Our executive pay arrangements are aligned to our purpose, vision and strategy, thereby incentivising great customer service and the creation of long-term value for all.
Chair of the remuneration committee
- The Code requires that "the board should establish a remuneration committee of at least three independent non-executive directors".
- The role of the committee is to set remuneration terms for all executive directors, other senior executives and the Chairman.
- By invitation of the committee, meetings are attended by the Chairman, the CEO, the company secretary, the customer services and people director, the head of reward and the external adviser to the committee.
Remuneration committee members
Sara Weller (chair)
Read more about how our remuneration approach complies with the UK Corporate Governance Code in theCode principle
Read more about At a glance summary: executive directors' remunerationhere
Read more aboutAnnual report on remuneration
Read more about Directors' remuneration policy in the Appendix 1: Directors' remuneration policy (abridged)
I am pleased to introduce the directors' remuneration report for the year ended 31 March 2020, which includes an 'at a glance' summary, the annual report on remuneration for the year ended 31 March 2020, and an abridged version of our directors' remuneration policy which was approved by shareholders at our 2019 AGM.
I will step down from the board at the 2020 AGM so this will be my last statement as Chair of the committee, a position I have held since 2012. Much has been achieved in those eight years, a period in which the corporate governance environment has evolved significantly. During that time we have always sought to fully embrace the changing landscape and have implemented remuneration arrangements that are transparent and well-aligned to our purpose, vision and strategy, incentivising great customer service and the creation of long-term value for all.
The year in focus
During this year there have been a number of changes to the composition of the board along with announcements of future departures and appointments. In each case the committee carefully considered the implications on remuneration, exercising discretion and judgement appropriately and delivering on commitments made in the new directors' remuneration policy, such as aligning the pension arrangements of future executive directors with those of the workforce. Further details relating to the various changes are shown in the Executive directors remuneration.
Reflecting on performance, as is detailed elsewhere in this Annual Report, during AMP6 we delivered well against all principal areas of our regulatory contract. Improvements in our customer service performance have been delivered year-on-year, and moving to be one of the top performers in the sector on ODIs is a significant achievement when we look back at our position at the start of AMP6 in 2015.
In the very last weeks of the 2019/20 performance year, we saw the emergence of the COVID-19 pandemic, to which the company reacted rapidly and made significant moves to respond. As described elsewhere, the committee concluded that this period did not significantly impact the overall performance in the year for remuneration purposes; however the impact on considerations for future years is considerable and I will come back to that later in this letter.
Recognising the difficulty being experienced by many customers in our region, all members of the board volunteered a 20 per cent reduction to their salary/fees for three months, with the money instead being shared with organisations supporting those in the front line helping communities cope with COVID-19.
Implementation of the directors' remuneration policy during 2019/20
The committee believes that executive directors' salaries remain appropriately positioned relative to the market. Whilst our policy is that executive directors will normally receive a salary increase broadly in line with the increase awarded to the general workforce, for the second consecutive year, Steve Mogford and Russ Houlden each received a base salary increase of 2 per cent (with effect from 1 September 2019), which was lower than the 3 per cent headline increase applied across the wider workforce. Salaries will next be reviewed in September 2020.
To ensure shared focus on the business plan at all levels, employees throughout the company participate in the annual bonus scheme, alongside the executive directors. The bonus measures used during the year reflect the importance and challenge of the targets set by our regulators for the period 2015–20.
We have seen another very good year of customer service, operational and financial performance in 2019/20, despite the challenges presented by the storms during early 2020.
The customer service element of the annual bonus is based on C-MeX and written complaints. As disclosed in our 2019 directors' remuneration report, the outcome of the C-MeX measure was originally intended to be based on our ranking on the customer service survey only (a sub-component of the overall C-MeX measure). When it became clear that relative ranking positions for the customer service sub-component would not be available as initially expected, the committee used its discretion to adjust this element to instead be based on the overall combined C-MeX ranking (which includes a perception survey sub component alongside the customer service survey). The committee was satisfied that this was appropriate, noting that it is ultimately the overall combined C-MeX score that determines future incentives and penalties and so it aligned well with shareholder interests. Continued enhancements of the services we provide have resulted in ever-improving standards of customer service, including being ranked in first position in the final two customer service surveys conducted by Ofwat in the year, and in third position overall on combined C-MeX across the whole year. Our approach on affordability received the highest Ofwat rating possible in their assessment of our business plan and our Priority Services proposition continues to set the industry standard in supporting vulnerable customers, with over 100,000 now registered.
This has been another year of strong performance against our outcome delivery incentives (ODIs) including a significant ODI reward payment in relation to our West Cumbria project. We are pleased with our overall AMP6 performance and well placed to make a strong start to AMP7.
Underlying operating profit increased in 2019/20, although the committee used its discretion to reduce the outcome for this part of the scorecard to account for the performance of Water Plus, of which Steve Mogford and Russ Houlden were directors. The efficient and effective delivery of the capital programme is reflected in our time, cost and quality index (TCQi) score which remains high at 95.1 per cent.
When considering the personal contributions of the executive directors, amongst other achievements during the year, the committee was mindful of their leadership throughout the price review process, including the acceptance of the final determination and the steps taken since then to start AMP7 strongly. Additionally, the fact that the departure of executive directors during the year and in the coming months have been managed through internal promotions is testament to the comprehensive succession and talent processes established within the company.
Overall company results, together with the strong personal performance of the executive directors, has resulted in annual bonus out-turn of around 71 per cent of maximum (compared to the 2018/19 outcome of around 79 per cent of maximum) and a company-wide bonus pool totalling around £17 million (which is the same as in the prior year). Half of the annual bonuses earned by the executive directors will be deferred into shares for a period of three years.
The Long Term Plan awards which were granted in 2017, and whose performance is measured over the three years to 31 March 2020, will vest in the summer of 2020 at an estimated 79 per cent. This reflects the continued delivery of high standards of customer service set in recent years, and the achievement of the stretch level of sustainable dividend performance. In December 2019 some of the uncertainty that had affected the water sector in recent years was lifted, which meant that the good underlying business performance was better reflected in the share price. This resulted in the target for the relative total shareholder return measure being partially met. As noted in the Annual report on remuneration, as a result of Ofwat transitioning from SIM to C-MeX, the committee used it discretion to amend the customer service element of the award to be based on the new C-MeX measure and written complaints. The final outcome of this element will not be known until the volume of written complaints received by other companies are published later in 2020 and the overall vesting level can be confirmed. The awards for the executive directors will vest only after the completion of a two-year holding period, during which the shares will remain subject to withholding provisions. The committee believes that this approach aligns the interests of the executive directors with those of shareholders and customers.
Agenda for 2020/21
As we look forward to the start of the new AMP, and specifically the 2020/21 performance year, the committee is very mindful of the challenging conditions arising from both the short and the longer-term potential impact of the COVID-19 pandemic.
Having reviewed the annual bonus measures for the new regulatory period the committee has concluded that they continue to support the business strategy. The measures will continue into AMP7, although the customer service elements will be based on Ofwat's new C-MeX measure, together with a goal to continue to further reduce customer complaints. The committee has removed the element based on personal performance for the executive directors to focus reward on the other scorecard elements. Further details are shown in the Annual report on remuneration.
2020 LTP awards will be based on the structure approved at the 2019 AGM, with equal weighting given to performance on Return on Regulated Equity (RoRE) and a basket of customer measures. Further details can be found in the Annual report on remuneration.
For all incentives the committee will continue to focus on setting stretching targets that drive excellent customer service, operational and financial performance and enhance long-term shareholder value.
Finally, since our new policy was approved at the 2019 AGM, and reflecting shifts in market guidance and best practice, the Committee agreed that post-employment shareholding requirements will be introduced from May 2020 and that pension arrangements for incumbent directors will be aligned to those of the workforce as part of the next policy, expected to be presented to shareholders at the 2022 AGM. Work will be undertaken to ensure that those developments to our governance approach are implemented robustly. We will also continue to enhance the way in which we hear and take account of the voice of the wider workforce.
I am grateful for the support that our approach to remuneration has received from shareholders during my time as Chair of the committee. I am delighted to announce that Alison Goligher, who has been a member of the Committee since 2016, will take over as Chair of the committee when I leave the board in the summer. We hope we will continue to receive your support again this year for the resolution relating to remuneration at the forthcoming AGM.
Chair of the remuneration committee