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Directors’ remuneration report (PDF 160 kB)
The committee is aware of the importance of clearly explaining to stakeholders how pay at Network Rail is determined.
During the year we have made significant changes to the way in which we consider pay. We have extended consultation with members and have sought to engage positively and productively with the Office of Rail Regulation (ORR) and other stakeholders to ensure we have widespread understanding and support.
The principles of decision making for the committee are:
From an operational perspective this was a year that saw some successes as well as some areas where there is still work to do, such as train performance and asset stewardship. During the year, the following was achieved:
In this overall context, the bonus outcome for 2012/13 fairly reflects performance. The award for executive directors will be equivalent to 17.17 per cent of salary out of a maximum possible award of 60 per cent of salary.
During the year the committee also assessed performance for the 2009-12 LTIP which was based on performance to March 2012 and was originally approved at the AGM in 2009. The 2012-15 LTIP will be presented to members for approval at the AGM in July.
It is important that we pay people fairly and in a way which can attract and retain talent of the highest calibre. Incentives have the potential to drive a wholesale shift in our performance in a way which creates exceptional value for taxpayers, the railway and its users.
Initial work on the pay framework for Control Period 5 has started. The focus will be on alignment with the long-term business strategy and investment objectives for 2014 to 2019. Any new framework will be discussed fully with our stakeholders prior to finalisation.
Graham EcclesChairmanRemuneration committee5 June 2013
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The remuneration committee determines pay levels and administers incentive plans, recognising the commercial nature of the organisation. Consistent with best practice among larger listed companies, members are provided with the opportunity to vote on remuneration matters. Firstly, the operation of the long-term incentive plan is subject to obtaining approval by members at a general meeting. Secondly, members have an advisory vote on the remuneration report. As the regulator, the ORR must also confirm that the incentive framework meets the network licence conditions.
The remuneration committee has considered Network Rail’s position in comparison to other companies and has concluded that for remuneration purposes it should be positioned slightly above public interest comparators because of the significant safety responsibilities, but at the lower end of private sector comparators because of the absence of equity pressures. This is explained in more detail in section 3a.
From next year, in line with listed companies, Network Rail will report under the new reporting framework which is currently being finalised by the Department for Business, Innovation and Skills (BIS). Under the new reporting framework the company’s remuneration policy will need to be formally approved by members and, following adoption, payments outside of the policy will not be made without seeking further approval from members.
The committee is committed to ongoing dialogue with key stakeholders, as outlined in the section below.
The chart shows member voting on the 2011/12 directors’ remuneration report at the 2012 AGM.
During 2012/13 there was a comprehensive review of how the committee should engage with members and other stakeholders including the ORR and funders, the Department for Transport and Transport for Scotland. Following this review there has been significant ongoing engagement with all key stakeholders. This approach reflects the committee’s commitment to transparent dialogue on executive remuneration issues in the context of the safety and business performance and strategic priorities.
During the year representatives from the committee and the company have attended three members workshops to discuss the principles behind executive remuneration in Network Rail, the design of long-term incentive arrangements, the performance measures used and outcome of incentive plans that have vested. In addition a new sub-group of members, the people engagement group, met twice during the year. This group discusses a range of people-related issues in greater depth including executive remuneration.
There are regular discussions with the ORR in relation to incentives for executive directors to ensure that the incentive plans, both short and long term, meet the licensing condition.
In addition there are meetings during the year with our principal funders to discuss incentive arrangements.
Further information in relation to the remuneration committee:
Membership of the remuneration committee
Graham Eccles – chair from 19 June 2012Mike FirthMichael O’Higgins (from 21 November 2012)Richard Parry-Jones
Terms of reference
The terms of reference for all board committees.
In carrying out its responsibilities, the committee seeks independent external advice as necessary.
For the first part of the year, Hewitt New Bridge Street provided advice in relation to executive remuneration.
During the year the committee undertook a tendering process for advisers and appointed Deloitte LLP to provide independent advice on matters under consideration by the committee. The committee is comfortable that the Deloitte engagement partner and team provide objective and independent remuneration advice to the committee and do not have any connections with Network Rail that may impair their independence. Deloitte is a founding member of the Remuneration Consultants Group and voluntarily operates under the code of conduct in relation to executive remuneration consulting in the UK. The code of conduct can be found at www.remunerationconsultantsgroup.com.
The principles of the remuneration policy are designed to be linked to the overall business strategy. The core principles are:
The remuneration framework must also satisfy the requirements of the licence agreement.
When making decisions on remuneration for executive directors, the committee takes into account pay and conditions across the rest of the company. The principles behind the remuneration packages for executive directors are consistent with those applied to other employees:
Securing the right talent to lead Network Rail is hugely important for the rail industry and its stakeholders. Network Rail is a business of significant scale and complexity and it requires individuals of the highest calibre to successfully lead such a business.
Remuneration packages need to be competitive and credible when trying to compete for top talent.
Market data is one point of reference for the committee when making judgements on the right level of executive pay. During the year the committee, with members, reviewed where Network Rail is positioned against external market data.
As occurs for any role within Network Rail, the objective is to consider market data which is relevant to the role in question, reflects the skills and experience required, and the nature of the organisation. The committee takes this approach for the executive directors.
Network Rail is a commercial business competing in the same talent markets as other commercial businesses. The committee therefore considers market data from large commercial organisations of a similar scale and which face similar operational challenges. However, the committee also recognises that a key difference between Network Rail and other commercial organisations is the absence of equity pressures due to the nature of its funding.
Network Rail is also publicly funded and has a strong element of public interest including safety responsibilities. The committee therefore considered also market data from a number of public or quasi public organisations.
During the year the committee undertook an in depth review of market data and positioning. The committee’s conclusion, which was shared with members, was that Network Rail is, and should be, positioned appropriately between these two markets, reflecting the nature of Network Rail’s operations and public characteristics.
This section sets out the remuneration policy for executive directors in 2013/14.
Alignment of short-term business performance and reward while ensuring value for money to funders
Corporate measures are aligned through the organisation and apply to executive directors and other employees
In accordance with the principles outlined by the ORR
Satisfies requirements of licence agreement
For 2012/13 and 2013/14 there are seven performance measures which have been selected to give a balanced measurement of business performance:
For each measure, stretching targets are set at the start of the year and performance is measured at the end of the performance year and, if appropriate, the committee has discretion to adjust based on a range of factors including the ORR’s annual assessment of Network Rail’s performance, and reports from the audit, risk and safety, health and environment committees.
Freight performance was added in 2012/13 as a separate measure
Previously part of overall passenger performance
Alignment of the outperformance key long-term performance measures for our stakeholders with reward for executives
In accordance with the principles outlined by the ORR
Designed on the basis of best practice principles
The 2012-15 LTIP is subject to performance measured over a three-year period up to 31 March 2015
Three performance measures:
Clawback provision where the committee can reduce or cancel an award in certain circumstances
Underpins as a safeguard for a balanced approach to measuring performance
In line with other senior management roles, executive directors are entitled to a car allowance, private healthcare and bi-annual health assessments
All employees are eligible for discounted rail travel and life insurance
There are three occupational pension schemes. All employees are eligible to participate on the same terms. Two are defined benefit, the other is a defined contribution scheme.
Executives participate subject to a notional pensions earnings cap and receive a cash allowance or additional company contribution above the cap
Accrual rate of 1/60th in the defined benefit schemes
Under the defined contribution plan the company matches the employee contribution, plus three per cent up to a maximum company contribution of seven per cent of base salary
For members of the retirement pension scheme two changes were made to make it more sustainable and affordable for both members and the Company:
In 2012/13, performance related retention payments were awarded to three executive directors (see Retention awards further down this page). These awards were specific to the particular circumstances at the time of award and the use of retention payments does not form part of the overall remuneration policy looking forward.
The individual components are discussed in more detail in the following sections.
Fixed pay comprises salary, benefits and pension and is set at an appropriate level to attract individuals with the calibre and experience needed to lead a business of the scale and complexity of Network Rail.
The base salaries of the executive directors are reviewed annually on 1 July. Following the 2013 review, it was determined that salaries will be increased by 2.5 per cent. With effect from 1 July 2013 the base salaries will be as follows:
The benefits for executive directors are aligned to other senior managers and include private medical cover, car allowance, life insurance and travel subsidy. There are no changes to benefits for executive directors in 2013/14.
Executive directors participate in one of our three occupational pension schemes: the Network Rail section of the Railway Pension Scheme (RPS), Network Rail CARE Pension Scheme (CARE) and Network Rail Defined Contribution Pension Scheme (NRDC). Benefit accrues at a rate of one-sixtieth of capped final pensionable pay (RPS) or capped average pensionable pay (CARE) for each year of membership. NRDC provides benefits on a money purchase basis. Executive directors contribute at the same rate as other members of the respective scheme. In addition, some directors are entitled to either additional money purchase pension benefits that are provided through the NRDC scheme or an additional cash allowance as detailed in the table remuneration paid to directors in respect of the financial year to 31 March 2013.
Following the latest actuarial valuation, changes were made to the RPS to make it more sustainable and affordable both for members and the company. Firstly, a new set of terms, known as RPS65, was introduced for those joining the scheme on or after 1 July 2012 and existing members who chose to switch on that date. Secondly, for all members pensionable salaries are now capped by the annual increase in the RPI plus 0.5 per cent, including those remaining on existing terms, now known as RPS60.
In normal circumstances, the earliest age at which members are entitled to receive their defined benefit pension without actuarial reduction is age 60 for those on RPS60 terms or age 65 for RPS65 and CARE scheme members. However, the directors can retire early on the same terms and conditions that apply to other members of the respective scheme from the age of 55 or in some cases age 50 in RPS60. Directors who are either in the CARE scheme or on RPS65 terms may retire early from age 55 and the pension is then subject to cost neutral early retirement terms. In the NRDC scheme, Directors can retire early from age 55 on the same terms and conditions that apply to other NRDC members. As NRDC benefits are provided on a money purchase basis, actuarial reduction factors are not applicable.
Incentives are an important feature of Network Rail’s remuneration, and indeed are a licence condition. They allow the business to target, reward and recognise exceptional performance for stakeholders. We therefore propose to continue to use incentive arrangements which measure performance over both short and long term.
The performance related element the annual incentive plan (AIP) and the long-term incentive plan (LTIP), ensure an appropriate balance between rewarding annual operational performance and long-term performance for stakeholders.
Performance related remuneration
For both the AIP and the LTIP, any payout requires the delivery of performance for stakeholders against stretching targets set at the time the awards are made (and assessed by the committee after the relevant performance period has ended). As shown below, the performance measures reflect the areas which Network Rail stakeholders are interested in, such as financial performance, train performance or expansion of capacity. The AIP and LTIP are designed to be simple and transparent, and drawing on key features of best practice in the listed environment.
The AIP remains unchanged for 2013/14.
A new LTIP is being proposed for the performance period 2012-15. This has been the subject of consultation with members and will be put to members and other stakeholders for formal approval at the AGM in 2013.
The AIP provides an opportunity to reward performance against a balanced scorecard of seven operational measures in areas that are key to our stakeholders and the success of Network Rail.
Any payment due is based on performance against stretching targets in each area. The measures, weightings and targets for 2013/14 are described in the table below.
The ORR has confirmed that the framework satisfies the licence agreement.
There were no changes for 2013/14 in respect of the structure, measures, proportion of measures and maximum bonus that can be achieved for executive directors.
The maximum opportunity will continue to be 60 per cent of salary, requiring exceptional levels of performance under each measure. A payment of 30 per cent of salary would be payable for achieving performance above expectations. This maximum opportunity was reduced in 2012/13 from the previous maximum of 100 per cent.
The committee has an overriding discretion to adjust payments to take account of overall business performance, including safety performance. In the event of a catastrophic accident for which Network Rail was culpable no annual bonus would be payable to any executive director.
The LTIP provides alignment between long-term performance for stakeholders and reward for management. There is no reward for failure.
The LTIP will be based on performance in the three years to 31 March 2015. It has been developed by the committee incorporating features of best practice drawn from incentive design in the listed environment and is subject to consultation with members. The plan is subject to formal approval by members at the 2013 AGM.
The LTIP is required under the terms of the licence agreement. The ORR has confirmed the LTIP meets the requirements of the licence agreement.
Payouts under the LTIP will be subject to performance against targets in three key areas, all of which have been identified as key areas for stakeholders. This is a simple, well-balanced framework, fully aligned with stakeholders.
Payouts are scaled to performance, using the following stretching targets for each measure:
As the plan spans two control periods, the targets will be subject to verification once the determination has been published and targets for the period in CP5 that this plan covers have been finalised.
The committee’s policy is to make awards under the LTIP on an annual basis, in line with practice in the commercial environment (where ‘rolling’ awards of this kind are encouraged by best practice principles). The maximum annual award for executive directors under the 2012-15 LTIP is 100 per cent of salary.
This LTIP is based on both operational and financial performance. Both are important to Network Rail and our stakeholders. Therefore the LTIP will use two underpins and the committee will retain discretion to made a suitable downward adjustment to vesting levels if the underpins are not satisfied. This is to provide a safeguard such that performance in one area must not be achieved at the expense of the other.
Another new proposal is the introduction of a clawback provision in line with best practice in the listed environment. This will give the committee discretion to reduce or cancel an award at any time before vesting, if circumstances are considered appropriate. These include:
Leavers will generally not be eligible for a payment unless they leave by reason of disability, injury, ill health, death in service, redundancy or retirement. In these circumstances the committee has the discretion to measure performance over a shorter period and make payments where considered appropriate.
Current service agreements:
* Previously held the position of non-executive director from 1 April 2010 to 31 January 2011.** Previously held other senior executive positions under an earlier employment contract.
The key features are:
Six months from the company, other than Simon Kirby who has a notice period from the company of 12 months
Six months from the executive director
Each agreement contains an express provision requiring the departing executive director to mitigate their loss. Network Rail would have regard to that duty and contractual requirement on a case by case basis when assessing the appropriate level of compensation which may be payable, including using phased payments
The chief executive’s agreement contains provisions for termination of his appointment without compensation upon the occurrence of certain significant financial failures of the group unless a majority board of the company and the Department for Transport (in its role as provider of credit facilities) decide that this appointment should not be terminated
This section provides details of remuneration in respect of 2012/13 and, as described below, in respect of previous years.
Summary table of 2012/13 decisions made
No LTIP was awarded in 2010 and therefore there was no LTIP vesting in respect of performance in 2012/13
However, as disclosed last year, the committee undertook to review performance of the 2009 LTIP which vested in respect of performance in the three years to March 2012. Following consultation with members, the following was agreed:
Achievement in excess of the maximum for the performance condition. However, the committee decided to scale back payment resulting in an 80 per cent vesting figure, which is subject to final verification by the ORR
To reflect this, payments are being phased with 48 per cent of salary being paid in 2012/13 and any balance that may be due to be paid out in 2014
As disclosed in last year’s remuneration report, the maximum award in 2012/13 was 60 per cent of salary, reduced from 100 per cent in previous years.
The bonus structure and achievement for 2012/13 was:
1Cost efficiency is the annual cost of Network Rail, normalised by capacity provided and adjusted by renewals activity and compared to base year.2Asset stewardship indicator measures the quality of Network Rail’s asset stewardship based on asset condition, reliability and performance.3Progress on infrastructure projects is measured through reports against achievement of key milestones for the year.4Passenger performance measures the percentage of trains arriving on time.5Passenger satisfaction with rail travel is measured with rail travel is measured through the National Passenger Survey.6Customer satisfaction is an assessment of how well Network Rail engages with its key customers.7Freight performance measures the percentage of freight trains arriving on time.
Stretching performance targets were set at the beginning of the year in the context of the regulatory targets for CP4.
The committee took account of a range of factors in deciding whether to adjust the overall payment downwards or upwards. These factors included the ORR’s annual assessment of Network Rail’s performance and a report from the safety, health and environment committees.
Performance against measures:
This LTIP was awarded in 2009 to the executive directors at the time. It was approved by members at the 2009 AGM.
As disclosed last year, this LTIP was previously intended to be rolled into the Gainshare Plan. When this plan did not proceed, the committee was required to consider performance against the targets and determine payouts (following member consultation).
The target set in 2009 was based on aggregate FVA in the three-year period to 31 March 2012, which was designed to reward participants for value added savings delivered for taxpayers. The committee was also required to consider overall business performance.
The overall business performance during the three-year period was strong.
This achievement is significantly above the £300m target for maximum LTIP payout.
Although the overall business performance was strong in the period the committee exercised discretion to reduce the payout in two areas, train performance and safety. This reduced the payout from 100 per cent to 80 per cent.
The aggregate LTIP payout to the executive directors represents less than 0.2 per cent of the achieved FVA figure.
The committee was mindful that the final FVA figure for the performance period could not be verified by the ORR until the end of CP4. It therefore made the decision to make the payments in two phases. The first payment was made in 2013, during the 2012/13 tax year.
The second payment, where any to be due, would be made is in 2014 to provide a mechanism for any adjustments which may be required following final ORR verification of FVA.
Members were informed of the first payment and there will be further engagement with Members once the ORR have given their final view on FVA for the 2009-12 performance period at the end of CP4.
The committee considered the overall business performance during the period and concluded that it was strong
The committee also took into account the views of the audit committee and the safety, health and environment committee in considering performance
The committee exercised discretion to reduce award by 20 per cent in total
This resulted in an overall payout of 80 per cent
As disclosed last year, performance related retention awards were made to three executive directors where the committee had concerns about retention.
A decision was made to make a one-off award to Robin Gisby, Patrick Butcher and Simon Kirby to reflect both the retention risks and the increased responsibilities for these three directors as a result of restructuring.
These one-off awards were approved by members at the 2012 AGM and will payout in 2014 subject to individual performance assessment.
Non-executive directors do not receive benefits or participate in incentives from the company or the Network Rail group
Graham Eccles receives a pension from the industry-wide Railway Pension Scheme, but this pension is not associated with Network Rail and is from his previous employment within the rail industry
Varying dependent on board and board committee duties but in general terms estimated to comprise as a minimum per annum*:
* Excluding induction phase.** Each of these are anticipated to require preparation time of up to one day per meeting.
Fees are reviewed bi-annually and, with the exception of the fee for the chairman (which is determined by the committee), are set by the executive directors to attract individuals with the appropriate range of skills and experience. In determining the level of fees their duties and responsibilities are considered, together with the level of time commitment required in preparing for and attending meetings.
The fees were last reviewed in January 2011 and no increase in base fees or committee chair fees were awarded. The fees are currently under review and any change will be detailed in the 2014 remuneration report.
The group is supportive of executive directors who wish to take on a non-executive directorship in order to broaden their experience and enhance their contribution to the company. Executive directors are normally required to seek approval from the committee to retain any fees they receive in respect of such appointments.
David Higgins is currently a non-executive director of Sirius Minerals plc and received fees of £25,000 during the year. He is also a non-executive director of the Rail Safety and Standards Board. Patrick Butcher is a member of the British Transport Policy Authority. No fees are received by them for these positions.
The company has no listed shares and therefore total shareholder return cannot be illustrated.
The table below sets out the remuneration paid to directors in respect of the financial year to 31 March 2013.
1 Peter Henderson stepped down as the group asset management director at the AGM on 19 July 2012 and the figure above includes payment in lieu of notice.2 Rick Haythornthwaite stepped down as the chairman at the AGM on 19 July 2012.3 Keith Ludeman received a fee of £10,000 per annum as chairman of Network Rail Consulting, which is included in this figure.4 Michael O’Higgins was appointed as a non-executive director on 21 November 2012.5 Richard Parry-Jones was appointed as chairman at the AGM on 19 July 2012.6 Steve Russell stepped down as the senior independent director at the AGM on 19 July 2012.7 Benefits include car allowance, private medical cover, any travel subsidy and life insurance.8 £22,000 relates to supplementary company pension contributions.9 These figures are calculated in accordance with the proposed Department of Business, Innovation and Skills reporting regulations and exclude supplementary pension allowance/ contributions, which are shown in the pension allowance/supplementary company pension contribution column. This information was not included in the 2011/12 annual report.
The table below sets out the interests of directors in relation to long-term incentives.
1 Amount deferred is subject to the ORR final verification of FVA at the end of CP4. Any balance will be paid in 2014.* Subject to member approval at the 2013 AGM.
All awards are made in cash as no shares can be issued. The value realised is included in the overall remuneration table remuneration paid to directors in respect of the financial year to 31 March 2013.
The awards made in 2009 were subject to a performance condition in relation to achievement of FVA. Maximum payout was earned for FVA in excess of £300m. This figure was exceeded, but the remuneration committee reduced the award to an 80 per cent payout to reflect train performance and workforce safety issues during the performance period.
The award for the period 2012-15 is subject to three performance conditions, FVA (50 per cent of the award), train performance, PPM (25 per cent of the award) and capital projects delivery (25 per cent of the award). Full details are disclosed in the relevant section Performance-related remuneration.
The table below contains details of retention awards made which will be paid to executive directors and were approved by members.
The table below shows the accrued pension entitlement from the respective Network Rail pension scheme for each executive director of the company during the year ended 31 March 2013, together with the increases in those benefits during the year, calculated using the accrued benefit basis.
The increases in pension benefits during the year represent the amount of the extra annual pension entitlement earned resulting from additional length of service and/or changes in salary and/or additional contributions in respect of money purchase benefits.
The increase in accrued defined benefit during the year is shown in the table core pension benefits. Values are normally shown before (column A) and after (column B) the effect of inflation. All benefit values shown exclude any additional voluntary contributions made by the director.
The RPS operates a matching additional voluntary contribution facility, whereby voluntary pension contributions paid by scheme members are matched by equivalent payments from the company, up to certain limits. These matching arrangements were frozen for members of the Network Rail section of the RPS at the levels applicable on 3 November 2003 and this limit was applied to directors as to other scheme members (matching is not available for new RPS members with the exception of those transferring in from other RPS sections who may retain previous matching subject to certain conditions).
Directors entitled to an additional pension allowance take this as a cash salary supplement, subject in some cases to an adjustment for National Insurance contributions; alternatively, directors may opt to have the gross payment made to the NRDC scheme as a pension contribution.
The contributions made during the year together, where appropriate, with contributions in respect of benefits accrued prior to the year under review are shown on remuneration paid to directors in respect of the financial year to 31 March 2013.
Notes1 Pension accruals shown are the amounts which would be paid annually on retirement (or earlier leaving) based on service to the end of the year.2 As in prior years figures in (B) showing inflation adjusted values reflecting the year to 30 September. The inflation adjustment is based on the revaluation method in accordance with the trust deed and rules of each pension scheme. The RPS is subject to increases based on September CPI and therefore a revaluation rate of 2.2 per cent was applied in respect of members of that scheme. The CARE scheme reflects revaluation based on September RPI and therefore a rate of 2.6 per cent was applied in respect of that scheme member.3 Transfer values as at 31 March 2012 (D) and 31 March 2013 (E) have been calculated in accordance with ‘The Occupational Pension Schemes (Transfer Values) (Amendment) Regulations 2008’.4 The change in the transfer value (F) includes the effects of fluctuations in the transfer value due to factors beyond the control of the company and directors, such as stock market movements.It is calculated after deducting the director’s contribution.5 The value of net increase (G) represents the incremental value to the director of their service during the year, calculated on the assumption that service terminated at the year end. It is based on the accrued pension increase (B) after deducting the director’s contribution.6 The NRDC scheme member does not have an accrued pension as this only applies to defined benefit schemes and therefore only the employer pension contribution is shown (G) based on seven per cent of pensionable salary up to the notional earnings cap (£137,400 for all four weekly pay periods).7 The company operates a SMART arrangement whereby, for participating employees, the employee member’s normal contributions are paid by the company and the employee member’s pensionable pay is reduced accordingly. For the purposes of these disclosures any SMART contributions have been treated as employee member contributions on a notional basis.
This report has been prepared in accordance with the Directors’ Remuneration Regulations 2008, UK Corporate Governance Code and the Companies Act 2006.
The annual bonus and the long-term incentive plan combined meet the network licence condition to have appropriate performance-related pay schemes in place.
Graham EcclesChairman,Remuneration committee5 June 2013
This report covers the fourth year of Control Period 4, the five year regulatory settlement running to 2014.