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 of our stakeholders.
Code principle – Remuneration
Introduction by Dr John McAdam
Our remuneration policy has been designed to promote the long-term success of the company, with a significant proportion of senior executives' pay being performance-related.
- 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; and
- By invitation of the committee, meetings are also attended by the Chairman, the CEO, the company secretary, the customer services and people director, the head of reward and pensions and the external adviser to the committee.
Terms of reference – unitedutilities.com/corporate-governance
Remuneration committee members
Sara Weller (chair)
I am pleased to introduce the directors' remuneration report for the year ended 31 March 2018. Our approach to remuneration is set out in our directors' remuneration policy, which was approved by shareholders at our 2017 AGM and has been implemented this year. A summary of the policy is included in an appendix for reference (see Appendix 1).
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 of our stakeholders. We aim to pay only what is required to recruit, retain and motivate the strong management team needed to achieve this ambition.
Executive directors' salaries are appropriately positioned relative to the market, and normally increase in line with salaries for other employees. In light of this, Steve Mogford and Russ Houlden received a base salary increase of 2.5 per cent with effect from 1 September 2017, in line with the headline increase applied across the wider workforce. Salaries will next be reviewed in September 2018.
Our annual bonus structure focuses on key measures of performance and ensures that employees at all levels benefit from company success, whilst longer-term incentives closely align the interests of executive directors and other senior leaders with those of shareholders and customers.
Employees throughout the company participate in the annual bonus scheme, alongside the executive directors, to ensure shared focus on the business plan at all levels. The bonus measures reflect the importance and challenge of the targets set by our regulators for the period 2015–20.
We have seen another good year of customer service, operational and financial performance in 2017/18, alongside commencement of the regulatory price review process for 2020–25.
The continued focus on providing the best service to customers has resulted in sustained improvements in customer satisfaction. This has been achieved through combining greater levels of investment to improve the resilience and reliability of water supplies, the increased use of technology to deliver better customer service, and by taking a leading approach to supporting vulnerable customers. This has been reflected in the company's achievement of its best ever scores against Ofwat's qualitative service incentive mechanism (SIM), reaching first position in the final wave of measurement in the year, and achieving an upper quartile position for the year overall.
Underlying operating profit was better than in 2016/17 and the efficient and effective delivery of the capital programme is reflected in our Time, Cost and Quality index (TCQi) score which remains high at 93.1 per cent. Performance against the outcome delivery incentives (ODIs) during the year was mixed, although cumulative ODI performance during the current regulatory period remains positive.
Overall company results, together with strong personal performance by the executive directors, has resulted in annual bonus outturn of around 75 per cent of maximum (compared to the 2016/17 outcome of around 84 per cent of maximum) and a company-wide bonus pool totalling £16 million (compared to £18 million 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 2015, and whose performance is measured over the three years to 31 March 2018, are expected to vest in July 2018 at 55.4 per cent. This reflects the significant improvements in SIM scores, and the achievement of the stretch level of sustainable dividend performance. Following the recent falls in the company's share price, the threshold target set for relative total shareholder return over the period was not achieved, and so there will be no vesting in relation to that measure.
To increase alignment with shareholders and the interests of customers, awards granted to executive directors will only be released to them following an additional two-year holding period and these shares will remain subject to withholding provisions over this period.
Appointment of chief operating officer
Steve Fraser joined the board on 1 August 2017 in the role of chief operating officer (COO). Some changes to the structure of management responsibilities during the year resulted in his role being further expanded on 1 January 2018.
The remuneration arrangements for Steve Fraser are in line with those of the two other executive directors and are fully consistent with our remuneration policy, including an expectation that he will build and maintain a shareholding of 200 per cent of salary within five years of his appointment to the board. Further details can be found in the Annual report on remuneration.
Agenda for 2018/19
During 2018/19 the remuneration arrangements will be kept under review, although no material changes are anticipated to how we implement the policy approved by shareholders last year (with c.99 per cent of votes cast in favour).
We expect that the 2018/19 annual bonus, and the Long Term Plan awards to be granted in 2018 will operate in a similar way to those in operation in 2017/18.
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, and on supporting preparation for the price review for 2020–25, noting that for the Long Term Plan, the performance period starting in 2018 will cross two separate regulatory periods.
The committee will also continue to monitor the developing corporate governance and remuneration environment, and in particular the outcome of the FRC's consultation on changes to the UK Corporate Governance Code.
I hope we will receive your support for the resolution relating to remuneration at the forthcoming AGM.
Chair of the remuneration committee
Pictured: Alison Goligher, Mark Clare, Brian May, Sara Weller (seated)