Halma Annual Report 2012 - Governance - Remuneration Report

Halma

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Annual Report and Accounts 2012

Remuneration Report

Report on Remuneration Strategy and Policy

Introduction

This report has been prepared in accordance with Schedule 8 to the Accounting Regulations under the Companies Act 2006. The report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the principles relating to directors’ remuneration in the UK Corporate Governance Code. As required by the Act, a resolution to approve the report will be proposed at the Annual General Meeting of the Company at which the Financial statements will be approved.

The Act requires the auditors to report to the Company’s members on certain parts of the Directors’ Remuneration Report and to state whether in their opinion those parts of the report have been properly prepared in accordance with the Accounting Regulations. The report has therefore been divided into separate sections for audited and unaudited information.

UNAUDITED INFORMATION

Remuneration policy

Executive remuneration packages are designed to attract, retain and motivate the high calibre executives needed to manage the Group successfully and align their interests with those of the shareholders by rewarding them for enhancing value to shareholders.

The packages also seek to reward achievement of stretching performance targets without driving unacceptable behaviours or encouraging excessive risk taking.

The performance measurement of the executive Directors and key members of senior management and the determination of their annual remuneration package are undertaken by the Remuneration Committee.

There are four main elements of the remuneration package for executive Directors and senior management:

Element of remuneration

How this supports the strategy

Opportunity
2011/12

Performance
measures/structure

Changes for
2012/13

Salary Provides fixed remuneration that will attract and retain key employees and reflect their experience and personal contribution to Group strategy. CEO – £435,000
CFO – £280,000
UK DCE – £223,000
US DCE – $380,000
Reviewed annually from 1 April. Benchmarked against appropriate market comparators. Linked to individual performance and contribution. CEO – £450,000
CFO – £290,000
UK DCE – £231,000
US DCE – $394,000
Annual incentive Incentivises the achievement of an objective annual target which supports the short – to medium-term strategy of the Group. 100% of salary paid in cash Bonus is based 100% on growth in the Economic Value Added (EVA) compared with a target based on a weighted average of the previous three financial years. There are no individual objectives. The EVA bonus is capped at 90% of salary with a further bonus of up to 25% of salary, subject to the overall cap of 100% of salary, being earned if revenue growth outside the UK, USA and Europe exceeds certain pre-set percentages (with this bonus fully payable at 25% growth).
Equity incentive Incentivises executives to achieve superior returns to shareholders over a three-year period.

Retains key individuals and aligns interests with shareholders reflecting the sustainability of the business model over the long term.

All executive Directors – up to 140% of salary delivered in Halma plc shares 50% based on TSR relative to a comparator group of the FTSE 250 excluding financial companies; full vesting requires upper quartile performance. 50% based on ROTIC exceeding 9.5%; full vesting requires ROTIC to be 14% or greater. The ROTIC target for full vesting of awards is increased to 17% with partial vesting occurring when ROTIC is between 9.5% and 17%.
Pension Provides competitive post-retirement benefits. CEO – pensionable salary* of £139,185 plus cash supplement paid CFO – deferred member of pension plan; cash supplement paid UK DCE – retired member of pension plan US DCE – 401k particpant Executives participate in either a Group defined benefit pension plan, Group defined contribution pension plan or the US 401k money purchase arrangement. Cash supplements in lieu of company pension contributions are made to some individuals. CEO – pensionable salary* of £146,423 plus cash supplement.

* The maximum pensionable salary on which future pensions are based is capped. The cap is increased each April by CPI. Final pensions are a proportion of the final pensionable salary based on the number of years of service.

As described above and below, executive Directors may earn annual bonus payments of up to 100% of their basic salary together with the benefits of participation in share plans which are subject to a maximum value, in the year of grant, of 140% of basic salary.

Each executive Director currently holds shares in the Company in excess of the guideline of one year’s salary (see page 85).

Executive Director pay mix (2011/12)

Split of package (expected)

Split of package (expected)
  • Salary (base) 40%
  • Pension (employer contributions) 6%
  • Annual incentive (expected) 24%
  • Equity incentive (expected value at grant) 31%

Split of package (actual)

Split of package (actual)
  • Salary (base) 25%
  • Pension (employer contributions) 4%
  • Annual incentive (paid) 17%
  • Equity incentive (vested) 54%

The split of the actual package in the year under review reflects modest outcomes (of between threshold and target) under the annual bonus plan and the full vesting of the 2008 PSP awards in relation to the achievement of top quartile TSR and ROTIC of more than 14% p.a. over the past three years. The Committee is satisfied that this outcome is closely aligned with, and reflective of, Halma’s strong underlying performance over this period.

Basic salary

Prior to the beginning of each year, each executive Director’s basic salary is reviewed by the Committee against the market, Company performance and future strategy and when an individual changes position or responsibility. The Chief Executive is responsible for assessing the performance of each senior executive taking account of the complexity of the operations under their control, their opportunities for advancement with the Group, their remuneration relative to other executives in the Group and their bonus earning potential. He then formulates a remuneration proposal for the Committee’s consideration. In deciding appropriate remuneration levels, the Committee also considers the Group as a whole and relies on objective external research which gives information on a comparator group of companies.

Basic salaries are reviewed in February of each year with increases, if appropriate, taking effect from 1 April. Executive Directors’ contracts of service which include details of remuneration will be available for inspection at the Annual General Meeting.

Annual bonus payments

During the year the Committee carefully assessed existing incentive arrangements and determined that incentive levels are appropriately set. The Committee established the economic value added (EVA) objectives that must be met for each financial year if a cash bonus is to be paid. In setting appropriate bonus parameters the Committee determined that bonuses of approximately 60% of salary are payable on the achievement of targeted levels of growth. The maximum performance-related bonus that can be paid is 100% of basic annual salary.

For the Chief Executive and Finance Director, bonuses are calculated as above but based on Group profit exceeding a target calculated from the profits for the three preceding financial years after charging cost of capital, including the cost of acquisitions.

In the case of a Divisional Chief Executive a bonus is earned if the profit of the Division for which they are responsible exceeds a target calculated from the profits of the three preceding financial years. The profits calculated for this purpose regard each Division as a standalone group of companies charging it with the cost of capital it utilises including the cost of acquisitions.

Executive Director bonus payments for 2012 totalled £725,000 versus £1,127,000 in the prior year reflecting the Group’s performance in terms of reported profit, EVA and the relative contributions of organic and acquisition growth .

This performance-related bonus plan, which applies to executive Directors and Divisional Chief Executives, is reviewed annually by the Committee and approved by the Board.

EVA calculation

Profit for each year

Minus

a charge on working capital

Minus

a charge on cost of acquisitions

Plus/minus

unrealised profit in inventory

Minus

the resultant bonus itself (to make it self-financing)

Equals

the Economic Value Added (EVA) for each year

Transitional provisions exist for divisional restructuring to ensure Divisional Chief Executives remain appropriately incentivised. Subsidiary directors participate in bonus arrangements similar to those established for senior executives.

Performance share plan (PSP)

The Directors have long believed that share plans are an excellent way to provide motivation and align the longer-term interests of senior management with those of shareholders. The Committee, recognising the need to assess and evaluate such incentives, adopted a performance share plan following shareholder approval at the 2005 annual general meeting. This PSP replaced the existing share option plans in respect of future share awards. The Committee has responsibility for supervising the PSP and the grants under its terms.

How the PSP works

Performance criteria determine the amount to be granted and, after three years, the amount to vest as illustrated below:

Stages

Award criteria

Award assessment

Vesting criteria

Final shares vested

Process Performance criteria determine the number of shares to be granted out of a Maximum Award level. Primary emphasis is placed upon the attainment of personal strategic objectives coupled with financial and operational success. The assessment of the individual’s achievement of their objectives establishes the proportion of the Maximum Award that an individual is granted (the Actual Award in the table below). 50% of the amount granted is subject to TSR growth relative to the FTSE 250, excluding financial companies, over the three-year vesting period. 50% of the amount granted is subject to ROTIC performance over each of the three years. Awards vest on a sliding scale, as set out in the PSP vesting table below.
Timeline Criteria set one year prior to grant. Assessment occurs immediately prior to grant. Vesting conditions apply throughout the three-year vesting period. Three years from grant or pro- rata for good leavers.
PSP value Opportunity to receive maximum Award. X % attainment of individual objectives. X % attainment of Group performance conditions. = Final shares vested.

The Committee believes that any incentive compensation awarded should be tied to the interests of the Company’s shareholders. It therefore decided that the principal measures of those interests should be Relative Total Shareholder Return (TSR) and Return on Total Invested Capital (ROTIC).

PSP vesting table %

Future awards
Percentage of award which
vests

 

TSR (percentile)

 

<50%

50%

75%

50%

ROTIC (post-tax) ≤9.5%   0.0 16.7   50.0   50.0
  12.0% 16.7 33.3   66.7   66.7
  14.5% 33.3 50.0   83.3   83.3
  17.0% 50.0 66.7 100.0 100.0

Subsisting awards
Percentage of award which
vests

 

TSR (percentile)

 

<50%

50%

75%

50%

ROTIC (post-tax) ≤9.5%   0.0 16.7   50.0   50.0
  11.0% 16.7 33.3   66.7   66.7
  12.5% 33.3 50.0   83.3   83.3
  14.0% 50.0 66.7 100.0 100.0

The Committee recognises that the Group’s improving performance in respect of its absolute ROTIC percentage metric merits a recalibration of the performance target at which full vesting of the ROTIC element is achieved. To that end, the Committee has determined that full vesting will now occur at a ROTIC performance of 17% for awards made in 2012.

ROTIC (Return on total invested capital) %

  • 2012 16.8
  • 2011 15.5
  • 2010 13.6
  • 2009 13.1
  • 2008 14.1

Vested awards are satisfied in shares with sufficient shares being sold to meet tax and social costs owing, at the recipient’s direction, and the net balance of shares transferred to the individual.

Awards lapse if they do not vest on the third anniversary of their award.

Current vesting expectations for awards made in 2009, 2010 and 2011 range from 50% to 99%.

Performance against objectives Maximum award
permitted *
Actual award
2011/12*
Estimate of vesting in
2014/15*
Chief Executive 140%

At individual % assessment level

138%

At 68.6% vesting expectation

95%
Finance Director 140% 135% 93%
Executive Directors 140% 134% 92%
Divisional Chief Executives 100% 96% 66%
Managing Directors and Divisional
Finance Directors
40% 31% 21%

* Expressed as a percentage of 2011/12 base salary.

Awards vest after three years on a sliding scale, as set out above, subject to the Company’s relative TSR performance against the FTSE 250, excluding financial companies, combined with a measure based upon an absolute ROTIC.

The Plan contains provisions permitting share option grants, restricted share awards and performance share awards. To date, the Committee has used the PSP only to award both approved and unapproved performance shares.

Total shareholder return (five years)

Total shareholder return (five years)
  • Halma
  • FTSE 250
  • FTSE 350 Electronic & Electircal Equipment

The five-year graph to the left shows the Company’s TSR performance over the five years to 31 March 2012 as compared to the FTSE 250 and the FTSE 350 Electronic & Electrical Equipment sector indices, the latter of which the Company has been a constituent since it was reclassified in June 2006. Over the period indicated, the Company’s TSR was 203% compared to 114% for the FTSE 250 and 180% for the FTSE 350 Electronic & Electrical Equipment sector.

At the commencement of the five-year period depicted in the graph, the Halma plc ordinary share price was 220.25p and the total of dividends paid in the year ended 31 March 2007 was 6.97p per share. The Halma plc ordinary share price at 31 March 2012 was 380.6p and the total of dividends paid in the year then ended was 9.35p per share.

Share option plans

The 1999 share option plan provided for the grant of two categories of option both of which are subject to performance criteria. The exercise criteria for this plan are noted in note 23 to the accounts.

No further grants may be made from this plan which has been replaced by the PSP approved by shareholders at the 2005 annual general meeting. The granting of options was spread over the life of the plan.

Dilution

The total dilution effect under these various discretionary share plans is less than 5%.

The Company does not operate any long-term incentive plans other than the share plans described above. No significant amendments are proposed to be made to the terms and conditions of any entitlement of a Director to share options or performance share awards.

Pension arrangements

Except as noted below, the executive Directors participate in the appropriate section of the Halma Group Pension Plan (the Plan). This section is a funded final salary occupational pension plan registered with HM Revenue & Customs, which provides a maximum pension of two-thirds of final pensionable salary after 25 or more years’ service at normal pension age (60). Up to 5 April 2006, final pensionable salary was the greatest salary of the last three complete tax years immediately before retirement or leaving service. From 6 April 2011, final pensionable salary was capped at £139,185 and is increased annually thereafter by CPI.

Bonuses and other fluctuating emoluments and benefits-in-kind are not pensionable nor subject to any pension accrued supplement. The Plan also provides for life cover of three times salary, pensions in the event of early retirement through ill-health and dependants’ pensions of one-half of the member’s prospective pension.

Early retirement pensions, currently possible from age 55 with the consent of the Company and the Trustees of the Plan, are subject to actuarial reduction. Pensions in payment increase by 3% per annum for service up to 5 April 1997, by price inflation (subject to a maximum of 5%) through to 31 March 2007 and 3% thereafter.

Whilst pension benefits are accruing, executive Directors receive pension supplements to compensate them for the fact that their pension accrual entitlement under the Halma Group Pension Plan defined benefit arrangements is limited by a pensionable salary cap introduced from 6 April 2006. The Company introduced a pensionable salary cap in order to address changes affecting the Plan made in the Pension Act 2006. Without the introduction of such a cap, there would, effectively, have been no benefit limits. This could have resulted in benefits in excess of prescribed levels with some individuals suffering penal rates of tax and potentially causing a limitation on the tax deductibility of employer contributions. The Company obtained external advice regarding the changes to the Plan and executive pension arrangements and required each affected executive to obtain independent advice prior to implementing the changes. These changes reduce the Plan’s future liabilities and their associated funding risk.

Prior to receiving pension payments, to the extent that an executive’s current salary exceeds the Plan salary cap, the Company compensates him at an annual rate of 26% of the excess. In April 2006, Kevin Thompson chose to cease entirely future service accrual in the Halma Group Pension Plan in return for the pension supplement on his full salary.

Benefits-in-kind

The executive Directors receive certain benefits-in-kind, principally use of a car and private medical insurance.

Directors’ contracts

It is the Company’s policy that executive Directors should have contracts with an indefinite term providing for a maximum of one year’s notice. The details of the Directors’ contracts are summarised in the table below:

 

Date of contract

Notice period

Andrew Williams April 2003 one year
Kevin Thompson April 2003 one year
Neil Quinn April 2003 one year
Adam Meyers July 2008 one year

In the event of early termination, no predetermined compensation is provided for in the Directors’ contracts.

Non-executive Directors

Unless otherwise indicated, all non-executive Directors have a specific three-year term of engagement which may be renewed for further three-year terms if both the Director and the Board agree. Stephen Pettit, who is proposed for re-election had his terms of engagement extended for a third three-year term in 2009 and has agreed to remain on the Board for an additional period of at least one year to provide stability and continuity following the appointment of three non-executive Directors in the past two years. The Board will evaluate this mandate annually.

The remuneration of the Chairman and the non-executive Directors is determined by the Committee and the Board based on independent surveys of fees paid to the Chairman and the non-executive Directors of similar companies. The Chairman receives a basic fee and the non-executive Directors receive a basic fee supplemented by additional fees for membership and/or chairmanship of the Audit, Remuneration and Nomination Committees.

The contract in respect of Geoff Unwin’s services provides for termination, by either party, by giving not less than six months’ notice. Stephen Pettit, Jane Aikman, Norman Blackwell, Steve Marshall and Daniela Barone Soares have contracts in respect of their non-executive Director services which can be terminated, by either party, by giving not less than three months’ notice.

The Chairman’s and the non-executive Directors’ fees were reviewed by the Board in April 2012 with increases taking effect from April 2012.

AUDITED INFORMATION

Aggregate Directors’ remuneration

The total amounts for Directors’ remuneration were as follows:

  2012
£000
2011
£000
Emoluments 2,307 2,649
Pension supplements 150 142
Gains on vesting of performance shares 2,587 1,377
Gains on exercise of share options 126 228
  5,170 4,396

Directors’ remuneration

  Salaries and fees
£000
Bonus £000 Benefits £000 Pension
supplement £000
2012
Total
£000
2011
Total
£000
Geoff Unwin 145 145 145
Andrew Williams 435 173 26 77 711 926
Kevin Thompson 280 111 10 73 474 617
Stephen Pettit 46 46 42
Neil Quinn 223 203 15 441 444
Richard Stone* 17 17 52
Jane Aikman 42 42 43
Adam Meyers* 238 238 3 479 467
Norman Blackwell 40 40 27
Steve Marshall 46 46 28
Daniela Barone Soares** 16 16
  1,528 725 54 150 2,457 2,791

* Remunerated in US Dollars and translated at the prevailing average exchange rate for the year.

**To/from date of retirement/appointment.

Directors’ interests

The Directors who held office at 31 March 2012 had the following interests in the ordinary shares of the Company:

  Shares
31 March 2012
Shares
2 April 2011
Geoff Unwin 68,250 68,250
Andrew Williams 420,806 364,885
Kevin Thompson 315,154 279,553
Stephen Pettit 2,000 2,000
Neil Quinn 261,041 219,571
Jane Aikman 2,000 2,000
Adam Meyers 203,064 182,929
Norman Blackwell 2,000 2,000
Steve Marshall 2,000 2,000
Daniela Barone Soares

There are no non-beneficial interests of Directors. There were no changes in Directors’ interests from 31 March 2012 to 14 June 2012.

Performance share plan

The movements in performance share awards during the financial year were as follows:

 

Date of grant

As at
02.04.11

Granted/(vested)
in the year

Five-day average
share price on
grant (pence)

As at
31.03.12

Andrew Williams Aug-08 274,297 (274,297) 201.30
Aug-09 226,610   194.36 226,610
Aug-10 200,215   281.08 200,215
Aug-11   164,912 362.34 164,912
Kevin Thompson Aug-08 173,154 (173,154) 201.30
Aug-09 157,473   194.36 157,473
Aug-10 124,126   281.08 124,126
Aug-11   103,571 362.34 103,571
Neil Quinn Aug-08 143,964 (143,964) 201.30
Aug-09 125,620   194.36 125,620
Aug-10 97,531   281.08 97,531
Aug-11   80,810 362.34 80,810
Adam Meyers Aug-08 110,507 (110,507) 201.30
Aug-09 80,909   194.36 80,909
Aug-10 110,005   281.08 110,005
Aug-11   88,552 362.34 88,552

Performance conditions for the awards made in the financial year are set out above. The 2008 grants vested in August 2011 at a value of 368.597 per share with 100% of the original number of shares granted being transferred to participants net of any tax and social charges. The current vesting expectation for grants made in 2009 is 98.5%; for grants made in 2010, 99% and for grants made in 2011, 50%.

Share incentive plan

As part of their participation in the performance share plan, UK executive Directors were awarded a proportion of their 2011 awards in Free Shares under the provisions of the UK share incentive plan (SIP) on 1 October 2011, as follows: Andrew Williams, 921 shares; Kevin Thompson, 949 shares; and Neil Quinn, 949 shares. The Free Shares are held in trust for the participants and may transfer to them from the third anniversary of the award, on request and subject to continued employment. The share price on the award date was 315.6p. SIP shareholdings are included in Directors’ interests above.

Directors’ share options

The movements in share options during the financial year were as follows:

  As at
02.04.11

Lapsed

Exercised

Share price
on exercise
(p)

As at
31.03.12

2012 Gains
on Exercise
(£)

2011 Gains
on Exercise
(£)
Andrew Williams 103,837 (12,000) 91,837
Kevin Thompson 177,286 (33,100) 144,186
Neil Quinn 170,256 (33,100) 137,156 75,246
Adam Meyers 352,781 (23,300) 60,000 355.20 269,481 125,718 153,169

There were no share option grants during the financial year. The gains are calculated by deducting the exercise price from the closing middle market price at the date of exercise or the actual gross sales proceeds if appropriate.

Details of Directors’ options outstanding at 31 March 2012 are set out in the table below. The status of the options can be summarised as follows:

  1. Exercisable at that date at a price less than 380.6p.
  2. Not yet exercisable, will only be exercisable when the performance criteria, set out in Note 22 to the accounts, have been met and have an exercise price per share of less than 380.6p.
 

Status
of options

Year
of grant

Number
of shares

Weighted
average exercise
price (pence)
per share

Andrew Williams 2 2002-2004 91,837 140.03
Kevin Thompson 2 2002-2004 144,186 140.10
Neil Quinn 2 2002-2004 137,156 139.99
Adam Meyers 1 2003-2005 158,783 137.99
2 2002-2004 110,698 140.07

All options lapse if not exercised within ten years from the date of grant.

The Company’s Register of Directors’ Interests, which is open to inspection at the Registered Office, contains full details of Directors’ shareholdings and share options.

There have been no variations to the terms and conditions or performance criteria for share options during the financial year.

The closing middle market price of the Company’s ordinary shares on Friday, 30 March 2012, the last trading day preceding the financial year end, was 380.6p per share and the range during the year was 306.3p to 429.6p.

Directors’ pension entitlements

Two Directors are accruing benefits under the Company’s defined benefit pension plan as follows:

 

Age at
31 March 2012

Years of
pensionable
service at
31 March 2012

Accrued
pension
2011
£000

Increase in
the year
£000

Accrued
pension
2012
£000

Andrew Williams 44 17 44 6 50
Kevin Thompson 52 18 100 3 103

The accrued pension shown is that which would be paid annually on retirement at age 60 based on service to the end of the year. Kevin Thompson’s increase in accrued pension relates entirely to inflation as he ceased future service accrual in 2006.

  Transfer value
2 April 2011

Directors’
contributions
£000

Increase in
value net of
contributions
£000

Transfer value
31 March 2012

Andrew Williams 497 15 179 691
Kevin Thompson 1,573 365 1,938

The transfer values disclosed above do not represent a sum paid or payable to the individual Director. Instead they represent a potential liability of the pension plan. The transfer values are Gilt related and depend upon the relative standings of the Gilt market at the respective valuation dates. The increase in transfer values is predominantly due to the significant reduction in the yields available on UK Gilts over the year. The fall in yields has been widely attributed to the Bank of England’s continued policy on Quantitative Easing and the Euro crisis. Other factors that have increased the transfer values are the impact of any additional service, revaluation in line with inflation and any real salary increases as well as the anticipated ageing of the members.

These values have been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11.

Adam Meyers is a member of the US 401k money purchase scheme. Company contributions paid in the year were $12,489 (£7,806) (2011: $24,015 (£15,394)).

The report was approved by the Board of Directors and signed on its behalf by:

Steve Marshall

Remuneration Committee (Chairman)

14 June 2012