Annual statement from the remuneration committee chair

Sara Weller, chair of the remuneration committee

The committee is fully committed to continuing to align executive pay with the company's strategy of delivering value by providing the best service to customers, at the lowest sustainable cost and in a responsible manner.

Quick facts

  • The Code requires that 'the board should establish a remuneration committee of at least three independent non-executive directors'
  • The role of the committee is to set remuneration terms for all executive directors, other senior executives and the Chairman
  • By invitation of the committee, meetings are also attended by the Chairman, the CEO, the company secretary, the business services director, the head of reward and the external advisor to the committee

Quick links

Terms of reference –

Directors' remuneration policy –


At a glance summary

Aligning remuneration to business strategy

Directors' remuneration policy (abridged)

Annual report on remuneration

Dear Shareholder

I am pleased to introduce the directors' remuneration report for the year ended 31 March 2016, which includes my statement, a summary of the directors' remuneration policy which took effect from the date of our 2014 AGM, and the annual report on remuneration for the year ended 31 March 2016.

Alignment to strategy

The committee is fully committed to continuing to align executive pay with the company's strategy of delivering value by providing the best service to customers, at the lowest sustainable cost and in a responsible manner. We seek to achieve this by strongly linking pay with performance, both at an individual and company level, and by encouraging a significant investment in company shares. We also recognise that a long-term focus is essential to creating value and therefore require executives to defer a significant portion of their incentives.

Implementation of policy in 2015/16

Annual bonus

In 2014/15 the committee reviewed the annual bonus measures to ensure that they fully incentivise delivery of our business strategy and annual plan, and reflect the importance and challenge of regulatory commitments for the period 2015–20. These bonus measures apply not only to the executive directors, but also to managers and employees through the company, to ensure alignment to the business plan at all levels.

As set out in detail in the annual report on remuneration, in this first year of the new regulatory period underlying financial and operational performance was good with underlying operating profit of £604 million, effective delivery of our accelerated capital programme targets, positive performance against Ofwat's outcome delivery incentives (ODIs) and retention of 'World Class' status in the Dow Jones Sustainability index.

Bonuses were lower than in 2014/15 reflecting the significant operational challenges which occurred during the year, including the prolonged water quality incident in Lancashire. Levels of customer service as measured by Ofwat's service incentive mechanism (SIM) fell during this incident and there was a net penalty in respect of the ODIs for water supply. Reflecting the impact on profit for shareholders and the inconvenience to customers caused by the water quality incident, the committee also used its discretion to reduce the underlying operating profit figure used for assessing bonus outcome for the executive directors by deducting the £25 million costs related to the incident.

Overall, the company's performance resulted in annual bonus out-turns for the executive directors of around 54 per cent of maximum (lower than the 2014/15 outcome of 77 per cent of maximum) and a company-wide bonus pool totalling £13 million (down from £15 million in the prior year).

Long-term incentives

The Long Term Plan awards which were granted in 2013, and whose performance is measured over the three years to 31 March 2016, are expected to vest at 34 per cent. Despite strong total shareholder return over the period of around 50 per cent, the sustainable dividend measure achieved only threshold performance (following dividend growth for the 2015/16 financial year of RPI and the achievement of an underlying dividend cover underpin) and the customer service excellence measure is expected to out-turn below threshold level (set at median position versus comparator water companies). The awards for executive directors will vest following an additional two-year holding period.

During the year both executive directors reached their respective fifth anniversaries of joining the company. Matching shares, which had been awarded under one-off Matching Share Incentive Schemes as part of their terms of appointment, vested in full. Shareholders benefitted from a total shareholder return of around 100 per cent over these five-year periods.

Shareholding requirements

To provide further alignment with shareholder interests, the board agreed in May 2015 to increase the shareholding guideline for executive directors from 100 per cent to 200 per cent of base salary. Both executive directors have a shareholding in excess of this level.

Agenda for 2016/17

During 2016/17 the committee will be reviewing the directors' remuneration policy ahead of seeking approval from shareholders for a revised policy at the 2017 AGM. We will be seeking feedback from shareholders as part of this review.

I hope we will receive your support for the resolution relating to remuneration at the 2016 AGM.

Sara Weller

Chair of the remuneration committee

At a glance summary: Executive directors' remuneration

Key elementImplementation of policy
Base salary
  • Salary increase of 2.0 per cent from 1 September 2015 in line with the wider workforce
Benefits and pension
  • Market competitive benefits package
  • Cash pension allowance of 22 per cent of base salary
Annual bonus
  • Maximum opportunity of 130 per cent of base salary
  • Annual bonus measures changed for 2015/16 to align with new regulatory period 2015–20
  • 2015/16 annual bonus outcome of around 54 per cent of maximum
  • 50 per cent of 2015/16 annual bonus deferred in shares for three years
  • Malus and clawback provisions apply
Long Term Plan
  • Maximum opportunity of 130 per cent of base salary
  • Estimated long-term incentive vesting of 34 per cent for the performance period 1 April 2013 to 31 March 2016, supported by a total shareholder return of around 50 per cent over the same period. These awards will vest after an additional two-year holding period
  • Malus provisions apply
One-off recruitment awards
  • Both executive directors received shares in relation to the vesting of their one-off Matched Share Investment Schemes which were awarded to them as part of their recruitment terms
Shareholding guidelines
  • Personal shareholdings remain significantly above the 200 per cent of salary minimum guideline