I am pleased to present our directors' remuneration report (the 'report') for the year ended 31 March 2018 incorporating our annual report on remuneration which is being tabled for shareholder approval at the 2018 AGM and which incorporates the remuneration policy approved at the AGM in 2017.
The Group has continued to perform very well during the year with good top and bottom line growth supported by strong cash flow. This was achieved through continuing focus on operational improvement, bid and contract management, supported by continued investment in people, processes and technology.
The management team performed well during the year despite the prolonged absence through ill health of Ian Lawson. The team was restructured on 1 February 2018, following Ian's departure from the business, which was agreed in accordance with the terms of his service agreement. The remuneration committee, within the terms of the approved remuneration policy and with due regard to the policy on payment for departure from office, considered Ian's long and successful tenure as chief executive officer and agreed the treatment of his deferred bonus shares under the deferred share bonus plan ('DSBP') and awards under the Severfield performance share plan ('PSP') on 31 January 2018. Ian was not paid any bonus for the year ended 31 March 2018. He was classified as a 'good leaver' for the share schemes in which he participated. Awards under the DSBP were allowed to vest in full on the date of retirement. In respect of Ian's outstanding awards under the PSP, these continue to be capable of vesting on their normal vesting date. The extent of the performance vesting of the awards remains dependent on the applicable performance conditions being met. In addition, a time pro-rata reduction shall be applied. The details of the departure terms are shown in the remuneration report.
Ian Lawson's successor as chief executive officer is Alan Dunsmore, an internal appointment. Alan was promoted from Group finance director to chief executive officer on a permanent basis, having undertaken the role on an acting basis since April 2017 and his remuneration adjusted accordingly. The remuneration package is substantively the same as that provided to the retiring chief executive officer, but with a reduced salary. Adam Semple was promoted from Group financial controller to Group finance director on the same date, having also undertaken the role on an acting basis, and his remuneration was also adjusted accordingly. Further details are set out below.
Outline of the remuneration report
The report is split into the following two sections:
- Part 1, the remuneration policy report, which sets out the remuneration policy for the executive and non-executive directors; and
- Part 2, the annual report on remuneration, which discloses how the remuneration policy was implemented for the year ended 31 March 2018 and how it will be implemented for the year ending 31 March 2019.
The annual report on remuneration will be subject to an advisory shareholder vote at the forthcoming AGM on 4 September 2018. This provides details of the remuneration earned by directors for performance in the year ended 31 March 2018. The directors' remuneration policy report was strongly supported by shareholders in a binding vote at the 2017 AGM, with 99.66 per cent of votes cast in favour and is not being submitted to a shareholder vote at the 2018 AGM. The policy is intended to remain in place for three years from the date of approval and will next be subject to a binding vote at the 2020 AGM (or sooner if changes are made to the policy).
Performance and reward 2018
The remuneration packages of Alan Dunsmore and Adam Semple were adjusted following their promotion on 1 February 2018, respectively, to positions of chief executive officer and Group finance director. 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.
I am pleased to report that the base financial targets set by the board were exceeded and the base safety targets met, resulting in a bonus pay-out of 63 per cent of the maximum for all of the executive directors except 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) who achieved a bonus pay-out of 69 per cent.
The normal maximum award level for the chief operating officer is up to 75 per cent of salary. An award of 100 per cent of salary was made to Ian Cochrane in 2018, above this level but within the approved policy maximum annual award limit of 150 per cent of salary. This is to reflect the increased responsibilities and contribution to the Group during Ian Lawson's absence and during the management team's restructuring. The targets for the 2018 award are set out below.
The levels of profit achieved last year resulted in targets for the 2015 PSP award (EPS targets which equated to PBT of between £16m and £24m) being exceeded, resulting in the expected vesting of these awards at close to their maximum level (95.4 per cent).
Implementation of policy for 2019
Salaries for the directors will be reviewed later this year after the conclusion of the pay review across the Group and will be effective from 1 July 2018. There will be no change to the fees paid to non-executive directors.
The financial and safety performance targets for the 2019 bonus reflect the continued strong forward momentum of the Group. The committee considered the balance of financial and non-financial measures, as well as the appropriateness of each measure, and considers that these remain appropriate for the year ahead.
The share plan targets are intended to incentivise management to maintain this momentum and will require the Group to deliver earnings per share ('EPS') in the range of 7.88p to 9.75p in 2021. This equates to a PBT range of £29.5m to £36.5m. 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). This represents a vesting range which the committee feels is realistic, whilst remaining appropriately stretching, particularly in the context of current expectations of the external market over the next performance cycle.
The committee continues to seek to strengthen shareholder alignment and ensure that pay remains firmly linked to performance whilst ensuring that the bonus and performance share plans provide a strong incentive for management to deliver superior performance over the short and longer term. We consider our remuneration policy achieves these objectives.
I look forward to engaging with shareholders before and at the AGM to answer any questions they might have.
Chairman of the remuneration committee
20 June 2018