Annual report on remuneration

This part of the Directors’ Remuneration report sets out the amounts paid to Directors for the year ended 31 March 2015 and describes how policy will be implemented in 2015/16. The Annual report on remuneration, along with the statement from the Chairman of the Remuneration Committee, will be put to an advisory shareholder vote at the AGM on 31 July 2015.

Implementation of policy for 2015/16

The table below sets out how the Remuneration policy will be implemented for the 2015/16 financial year:

Executive Directors

Bill Halbert Paul Simpson
Base salary Bill Halbert’s base salary for the year will remain at £396,872. Paul Simpson’s base salary for the year will remain at £262,126.
Benefits The benefits to be provided remain unchanged from 2014/15. These include private medical insurance for the Executive and his immediate family, income protection, life assurance, a car allowance of £16,000 per annum for Bill Halbert and £14,000 per annum for Paul Simpson, a fully expensed fuel card, medical screening and the opportunity to participate in the all-employee Share Incentive Plan. The Executive Directors are also able to purchase additional flexible benefits which are available to all employees.
Retirement benefits Each Executive Director is entitled to an employer pension contribution of 20 per cent of base salary.
Annual bonus The performance measures for the annual bonus scheme are growth in EBITDA and growth in revenue, measured for the 2015/16 financial year. Both Bill Halbert and Paul Simpson have a maximum annual bonus entitlement of 100 per cent of base salary. Up to 10 per cent of the maximum entitlement is triggered upon exceeding a specific targeted level of EBITDA. If the EBITDA achieved in the year is greater than that required to trigger the full 10 per cent payment then further bonus payments begin to accrue; however, payment of any bonus beyond the 10 per cent is dependent on an underpin of revenue growth in the year. The exact targets set are commercially sensitive and therefore cannot be disclosed here, but will be disclosed in the Annual report on remuneration next year.
Long-term incentives It is proposed to grant LTIP awards to Bill Halbert and Paul Simpson in July 2015 under the current scheme, which will be equivalent to 150 per cent of their base salary at the date of grant. These awards will have a three year performance period and therefore will be due to vest in July 2018 subject to the achievement of relative total shareholder return performance conditions. The rationale for this level of award is described further in the Policy report. The performance conditions attached to the LTIP awards are described below.

Non-Executive Directors

The fees of the Non-Executive Directors were reviewed in June 2015 and have not been increased for 2015/16 from levels set in July 2014.

£’000
Chairman fee 125
Base fee 43
Senior Independent Director fee 11
Audit Committee Chairman fee 6
Remuneration Committee Chairman fee 61

1. Tony Illsley does not receive a fee for his role as Chairman of the Remuneration Committee as his fee for the role of Senior Independent Director is deemed to be inclusive of any Committee Chairman fees.

Single total figure table (audited)

Executive Directors

Bill Halbert Paul Simpson Kevin Walsh Total
FY2015
£’000
FY2014
£’000
FY2015
£’000
FY2014
£’000
FY2015
£’000
FY2014
£’000
FY2015
£’000
FY2014
£’000
Fixed pay
Base salary 394 386 260 255 81 241 735 882
Taxable benefits 16 16 23 24 6 17 45 57
Retirement benefits 66 66 50 49 14 47 130 162
Sub-total 476 468 333 328 101 305 910 1,101
Performance-related pay
Annual bonus 27 18 17 62
Long-term incentives 477 413 477 413 954 826
Sub-total 27 477 431 477 430 954 888
Total 476 495 810 759 578 735 1,864 1,989

Non-Executive Directors

Graham Holden Tony Illsley Peter Smith Martin Towers Total
FY2015
£’000
FY2014
£’000
FY2015
£’000
FY2014
£’000
FY2015
£’000
FY2014
£’000
FY2015
£’000
FY2014
£’000
FY2015
£’000
FY2014
£’000
Fees 125 47 54 52 10 49 47 238 146
Total 125 47 54 52 10 49 47 238 146

Explanatory notes

Base salary

The salary for Kevin Walsh was paid up to the date of his retirement from the Board on 29 July 2014.

Taxable benefits

Bill Halbert received a car allowance of £16,000 but elected not to receive any other benefits from the Group. The taxable benefits for Paul Simpson and Kevin Walsh include private medical insurance, income protection, life assurance, medical screening, a company car equivalent to a £14,000 per annum car allowance, fully expensed fuel cards and membership of the all-employee Share Incentive Plan. The benefits included above for Kevin Walsh ceased on the date of his retirement from the Board on 29 July 2014.

Retirement benefits

Bill Halbert has elected not to be a member of the Group pension scheme and, accordingly, the Group made no contributions on his behalf. Instead he received cash payments totalling £65,905 (2014: £65,905) which are disclosed above within retirement benefits.

Paul Simpson and Kevin Walsh elected to receive part of their pension contribution entitlement in cash due to their Pension Lifetime Allowance contributions being reached. These amounts were £17,000 (2014: £15,000) and £14,000 (2014: £12,000) respectively and are included in the table above within retirement benefits. The retirement benefits payable to Kevin Walsh included above ceased on the date of his retirement from the Board on 29 July 2014.

None of the Directors have any prospective entitlement to defined benefits or cash balance benefits in respect of qualifying services.

Bonus receivable for the year

The annual bonus was dependent on the achievement of Group financial performance targets around growth in pre exceptional Group EBITDA and Group revenue. Up to 10 per cent of the maximum bonus entitlement, of 100 per cent of salary, was dependent on exceeding pre exceptional Group EBITDA of £76.5 million in the year. Over-performance against this target would have created a bonus pot with a proportion of profits above this level being shared amongst all employees in the scheme, as well as the Executive Directors, up to the maximum level of bonus for all participants. Any additional bonus above the 10 per cent would also be dependent on an underpin of year on year Group revenue growth.

The level of pre exceptional Group EBITDA achieved in the year was £74.3 million, which was not enough to trigger a bonus and therefore no bonus is payable.

Kevin Walsh did not participate in the annual bonus plan for 2014/15.

Long-term incentives

In the current and prior year, shares were released from the Executive Incentive Plan to Paul Simpson and Kevin Walsh, the amounts of which have been included in the table above. Further details on this scheme are included below.

Included within the EIP vesting figures were dividends of £78,000 (2014: £58,000) for Paul Simpson and £78,000 (2014: £58,000) for Kevin Walsh.

The first awards under the LTIP were made in July 2012 and the performance period for these awards ends on 19 July 2015. Based on performance up to April 2015 it did not appear that any vesting of awards would be triggered, but the actual figures, once confirmed, will be included in the single total figure table for 2015/16.

Payments for loss of office

No payments for loss of office have been made.

In November 2013 Kevin indicated that it was his intention to retire from the Group in the summer of 2014. He stepped down from the Board at the AGM on 29 July 2014 and signed a new service contract reducing his notice period to just three months, therefore ensuring that the notice period for which he was paid did not extend beyond 12 months from the date of his initial indication.

Kevin therefore retired as an employee on 31 October 2014 and his fixed pay ceased on that date. Kevin received awards under the LTIP scheme in July 2012 and July 2013. The performance period for these schemes ends in July 2015 and July 2016 respectively and, as a good leaver, Kevin will be entitled to receive any shares that vest under the scheme, pro-rated to the date of his retirement to the extent determined by the Remuneration Committee.

Non-Executive Directors

The fees for the Non-Executive Directors were increased from £42,000 per annum to £43,000 per annum with effect from 1 July 2014, with an additional £6,000 per annum from 1 July 2014, previously £5,000 per annum, for the responsibility of chairing the Audit Committee and an additional £11,000 from 1 July 2014, previously £10,000, for the role of Senior Independent Director.

Share awards outstanding at the year end

The Long Term Incentive Plan (LTIP)

On 19 July 2012 a new long-term incentive scheme, the LTIP, was approved by shareholders. The scheme authorises the Remuneration Committee to grant nil-cost share options to the Executive Directors and selected senior managers on an annual basis.

Awards made under the LTIP scheme (audited)

Date of
grant
Share price
at date of
grant
Nil cost
options
outstanding
on 1 April
2014
000’s of
options
Nil cost
option
awarded in
the year
000’s of
options
Nil cost
options
lapsed due
to retirement
000’s of
options
Nil cost
options
outstanding
on 31 March
2015
000’s of
options
Face
value of
maximum
award1
£’000
Award that
would vest at
threshold
performance2
000’s of
options
End of
performance
period
Bill Halbert 19 July 2012 76.35p 518 518 396 130 19 July 2015
17 July 2013 82.50p 468 468 386 97 17 July 2016
17 July 2014 95.00p 418 418 397 105 17 July 2017
Paul Simpson 19 July 2012 76.35p 342 342 261 86 19 July 2015
17 July 2013 82.50p 309 309 255 64 17 July 2016
17 July 2014 95.00p 276 276 262 69 17 July 2017
Kevin Walsh 19 July 2012 76.35p 325 (78) 2473 189 62 19 July 2015
17 July 2013 82.50p 293 (167) 1263 104 32 17 July 2016

1. Face value has been calculated using the share price at the date of grant.

2. 25 per cent of the award vests at threshold performance.

3. Kevin Walsh has been deemed by the Committee to be a good leaver and therefore remains entitled to receive these shares, which have been pro-rated to the date of his retirement, subject to vesting conditions being met.

The scheme measures TSR performance over a three year performance period from the date of grant, relative to the TSR performance of each company within a comparator group, comprising those companies within the FTSE 250 (excluding investment trusts) as at the start of the performance period.

No part of the awards may vest unless the Company’s TSR performance ranks at least median to the TSR performance of the comparator group. Performance at median would result in 25 per cent of the awards vesting, with performance between median and upper quartile resulting in a vesting of awards on a straight-line basis with 100 per cent vesting at upper quartile performance.

In addition, regardless of TSR performance, no awards shall vest unless the Remuneration Committee is satisfied that the Company’s financial and non-financial performance over the performance period warrants the level of vesting set out in the vesting schedule. The Committee will consider the Company’s share price progression, dividend policy and EPS performance as part of this review.

On the exercise of an award participants receive an amount in cash or extra shares equal to the dividends that were declared during the period from grant to exercise, but only in respect of the shares that vest.

The first awards under the scheme were made on 19 July 2012 with further awards made in each of the subsequent two years. The maximum award allowed under the Remuneration policy is 150 per cent of base salary at the time of the award. For each of the three grants to date the award granted to each Director has been equivalent to 100 per cent of base salary at the time of the award.

Shares awards released during the year

Executive Incentive Plan (EIP)

The EIP was introduced in 2009 at the request of shareholders, as the Group’s main long-term incentive scheme. All the Executive Directors participated in this scheme and were granted a conditional right to a number of ordinary shares in the Group which would vest after three years to the extent that the associated TSR performance condition was met. The scheme has now closed and there are no further shares to vest or be released.

The maximum awards and amounts vested for the EIP (audited)

Date of
grant
Market
price at
date of
grant
Maximum
award
000’s of
shares
Actual
award
vested at
24 July
2012
000’s of
shares
Market
price at
date of
vesting
Released
on 24 July
2012
000’s of
shares
Value of
shares
released on
24 July
2012
£’000
Released
on 24 July
2013
000’s of
shares
Value of
shares
released on
24 July
2013
£’000
Released
on 24 July
2014
000’s of
shares
Value of
shares
released
on 24 July
2014
000’s
Current Directors
Bill Halbert 24 July 2009 28.25p 7,480 5,187 74.0p 5,187 3,838
Paul Simpson 24 July 2009 28.25p 2,420 1,678 74.0p 839 621 420 355 420 399
Kevin Walsh 24 July 2009 28.25p 2,420 1,678 74.0p 839 621 420 355 420 399
Previous Director
Paul Renucci 24 July 2009 28.25p 1,028 713 74.0p 357 264 178 151 178 167

For full vesting, KCOM Group’s average TSR over any three month period in the three years to 24 July 2012 had to equal or exceed 100 pence. This reduced to 10 per cent vesting on a straight-line basis for a TSR of 45 pence, with no vesting below 45 pence. During the performance period the highest rolling three month TSR achieved was 81.26 pence which meant that 69.34 per cent of the maximum awards vested on 24 July 2012.

Vesting was also subject to the Remuneration Committee being satisfied that there had been a demonstrable and sustainable improvement in the Group’s financial and non-financial performance over the performance period. This was considered and the Remuneration Committee took into account the increase in shareholder value over the same period, comparing the market capitalisation of the Group at 24 July 2009 of £145.9 million with the market capitalisation of the Group at 24 July 2012 of £382.3 million, showing a 162.0 per cent increase.

In addition over the performance period, dividends of £48.3 million had been paid, resulting in a total increase in shareholder value over the performance period of £284.7 million. The awards granted to the Executive Directors on the vesting of the scheme on 24 July 2012 had a market value on vesting of £6.8 million, representing just 2.4 per cent of the total increase in shareholder value over the three years of the scheme.

The vested shares were released in full to Bill Halbert at the end of the performance period as, at the time the scheme was introduced, this timescale was better aligned to his expected tenure in his role.

Relative Group performance

The graph below shows, for the financial year ended 31 March 2015 and for each of the previous six financial years, the TSR on a holding of the Group’s ordinary shares compared with a hypothetical holding of shares in the FTSE Fixed Line All-Share and the FTSE 250. These indices have been chosen as appropriate comparators because they reflect the performance of other companies most similar to KCOM Group in terms of product and service offering and market capital.

TSR performance since 31 March 2009

KCOM Group vs. FTSE Fixed Line All-Share and FTSE 250

Value of £100 invested at 31 March 2009

TSR performance since 31 March 2009

Remuneration of the Chief Executive

Bill Halbert became the Chief Executive of the Group on 1 April 2014, having previously been the Executive Chairman and performing a dual role of both Chief Executive and Chairman. The table below sets out the remuneration for Bill Halbert in his role as either Executive Chairman or Chief Executive in each of the last six years:

FY2015
£’000
FY2014
£’000
FY2013
£’000
FY2012
£’000
FY2011
£’000
FY2010
£’000
Total remuneration 476 495 4,791 522 476 523
Annual bonus paid against maximum opportunity 0% 7% 0% 10% 0% 40%
Long-term incentive vesting against maximum opportunity1 N/A N/A 69.34% N/A N/A N/A

1. There was no long-term incentive scheme scheduled to vest based on performance ending in any of the financial years other than the year ended 31 March 2013.

The table below sets out the increase in the remuneration of the Chief Executive from the prior year in comparison to the average percentage change in respect of the employees of the Group as a whole:

Bill Halbert Average per
employee1
Percentage change in the year to 31 March 2015
Base salary Increase of 2.1% Increase of 2.2%
Benefits Increase of 1.7% Increase of 3.2%
Annual bonus Reduction of 100% Increase of 7.1%

1. The average per employee has been calculated on a per head basis using all of the employees in the Group who have remained in the same role throughout the year, excluding the Executive Directors. This group has been selected to enable a like-for-like comparison with the Chief Executive.

Relative spend on pay

The table below sets out the relative spend on pay for the entire KCOM Group in comparison to distributions to shareholders:

Year ended
31 March 2015
£’000
Year ended
31 March 2014
£’000
Percentage change
Total remuneration cost for all employees1 68,360 85,953 (20.5%)
Dividend payments to shareholders 26,057 23,764 9.6%

1. The total remuneration cost for all employees is taken from Note 8 to the financial statements and includes wages and salaries, social security costs, other pension costs and share scheme costs.

Service contracts and letters of appointment

Date of Board
appointment
Date of current service contract
or letter of appointment
Notice period
(months)
Executive Directors
Bill Halbert 1 September 20061 17 June 2011 6
Paul Simpson 24 May 2004 20 June 2011 12
Non-Executive Directors
Graham Holden 27 November 20072 13 May 2014 6
Liz Barber 7 April 2015 30 March 2015 6
Tony Illsley 2 June 2009 29 May 2009 6
Peter Smith 5 January 2015 26 December 2014 6
Martin Towers 2 June 2009 1 June 2009 6

1. Bill Halbert was a Non-Executive Director of the Group from the date of his Board appointment until 25 November 2008, when he became Executive Deputy Chairman. On 24 July 2009 he moved into the role of Executive Chairman. From 1 April 2014 the role of the Executive Chairman was split and Bill moved into his current role as Chief Executive.

2. Graham Holden was a Non-Executive Director of the Group from the date of his Board appointment until 1 April 2014, when he was appointed as Non-Executive Chairman.

Remuneration Committee
Director Number of meetings Out of possible
Tony Illsley (Chairman) 3 3
Graham Holden 3 3
Peter Smith
Martin Towers 3 3

The membership and attendance at Committee meetings during the year is shown in the table above. Meetings were also attended during the year by the Non-Executive Chairman, the Chief Executive, the Group HR Director and the Company Secretary, although none were present when their own reward was under discussion.

The Remuneration Committee is a sub-committee of the Board and has three scheduled meetings a year and meets for additional meetings as and when required. For the year under review there were no additional meetings held.

During the year under review, the Committee received advice on all aspects of remuneration from independent remuneration consultants New Bridge Street, a trading name of Aon Hewitt Limited, an Aon plc company, which was appointed by the Committee in August 2011 following a comprehensive tender process. New Bridge Street is a signatory to the Remuneration Consultants Group Code of Conduct and any advice received is governed by that code. The fee paid to New Bridge Street during the year for this advice was £41,537 (2014: £45,000) which is charged as a fixed annual fee for recurring work, with separate fees agreed as appropriate for additional adhoc work.

The Committee has reviewed the way in which New Bridge Street operates and its relationship with the Group and remains satisfied that the advice it receives is independent and objective. Aon Hewitt also provides actuarial and investment consultancy advice to the Trustees of the Group’s two defined benefit pension schemes, which the Committee considers does not result in a conflict of interest.

In accordance with its Terms of Reference, the Committee is responsible for:

  • determining and agreeing the Remuneration policy for the Chief Executive, the Executive Directors and senior management across the Group;
  • having regard to remuneration trends across the Group and remuneration in other companies when setting Remuneration policy, as well as to environmental, social and governance matters when appropriate;
  • selecting, appointing and setting the Terms of Reference for any remuneration consultants who advise the Committee;
  • approving the design of, and determining targets for, any performance related pay schemes operated by the Group and approving the total annual payments made under such schemes;
  • reviewing the design of all share incentive plans for approval by the Board and shareholders and determining each year whether awards will be made and, if so, the overall amount of such awards, the individual awards and the performance targets to be used;
  • determining the policy for, and scope of, pension arrangements for each Executive Director and senior management; and
  • ensuring that contractual terms on termination, and any payments made, are fair to the individual and the Group, that failure is not rewarded and that the duty to mitigate loss is fully recognised.

The Committee’s Terms of Reference are in line with the recommendations in the UK Corporate Governance Code and the Institute of Chartered Secretaries and Administrators’ Guidance on Terms of Reference for Remuneration Committees. Copies of the Terms of Reference are available from the Company Secretary or on our website, www.kcomplc.com.

The specific matters considered by the Committee during the year were:

Description What the Committee has done
Reviewing the Executive Directors’ remuneration packages The Committee reviewed benchmark analysis of the remuneration packages of the Executive Directors and the senior management team against comparable roles and considered market trends in remuneration across the industry and in similar sized companies, as well as considering the performance of the Group and of the individuals.
Reviewing the proposed annual bonus scheme for the 2014/15 financial year and performance against the scheme for 2013/14

The proposed scheme for 2014/15 was reviewed by the Committee with particular emphasis on the need to ensure that the bonus scheme incentivised those with the greatest ability to have a direct impact on the performance of the Group.

The Committee reviewed the financial performance of the Group that had triggered a bonus payment of 14 per cent of the maximum for 2013/14 and agreed that it was appropriate that this should be paid.
Reviewing progress on the LTIP scheme and determining the awards for 2014 The awards made in July 2014 under the LTIP scheme were reviewed and approved by the Committee. There was also a review at each meeting of progress against the performance measures.
Reviewing the Directors’ Remuneration report in the annual report and accounts The Directors’ Remuneration report in the 2014 annual report and accounts was reviewed by the Committee during the year. Following the year end the Committee reviewed and approved the current Remuneration report.
Reviewing remuneration trends and up-to-date guidance from governance institutions The Committee spent time considering trends in relation to remuneration and considered matters such as introducing deferral to the bonus scheme and LTIP scheme. It was agreed that this would be considered going forward as new schemes were introduced.

Directors’ interests in shares (audited)

As at 31 March 2015
Shares owned
outright
Nil-cost share
options subject
to performance
conditions1
Actual share
ownership as a
percentage of
salary on
31 March 20152
Required share
ownership as a
percentage of
salary
Requirement met?
Executive Directors
Bill Halbert 2,482,371 1,404,397 570.8% 100% Yes
Paul Simpson 525,8953 927,576 183.1% 100% Yes
Non-Executive Directors
Graham Holden 50,000
Tony Illsley
Peter Smith
Martin Towers 237,990

1. These are awards made under the LTIP scheme, further details of which can be found above.

2. Calculated using the closing mid-market price of KCOM Group PLC shares on 31 March 2015 and only those shares owned outright by the Executive Directors and their connected persons.

3. This includes matching shares awarded under the SIP which may be subject to forfeiture in certain circumstances.

The table above sets out the interests of all the Directors as at 31 March 2015 (as listed on the Board of Directors pages) and their connected persons in the Group’s shares.

The Group Share Incentive Plan (SIP) is open to all employees and offers free matching shares on a sliding scale from 2:1 for monthly contributions of £20 to 1:3 for monthly contributions over £51. Currently 980 employees participate in the scheme, including one of the Executive Directors.

Since the end of the year shares in the SIP have continued to be awarded each month, for which we make monthly announcements as required under Section 5.6.1 of the Disclosure and Transparency Rules. This has resulted in Paul Simpson holding 705 additional shares, which includes matching shares awarded under the SIP which may be subject to forfeiture in certain circumstances.

Shareholder views

At the 2014 AGM there were shareholder votes taken on both the Remuneration policy and the remainder of the Remuneration report. The outcomes of the votes are shown in the charts below:

Remuneration policy votes chart

Directors’ Remuneration report (excluding the Remuneration policy) votes chart

1. A ‘vote withheld’ is not a vote in law and is therefore not counted in the calculation of the proportion of votes ‘for’ and ‘against’.

Outside appointments

In 2014/15 Bill Halbert received no direct remuneration for his external non-executive positions. Kevin Walsh acted as Chairman of Manx Telecom Plc whilst also working as Executive Director at KCOM Group. His remuneration for the period from 1 April 2014 up to his retirement on 31 October 2014 was £46,667, which the Board agreed he should retain.

General information (audited)

The closing mid-market price of KCOM Group PLC shares on 31 March 2015 was 91.25 pence. The high and low closing mid-market share prices during the year were 104.10 pence and 79.0 pence respectively.

Signed on behalf of the Board.

Kathy Smith

Company Secretary
17 June 2015