Part 2 – annual remuneration report

In this section, we report on the implementation of our policies in the year ended 31 March 2018 as well as how the policy will be implemented for 2019. The regulations require the auditor to report to the Group's shareholders on the auditable part of the directors' remuneration report and to state whether, in its opinion, that part of the report has been properly prepared in accordance with the Companies Act 2006. The relevant sections subject to audit have been highlighted in the annual report on remuneration.

In determining the remuneration of executive directors and remuneration policy for the Group, the committee took account of general market conditions and pay levels for the workforce as a whole. In so doing, the committee reviewed wage growth generally and the proportion of earnings paid as bonus to groups of staff at each level – executive directors, senior staff and all other employees (who receive a profit share bonus and are eligible to participate in an SAYE scheme). The Group recognises a number of trade unions who are consulted regarding wage settlements on a site-by-site basis and seeks employee participation on a range of matters including safety.

Implementation of policy for 2018

Remuneration committee

Membership, meetings and attendance

The Group has an established remuneration committee which is constituted in accordance with the recommendations of the UK Corporate Governance Code.

The members of the remuneration committee who served during the year are shown below together with their attendance at remuneration committee meetings:

Number of meetings attended:
Alun Griffiths (chairman)5/5
John Dodds1/1
Chris Holt5/5
Kevin Whiteman4/5
Tony Osbaldiston5/5

The Group considers all members of the committee to be independent. Executive directors may attend remuneration committee meetings at the invitation of the committee chairman, but do not take part in any discussion about their own remuneration. For the period from 1 April 2017 until 31 January 2018, during which period, he was executive chairman, John Dodds attended all meetings by invitation only.

The terms of reference for the remuneration committee are available on the Company's website.

Advisers to the committee

The committee retained New Bridge Street (an Aon plc company) as an independent adviser to the remuneration committee throughout the year. New Bridge Street is a member of the Remuneration Consultants Group and is a signatory to its code of conduct. Neither New Bridge Street nor any other part of Aon plc provided other services to the Group during the year. The fees paid to New Bridge Street for work carried out during the year ended 31 March 2018 totalled £33,000 (2017: £34,000).

Directors' earnings for the 2018 financial year (audited)

Remuneration received by the directors

Year ended 31 March 2018
£000SalaryBonusFeesBenefitsPensionLTIPs*Total
Executives
Ian Lawson1 (until 31 January 2018)2721664385737
Alan Dunsmore23302061653197802
Ian Cochrane3021901650240798
Derek Randall24917350197669
Adam Semple316766111621281
John Dodds414621167
Non-executives
Tony Osbaldiston4545
Kevin Whiteman4545
Alun Griffiths4545
Chris Holt4040
1,466635196592331,0403,629

Taxable benefits include the provision of company cars, fuel for company cars, car and accommodation allowances and private medical insurance. LTIPs reflect those PSP awards expected to vest based on performance to 31 March 2018.

* Calculated at 95.4 per cent of maximum award × the average share price over the period 1 January 2018 to 31 March 2018 of 78.01p.

  1. Ian Lawson was an executive director for the period 1 April 2017 to 31 January 2018 and received compensation for loss of office of £408,000 on his departure on 31 January 2018. These payments represent amounts to which the Group was contractually obliged. He was not paid any bonus for the year ended 31 March 2018.
  2. Alan Dunsmore's remuneration comprises his remuneration as acting chief executive officer and as chief executive officer. He was paid a supplement of £63,000 to his salary as Group finance director to reflect the additional responsibilities of the acting chief executive officer role for the period 1 April 2017 to 31 January 2018.
  3. Adam Semple operated as acting Group finance director from 1 April 2017 to 31 January 2018 when he was appointed to this role on a permanent basis. The remuneration stated above comprises his remuneration as acting Group finance director and as Group finance director. He was paid a supplement of £43,000 to his salary as Group financial controller to reflect the additional responsibilities of the acting Group finance director role for the period 1 April 2017 to 31 January 2018.
  4. John Dodds operated as executive chairman from 1 April 2017 to 31 January 2018 when he resumed his role as non-executive chairman. The salary he received as an executive director and the fees he received as a non-executive director have been disclosed separately.
Year ended 31 March 2017
£000SalaryBonusFeesBenefitsPensionLTIPs*Total
Executives
Ian Lawson37335928753931,228
Ian Cochrane2932823150231887
Alan Dunsmore2482391650190743
Derek Randall24319550190678
Non-executives
John Dodds100100
Tony Osbaldiston4545
Kevin Whiteman4545
Alun Griffiths4545
Chris Holt4040
1,1571,075275752251,0043,811

Taxable benefits include the provision of company cars, fuel for company cars, car and accommodation allowances and private medical insurance.

* LTIPs reflect those PSP awards vesting based on performance to 31 March 2017 and are calculated as actual value of benefit at the actual vesting date based on the vesting share price of 81.25p.

Remuneration received by the directors

The remuneration packages of Alan Dunsmore and Adam Semple were adjusted following their promotion on 1 February 2018, to positions of chief executive officer and Group finance director respectively. The base salary for Alan Dunsmore was increased to £350,000 from £325,000 (his base whilst undertaking the role on an acting basis). The base salary for Adam Semple was increased to £220,000. This provides scope for further growth as he develops in his role. Other terms and conditions were adjusted in line with policy. In both cases, the revised base salaries are below those of the previous incumbents.

During the year, other directors received a 2.5 per cent salary increase which was broadly in line with that received by the UK workforce.

Past directors/loss of office payments (audited)

During the year, a payment for loss of office was made to Ian Lawson, chief executive officer until 31 January 2018. In accordance with our policy on compensation for loss of office, Ian was paid 12 months' salary but was not paid any bonus for performance in 2018. Given the circumstances of his decision to leave the business, coming as it did at the end of absence due to physical ill health, the committee decided to treat him as a good leaver so that he retained his unvested PSP awards. These are therefore expected to vest at their normal vesting date with a pro-rata reduction being made to each for the unexpired element of the performance period as at 31 January 2018. In addition, in relation to his forfeitable DSBP share awards made in the last three years, the committee decided to treat him as a good leaver and allow his awards to vest on 31 January 2018. Finally, reflecting his personal circumstances, the committee decided to allow Ian to retain his private health benefit until 31 December 2018. There have been no other payments made to past directors during the year.

How pay linked to performance in 2018

Bonus

The executive directors will receive the bonuses set out in the table below, of which 50 per cent will be paid in shares deferred for three years.

Under the rules of the Group's deferred share bonus plan, the participants will receive nil cost options exercisable after three years over a seven-year period which are forfeitable only in certain scenarios in accordance with the remuneration policy.

Alan Dunsmore£206,000
Ian Cochrane£190,000
Adam Semple£66,000
Derek Randall£173,000

As reported last year, the bonus plan applicable to the executive directors for 2018 had two separate performance conditions:

  • Eighty per cent was payable on achieving budgeted Group PBT (with the exception of Derek Randall who, whilst he remains in India, has the profit performance-based component of his bonus split 50/50 between Group PBT and PBT for India). The financial element begins to pay out at 95 per cent of budgeted Group PBT, rising to 50 per cent of this element being payable for achieving budget and full pay-out for achieving 120 per cent of budget.
  • Twenty per cent was payable based on achieving a target Group AFR (with the exception of Derek Randall who, whilst he remains in India, has the AFR-based component of his bonus based on AFR (India)).

Our policy is to disclose annual PBT and AFR targets retrospectively following the end of the performance period, unless, in the view of the remuneration committee, this would compromise the commercial position of the Group.

The targets for 2018 and the pay-out against these targets are set out below:

For all directors (excluding Derek Randall)

Measure% of maximum bonus opportunityThresholdOn-targetMaximumActual% of bonus paidPay-out as % of salary
Group PBT*80%£22.0m£23.2m£27.8m£23.5m53%43%
Group AFR20%0.260.260.260.22100%20%
63%

* For Group PBT, 'threshold' represents 95 per cent of budget, 'on-target' represents 100 per cent of budget and 'maximum' represents 120 per cent of budget.

During the financial year, Adam Semple achieved 67 per cent bonus pay-out as a percentage of salary reflecting the additional Group cash flow measure included in his agreed bonus target as acting Group finance director.

Derek Randall (JSSL managing director):

Measure% of maximum bonus opportunityThresholdOn-targetMaximumActual% of bonus paidPay-out as % of salary
Group PBT*40%£22.0m£23.2m£27.8m£23.5m53%21%
JSSL (India) PBT*40%Break-even4.2 Cr20.0 Cr10.5 Cr70%28%
JSSL (India) AFR20%0.120.120.12100%20%
69%

* For Group and JSSL PBT, 'threshold' represents 95 per cent of budget, 'on-target' represents 100 per cent of budget and 'maximum' represents 120 per cent of budget.

The 2015 PSP awards are due to vest in June 2018, subject to the achievement of an EPS performance condition measured over the three financial years ended 31 March 2018. The minimum EPS figure required for vesting of 25 per cent of the award was c.4.30p which equates to a PBT of £16.0m. The EPS figure required for vesting at maximum of 100 per cent of the award was c.6.45p which equates to a PBT of £24.0m. The actual PBT achieved was £23.5m which equates to EPS of 6.38p and therefore it is estimated that 95.4 per cent of these awards will vest subject to continued service.

A summary is set out below:

PSP awards granted to directors in 2018 (audited)

Share awards were made in the year under the PSP scheme for the three-year period expiring on 31 March 2020. Details of the awards made to the executive directors are summarised below.

TypeNumber of shares% of salaryFace value (£)1Performance condition2Performance period% vesting at threshold
Ian Lawson³Nil-cost option458,132100%377,959EPS3 financial years ending 31 March 202025%
Alan DunsmoreNil-cost option304,549100%251,253
Ian CochraneNil-cost option269,88875%222,658
Derek RandallNil-cost option221,94875%183,107
Adam SempleNil-cost option31,65525%26,115
  1. Face value calculated based on the pre-grant date share price of 82.50p on 14 June 2017.
  2. Performance conditions are based on EPS targets of 6.76p (minimum performance – 25% vests) to 7.98p (maximum performance – 100% vests) with linear interpolation in between. This represents a PBT range of £25m–£29.5m.
  3. Ian Lawson will be entitled to receive a pro-rated award reflecting the period up to his departure on 31 January 2018.

The PSP and the annual bonus plan contain malus and clawback provisions (together 'clawback') which can be applied before an award vests or for a period of three years post vesting or within three years of the bonus being paid. Clawback can be applied when it becomes apparent that a PSP award or bonus was larger than ought to have been the case due to the Company having materially misstated its financial results or having made an error in assessing any performance condition or bonus. Clawback can also be applied in the case of subsequently discovered misconduct of a relevant individual or where there has been a substantial failure of risk control. The amount of the relevant clawback would be the net of tax amount (or the full amount to the extent that the individual can recover any tax paid) that had effectively been overpaid in the case of misstatement or error or would be at the committee's discretion in the case of misconduct. Clawback can be imposed by a reduction in the amount of any unvested PSP award, a reduction in the amount of any future bonus or by a requirement to pay back the amount in question (with a right to deduct from salary).

Outstanding share awards at the year-end (audited)

Details of share awards under the PSP to the executive directors which were outstanding at the year-end are shown in the following table:

DirectorYear of
award
Vesting
date (June)
Performance
condition
Awards
held at
1 April
2017
Awards
granted in
year
Awards
lapsed in
year4
Awards
vested
in year
Awards
held at
31 March
2018
Ian Lawson20142017EPS632,054(148,791)(483,263)
20152018EPS513,262(27,655)485,607
20162019EPS741,186(286,998)454,188
20172020EPS458,132(330,106)128,026
Total1,886,502458,132(793,550)(483,263)1,067,821
Ian Cochrane20142017EPS372,460(87,681)(284,779)
20152018EPS302,366302,366
20162019EPS436,637436,637
20172020EPS269,888269,888
Total1,111,463269,888(87,681)(284,779)1,008,891
Alan Dunsmore20142017EPS306,298(72,105)(234,193)
20152018EPS248,656248,656
20162019EPS492,714492,714
20172020EPS304,549304,549
Total1,047,668304,549(72,105)(234,193)1,045,919
Derek Randall20142017EPS306,298(72,105)(234,193)
20152018EPS248,656248,656
20162019EPS359,071359,071
20172020EPS221,948221,948
Total914,025221,948(72,105)(234,193)829,675
Adam Semple20142017EPS
20152018EPS26,38826,388
20162019EPS48,24148,241
20172020EPS31,65531,655
Total74,62931,655106,284
5,034,2871,286,172(1,025,441)(1,236,428)4,058,590

Performance conditions are based on a range of EPS targets as follows:

Threshold (25% vests)Maximum (100% vests)
2015 award14.30p6.45p
2016 award25.06p6.53p
2017 award36.76p7.98p
  1. Represents a PBT range of £16.0m – £24.0m.
  2. Represents a PBT range of £18.6m – £24.0m.
  3. Represents a PBT range of £25.0m – £29.5m.
  4. The figures for awards lapsed in the year against Ian Lawson's PSP awards for 2015, 2016 and 2017 reflect that he was a good leaver when he left the Company in January 2018 and is entitled to retain his existing PSP awards calculated on a time pro-rata reduction. The amounts lapsed are those elements of those awards which, after applying that calculation, have effectively lapsed now in any event.

Statement of directors' shareholding

As at 31 March 20181, all executive directors and their connected persons have a shareholding as follows:

Actual share ownership as a percentage of salary
Alan Dunsmore62%
Ian Cochrane2745%
Adam Semple3-
Derek Randall105%
  1. Actual share ownership was calculated with reference to the closing mid-market share price at 31 March 2018. The shareholding requirement increased to 200% for the chief executive officer and the Group finance director under the new remuneration policy, approved at the 2017 AGM, 150% for all other executive directors. Executive directors are required to retain shares acquired under equity incentive schemes until such time as they have met the share ownership requirement. Ian Lawson left the Group on 31 January 2018 and has not been included in this table. Details of his interests as at 31 January 2018 are included in the table below.
  2. As at 31 March 2018, only Ian Cochrane satisfied the Company's shareholding guideline.
  3. In his previous role, Adam Semple was not required to meet a shareholding requirement.

Directors' current shareholdings (audited):

The following table provides details on the directors' beneficial interests in the Company's share capital as at 31 March 2018, other than Ian Lawson who left the Company on 31 January 2018 and whose holdings are stated as at that date.

Owned shares1Share incentive plan (SIP)2Sharesave schemeDSBP3PSP4Total5
Executives
Alan Dunsmore296,17316,41633,003216,4671,045,9191,607,978
Ian Cochrane3,087,92016,41633,003258,3751,008,8914,404,605
Adam Semple6,200106,284112,484
Derek Randall358,4114,667233,307829,6761,426,061
Ian Lawson553,8838,72633,003328,9301,067,8211,992,363
Non-executives
John Dodds419,833419,833
Tony Osbaldiston
Kevin Whiteman
Alun Griffiths30,00030,000
Chris Holt53,09753,097
  1. Includes shares owned by connected persons.
  2. SIP shares are unvested and held in trust.
  3. The principal terms of the deferred share bonus plan are described in the directors remuneration policy.
  4. PSP shares are in the form of conditional awards which will only vest on the achievement of certain performance conditions. The total includes 2015 awards which had not actually vested as at 31 March 2018.
  5. There have been no changes in the directors' interests in the shares issued or options granted by the Company between the end of the period and the date of this annual report, except shares held pursuant to the SIP. There have been no changes in the directors' beneficial interests in trusts holding ordinary shares of the Company. Some of the executive directors continued their membership in the SIP after the end of the period and were therefore awarded further shares pursuant to the SIP rules. Between the end of the period and 21 May 2018, being the last practicable date prior to the publication of this annual report, the executive directors acquired further shares under the SIP as set out in the table below.
ExecutivesNew SIP shares since
31 March
2018
Total SIP shares at
21 May
2018
Ian Cochrane32316,739
Alan Dunsmore32316,739

Position against dilution limits

Severfield plc complies with the Investment Association's principles of executive remuneration. These principles require that commitments under all of the Group's share ownership schemes (including the share incentive plan (SIP), sharesave scheme and the PSP) must not exceed 10 per cent of the issued share capital in any rolling 10-year period. The Group's position against its dilution limit as at 31 March 2018 was well under the maximum 10 per cent limit at 5.6 per cent.

Performance graph

The following graph shows the Group's performance, measured by total shareholder return, compared with the performance of the FTSE Small Cap Index. It is based on the change in the value of a £100 investment made on 31 March 2009 over the nine-year period ended 31 March 2018.

This index was selected as it represents a broad equity market index and an appropriate comparator group of companies over the period.

Total shareholder return

Source: Factset

Chief executive officer remuneration change

The table below shows the total remuneration figure for the chief executive officer role over the same nine-year period. Total remuneration includes bonuses and the value of PSP awards which vested (or in the case of 2018 are expected to vest) based on performance in those years (at the share price at which they vested or, in the case of the 2018 figures, at the average share price for the quarter immediately prior to the year-end).

2009 Haughey2010 Haughey2011 Haughey2013 Haughey12013 Dodds2, 32014 Dodds22014 Lawson42015 Lawson2016 Lawson2017 Lawson2018 Lawson52018 Dunsmore6
Total remuneration (£000)1,265640701450622892336819461,228737802
Annual bonus (%)94.8%50.1%60.5%N/AN/A34.0%65.0%63.0%95.0%62.6%
LTIP vesting (%)100.0%100.0%N/AN/A64.0%74.0%95.4%95.4%
  1. Tom Haughey received compensation of £423,000 for loss of office in accordance with his contract.
  2. John Dodds was appointed executive chairman in an interim capacity following Tom Haughey's resignation as chief executive officer on 23 January 2013 and prior to the appointment of Ian Lawson as chief executive officer on 1 November 2013. During this time he was awarded a discretionary bonus (no maximum was set) but not entitled to any PSP award. These figures do not include his fees as non-executive chairman.
  3. Financial year 2013 represented the 15-month period to 31 March 2013.
  4. Appointed on 1 November 2014.
  5. Ian Lawson received compensation of £408,000 for loss of office in accordance with his contract.
  6. Alan Dunsmore operated as acting chief executive officer from 1 April 2017 to 31 January 2018, during Ian Lawson's absence due to physical ill health. Alan's appointment to this role was made permanent from 1 February 2018. The figures in the table above represent Ian Lawson's remuneration for this period and Alan Dunsmore's remuneration for the period in which he was both acting and permanent chief executive officer.

How the change in chief executive officer pay for the year compares to that of the Group's employees

The table below shows the percentage change in salary, benefits and annual bonus earned for the chief executive officer compared to the percentage change of each of those components of pay of the average of a group of employees. The committee has selected salaried employees in mainland UK as this geography provides the most appropriate comparator.

2018
£000
2017
£000
% change
Chief executive officer
Salary330373-11.5%
Benefits1628-42.9%
Bonus206359-42.6%
Average employees
Salary47462.2%
Benefits330.0%
Bonus35-40.0%

Relative importance of spend on pay

The following table shows the actual spend on pay for all employees relative to revenue and underlying operating profit before the results of JVs and associates:

2018
£000
2017
£000
% change
Staff costs70,23767,6753.8%
Revenue274,203262,2244.6%
Underlying operating profit (before JVs and associates)22,86619,61416.6%
Dividends7,4905,07847.5%

Shareholder voting

The results below show the response to the 2017 AGM shareholder voting for the directors' 2017 remuneration report (excluding remuneration policy):

Total number of votes% of votes cast
For232,317,28099.96%
Against91,9300.04%
Total votes cast (for and against)232,409,210100%
Withheld votes137,668N/A
Total votes (including withheld votes)232,546,878N/A

The results below show the response to the 2017 AGM shareholder voting for the directors' 2017 remuneration policy:

Total number of votes% of votes cast
For231,684,76199.66%
Against801,1890.34%
Total votes cast (for and against)232,485,950100%
Withheld votes60,928N/A
Total votes (including withheld votes)232,546,878N/A

Implementation of policy for 2019

The executive directors' current salaries

The salaries of the executive directors will be reviewed in October 2018 and backdated to July 2018. Increases will be set in the context of overall salary increases for the wider workforce.

The executive directors' salaries at the start of the 2019 financial year are as follows:

£
Alan Dunsmore350,000
Ian Cochrane304,309
Adam Semple220,000
Derek Randall250,247

Benefits and pension

All executive directors will be entitled to a car allowance of £15,000 (chief executive officer: £18,000), a fuel allowance, life insurance cover and medical insurance. Alan Dunsmore will receive a salary payment in lieu of pension contribution of 20 per cent of basic salary up to a maximum of £75,000 and Adam Semple will be offered a pension contribution of 18 percent of salary up to a maximum of £50,000. Ian Cochrane and Derek Randall will each receive a salary payment in lieu of pension contribution of £50,000.

Rewards for performance in 2019

Bonus

The annual bonus for 2019 will operate on the same basis as for 2018 and will be consistent with the policy detailed in the remuneration policy section of this report in terms of the maximum bonus opportunity, deferral and clawback provisions. The measures have been selected to reflect a range of financial and operational goals that support the key strategic objectives of the Group.

The performance measures and weightings will be as follows:

Profit performance-based component — 80 per cent

The sliding scale range for bonus targets in 2019 is as follows:

Maximum bonus based on actual PBT versus budget

PBT % of budget% of award
95 or below
10050
120 or better100

The committee believes that the budget PBT figures are commercially sensitive metrics and therefore are not disclosed at this time. Actual target figures will be disclosed on a retrospective basis when these sensitivities have been removed.

Other performance-based component — 20 per cent

AFR (accident frequency rate) will again be used throughout the Group.

AFR is an industry-recognised and measurable target. The pre-set targets have not been disclosed due to commercial sensitivities. Actual target figures will be disclosed on a retrospective basis when these sensitivities have been removed.

Whilst Derek Randall remains in India the AFR component of his bonus will be based on AFR (India).

Rewards for performance in 2019

PSP

It is the committee's current intention to grant PSP awards of 100 per cent of salary to the chief executive officer and the chief operating officer and 75 per cent of salary to the Group finance director and the JSSL managing director.

This year, we will set a performance condition for a three-year period commencing on 1 April 2018 and ending on 31 March 2021. These targets reflect the continuing expected recovery of profitability, recognising that market conditions remain challenging in many areas. At the lower threshold, below which no awards will vest, we have set a target EPS equivalent to PBT of £29.5m. If this level is achieved, 25 per cent of the shares granted will vest. At the higher end, we have set a target EPS equivalent to PBT of £36.5m. If this is achieved, 100 per cent of the shares granted will vest. Vesting at EPS levels between the lower and upper thresholds will be calculated by linear interpolation.

This represents an increase in the lower vesting threshold of £4.5m (18 per cent) and in the threshold at which maximum vesting takes place of £7.0m (24 per cent). When setting this target range, the committee considered a number of reference points including internal financial forecasts, external analyst consensus, the base EPS and a broad view of the wider construction industry. This reflects, in the view of the committee, a realistic performance range whilst maintaining the targets at an appropriately stretching level. They will require management to deliver strong, sustainable performance over the period without encouraging undue risk-taking and in the context of the market environment are considered more challenging than targets set for prior awards.

How will the non-executive directors be paid in the 2019 financial year

The fees for the chairman and non-executive directors will be as follows:

£20192018
Chairman125,000175,000*
Basic fee for other non-executive directors40,00040,000
Additional fee for SID role5,0005,000
Additional fee for chairman of audit and remuneration committees5,0005,000

* This was the agreed figure for John Dodds' temporary appointment as executive chairman.

Approval

This report was approved by the board of directors and signed on behalf of the board.

Alun Griffiths
Chairman of the remuneration committee
20 June 2018