Remuneration philosophy

There are three key principles of our approach to executive remuneration.

Align

to our purpose, vision and strategy

Incentivise

great customer service

Create long-term value

for all of our stakeholders

Executive directors' remuneration policy

Elements of executive directors' pay

A significant proportion of executive directors' pay is performance-linked, long-term and remains 'at risk' (i.e. subject to withholding and recovery provisions for a period over which the committee can withhold vesting or recover sums paid):

Fixed vs performance-linked (%)(1)

Fixed 33%

Base salary 26%

Pension and other benefits 7%

Performance-linked 67%

Annual bonus – cash 17%

Annual bonus – shares 17%

Long Term Plan (LTP) 33%

Short-term vs long-term (%)(1)

Short-term 50%

Base salary 26%

Pension and other benefits 7%

Annual bonus – cash 17%

Long-term 50%

Annual bonus – shares 17%

Long Term Plan (LTP) 33%

  1. Based on maximum pay-out scenario for executive directors assuming the normal maximum award level of 130 per cent of salary for the Long Term Plan (LTP).

Pay at risk

Further details on what triggers the withholding and recovery provisions can be found in the Directors' remuneration policy.

Implementation of directors' remuneration policy in 2018/19

The table below summarises the implementation of the directors' remuneration policy for executive directors in 2018/19. For further details see the Annual report on remuneration.

Key elementImplementation of policy in 2018/19
Base salary
  • Salary increase of 2.0 per cent from 1 September 2018 (the general employee base salary increase in 2018 was 3.0 per cent).
Benefits and pension
  • Market competitive benefits package.
  • Cash pension allowance of 22 per cent of base salary.
Annual bonus
  • Maximum opportunity of 130 per cent of base salary.
  • 2018/19 annual bonus outcome of around 79 per cent of maximum.
  • 50 per cent of 2018/19 annual bonus deferred in shares for three years.
  • Withholding and recovery provisions apply.
Long Term Plan
  • Award of 130 per cent of base salary.
  • Estimated long-term incentive vesting of 60 per cent for the performance period 1 April 2016 to 31 March 2019. These awards will vest after an additional two-year holding period.
  • Withholding and recovery provisions apply.
Shareholding guidelines
  • Personal shareholdings for Steve Mogford and Russ Houlden remain above the 200 per cent of salary minimum guideline. Steve Fraser is expected to reach the minimum guideline within five years of his appointment to the board.

Single total figure of remuneration for executive directors for 2018/19

Fixed pay comprises base salary, benefits and pension. There is no share price appreciation attributable to the value of the long-term incentives. Further information on the single figure of remuneration can be seen in the Annual report on remuneration.

Long-term incentives

Annual bonus

Fixed pay

Key performance indicators (KPIs) performance

Annual bonus –
Year ended 31 March 2019
Long Term Plan –
Three years ended 31 March 2019
Underlying operating profit(1)SIM qualitative ranking
versus other WASCs
SIM quantitative scoreWholesale outcome delivery incentive
(ODI) composite
Time, Cost and Quality index (TCQi)Total shareholder return (TSR)(2)Underlying dividend cover(3)SIM ranking versus other water companies(4)
£838.9m4th out of 1069.8£19.2m95.4%2.7%1.225th out of 18

Key:

At or above stretch target

Between threshold and stretch targets

Below threshold target

  1. For the purpose of annual bonus, underlying operating profit excludes infrastructure renewals expenditure and property trading.
  2. Below threshold versus the comparator group. See the Annual report on remuneration for further details.
  3. Average underlying dividend cover over 2016/17, 2017/18 and 2018/19.
  4. The estimated SIM combined score ranking for 2018/19.

Annual bonus and Long Term Plan (LTP) outcomes

The charts below show the results of the performance against targets for the annual bonus and LTP schemes. Further information on the annual bonus can be seen in the Annual report on remuneration which also includes the LTP.

2018/19 Annual bonus outcome

Underlying operating profit

SIM qualitative

SIM quantitative

Wholesale outcome delivery incentive (ODI) composite

TCQi

Personal objectives

Estimated 2016 Long Term Plan (LTP) outcome

Relative total shareholder return (TSR)

Sustainable dividends

Customer service excellence

Aligning our remuneration philosophy to business strategy

Our remuneration philosophy is aligned to our purpose, vision and strategy, thereby incentivising great customer service and the creation of long-term value for all of our stakeholders.

The following table provides a summary of how our incentive framework in 2018/19 aligned with our business strategy and the results that it delivers. Many of the performance measures are key performance indicators (KPIs) for the regulatory period 2015–20 (see How we measure our performance)

Alignment to strategyLink to
strategic themes
A long-term approach to creating sustainable value
Annual bonus
Underlying operating profitKey measure of shareholder value.
Customer service in year(1)
  • Service incentive mechanism – qualitative
  • Service incentive mechanism – quantitative

Delivering the best service to customers is a strategic objective.

Ofwat can apply financial incentives or penalties depending on our customer service performance.

Maintaining and enhancing services for customers
  • Wholesale outcome delivery incentive (ODI) composite
  • Time, cost and quality of the capital programme (TCQi)

Delivering the best service to customers is a strategic objective.

There is a direct financial impact on the company of Ofwat incentives and penalties for delivery/non-delivery of customer promises.

Keeping tight control of our capital programmes ensures we can provide a reliable service to our customers at the lowest sustainable cost.

PersonalFocused on specific areas of individual contribution.
Compulsory deferral of bonusDeferral of part of bonus into shares aligns the interests of executive directors and shareholders.
Long Term Plan (LTP)
Relative total shareholder return (TSR)Direct measure of delivery of shareholder returns, rewarding management for the outperformance of a comparator group of companies.
Sustainable dividendsDirect measure of return to shareholders through dividend payments, while focusing on the creation of strong earnings that ensure the sustainability of dividends.
Customer service excellenceThis is fundamental to delivering our vision of becoming the best UK water and wastewater company. This measure has a direct financial impact on the company as Ofwat can apply financial incentives or penalties depending on our customer service performance.
Additional two-year holding periodEnsures continued alignment with shareholder interests and provides an additional period over which withholding can be applied.
Shareholding guidelinesIt is important that a significant investment is made by each executive director in the shares of the company to provide alignment with shareholder interests.

key:

The best service to customers At the lowest sustainable costIn a responsible manner

  1. As Ofwat transitions from using the service incentive mechanism (SIM) to C-MeX as its primary assessment of customer service, for the 2019/20 annual bonus the two SIM measures will be replaced by measures based on performance related to the new C-MeX approach. See the Annual report on remuneration for details.