Remuneration
In defining the Group's remuneration policy, the Committee takes into account advice received from external consultants and also the principles and best practice guidelines set by regulators and institutional shareholder bodies, including the Association of British Issuers ("ABI"). The Committee has also followed the principles of Section D of the UK Corporate Governance Code that relate to remuneration.
The current intention is that the framework of this remuneration policy will apply for future years.
Performance based rewards
The Company has a well-developed, Group-wide performance management system which ensures that senior managers are rewarded based on performance. For Executive Directors, the Company operated the following performance-related incentive arrangements in 2011:
- an Annual Performance Bonus Scheme - designed to focus executives on the business priorities of the financial year and to reinforce individual and Group performance objectives; and
- Long-Term Incentives - designed to reward and retain Executives over the longer term while also aligning their interests with those of the Company's shareholders. For awards made in January 2011, Executive Directors received grants of PSP and SMP awards. These awards aim to motivate participants to maximise Adjusted EPS and TSR, as measured against the FTSE mid-250 Index, excluding Investment Trusts (the "FTSE 250 index").
The two incentive arrangements complement each other and enable the measurement and reward of both short and long-term performance. In particular, the Committee considers that these complementary incentive arrangements take appropriate account of business risk and align the reward arrangements of the Executive Directors with the delivery of sustained returns to shareholders. The Committee continues to consider that the three-year vesting period for its long-term incentives is appropriate.
The FTSE 250 index was chosen because this is a recognised broad equity market index of which the Company is now a member.
Shareholding guidelines
The Committee has adopted guidelines for Executive Directors, to encourage substantial long-term share ownership. These specify that, over a period of five years from the date of appointment, the Chief Executive should build up, and then retain, a holding of shares with a value equivalent to 200% of base salary. The guideline holding for other Executive Directors should be 100% of base salary. The guidelines also require that, in relation to the long-term incentive awards, vested shares (net of tax) should be retained by the individual until the required shareholding level is reached.
The chart above sets out the percentage of base salary held in shares by each of the Executive Directors, as compared with the guidelines.
Components of Remuneration
A summary of the components of reward for Executive Directors of Diploma PLC is set out here.
The current remuneration package for Executive Directors comprises fixed and variable components. The variable components are the incentive arrangements referred to above and the fixed components are base salary and benefits (including pensions entitlements).
The average proportion of total remuneration that was performance-related in 2011 is illustrated by the chart shown below. This shows that a significant proportion of each Executive Director's total remuneration is performance-related at the target performance level. For stretch performance, the proportion of total remuneration that is performance-related is higher still. In estimating the relative contribution of those elements of remuneration that are performance related and those that are not (as required by Regulations), a number of assumptions have had to be made about the Company's share price growth over the next three years and TSR performance relative to the FTSE 250 index.
Senior executives below the Executive Directors
The policies and practices with regard to the remuneration of senior executives below the Executive Directors are generally treated consistently with the Executive Directors. These senior executives all have a significant portion of their reward package linked to performance. Annual bonuses are linked to short term financial targets which are similar to the targets for the Executive Directors. They also participate in cash based long-term incentive plans which are focused on the operating profit growth of their businesses over rolling three year periods. The Committee reviews and monitors the senior executive remuneration arrangements.
Executive Directors' base salaries
Executive Directors' salaries are reviewed each year, with any changes normally taking effect from 1 October. This review takes into account market competitiveness, individual performance and experience.
The base salary increases for the Executive Directors which took effect from 1 October 2010 are summarised in the table below. The salary increases awarded to the Executive Directors were in line with the average percentage base salary increases awarded across the Group.
| Executive Director | Base salary at 30 Sep 2011 £'000 |
Base salary at 30 Sep 2010 £'000 |
% increase |
| Bruce Thompson | 360 | 345 | 4.3 |
| Iain Henderson | 220 | 210 | 4.8 |
| Nigel Lingwood | 230 | 220 | 4.5 |
The Committee has regard to reward levels and practices in the Company's businesses when determining remuneration levels for Executive Directors. In determining the annual base salary increases which applies from 1 October the Committee also considered the range of salary increases applying across the Group.
Annual performance bonus
The annual performance bonus is a cash based scheme designed to reward Executive Directors for meeting stretching shorter term performance targets. At the start of the year (1 October), the Board sets stretching financial performance targets relating to Adjusted EPS, operating margins, free cash flow and return on trading capital employed ("ROTCE"). Individual objectives are also set for the Chief Operating Officer and the Group Finance Director relating to factors including operational performance and business development activities.
At the end of the financial year, the Committee meets to assess the performance of each Executive Director against the financial and individual objectives. Bonuses are paid in cash in December.
Long-term incentive plans
The Company operates long term incentive arrangements for Executive Directors. These are designed to reward and retain Executive Directors over the longer term, while also aligning their interests with those of Diploma PLC shareholders.
The Diploma PLC LTIP ("2004 LTIP"), having been in operation over a number of years, expired in 2011. It was replaced by the new LTIP comprising two incentive schemes; the Diploma PLC 2011 Performance Share Plan ("PSP") and the Diploma PLC 2011 Share Matching Plan ("SMP"), following approval by the shareholders at the Company's annual general meeting on 12 January 2011.
The 2004 LTIP and the PSP which replaces it, operate in a similar way for Executive Directors of the Company. They both provide for a grant of conditional awards of a specified number of ordinary shares in the Company, or an option to acquire a specified number of shares at an exercise price determined by the Committee (which may be nil or a nominal amount). No payment is required for the grant of an award.
The SMP also operates for Executive Directors of the Company and again provides for a grant of conditional awards of a specified number of ordinary shares in the Company. In the case of the SMP however, an Executive Director must accept an invitation from the Committee to personally acquire or pledge shares for a period of three years. These acquired or pledged shares are held by a nominee for an Executive Director and will be released at the end of the three year performance period applying to the awards.
Awards, which are normally granted annually, must generally be made within 42 days after the announcement of the Company's annual results. When making the decision on the level of award, the Committee takes into consideration a number of factors, including the face value of the award and plan dilution limits.
The face value of an award is equal to the number of shares, or shares under option, multiplied by the relevant share price. The relevant share price will be the midmarket closing share price on the day before the award (however for the 2004 LTIP the share price was the average share price for the 30 days immediately preceding the award). A face value limit of 100% of base salary applies to each PSP or 2004 LTIP award to Executive Directors in normal circumstances. A face value limit of up to 100% of base salary is applied in respect of SMP awards.
All awards will normally vest three years after the date of grant. The vesting of awards is conditional on:
- continued employment;
- the Company's growth in Adjusted EPS over a three year performance period; and
- the Company's TSR performance over a three year performance period.
The latter two performance conditions apply to each award so that the vesting of 50% of the award is based on growth in Adjusted EPS and 50% of the award is based on the relative TSR performance. Each performance condition is measured over a three year period commencing on the first day of the financial year in which the award is made. There is no retesting of either performance metric.
The first performance condition is that the average annual compound growth in the Company's Adjusted EPS over the three consecutive financial years, following the year prior to the grant, must exceed the annual compound growth rate in the UK Retail Price Index ("RPI") over the same period as set out below.
| % of awards vesting | |||
| New LTIP | |||
| Adjusted EPS growth (over 3 years) | PSP | SMP | 2004 LTIP |
| RPI + 15% p.a. or above | 100 | 200 | 100 |
| RPI + 12% p.a. | 100 | 100 | 100 |
| RPI + 5% p.a. | 45.5 | 45.5 | 100 |
| RPI + 3% p.a. | 30 | 30 | 30 |
| Below RPI + 3% p.a. | NIL | NIL | NIL |
Where the Company's Adjusted EPS performance is between these percentage bands, vesting of the award is on a straight line basis.
For the purposes of this condition, EPS will comprise adjusted EPS as defined in note 2 to the consolidated financial statements. The definition of adjusted EPS remains consistent with the definition of EPS approved by the Remuneration Committee in previous years.
The second performance condition compares the growth of the Company's TSR over a three year period to that of the companies in the FTSE 250 index as set out below:
| % of awards vesting | |||
| TSR relative to FTSE 250 Index (over 3 years) |
New LTIP | ||
| PSP | SMP | 2004 LTIP | |
| Median + 15% p.a. or greater | 100 | 200 | (a) |
| Median + 12% p.a. | 100 | 100 | (a) |
| Median | 30 | 30 | 30 |
| Below Median | NIL | NIL | NIL |
(a) Under the 2004 LTIP, the TSR condition is based on the ranking of the Company's performance in the comparator group, rather than on absolute performance. Where the Company's TSR performance ranks in the top quartile of the comparator group, 100% of the awards will vest.
Where the Company's relative TSR performance is between the median and the maximum performance condition, vesting of the award is on a straight line basis.
At 30 September 2011, the award made under the 2004 LTIP on 17 December 2008 crystallised and 100% of the award vested as nil paid options. These options are exercisable by each individual at a price of £1 up until 17 December 2018. An award made under the 2004 LTIP on 18 November 2009 remains outstanding and will crystallise at the end of the performance period at 30 September 2012. Awards under the PSP and SMP were made on 24 and 27 January 2011 respectively, to Bruce Thompson, Iain Henderson and Nigel Lingwood. The amount of shares that vest under these Awards will be determined at the completion of the three year performance period at 30 September 2013. Full details of all of these awards are set out in the 2011 Annual Report.
Dilution
In any ten-year period, the number of shares which may be issued or placed under option under any executive share plan established by the Company may not exceed 5% of the issued ordinary share capital of the Company from time to time. In any ten-year period, the aggregate number of shares which may be issued or placed under option, under all share plans established by the Company, may not exceed 10% of the issued ordinary share capital of the Company, from time to time.
Change of control
In the event of a change in control, vesting of award shares under the Company's long-term incentive plans is not automatic and would depend on the extent to which performance conditions had been met at that time. Time pro-rating will apply if the Committee considers it appropriate, given the circumstances of the change of control.
Dividend accrual
The Committee may decide, on or before the grant of an award, that on exercise of the award, the participant may receive, in addition to the shares to which he then becomes entitled, a payment equal in value to the aggregate amount of the dividends (excluding any tax credit) which would have been paid to the participant in respect of those shares between the date on which the award vests and the option period commences and the date on which the option is exercised, as if they had been beneficially owned by him over that period. The payment may be made in cash or in an equivalent number of shares.
Pensions
The pension arrangements for Executive Directors are set out below.
The Executive Directors receive pension contributions from the Company which they may pay directly into personal savings vehicles or take as additional salary, subject to income tax.
Pension contributions, which are equivalent to 20% (2010: 20%) of base salary were as follows:
| 2011 £000 |
2010 £000 |
|
| Bruce Thompson | 72 | 69 |
| Iain Henderson | 44 | 42 |
| Nigel Lingwood | 46 | 44 |
No pension contributions were paid as additional salary during the year (2010: Nil).
In September 2010, the Company established an unregistered retirement benefits scheme, known as the Diploma Holdings PLC Employer-Financed Retirement Benefits Scheme ("the Scheme"). The Scheme was established for Executive Directors and higher paid UK employees in the Group as an alternative to the employees' current pension arrangements and contains all the key features of a conventional registered pension plan. During the year, £111,000 of pension contributions received from the Company were paid into the Scheme relating to 2011 and earlier years. No contributions have been paid into the Scheme since 5 April 2011.
Executive Directors' service contracts
The Executive Directors' service contracts, including arrangements for early termination, are carefully considered by the Committee and are designed to recruit, retain and motivate directors of the quality required to manage the Company. The Committee considers that a rolling contract with a notice period of one year is appropriate.
The Executive Directors' service contracts contain provisions for compensation in the event of early termination or change of control, equal to the value of salary and contractual benefits for the notice period.
However when calculating termination payments, the Committee takes into account a variety of factors, including individual and Company performance, the obligation for the Director to mitigate his or her own loss (for example, by gaining new employment) and the Director's length of service.
Details of the service contracts of the Executive Directors who served during the year are set out below:
| Executive Directors | Contract date | Unexpired term | Notice period | Compensation payable upon early termination |
| Bruce Thompson | 13 July 2000 | Rolling 1yr | 1yr | 1yr |
| Iain Henderson | 1 August 2000 | Rolling 1yr | 1yr | 1yr |
| Nigel Lingwood | 3 July 2001 | Rolling 1yr | 1yr | 1yr |
The Committee considers that these provisions assist with recruitment and retention and that their inclusion is therefore in the best interests of shareholders.
Executive Directors' interests in ordinary shares
The Executive Directors' interests in ordinary shares of the Company at the start and end of the financial year were as follows:
| Interests in ordinary shares | ||
| As at 30 Sep 2011 |
As at 1 Oct 2010 |
|
| Bruce Thompson | 1,155,154 | 1,125,000 |
| Iain Henderson | 470,031 | 416,640 |
| Nigel Lingwood | 194,265 | 150,000 |