive directorBase salary £'000
1 September 20191 September 2018
Steve Mogford775.2760.0
Russ Houlden489.6480.0
Steve Fraser(1)443.7443.7

(1) Steve Fraser's final date of employment with the company was 31 August 2019. He received no salary increase in 2019.

Executive director salaries were increased by 2.0 per cent with effect from 1 September 2019. This is lower than the 3.0 per cent increase applying to the general workforce in 2019. The committee judged that the increase was supported by very good individual and business performance.

Pensions

The current executive directors receive a cash allowance of 22 per cent of base salary in lieu of pension, and no changes are expected to the pensions cash allowance percentage for the current executive directors during the year commencing 1 April 2020. Pension arrangements for the chief executive officer will be aligned to those of the wider workforce as part of the next directors' remuneration policy, expected to be put to shareholders at the 2022 AGM. When Phil Aspin joins the board as chief financial officer in July 2020 his pension arrangements will align with the workforce rate.

Benefits

For executive directors, benefits include: a car allowance of £14,000; health, life cover and income protection insurance; travel costs; and communication costs.

No material changes are expected to benefits during the year commencing 1 April 2020.

External appointments

Steve Mogford is the senior independent director of G4S PLC for which he received and retained an annual fee of £79,500 for the year ended 31 March 2020. Russ Houlden is an independent member of the supervisory board, and audit committee chairman, of Orange Polska SA, for which he received and retained annual fees of around £81,000 for the year ended 31 March 2020.

Annual bonus

Annual bonus in respect of financial year ended 31 March 2020 (audited information)

The performance measures, targets and outcomes in respect of the executive directors' annual bonus for the year ended 31 March 2020 are set out below. The table in the Annual report on remuneration summarises how these performance measures are linked to our business strategy.

MeasureThreshold (25%
vesting)
TargetStretch (100% vesting)Payout as a % of maximumSteve Mogford weighting (% of award) OutcomeRuss Houlden weighting (% of award) Outcome
Underlying operating profit(1)
£851.8m£876.8m£901.8m40.9%30.0%30.0%
12.3%12.3%
Customer service in year
C-MeX ranking versus the other WASCs(2)6th position4th position3rd position100%12.0%12.0%
12.0%12.0%
Written complaints16.6216.0615.50100%4.0%4.0%
4.0%4.0%
Maintaining and enhancing services for customers
Outcome delivery incentive (ODI) composite(£21.6m)(£10.5m)£37.1m72.4%24.0%24.0%
17.4%17.4%
Time, cost and quality of capital programme (TCQi)(3)85.0%91.5%98.0%77.7%20.0%20.0%
15.5%15.5%
Personal objectives (see page •• for further detail)
Steve Mogford95.0%10.0%
9.5%
Russ Houlden95.0%10.0%
9.5%
Total:
Actual award (% of maximum)70.7%70.7%
Maximum award (% of salary)130%130%
Actual award (% of salary)(4)91.9%91.9%
Actual award (£'000 – shown in single figure table)(4)707446

(1) The underlying operating profit figure for bonus purposes is based on the underlying operating profit in Our performance in 2019/20 and excludes infrastructure renewals expenditure and property trading. Recognising the performance of Water Plus during the year, of which Steve Mogford and Russ Houlden were directors, the committee used its discretion to reduce the underlying operating profit outcome used for assessing their bonus outcomes, such that the vesting on that measure was adjusted from 61.8 per cent to 40.9 per cent as shown in the table.

(2) As disclosed in the 2019 DRR, this element of the 2019/20 annual bonus was originally intended to be based on a ranking versus the other water and wastewater companies using Ofwat's C-MeX customer service survey (a sub-component of the overall C-MeX measure). When it became clear that relative ranking positions for the customer service survey component would not be available as initially expected, the committee resolved to adjust this element to be based instead on the overall C-MeX measure, with targets set to be of equivalent difficulty.

(3) TCQi is an internal measure which measures the extent to which we deliver our capital projects on time, to budget and to the required quality standard. It is expressed as a percentage, with a higher percentage representing better performance.

(4) Under the Deferred Bonus Plan, 50 per cent of the annual bonus will be deferred in shares for three years.

Further detail of achievement against personal objectives

Personal objectives represent 10 per cent of the total bonus opportunity. Assessment of outcomes against personal objectives is summarised in the table below:

Steve Mogford
Personal objectives related to:Performance summary
  • Leadership of the company's preparations for the new regulatory period 2020–25 and the ongoing relationship with the Regulator
The committee assessed that Steve Mogford's performance warranted an outcome of 95 per cent in respect of the personal objective element of his bonus, including:
  • Continued development of the company's relationship with the regulator including engagement contributing to the final determination outcome, and positioning the company well in discussions on supporting customer affordability during the recovery period following COVID-19.
  • Strong leadership of the company's response to addressing the impact of the storms (Ciara and Dennis) during early 2020 and the rapid and effective mobilisation of the response to COVID-19.
  • Delivery of an effective internal talent pipeline, such that both the departure of Steve Fraser during the year and the planned retirement of Russ Houlden in July 2020 have been managed through internal promotions.
  • Continued growth of the senior leadership team's capabilities and impact, as evidenced in the delivery of improving operational performance, services to customers and levels of workforce engagement scores.
  • Mitigating the effect of unexpected events on operational performance and customer service
  • Succession planning
  • Developing the right organisation culture
Russ Houlden
Personal objectives related to:Performance summary
  • Preparations for the new regulatory period 2020–25
The committee assessed that Russ Houlden's performance warranted an outcome of 95 per cent in respect of the personal objective element of his bonus, including:
  • Cyber security
  • Material contribution to the company's final determination outcome.
  • Financing activities
  • Led the design of the company's response to the new NIS cyber security requirements including the formulation of the company's plan for compliance.
  • Succession planning
  • Continued to lead the delivery of the company's financing competitive advantage, with low cost financing raised within the context of a low risk hedging strategy delivering significant value to customers and shareholders, benefiting service resilience and the environment.
  • Delivered, over several years, a high engagement, high performance Finance function and developed the talent within it, thereby facilitating the appointment of an internal candidate as the next CFO.

Deferred Bonus Plan awards made in the year ended 31 March 2020 (audited information)

Bonuses are earned by reference to performance in the financial year and paid in June following the end of the financial year. Fifty per cent of any bonus is deferred into shares under the Deferred Bonus Plan. These awards vest after three years and are subject to withholding provisions. There are no service or additional performance conditions attached.

The table below provides details of share awards made on 17 June 2019 in respect of deferred share bonus payments made to executive directors for the 2018/19 financial year.

Executive directorType of
award
Basis of
award
Number of
Shares
Face value of award(1)
(£'000)
End of
deferral period
Steve MogfordConditional shares50% of bonus46,960£38718.6.2022
Russ HouldenConditional shares50% of bonus29,485£24318.6.2022
Steve FraserConditional shares50% of bonus27,417£22618.6.2022

(1) The face value has been calculated using the closing share price on 14 June 2019 (the dealing day prior to the date of grant), which was 824.2 pence per share.

Long-term incentives

Performance for Long Term Plan awards

2017 Long Term Plan (LTP) awards with a performance period ended 31 March 2020 (audited information)

The 2017 LTP awards were granted in June 2017 and performance was measured over the three-year period from 1 April 2017 to 31 March 2020. Executive directors' awards will normally vest in April 2022, following an additional two-year holding period. The unvested shares will remain subject to withholding provisions over this two-year holding period.

Note that the final outcome for the customer service excellence measure (which forms one-third of the award) will not be known until the customer service scores for the other water and wastewater companies are published in late summer 2020. The values of the 2017 LTP awards in the single total figure of remuneration table are therefore estimated and will be restated in next year's report once the final outcome is known.

The table below shows how the long-term incentive amount in respect of the 2017 LTP was calculated:

MeasureThreshold (25%
vesting)
IntermediateStretch (100% vesting)Vesting as a % of maximumSteve Mogford weighting (% of award)
Outcome
Russ
Houlden weighting (% of award)
Outcome
Relative total shareholder return (TSR)
TSR versus median TSR of FTSE 100 companies (excluding financial services, oil and gas, and mining companies)(1)Median TSRStraight-line between threshold and stretchMedian TSR 1.1562.0%33.3%33.3%
Actual: TSR between thresholdand stretch20.7%20.7%
Company TSR of 17.5% was between threshold TSR of 9.4% and stretch TSR of 25.8%
Sustainable dividends(50% vesting)
Average underlying dividend cover over the three-year performance period1.051.131.15100%33.3%33.3%
Actual: 1.3233.3%33.3%
Underpin: Dividend growth of at least RPI in each of the years 2017/18, 2018/19 and 2019/20(2) (2)✓ Met
Customer service excellence(3)
Ranking for the year ended 31 March 2020 out of the 11 water and wastewater companies using a combined customer service measure comprising C-MeX performance and customer complaints(4)Median rank (6th position)Straight-line between threshold and stretchUpper quartile rank (3rd position)75.0%33.3%33.3%
Estimate: 4th position25.0%25.0%
Overall underpin
Overall vesting is subject to the committee being satisfied that the company's performance on these measures is consistent with underlying business performance✓ Assumed met.
The committee will make a final assessment of the company's performance once the outcome of the customer service excellence measure is known.
Estimated vesting (% of award)79.0%79.0%
Number of shares granted103,57265,391
Number of dividend equivalent shares12,9638,183
Number of shares before performance conditions applied116,53573,574
Estimated number of shares after performance conditions applied92,06258,123
Three-month average share price at end of performance period (pence)(5)960.2960.2
Estimated value at end of performance period (£'000 – shown in single figure table)(6)884558

(1) For the purposes of calculating TSR, the TSR index is averaged over the three months prior to the start and end of the performance period. TSR is independently calculated by the committee's advisers.

(2) Subject to approval of the final dividend by shareholders at the 2020 AGM.

(3) As disclosed in the 2018 DRR, this element of the 2017 LTP was originally based on a ranking versus the other water and wastewater companies using Ofwat's Service Incentive Mechanism (SIM) combined score, with 25 per cent vesting for a median ranking and 100 per cent vesting for an upper quartile ranking. As a result of Ofwat transitioning from SIM to C-MeX as its primary assessment of customer service, the committee resolved to adjust this element of the 2017 LTP to be based on the new C-MeX measure and written complaints, with targets set to be of equivalent difficulty. A similar adjustment has been made in respect of the 2018 LTP, details of which will be included in next year's report.

(4) This is an estimate as the final outcome will not be known until the volume of written complaints received by other companies are published later in 2020.

(5) Average share price over the three-month period from 1 January 2020 to 31 March 2020.

(6) 5.2 per cent of the value vesting is attributable to share price appreciation which equates to £44,000 for Steve Mogford and £28,000 for Russ Houlden.

Long Term Plan awards granted in the year

2019 LTP awards with a performance period ending 31 March 2022 (audited information)

The table below provides details of share awards made to executive directors on 28 June 2019 in respect of the 2019 LTP:

Executive directorType of awardBasis of awardFace value
of award
(£'000)(1)
Number of
shares under
award
% vesting at
threshold
End of
performance
period(2)
Steve MogfordConditional shares130% of salary£988125,12625%31.3.2022
Russ HouldenConditional shares130% of salary£62479,02725%31.3.2022

(1) The face value has been calculated using the closing share price on 27 June 2019 (the dealing day prior to the date of grant) which was 789.6 pence per share.

(2) An additional two-year holding period applies after the end of the three-year performance period.

During the 2018/19 shareholder consultation process on the new directors' remuneration policy the committee concluded that there was shareholder support for the introduction of a new Return on Regulated Equity (RoRE) measure in the LTP under the new policy.

In recognition that setting meaningful targets for the sustainable dividend measure that could cross regulatory periods (from AMP6 to AMP7) would be challenging the committee indicated to shareholders that it might replace the 1/3 sustainable dividends element that would normally have applied to the 2019 LTP awards with one based on RoRE, and where delivery of the dividend policy would operate as an overall underpin. No negative feedback was received from shareholders on this proposal, and so the committee proceeded with the change.

Details about the 2019 LTP performance measures and targets are shown in the following table. Performance is measured over the three-year period 1 April 2019 to 31 March 2022. The table in the Annual report on remuneration summarises how these performance measures are linked to our business strategy.

MeasureTargetsWeighting
Threshold
(25% vesting)
Stretch
(100% vesting)
Relative total shareholder return (TSR)
TSR versus median TSR of FTSE 100 companies (excluding financial services, oil and gas, and mining companies)(1) measured over the three-year performance periodMedian TSRMedian TSR
× 1.15
33.3%
Return on Regulated Equity (RoRE)(2)
Average RoRE compared to the average allowed return set by the regulator across the three-year performance periodAverage RoRE of -0.5% below the average allowed returnAverage RoRE of 1% above the average allowed return33.3%
Customer service excellence
Ranking for the year ended 31 March 2022 out of the 11 water and wastewater companies using a combined customer service measure comprising C-MeX performance and customer complaintsMedian rank
(6th position)
Upper
quartile rank
(3rd position)
33.3%
Overall underpin
Overall vesting is subject to the committee being satisfied that the company's performance on these measures is consistent with underlying business performance and that the Company's dividend policy has been delivered in respect of each financial year of the performance period.

(1) For the purposes of calculating TSR, the TSR index is averaged over the three months prior to the start and end of the performance period. TSR is independently calculated by the committee's advisers.

(2) Stretching targets were set for the RoRE measure taking into account the allowed return over the period (as set out in the final determination) and the expected returns to be generated through financial and operational performance.

Straight-line vesting applies between the threshold and stretch targets, with nil vesting below threshold performance.

Incentives in 2020/21

Ensuring alignment with our business plan

The performance measures used in our incentive schemes during 2020/21 will be aligned directly with the business plan, with a material weighting on measures that are linked to delivery for customers. Further details about the measures used and the stretching targets set will be provided in next year's directors' remuneration report.

Annual bonus in respect of the financial year commencing 1 April 2020

The maximum bonus opportunity for the year commencing 1 April 2020 will remain unchanged at 130 per cent of base salary.

In a change to previous years, and consistent with the directors' remuneration policy, the annual bonus for 2020/21 will be wholly aligned to the group bonus scorecard, with no personal performance element. In making this change, the committee considered that individual contributions are already directly reflected in the outcomes of the group scorecard and therefore a standalone element was no longer required.

In addition, unlike the approach adopted during AMP6, there will be no additional weighting applied to the underlying operating profit (UOP) measure, with the 10 per cent weighting being redistributed to the scorecard measures. This change is driven by the fact that there are lower allowed revenues in AMP7 due to the lower WACC and the importance to the overall financials of delivering the customer measures and ODIs as they provide greater opportunity to earn value and impact Return on Regulated Equity.

The table below summarises the measures, weighting and targets for the 2020/21 bonus. Targets that are considered commercially sensitive will be disclosed retrospectively in the 2020/21 annual report on remuneration.

MeasureTargetsWeighting (% of award)
Threshold (25% vesting)Target (50% vesting)Stretch (100% vesting)
Underlying operating profit(1)Commercially sensitive25.0%
Customer service in year
C-MeX ranking out of the 17 water companies8th position6th position4th position20.0%
Written complaints14.6314.4914.36
Maintaining and enhancing services for customers
Outcome delivery incentive (ODI) compositeCommercially sensitive35.0%
Time, cost and quality of capital programme (TCQi)(2)80%87.5%95%20.0%
Total100%

(1) Underlying operating profit for bonus purposes excludes infrastructure renewals expenditure and property trading.

(2) TCQi is an internal measure which measures the extent to which we deliver our capital projects on time, to budget and to the required quality standard. It is expressed as a percentage, with a higher percentage representing better performance.

2020 LTP awards with a performance period ending 31 March 2023

As part of the directors' remuneration policy review during 2018/19 the committee consulted with shareholders on changing the structure of the LTP with effect from the 2020 awards, such that they would be based on two equally weighted components: Return on Regulated Equity (RoRE) and a customer basket of measures. Shareholders subsequently approved the new policy at the 2019 AGM and so the new structure will apply when the 2020 LTP awards are granted. The award level for executive directors will remain unchanged at 130 per cent of base salary.

Stretching targets will be set for the RoRE measure taking into account the allowed return over the period (as set out in the final determination) and the expected returns to be generated through financial and operational performance.

In respect of the customer basket the committee will finalise the selection of measures having reflected on the group's research in relation to customer priorities. The basket will demonstrate our focus on customer delivery, as committed to Ofwat in our PR19 business plan, and will recognise evolving expectations in regard to Environmental, Social and Governance matters.

The targets for both the RoRE and customer basket measures are still being determined. Full details of the targets set will be disclosed in the 2020/21 annual report on remuneration.

Executive directors' interests in shares

Executive directors' shareholding (audited information)

Executive directors are expected to reach a shareholding guideline of 200 per cent of salary, normally within five years of appointment. With effect from 19 May 2020 the shareholding guideline was updated to include a post-employment shareholding requirement, under which executive directors must continue to hold the lower of 200 per cent of salary in shares or their shareholding on departure, for two years after ceasing employment with the group. Executive directors in role before 19 May 2020 must retain shares vesting from future incentive awards if not doing so would take their shareholding below the guideline. Executive directors appointed on or after 19 May 2020 must retain shares vesting from all incentive awards (including in-flight awards) if not doing so would take their shareholding below the guideline. The committee has put in place legal mechanisms to enable the post-employment shareholding requirements to be enforced.

Details of beneficial interests in the company's ordinary shares as at 31 March 2020 held by each of the executive directors and their connected persons are set out in the charts below along with progress against the target shareholding guideline level. Steve Mogford and Russ Houlden both continue to exceed the target shareholding guideline level of 200 per cent of salary.

 

Unvested shares not subject to performance conditions after tax and National Insurance

Shares owned outright

......... Number of shares required to achieve shareholding guideline at 31 March 2020

Further details of the executive directors' shareholdings and share plan interests are given in the table below and in the Appendix 2

DirectorShare- holding guideline (% of salary)Number of shares required to meet share-
holding guide-
line(1)
Number of shares owned outright (including connected persons)Unvested shares not subject to performance conditions(2)Total shares counting towards shareholding guidelines(3)Share-holding as % of base salary at 31 March 2020(1)Share- holding guideline met at 31 March 2020Unvested shares subject to performance conditions(4)
20202019202020192020201920202019
Steve Mogford(5) (6)200%161,46670,178158,299289,524255,366223,646293,665277%Yes381,010352,738
Russ Houlden(5) (6)200%101,97914,19555,040182,219160,669110,791140,217217%Yes240,605222,701
Steve Fraser(5) (7)200%92,41860,90260,60864,06543,06994,86483,457n/an/a0129,081

(1) Share price used is the average share price over the three months from 1 January 2020 to 31 March 2020 (960.2 pence per share).

(2) Unvested shares subject to no further performance conditions such as matching shares under the ShareBuy scheme. Includes shares subject only to withholding provisions such as Deferred Bonus Plan shares in the three-year deferral period and Long Term Plan shares in the two-year holding period.

(3) Includes unvested shares not subject to performance conditions (on a net of tax and National Insurance basis), plus the number of shares owned outright.

(4) Includes unvested shares under the Long Term Plan.

(5) In the period 1 April 2020 to 19 May 2020, additional shares were acquired by Steve Mogford (34 ordinary shares) and Russ Houlden (34 ordinary shares) in respect of their regular monthly contributions to the all-employee ShareBuy scheme. These will be matched by the company on a one-for-five basis. Under the scheme, matching shares vest one year after grant provided the employee remains employed by the company.

(6) On 1 April 2020, shares granted on 30 June 2015 under the Long Term Plan vested for Steve Mogford and Russ Houlden following their additional two-year holding period. Steve Mogford had 66,320 shares vesting, of which 31,249 shares were sold to cover tax and National Insurance. Steve retained the remaining balance of 35,071 shares. Russ Houlden had 41,869 shares vesting, of which 19,728 shares were sold to cover tax and National Insurance. Russ retained the remaining balance of 22,141 shares.

(7) Steve Fraser left the company on 31 August 2019 and the shares reflect his shareholding at his departure date, valued using the average share price over the three months from 1 January 2020 to 31 March 2020. As at 31 March 2020 he continued to have a beneficial interest in 64,953 shares.

Dilution limits

Awards granted under the company's share plans are satisfied by market purchased shares bought on behalf of the company by United Utilities Employee Share Trust immediately prior to the vesting of a share plan. The company does not make regular purchases of shares into the Trust nor employ a share purchase hedging strategy and shares are bought to satisfy the vesting of share plans. The rules of the Deferred Bonus Plan do not permit awards to be satisfied by newly issued shares and must be satisfied by market purchased shares. The rules of the Long Term Plan permit the awards to be satisfied by newly issued shares but the company has decided to satisfy awards by market purchased shares.

Should the company's method of satisfying share plan vestings change (i.e. issuing new shares) then the company would monitor the number of shares issued and their impact on dilution limits set by The Investment Association in respect of all share plans (10 per cent in any rolling 10-year period) and executive share plans (5 per cent in any rolling 10-year period).

No treasury shares were held or utilised in the year ended 31 March 2020.

Other information

Company performance and CEO remuneration comparison

The TSR chart below illustrates the company's performance against the FTSE 100 over the past ten years. The FTSE 100 has been chosen as the appropriate comparator as the company is a member of the FTSE 100 and it is considered to be the most widely published benchmark for this purpose. The chart shows the growth in the value of a hypothetical £100 holding invested in the company over the ten year period. The table below the TSR chart shows the remuneration data for the CEO over the same period as the TSR chart.

Year ended 31 March2011201220132014201520162017201820192020
CEO single figure of remuneration (£'000)Steve Mogford3771,4211,5492,3782,8842,760(1)2,2332,221(2)2,429(3)2,564
Philip Green3,073n/an/an/an/an/an/an/an/an/a
Annual bonus payment (% of maximum)Steve Mogford90.672.084.478.277.454.583.774.979.070.7
Philip Green90.8n/an/an/an/an/an/an/an/an/a
LTP vesting (% of maximum)(4)Steve Mogfordn/a(5)n/a(5)n/a(5)93.597.533.654.555.464.4(3)79.0(7)
100(6)
Philip Green28.1(8)n/an/an/an/an/an/an/an/an/a
100(9)

(1) This includes the payout from the 2013 Long Term Plan (LTP) as well as £1.028 million in respect of Steve Mogford's one-off Matched Share Investment Scheme that ended on 5 January 2016.

(2) The pay out from the 2015 LTP, which vested on 1 April 2020 after the end of a two-year holding period, has been updated to reflect the additional dividends accruing on this award and the closing share price on the date of vesting of 867.8 pence per share.

(3) The payout and vesting percentage for the 2016 LTP have been restated to reflect the additional dividend equivalents accruing on these awards, final vesting outcome and updated share price. See Annual report on remuneration for further details.

(4) For performance periods ended on 31 March, unless otherwise stated.

(5) Steve Mogford was not a participant in any long-term incentive plans that had performance periods ending during 2011 to 2013. For those who did participate in those plans, the vesting as a percentage of maximum was 37.5 per cent for those vesting in 2012 and 35.3 per cent for those vesting in 2013.

(6) The retention period applicable to Steve Mogford's Matched Share Investment Scheme ended on 5 January 2016.

(7) The 2017 Long Term Plan amount vesting percentage is estimated. See Annual report on remuneration for further details.

(8) 2008 Performance Share Plan (PSP) and Matching Share Award Plan (MSAP).

(9) The retention period applicable to Philip Green's Matched Share Investment Scheme ended on 12 February 2011.

Date of service contracts

Executive directorsDate of service contract
Steve Mogford5.1.11
Russ Houlden1.10.10

Pay arrangements across the wider workforce and their alignment with our executive pay approach

The committee has always been mindful of the alignment of executive pay arrangements and those of the wider workforce, and as is demonstrated in the table below there is a high level of alignment and consistency of approach.

When reviewing salaries and assessing incentive outcomes for the executives the committee takes account of how those elements of remuneration have been (or will be) applied across the wider workforce in respect of the same periods. At least annually the committee reviews a report detailing all elements of the workforce's pay and benefits, with any notable changes since the previous review being clearly identified and discussed.

The committee has mechanisms through which it hears from and engages with the workforce on executive pay, and its alignment with wider arrangements. As a member of the committee, insights related to remuneration that arise via Alison Goligher in her role as Employee Voice Non-Executive Director can be quickly and appropriately considered, and Alison provides a formal report to the committee at least annually in this respect. Additionally, Alison hosts sessions with the Employee Voice panel which cover the alignment of our executive pay approach with that of the wider workforce.

Cascade of remuneration through the organisation

Employee group (number of employees covered)Element of payDescription
Employees at all levels (circa 5,500)SalaryWe aim to attract and retain employees of the experience and quality required to deliver the company's strategy. Executive directors will normally receive a salary increase broadly in line with the increase awarded to the general workforce. For 2019 the average base salary increase for employees was 3 per cent (2 per cent for executive directors).
Health and well-being benefitsAll employees are eligible for company-funded healthcare. Employees have access to a Best Doctors service for them and their families. Financial awareness courses are available for all employees to help with their financial well-being and cover a broad range of money management topics such as financial planning, managing debt and pensions
Flexible benefitsAll employees have access to a variety of additional voluntary benefits to suit their lifestyle, and can choose from a range of deals and discounts all year round. Employees can donate to their chosen charities directly from their pay if they want to. Around 70 per cent of employees take up at least one of these flexible options.
PensionEmployees at all levels can participate in our award-winning pension arrangements and 99 per cent of our employees do so. The company doubles any contributions that employees make up to a maximum of 14 per cent of salary. As part of the pension scheme employees receive company-funded life assurance.
ShareBuyAny employee can become a shareholder in our company and share in our success by participating in our ShareBuy scheme. For every five shares an employee buys the company gives another one free. Just over half of the workforce participate in our ShareBuy scheme.
Annual bonus cashEmployees at all levels participate in the annual bonus scheme, receiving financial rewards based on the performance of the company and achievement of personal objectives. Specific weightings and award levels vary by grade. There is a strong level of alignment in measures throughout the organisation.
CEO, CFO and senior executives (7)Annual bonus - deferred sharesEach of the executive directors and senior executives is required to defer a proportion of their bonus into shares for three years.
CEO, CFO, executives and directors (circa 60)Long Term Plan (LTP)Executives and directors may be invited to participate in the LTP. Performance conditions are the same for all participants but award sizes vary.

Percentage change in CEO's remuneration versus the wider workforce

The figures below show how the percentage change in the CEO's salary, benefits and bonus earned in 2018/19 and 2019/20 compares with the percentage change in the average of each of those components for a group of employees.

Change in CEO remuneration

Base salary(1)

+2.0%

Bonus(2)

-8.7%

Benefits(3)

+25.4%

Change in employee remuneration(3)

Base salary(4)

+4.5%

Bonus

+3.6%

Benefits

+8.6%

(1) On 1 September 2019, Steve Mogford received a base salary increase of 2.0 per cent.

(2) See Annual report on remuneration for further details.

(3) The increase in the value of benefits for Steve Mogford relates primarily to his group income protection benefit. With effect from 1 April 2019 the cost of providing the benefit increased and so this is reflected in the value of benefits shown in the single figure table. The underlying value he would actually receive if he were to access the benefit did not change.

(4) To aid comparison, the group of employees selected by the committee are all those members of the workforce who were employed over the complete two-year period.

(5) Includes promotional increases. The headline salary increase for employees was 3.0 per cent.

CEO pay ratios

New legislation requires listed companies with more than 250 employees to publish the ratio of their CEO's pay to that of the 25th percentile (P25), median (P50) and 75th percentile (P75) total remuneration of full-time equivalent employees. The regulations provide for three calculation approaches to determine the pay ratio (Options A, B and C).

The data in the tables below has been calculated using Option A which is considered to be the most accurate methodology and uses the same calculation basis as required for the CEO's total remuneration as shown in the single figure table in the Annual report on remuneration.

  • We identified all employees who received base salary during the year ended 31 March 2020 and who were still employed on that date.
  • The calculations were carried out using their total pay and benefits received in respect of the year ended 31 March 2020, including bonuses earned by reference to performance in the financial year and paid in June following the end of the financial year.
  • For employees who were employed on a part-time basis, or who were not employed for the full year, their remuneration has been annualised to reflect the full-time equivalent.
  • No other estimates or adjustments have been used in the calculations and no other remuneration items have been omitted.
Pay ratios
Financial yearMethodP25P50P75
2019/20Option A77:158:146:1

Along with the above ratios comparing total remuneration, the committee will keep under review the ratios for salary and salary plus annual bonus, and track how these change over time. With a significant proportion of the remuneration of the CEO linked to company performance and share price movements over the longer term, it is expected that the headline ratios will depend primarily on the Long Term Plan (LTP) outcome, and accordingly may fluctuate from year to year. Participation in the LTP is currently limited to around 60 executives and directors, with none of the individuals identified as P25, P50 and P75 in this group. On the other hand, employees at all levels participate in the annual bonus scheme, and so the committee considers this ratio as well as the ratio comparing only salary, to provide helpful additional context.

Pay ratios
Pay ratios for different elements of remunerationP25P50P75
Total remuneration (as above)77:158:146:1
Salary plus annual bonus47:137:131:1
Salary26:120:117:1

The table below shows the total remuneration, salary plus annual bonus, and salary at each of the three quartiles.

£'000
CEOP25P50P75
Total remuneration2,564334456
Salary plus annual bonus1,476324048
Salary769303844

With this being the first full year under the revised reporting requirements, there is limited data against which to compare the pay ratios above. The committee will consider the pay ratios in the context of the ratios reported in future years as well as other important metrics such as the gender pay gap and employee engagement levels.

Relative importance of spend on pay

The table below shows the relative importance of spend on pay compared to distributions to shareholder.

(1) Employee costs includes wages and salaries, social security costs, and post-employment benefits.

Non-executive directors

Single total figure of remuneration for non-executive directors (audited information)

Salary/fees £'000Taxable benefits £'000Total £'000
202020192020201920202019
Dr John McAdam(1)23230721234308
Sir David Higgins(2)126n/a3n/a129n/a
Stephen Carter8078108178
Mark Clare8180308480
Alison Goligher6866006866
Brian May8482308782
Paulette Rowe6866207066
Sara Weller8180108280

(1) Dr John McAdam retired from the board on 31 December 2019.

(2) Sir David Higgins joined the board as a non-executive director and chairman designate with effect from 13 May 2019, receiving annual fees of £80,000. On his appointment as Chairman, effective 1 January 2020, his annual fees increased to £300,000.

Fees

Non-executive director annual fee rates were reviewed and increased with effect from 1 September 2019 as shown below. Base fees were increased by 2.0 per cent which is lower than the 3.0 per cent increase applying to the general workforce in 2019. Additional fees for the senior independent non-executive director and the chairs of committees were not increased.

RoleFees £'000
1 Sept 20191 Sept 2018
Base fee: Chairman(1) (2)315.0309.0
Base fee: other non-executive directors(3)68.266.9
Senior independent non-executive director(3)13.513.5
Chair of audit and treasury committees(3)16.016.0
Chair of remuneration committee(3)13.513.5
Chair of corporate responsibility committee(3)12.012.0

(1) Approved by the remuneration committee.

(2) With effect from 1 January 2020 the base fee for the Chairman was set at £300,000.

(3) Approved by a separate committee of the board.

Non-executive directors' shareholding (audited information)

Details of beneficial interests in the company's ordinary shares as at 31 March 2020 held by each of the non-executive directors and their connected persons are set out in the table below.

Non-executive directorsDate first appointed
to the board
Number of shares owned outright (including connected persons) at 31 March
2020(1)
Dr John McAdam(2)4.2.081,837
Sir David Higgins13.5.193,000
Stephen Carter1.9.143,075
Mark Clare1.11.137,628
Alison Goligher1.8.163,000
Brian May1.9.123,000
Paulette Rowe1.7.173,000
Sara Weller1.3.1211,000

(1) From 1 April 2020 to 19 May 2020 there have been no movements in the shareholdings of the non-executive directors.

(2) Dr John McAdam had 1,837 shares when he stepped down from the board with effect from 1 January 2020.

The remuneration committee

Summary terms of reference

The committee's terms of reference were last reviewed in November 2019 and are available on our website:

corporate.unitedutilities.com/corporate-governance

The committee's main responsibilities include:

  • Determining and recommending to the board the policy for executive director remuneration, having reviewed and taken into account workforce remuneration and related policies and the alignment of incentives and reward with culture;
  • Setting the individual employment and remuneration terms for executive directors and other senior executives, including: recruitment and severance terms, bonus plans and targets, and the achievement of performance against targets;
  • Approving the general employment and remuneration terms for selected senior employees;
  • Setting the remuneration of the Chairman;
  • Proposing all new long-term incentive schemes for approval of the board, and for recommendation by the board to shareholders; and
  • Assisting the board in reporting to shareholders and undertaking appropriate discussions as necessary with institutional shareholders on aspects of executive remuneration.

Composition of the remuneration committee

MemberMember sinceMember to
Sara Weller (chair since 27.7.12)1.3.12To date
Mark Clare1.9.14To date
Alison Goligher1.8.16To date
Brian May16.5.17To date

The committee's members have no personal financial interest in the company other than as shareholders and the fees paid to them as non-executive directors.

Support to the remuneration committee

By invitation of the committee, meetings are attended by the Chairman of the company, the chief executive officer, the company secretary (who acts as secretary to the committee), the customer services and people director and the head of reward, who are consulted on matters discussed by the committee, unless those matters relate to their own remuneration. Advice or information is also sought directly from other employees where the committee feels that such additional contributions will assist the decision-making process.

The committee is authorised to take such internal and external advice as it considers appropriate in connection with carrying out its duties, including the appointment of its own external remuneration advisers.

During the year, the committee was assisted in its work by the following external advisers:

AdviserAppointed byHow appointedServices provided to the committee in year ended 31 March 2020Additional services provided in year ended 31 March 2020Fees paid by company for these services in respect of year and basis of charge
New Bridge Street (to 31 December 2019)CommitteeReappointed following committee review in 2013General advice on remuneration matters and support for the directors' remuneration policy reviewBenchmarking of roles not under the committee's remit and advice on non-
executive director remuneration. Provision of market information relevant to the price review submission
£67,000 on a time/cost basis
Mercer (from 1 January 2020)CommitteeAppointed following a tender process in 2019General advice on remuneration mattersBenchmarking of roles not under the committee's remit and advice on non-
executive director remuneration
£22,000 on a time/cost basis

The independent consultants New Bridge Street (a trading name of Aon Hewitt Limited, an Aon PLC company) and Mercer are members of the Remuneration Consultants Group and, as such, voluntarily operate under the Code of Conduct in relation to executive remuneration consulting in the UK. The committee is satisfied that the advice they received from external advisers is objective and independent.

In addition, during the year the law firm Eversheds Sutherland provided advice to the company in relation to the company's share schemes.

Key activities of the remuneration committee over the past year

The committee met seven times in the year ended 31 March 2020.

Regular activities

  • Approved the 2018/19 directors' remuneration report;
  • Reviewed the pay comparator group;
  • Reviewed the base salaries of executive directors and other members of the executive team;
  • Reviewed the base fee for the Chairman;
  • Assessed the achievement of targets for the 2018/19 annual bonus scheme, reviewed progress against the targets for the 2019/20 annual bonus scheme, and considered the targets for the 2020/21 annual bonus scheme;
  • Assessed the achievement of targets for the Long Term Plan (LTP) awards made in 2016 and set the targets for LTP awards made in 2019;
  • Reviewed and approved awards made under the annual bonus scheme, Deferred Bonus Plan (DBP) and LTP;
  • Monitored progress against shareholding guidelines for executive directors and other members of the executive team;
  • Reviewed the committee's performance during the period;
  • Amended the committee's terms of reference, taking account of best practice and changes introduced by the 2018 UK Corporate Governance Code, including the committee assuming responsibility for the setting of remuneration for all members of the executive team;
  • Considered governance developments and market trends in executive remuneration, including in the wider utilities sector; and
  • Noted progress on the company's gender pay gap reporting.

Other activities

  • Reviewed the executive pay arrangements and consulted with shareholders on the proposed directors' remuneration policy;
  • Determined the remuneration arrangements for departing and new/designate board members falling under the remit of the committee;
  • Reviewed the shareholding guidelines including the introduction of post-employment shareholding requirements; and
  • Agreed to align pension arrangements for future executive directors with those of the wider workforce and that pension arrangements for current executive directors would align as part of the next policy review.

2019 AGM: statement of voting

At the last annual general meeting on 26 July 2019, votes on the remuneration-related resolutions were cast as follows:

Approval of the directors' remuneration policy

Votes for 458,175,960
(99.41% of votes cast)

Votes against 2,709,122
(0.59% of votes cast)

460,885,082

Total votes cast

667,337

Votes withheld (abstentions)

 

Approval of the directors’ remuneration report

(other than the part containing the directors' remuneration policy)

Votes for 454,289,863
(98.54% of votes cast)

Votes against 6,734,908
(1.46% of votes cast)

461,024,771

Total votes cast

527,648

Votes withheld (abstentions)

 

The directors' remuneration report was approved by the board of directors on 19 May 2020 and signed on its behalf by:

Sara Weller

Chair of the remuneration committee