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  • Directors' remuneration report

  • Contents

    1. Statement from remuneration committee chairman 

    2. Unaudited information
      Governance 
      1. Determining executive pay 
      2. Voting on directors’ remuneration report 
      3. Engaging with stakeholders 
      4. Agenda items 
      5. Remuneration committee 
       
    3. Executive director remuneration policy
      1. Principles of the remuneration policy 
      2. Remuneration policy for 2013/14 
      3. Fixed remuneration 
      4. Performance-related remuneration 
      5. Service agreements 
       

    4. Executive director remuneration in 2012/13
      1. Annual incentive plan 
      2. Long-term incentive plan 2009-12 
       

    5. Other information
      1. Non-executive directors 
      2. Outside appointments 
       

    6. Audited information
      1. Total remuneration 
      2. Directors’ interests 
      3. Pension benefits 
       

    Directors’ remuneration report (PDF 160 kB)

    1. Statement from remuneration committee chairman

    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:

    • Aligning pay with performance
    • No reward for failure
    • Performance measurement strikes a balance between improving efficiency, the quality of the railway network and saving money for tax payers
    • Safety of the workforce, passengers and the general public remains paramount.

    Pay for performance

    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:

    • Passenger satisfaction reached a record high – 85 per cent
    • Passenger numbers reached 1.5bn for the first time since the 1920s
    • 95 per cent of passengers felt that rail travel during the Olympics had exceeded or met their expectations
    • £4.4bn worth of work on almost 2,000 projects aimed at improving and expanding the railway
    • 201 bridges were renewed and rebuilt
    • 940 miles of track were replaced
    • Almost 91 per cent of trains for the 12 months ran to time, but below the targets set by the ORR
    • Significant improvement in customer (passenger and freight operators) satisfaction.

    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.

    Looking ahead

    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 Eccles

    Chairman
    Remuneration committee
    5 June 2013

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    2. Unaudited information

    Governance

    2a. Who is responsible for determining executive pay at Network Rail?

    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.

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    How did members vote on the 2011/12 directors’ remuneration report?

    The chart shows member voting on the 2011/12 directors’ remuneration report at the 2012 AGM. 
     

    The chart shows member voting on the 2011/12 directors’ remuneration report at the 2012 AGM. 95.5% voted for and 4.4% voted against.

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    How does the committee engage with stakeholders?

    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.

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    What were the key remuneration committee agenda items during the year?

    Month Agenda items
    April 2012
    • Executive pay
    • Incentive schemes
    • BIS consultation
     
    May 2012
    • 2011/12 annual incentive plan out-turn proposals
    • 2009-12 long-term incentive plan out-turn proposals
     
    June 2012
    • External advisers to the committee
     
    September 2012
    • Summary of the remuneration cycle
    • Role of committee advisers
    • 2012/13 annual incentive plan
    • 2012-15 long-term incentive plan design
     
    November 2012
    • Benchmarking approach and data for executive directors
    • 2012/13 annual incentive plan – updates from discussions with the ORR
    • 2012-15 long-term incentive plan – initial proposals for discussion
    • CP5 incentives – potential principles
    • BIS proposals and potential impact
     
    January 2013
    • Principles for framework of CP5 incentives
    • Presentation on financial value added (FVA) and how it is used in incentives
    • 2012-15 long-term incentive plan – proposals
     
    February 2013
    • 2012-15 long-term incentive plan final documentation
    • Engagement/approval plan for the AGM
     
    March 2013 Approvals process and timings in relation to 2013 AGM

    Further information in relation to the remuneration committee:

    Subject Information

    Membership of the remuneration committee

    Graham Eccles – chair from 19 June 2012
    Mike Firth
    Michael O’Higgins (from 21 November 2012)
    Richard Parry-Jones

    Terms of reference

    The terms of reference for all board committees.
     

    External advisers

    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.

    Internal advisers
    • The group general counsel is secretary to the committee
    • The chief executive attends meetings at the invitation of the committee. He is not present when his own remuneration is being discussed
    • The committee is also supported by the director, human resources, head of reward and benefits and deputy company secretary.
     
    Number of meetings Eight meetings were held during the year.

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    3a. What are the principles of the remuneration policy?

    The principles of the remuneration policy are designed to be linked to the overall business strategy. The core principles are:

    • Alignment between performance and reward. We believe that exceptional performance delivered for our stakeholders should be rewarded, and there should be no reward for failure. Network Rail needs to deliver performance to all of our stakeholders, including trains running on time, expanding the network, managing the assets of the network and delivering financial savings for taxpayers. Our philosophy is to have incentives that pay for delivering performance in the areas that matter to our stakeholders
    • Safety of the workforce, passengers and the general public remains the paramount consideration. We believe that it is not appropriate to include safety as a specific performance measure. The executive directors already treat safety matters as the priority as they strive to continuously improve performance in this area. Nevertheless the remuneration committee retains a wide discretion to adjust any award downwards for poor safety performance, particularly in the case of a catastrophic accident for which Network Rail was found to be culpable
    • Attracting the calibre of individual that we need, while at the same time ensuring value for money to our funders. Network Rail is a business of considerable size, scale and complexity. This type of business needs leaders of the highest calibre and it is crucial to the success of the railway that we can attract and retain such individuals. We also need to ensure value for money. Having incentives allows us to create a competitive remuneration package, but one that gives value for money by only paying out for delivery of exceptional performance
    • Our policies are consistent with best practice in commercial organisations. Network Rail as a business is run in a way that is consistent with the best practice for commercial organisations, irrespective of their funding model. Our licence agreement requires us to include incentives in the remuneration package and to consider best practice
    • Strategic alignment. Our longer term business strategy for CP5 in 2014 and beyond has recently been outlined in the strategic business plan documents. During the 2012/13 financial year, the committee has been reviewing the remuneration arrangements for executive directors in the context of the overall business objectives. The structure of the annual incentive arrangements (AIP) and the longer term incentives (LTIP) reflect what is important to the business in terms of performance.

    The remuneration framework must also satisfy the requirements of the licence agreement.

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    How does the remuneration for executive directors compare with arrangements for other employees?

    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:

    • Base pay increases for executive directors take into account the average managerial salary increase, which was three per cent in 2012. Base salary increase for front line employees was 3.5 per cent effective from 1 January 2013
    • Employees across the company are eligible to participate in an annual bonus. The corporate element of the bonus scheme has the same measures and targets for all participants, including executive directors, incentivising the achievement of shared, company-wide objectives for all
    • There are three occupational pension schemes. All employees are eligible to participate on the same terms.

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    How is pay positioned against the market?

    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.

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    3b. What are the remuneration policy details for 2013/14?

    This section sets out the remuneration policy for executive directors in 2013/14.

    Summary of remuneration policy
    Remuneration element Purpose and link to strategy and performance measures Details and performance measures Quantum Changes in the year
    Base salary To deliver the strategy, reflect the calibre of individual needed for the role Reviewed annually on 1 July

    Salary awards for executive directors take into account the average managerial salary increase
    Salary increases for executive directors take into account a range of factors including the average managerial salary increases A three per cent increase on 1 July 2012, in line with other management pay awards

    Details of salary levels for executive directors are set out in the base salary section below
    Annual incentive plan (AIP)

    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:

    1. Passenger performance (27%)
    2. Freight performance (3%)
    3. Asset stewardship indicator (20%)
    4. Cost efficiency (10%)
    5. Passenger satisfaction (10%)
    6. Customer satisfaction (10%)
    7. Progress on infrastructure projects (10%)

    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.

    Scale of 0 per cent - 60 per cent of salary at maximum. Payment of 30 per cent of salary for performance above expectations

    Freight performance was added in 2012/13 as a separate measure

    Previously part of overall passenger performance

    Long-term incentive plan (LTIP)

    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:

    1. Delivering incremental savings (FVA) (50%)
    2. Train performance (PPM) (25%)
    3. Capital projects milestones (25%)

    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

    Maximum annual award of 100 per cent of salary over the life of the LTIP New policy proposed for the period 2012-15 and subject to member approval at the 2013 AGM
    Benefits To help recruit and retain the right calibre of people

    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

    Market competitive No changes
    Pension To help recruit and retain the right calibre of people

    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:

    1. Pensionable pay is now capped by RPI plus 0.5 per cent
    2. A new set of terms were introduced for those joining the scheme on or after 1 July 2012 and existing members who chose to switch
     

    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.

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  • 3c. Fixed remuneration 2013/14

    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.

    Base salaries 2013/14

    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:
     

      1 July 2012 1 July 2013
    David Higgins £577,000 £591,425
    Patrick Butcher £394,000 £403,850
    Robin Gisby £371,000 £380,275
    Simon Kirby £371,000 £380,275
    Paul Plummer £348,000 £356,700
    Benefits 2013/14

    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.

    Pension 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.

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    3d. Performance-related remuneration 2013/14

    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 

    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.The AIP is measured over one year against a balanced score card of key operational metrics. The LTIP measures long-term performance over 3 years against primary financial and operational metrics.

    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.

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    Annual incentive plan 2013/14

    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.
     

      Weighting Start of taper 2013-14 target Maximum target
    Public performance measure
    measures the percentage of trains arriving on time
    27% 90.9% 92.0% 92.5%
    Freight performance measure
    measures the percentage of freight trains arriving on time
    3% 74.1% 74.9% 77.0%
    Asset stewardship
    indicator measures the quality of Network Rail’s asset stewardship based on asset condition, reliability and performance
    20% 0.093 0.111 0.123
    Cost efficiency
    the annual cost of Network Rail, normalised by capacity provided and adjusted by renewals activity and compared to base year
    20% 17.0% 21.0% 23.0%
    Passenger satisfaction
    is measured through the National Passenger Survey
    10% 84.3% 84.3% 84.6%
    Customer satisfaction
    is an assessment of how well Network Rail engages with its key customers
    10% Discretionary    
    Investment milestones
    Progress on infrastructure projects is measured through reports against achievement of key milestones during the year
    10% Discretionary    

    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.

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    Long-term incentive plan 2012-15

    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.

    Long-term incentive plan
    Financial value add (FVA) Reflects the extent to which Network Rail outperforms the ORR’s income and expenditure determination and is a key measure of the savings delivered for taxpayers 50%
    Passenger performance (PPM) Measures the extent to which trains arrive on time and is a key measure for users of the railway network 25%
    Projects This measures the delivery of capital and expansion projects ensuring the ability to operate effectively in the future 25%

    Payouts are scaled to performance, using the following stretching targets for each measure:

      % of maximum Cumulative FVA 50% of award PPM moving annual average 25% of award Project milestones 25% of award
    Performance above expectations 25% £75m 92.5% Delivery above expectations
    Exceptional performance 100% £450m or above 93.0% or above Exceptional delivery

    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.

    Measure Underpin
    Operational measures (PPM and milestones) Subject to a positive cumulative FVA over the period
    Financial measure (FVA) Subject to the committee’s assessment that key regulatory outputs have been sufficiently delivered

    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:

    • Gross misconduct
    • A material misstatement of the company’s audited results
    • An unacceptable level of safety performance. In the event of a catastrophic accident for which Network Rail was culpable, no LTIP would normally be payable to any Network Rail executive director
    • A material failure of risk management
    • A failure to comply with obligations set out in applicable contractual agreements
    • Serious reputational damage to the company as a result of the participant’s misconduct.

    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.

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    3e. What are the terms of the service agreements for executive directors?

    Current service agreements:

    Name Effective date of agreement
    David Higgins* 1 February 2011
    Patrick Butcher 20 April 2009
    Robin Gisby** 1 October 2008
    Simon Kirby** 1 October 2008
    Paul Plummer** 1 October 2008

    * 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:

    Feature Detail
    Notice period

    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

    Termination provisions

    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

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    4. What was the director’s remuneration in 2012/13?

    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 

    Base salary For salary increases with effect from 1 July 2012, a three per cent increase in line with the pot for managerial pay awards
    Annual bonus Achievement of 28.62 per cent of bonus potential, which is 17.17 per cent of salary 
    LTIP (2009-12)

    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

  • 4a. Annual incentive plan 2012/13

    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:

      Below threshold – nil vesting Threshold performance Target Max Achieved Weighting Payout %
    Value through cost savings 
    1 Cost efficiency    16.8% 17.6% 22.3% 17% 20% 2.5%
    Investing in the railway 
    2 Asset stewardship indicator    0.091% 0.107% 0.123% 0.093% 20% 1.3%
    3 Progress on infrastructure projects   1 3 5 4 10% 8%
    Delivering for our passengers 
    4 Passenger performance 90.0% 92% 92.2% 92.5% 90.0% 27% 0%
    5 Passenger satisfaction   83.7% 84% 84.3% 84.3% 10% 10%
    Serving our customers 
    6Customer satisfaction   1 3 5 5 10% 10%
    7Freight performance 74.1% 75.8% 76.4% 77% 74.1% 3% 0%
      Safety – discretionary reduction to outcome 0.9x
      Total vesting  28.6% of max 

    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:

    • Train performance, both freight and passenger was below the threshold for payment this year and as a result, no payment was made in relation to these measures which account for 30 per cent of overall bonus
    • Asset stewardship indicator performance was above threshold and therefore triggered a payment
    • Cost efficiency during the year was above the threshold and a payment was triggered
    • Passenger satisfaction is measured through the National Passenger Survey, commissioned by Passenger Focus, which provides a network-wide picture of passenger’s satisfaction with rail travel. Passenger satisfaction during the year was at a record high of 85 per cent, triggering a maximum payment for this measure. This recognised the continued improvement of punctuality, which is the biggest driver of passenger satisfaction. It also recognised significant improvements in a number of Network Rail managed stations, notably King’s Cross and Waterloo, where recent investment is resulting in a much improved passenger experience
    • Customer satisfaction is an assessment of how well Network Rail engages with its key customers, principally passenger and freight operating companies. It is measured by the Customer Satisfaction Survey, carried out by a third party, and takes into account the customer satisfaction achieved in each of the Network Rail routes. All routes had an increase in scores in 2012 compared to 2011, with six having met their overall maximum customer satisfaction target
    • Progress on infrastructure projects is measured through reports against achievement of key milestones for the year. During 201/13 there were almost 2,000 projects aimed at improving and expanding the railway
    • The ORR recognised successes during the year including an increase in both passenger and freight journeys, the national passenger satisfaction level being at the highest level, and customer/train operator satisfaction with Network Rail increasing by 25 per cent from the previous year. The ORR also acknowledged that Network Rail coped well with the transport challenges of the Olympics and cited the evidence of recent European rail study which concluded that the UK rail network is the most improved in Europe over the last two control periods. In addition they commented on the further progress in relation to the safety culture through the development of the health and safety strategy as well as being on course to deliver a substantial programme of enhancements. However, the ORR also felt that some areas of performance during 2012/13 fell short of what is expected or were not consistent enough such as punctuality and passenger performance in England and Wales and the degree of pro-active maintenance and performance against the asset stewardship indicator
    • The committee took into account all of the above factors as well as a report from the safety, health and environment committee in determining the overall level of payout for the year. In addition it considered the success of transport for the Olympics, the successful relocation of the corporate offices to Milton Keynes during the year and workforce safety issues. Taking all of these into account the committee decided to apply discretion and reduce the overall payment by 10 per cent for executive directors to 28.62 per cent of maximum, which equates to 17.17 per cent of salary for executive directors.

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    4b. LTIP 2009-12

    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.

    • A reduction in the cost of running the railway by £1.6bn against 2008/09 levels
    • £698m reported FVA
    • Passenger journeys rose by 13 per cent
    • Passengers arriving on time rose by 13 per cent
    • Freight traffic rose by 10 per cent
    • Over 6,000 projects worth £12bn were completed, including landmark projects such as King’s Cross
    • The UK has been recognised as having made the most progress in improving its railway infrastructure of any country in Europe (European Commission report 2013)
    • £152m has already been returned to the Government.

    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.

    Summary of 2009-12 LTIP terms
    Performance period Three years, 31 March 2009 – 2012
    Performance targets FVA achievement
    £(300)m for 0 per cent payment
    £300m for maximum payment
    Remuneration Committee discretion

    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

    1. A reduction of 10 per cent for safety-related matters including workforce safety, level crossing safety and enforcement notices – taking into account the views of the safety, health and environment committee.
    2. A reduction of 10 per cent to reflect train performance in the period. Although significant improvements were achieved, train performance targets were not met

    This resulted in an overall payout of 80 per cent

    Achievement against targets £698m reported FVA
    Retention awards

    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.

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    5. Other information

    5a. What are the terms of non-executive directors’ appointments?

    Provision Policy
    Period of appointment Three-year term which can be extended by mutual consent
    Termination without compensation By the director or the company giving the other six months’ written notice
    Fees As described below
    Benefits, pension and incentives

    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

    Expenses Reimbursement of expenses reasonably and properly incurred in attending meetings of the board or otherwise in the performance and discharge of their duties and responsibilities
    Time commitment

    Varying dependent on board and board committee duties but in general terms estimated to comprise as a minimum per annum*:

    • Eight board meetings
    • Typically six or more board committee meetings (depends on committee membership)**
    • Three stakeholder relationship events
    • One board strategy day**
    • One AGM
    • Two members’ workshops/meetings**
    • Three non-executive director only meetings
     

    * Excluding induction phase.
    ** Each of these are anticipated to require preparation time of up to one day per meeting.

    What is the policy on non-executive directors’ fees?

    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.

    Annual fees for non-executive directors as at 31 March 2013
      Committee chairmanship
      Board membership £ Senior independent director £ Safety, health and environment £ Remuneration £ Policy and performance  £ Audit and risk  £ Treasury £
    Malcolm Brinded 50,000            
    Graham Eccles 50,000     10,000      
    Mike Firth 50,000           6,000
    Lawrie Haynes 50,000   10,000        
    Janis Kong 50,000            
    Keith Ludeman 50,000 9,000     10,000    
    Michael O’Higgins 50,000            
    Richard Parry-Jones 250,000            
    Bridget Rosewell 50,000         10,000  

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    5b. What is the policy on executive directors holding outside appointments?

    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.

    Performance graph

    The company has no listed shares and therefore total shareholder return cannot be illustrated.

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    6. Audited section

    6a. Total remuneration

    The table below sets out the remuneration paid to directors in respect of the financial year to 31 March 2013.

    Director Base salary/fees £000 Benefits7 £000 Pension allowance/ supplementary company pension contribution £000 Pension9 £000 Incentives £000 Total £000
      2012/13 2011/12 2012/13 2011/12 2012/13 2011/12 2012/13 2011/12 2012/13 2011/12 2012/13 2011/12
    David Higgins
    (executive)
    573 560 15 15 1668  161 10 9 99 - 863 745
    Patrick Butcher
    (executive)
    391 382 15 15 110 108 43 45 236 - 795 550
    Robin Gisby
    (executive)
    368 360 15 15 104 102 69 40 222 - 778 517
    Peter Henderson1
    (executive) 
    321 440 5 14 33 110 29 41 211 - 598 605
    Simon Kirby
    (executive)
    368 360 15 15 104 102 59 41 222 - 768 518
    Paul Plummer
    (executive)
    346 338 21 15 102 95 64 41 209 - 742 489
    Malcolm Brinded
    (non-executive)
    50 50 - - - - - - - - 50 50
    Graham Eccles
    (non-executive)
    57 50 - - - - - - - - 57 50
    Mike Firth
    (non-executive)
    59 66 - - - - - - - - 59 66
    Lawrie Haynes
    (non-executive)
    60 60 - - - - - - - - 60 60
    Rick Haythornthwaite2
    (non-executive) 
    76 250 - - - - - - - - 76 250
    Janis Kong
    (non-executive)
    50 50 - - - - - - - - 50 50
    Keith Ludeman3
    (non-executive) 
    66 37 - - - - - - - - 66 37
    Michael O’Higgins4
    (non-executive) 
    18 - - - - - - - - - 18 -
    Richard Parry-Jones5
    (non-executive) 
    174 1 - - - - - - - - 174 1
    Bridget Rosewell
    (non-executive)
    60 60 - - - - - - - - 60 60
    Steve Russell6
    (non-executive) 
    23 69 - - - - - - - - 23 69

    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.

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    6b. Long-term incentives

    The table below sets out the interests of directors in relation to long-term incentives.

    Name Date of award Performance period Maximum value on the date of the award £000 Date of release Value realised Deferred amount1
    David Higgins 2012* 2012-2015 577 2015 -  
    Patrick Butcher 2009 2009-2012 350 05/04/13 168 112
    Patrick Butcher 2012* 2012-2015 395 2015 - -
    Robin Gisby 2009 2009-2012 330 05/04/13 158 106
    Robin Gisby 2012* 2012-2015 371 2015 - -
    Peter Henderson 2009 2009-2012 440 19/07/12 211 141
    Simon Kirby 2009 2009-2012 330 05/04/13 158 106
    Simon Kirby 2012* 2012-2015 371 2015 - -
    Paul Plummer 2009 2009-2012 310 05/04/13 149 99
    Paul Plummer 2012* 2012-2015 338 2015 - -

    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.

    Retention awards

    The table below contains details of retention awards made which will be paid to executive directors and were approved by members.

      Year of award Maximum value on the date of the award £000 Date of release
    Patrick Butcher 2012 300 04/14
    Robin Gisby 2012 300 04/14
    Simon Kirby 2012 300 04/14

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    6c. Pensions

    Core pension benefits

    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).

    Additional pension benefits

    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.

    Core pension benefits

      Gross increase in accrued occupational pension £ (A) Increase in accrued occupational pension net of inflation £ (B) Total accrued occupational pension at 31 March 2013 £ (C) Transfer value of accrued occupational pension at 31 March 2012 £ (D) Transfer value of accrued occupational pension at 31 March 2013 £ (E) Total change in transfer value during period £ (F) Value of net increase in accrual over period £ (G)
    David Higgins - - - 41,528 55,173 13,645 8,172
    Patrick Butcher 2,280 2,107 8,962 78,864 113,522 16,833 24,806
    Robin Gisby 4,270 3,546 37,173 532,794 650,202 50,169 105,546
    Peter Henderson 1,923 1,472 22,404 380,863 414,043 23,201 29,173
    Simon Kirby 3,428 3,012 22,335 170,664 209,397 16,376 26,871
    Paul Plummer 3,816 3,258 29,174 225,639 269,419 18,229 31,918

    Notes
    1 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.

    Corporate governance statements

    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 Eccles
    Chairman,
    Remuneration committee
    5 June 2013