Policy report

This Directors’ Remuneration report sets out details of the Remuneration policy for Executive and Non-Executive Directors, describes the implementation of the policy and discloses the amounts paid for the year ended 31 March 2015. The report complies with the provisions of the Companies Act 2006 and Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 and has been prepared in line with the recommendations of the UK Corporate Governance Code and the requirements of the UKLA Listing Rules.

The Directors’ Remuneration policy of the Group was put to a binding shareholder vote at the AGM on 29 July 2014, in accordance with Section 439A of the Companies Act 2006, and was approved. It therefore became effective from that date. The current intention is to operate the policy, as approved, for the full three years to the 2017 AGM and we therefore do not propose to resubmit it to shareholders for approval at the AGM in July 2015. This part of the Directors’ Remuneration report sets out an abridged version of the approved policy. A full version of the Remuneration policy can be found on pages 46 to 51 of the Annual report and accounts 2013/14 which can be found on our website at www.kcomplc.com.

Executive Directors’ policy table

Element and how it supports the KCOM Group strategy How does this operate and what is the maximum that may be paid? What performance measures are used and why? Are there any provisions to recover sums paid?

Base salary

Setting the base salary at the right level enables us to attract and retain the right individual for the role, whilst reflecting appropriately the status, responsibility and experience of the individual.

Base salaries are normally reviewed at least annually. Salaries are typically set following comparison with industry based peer companies and companies of a similar size. We aim to pay salaries around the median; however, we also take into account a number of other specific factors, including the experience and performance of the individual, the criticality of the individual to the success of the Group, pay and conditions throughout the Group and the wider economic climate.

Increases will not ordinarily exceed the general level of increase for the Group’s employees; however, increases beyond those awarded to the Group’s employees may be awarded in certain circumstances, for example, where there is a change in responsibility, progression in the role, experience, or where there is a significant increase in the scale of the role or the size and/or complexity of the Group.

Details of the base salary for each of the Executive Directors are shown in the Annual report on remuneration.

No specific performance measures are used in relation to determining base salary, but individual and business performance are considered as part of the discussion when setting the base salary levels.

There are no provisions to recover any sums paid.

Benefits

Paying the right amount of benefits helps us to attract and retain the right individual for the role.

The provision of benefits is set based upon market practice at similar companies, taking into account also the benefits available to other employees across the Group.

The benefits available to both Executive Directors are:

  • private medical insurance for the Executive and their immediate family;
  • income protection;
  • life assurance;
  • car allowance of up to £16,000 per annum for the Chief Executive and £14,000 per annum for the Chief Financial Officer;
  • fully expensed fuel card;
  • medical screening; and
  • the opportunity to participate in any all-employee share plans operated by the Company, in line with HMRC guidelines.

The cost of insured benefits may vary from year to year and there is no maximum level set. Additional benefits can be purchased via a deduction in salary through the flexible benefits arrangements available to all employees.

Benefits are not performance related.

There are no provisions to recover any sums paid.

Retirement benefits

Retirement benefits are paid as part of a market competitive package which, in turn, helps us to attract and retain high calibre individuals.

Both Executive Directors are entitled to receive an employer pension contribution of up to 20 per cent of base salary. This can either be paid as a contribution direct to the Group Stakeholder Pension Plan or as cash to the individual. Contributions to the Group Stakeholder Pension Plan are dependent on a minimum employee pension contribution of three per cent per annum.

Retirement benefits are not performance related.

There are no provisions to recover any sums paid.

Annual bonus

The annual bonus is designed to reward the achievement of stretching Group objectives and therefore drive operational excellence.

All payments are at the discretion of the Committee. Payments are considered and approved by the Committee and are payable annually following publication of the Group’s full year results. Up to 10 per cent of maximum bonus is dependent on achieving the threshold hurdle with sliding scale targets set for payments above this level.

Target performance receives up to 50 per cent of salary. Performance above-target results in a higher percentage up to a maximum of 100 per cent of salary.

The performance measures will be financial measures, such as EBITDA. The measures chosen will be those that the Committee believes most closely align Executive Director and shareholder interests and are important to the long-term success of the Group. The measures in place for 2014/15 are set out in more detail in the Annual report on remuneration.

Clawback may be invoked for the annual bonus for:

  • material misstatement of the accounts;
  • error in assessing performance conditions; or
  • gross misconduct.

Long-term incentives

Long-term incentive schemes are used to drive growth in shareholder value and to ensure that there is a direct link between reward and superior shareholder returns.

Awards are normally made annually and performance is measured over a three year period.

The plan rules state that a maximum of 150 per cent of salary per annum may be awarded (200 per cent of salary may be made in exceptional circumstances). Actual award levels are disclosed each year in the Annual report on remuneration.

The performance measure used in the LTIP is Total Shareholder Return (TSR). The Committee believes that a relative TSR measure offers a robust measure of performance over the long-term as it takes into account changes in the economic cycle, while maintaining a focus on shareholder returns. KCOM Group’s TSR must rank at least median to the TSR performance of the companies within a comparator group. Performance at median would result in 25 per cent of the awards vesting, with performance between median and upper quartile resulting in vesting of awards on a straight-line basis with 100 per cent vesting at upper quartile performance. In addition, there is an underpin that the Committee must be satisfied that the Group’s financial and non-financial performance over the performance period warrants the level of vesting, having regard to a number of factors such as share price progression, dividend policy and Earnings Per Share (EPS) performance.

Clawback may be invoked for the LTIP for:

  • material misstatement of the accounts;
  • error in assessing performance conditions; or
  • gross misconduct.

Discretion retained in operating incentive plans

The Committee will operate the Group’s annual bonus plan and LTIP according to the rules of each respective plan and consistent with normal market practice and the Listing Rules, including flexibility in a number of regards.

Non-Executive Directors’ policy table

Element and how it supports the KCOM Group strategy How does this operate and what is the maximum that may be paid?

Fees

Fees are set to recognise the responsibility and experience of the individual and enable us to attract and retain the right calibre of individual.

Fees are normally reviewed at least annually and may be adjusted as necessary to align with market rates in companies of a comparable size and to take account of factors such as the time commitment of the role.

The Chairman is paid an all-encompassing fee to take account of all Board responsibilities. The other Non-Executive Directors receive a base fee with additional fees paid for additional responsibility, such as the chairing of a Committee and performing the role of Senior Independent Director.

No Non-Executive Directors participate in any of the Company’s incentive arrangements and no benefits or other remuneration are provided. Non-Executive Directors will be reimbursed for any normal business-related expenses.

What performance measures are used and why?

Fees are not performance related; however, performance is addressed through regular one to one meetings between the Chairman and each Non-Executive Director.

Are there any provisions to recover sums paid?

There are no provisions to recover any sums paid.

Recruitment policy

This table sets out the Company’s policy on recruitment of new permanent Executive Directors for each element of the remuneration package.

Executive Directors

Remuneration element Policy on recruitment
Base salary

The Remuneration Committee will typically offer salaries around the median market level for comparative roles, but salaries above or below this level may be set to recognise the experience of the individual, the wider economic climate and pay and conditions throughout the Group.

Where it is appropriate to set a lower salary initially, a series of increases above the level awarded to the wider workforce may be given over the proceeding few years until the desired positioning is achieved, subject to individual performance. This may apply to those promoted internally in the Group as well as to those recruited from outside.

Benefits

The Remuneration Committee will offer a benefits package that will be set in line with its policy for existing Executive Directors.

In addition to the benefits currently available to existing Executive Directors, the Committee may also offer an allowance to cover relocation expenses as appropriate.

Retirement benefits

The maximum pension contribution will be set in line with the Company’s policy for existing Executive Directors at 20 per cent of base salary.

Annual bonus

The Remuneration Committee will offer an annual bonus in line with its policy for existing Executive Directors of up to 100 per cent of salary.

Different performance measures may be set initially depending on the point in the financial year at which the individual joined. The opportunity for an annual bonus will be pro-rated for the period of employment.

Long-term incentives

On an ongoing basis awards will be made in line with the policy for other Directors. In the year of recruitment a higher award may be made within the approved limits of the plan (200 per cent of salary in exceptional circumstances, such as recruitment).

‘Buy-outs’

The Committee may offer additional cash and/or share-based elements when it considers these to be in the best interests of shareholders and the Company. Any such payments would be based solely on remuneration relinquished when leaving the former employer and would reflect (as far as possible) the nature and time horizons attaching to that remuneration and the impact of any performance conditions.

The Remuneration Committee’s policy on the ‘buying-out’ of existing incentives granted by the Executive’s previous employer will depend on the circumstances of recruitment and will be negotiated on a case-by-case basis. There will not be a presumption in favour of buy-out but it will be considered if necessary to attract the right candidate.

In total the maximum variable pay level in the year of appointment – excluding the value of any buy-out awards – will be 300 per cent of salary.

For an internal executive appointment, any variable pay element awarded in respect of the prior role would be allowed to pay out according to its terms, adjusted as relevant to take into account the appointment. In addition, any other ongoing remuneration obligations existing prior to appointment would continue.

Non-Executive Directors

On the appointment of a new Non-Executive Chairman or Non-Executive Director, fees will be set to take account of the calibre and experience of the individual, prevailing market rates in companies of a similar size and the expected time commitment associated with the role.

Service contracts

It is the policy of the Group that the notice period for Executive Directors is set at six months for either party. Prior to 2008, the notice period for Executive Directors was set at 12 months. The decision has been taken not to retrospectively alter the notice period for those Directors appointed with a 12 month notice period.

Letters of appointment

Non-Executive Directors are appointed by letters of appointment rather than service contracts and the notice period in all letters of appointment is set at six months for either party.

Copies of the Directors’ service contracts and letters of appointment are available for inspection during office hours at our head office at 37 Carr Lane, Hull, HU1 3RE. There are no obligations on the Group in any of the service contracts or letters of appointment to make payments beyond those disclosed in this report.

Payments for loss of office

This table sets out the policy on exit payments in relation to each remuneration element for Executive Directors.

The Committee is clear that there will be a consistent approach to exit payments and no reward for poor performance. No amount is payable if an Executive Director is dismissed for serious breach of contract, serious misconduct or under-performance or acts that bring the Executive Director or Group into serious disrepute.

The Non-Executive Directors’ letters of appointment do not include any compensation for loss of office.

Executive Directors

Remuneration element Treatment on exit
Base salary

Salary will be paid over the contractual notice period. In all cases the Company will seek to mitigate any payments due and the Executive Directors have a contractual duty to use reasonable endeavours to obtain alternative income, which can then be used to reduce the salary if being paid by instalments. However, the Company has discretion to make a lump sum payment on termination in lieu of notice.

Benefits and retirement benefits

Benefits and retirement benefits will normally continue to be provided over the notice period. In all cases the Company will seek to mitigate any payments due. However, the Company has discretion to make a lump sum payment on termination equal to the value of the benefits payable during the notice period.

Annual bonus

Whether an annual bonus payment is made is entirely at the discretion of the Remuneration Committee and would be pro-rated to the time of active service in the year of cessation. The decision of the Committee would take into consideration the performance of the individual, the circumstances of the departure and the financial performance of the Group.

Long-term incentives

Normally awards will lapse on cessation of employment, unless the Company determines and the Remuneration Committee agrees that the Executive is a good leaver. Good leaver status is usually conferred for one of the following reasons: death, ill-health, injury or disability, retirement, redundancy, or other circumstances at the discretion of the Committee. Good leavers will be treated in accordance with the rules of the LTIP, as approved by shareholders. In these circumstances a participant’s awards vest on a time pro-rata basis subject to the satisfaction of the relevant performance criteria over the original period, with the balance of the awards lapsing. The Committee retains discretion to decide not to pro-rate, to alter the basis of time pro-rating, and to alter the date on which performance is calculated if it feels such decisions are appropriate in particular circumstances.

Payments on a change of control, where a Director’s employment is adversely changed, will be as on termination. There will be no enhanced provisions on a change of control.