I am pleased to present the Remuneration Committee’s report on Directors’ remuneration for the year ended 31 December 2014. This sets out our remuneration policy for the Directors and how our remuneration policy was applied during 2014.
The Group has had another strong year, delivering increased growth in underlying performance, Group operating profit before tax and Group operating return on equity from continuing operations. Furthermore, 2014 has been a pivotal year in the development of the Group as a global investment solutions provider. This development has been accelerated through the acquisition of Ignis and the planned sale of our Canadian business to Manulife which completed on 30 January 2015. The sale of our Canadian business was the most significant of these corporate actions in terms of size.
As a result of the scale of these corporate actions the Remuneration Committee has determined that it is appropriate to restate the financial performance targets for the long-term incentive plans and 2014 annual bonus award to account for the changes in the structure of the Group.
Performance targets
The Remuneration Committee considered that the targets previously set for the long-term incentive plans and 2014 annual bonus plan had become inappropriate for rewarding our executives for the delivery of our goal of driving shareholder value. These targets were based on budgets set, and structures in place, prior to the decisions to proceed with the corporate actions noted above. As such, whilst the Remuneration Committee will continue to drive performance through the existing incentive plans, we have restated the performance targets set for the awards on a plan by plan basis. We have adjusted the targets for the awards made in 2012 and 2013 under the Group Long-Term Incentive Plan (Group LTIP) which are based on Group operating profits in the final year of the three-year performance periods and the targets for the awards made in 2014 under the Standard Life plc Executive Long Term incentive plan (Executive LTIP). We have also adjusted the targets for the 2014 annual bonus scheme. In addition, the awards made in 2012, 2013 and 2014 under the Standard Life Investments Long-Term Incentive Plan (Standard Life Investments LTIP) have been adjusted.
Leading up to and during 2014 the key objective in relation to the sale of the Canadian business, was to seek to maximise shareholder value through aligning actions and decisions to support a possible sale. As a result, the Board determined that certain initiatives and activities which would have positively impacted the Canadian business operating profit, and would have been reflected in the assessment of performance in terms of the incentive plans, should not proceed, as these may have impacted the sales process or the shareholder value to be generated. As a consequence, compared to the Group LTIP target set in 2012, a significant reduction in operating profit for the Canadian business was expected in 2014, and a smaller although still significant reduction was also expected for the Canadian business compared to the 2014 annual bonus targets set in 2013.
In respect of the 2012 Group LTIP awards the Remuneration Committee discussed a number of methods of adjustment, including attempting to restate the targets as if our Canadian business had not been sold, and trying to estimate the impact of the various management actions and business opportunities that did not proceed. However, given the complexity and subjectivity involved in making such adjustments, and with the 2012 target being based only on the profits in 2014, we decided that the most appropriate and transparent methodology for adjustment was to remove the 2014 operating profits of the Canadian business from both the target and the 2014 financial results used to determine the vesting of the 2012 award.
Whilst the principal driver behind the restatement of the targets is the sale of the Canadian business, given the increasing
importance of the Newton Private Client business acquisition (which is now part of Standard Life Wealth); the Ignis acquisition and the joint ventures in delivering our strategy as a global investment solutions provider, we considered it was appropriate to include these businesses in the restated targets at the same time. The restated targets for the 2012 and 2013 Group LTIP will include Ignis and Newton Private Client business. The 2014 Executive LTIP restated targets will include Ignis (the Newton Private Client business was already in the original target). The joint ventures will be included in the restated targets for the 2013 Group LTIP and 2014 Executive LTIP.
In summary, the adjustments made to the 2014 Group operating profit targets and results for the 2012 Group LTIP, which vests in March 2015, are as follows:
• Removal of Canadian business, sold in January 2015
• Inclusion of Ignis, acquired in July 2014
• Inclusion of Newton Private Client business, acquired in September 2013
• Removal of interest income no longer receivable due to Canadian capital restructuring.
In relation to the 2014 Group annual bonus plan the following adjustments have been made to the targets and results:
• Removal of Canadian business, sold in January 2015
• Inclusion of Ignis, acquired in July 2014.
Further details of the adjustments made to the targets for the 2013 Group LTIP and the 2014 Executive LTIP awards and details of the restated Group and Executive LTIP targets are provided on pages 91 to 94.
2. Governance information – Directors’ remuneration continued
In respect of Standard Life Investments, the adjustments made to the targets and results for the 2012 and subsequent Standard Life Investments LTIP awards are as follows:
• Removal of Canadian business, sold in January 2015 (in line with the approach taken for the 2012 Group LTIP)
• Inclusion of Ignis, acquired in July 2014
• Inclusion of Standard Life Wealth, accounted for within Standard Life Investments from January 2014
• Use of earnings before interest, tax, depreciation and amortisation (EBITDA) rather than earnings before interest and tax (EBIT). As a result of the impact on the Standard Life Investments’ balance sheet of the acquisition of Ignis and transfer in of Standard Life Wealth the profit measure has been amended from EBIT to EBITDA as we believe this is more reflective of the day to day performance of the business.
The expected IFRS gain on the sale of the Canadian business will be reflected in non-operating profit and will therefore not be included in the performance assessment of any long-term incentive plan or annual bonus plan.
In determining the adjustments detailed above the Remuneration Committee considers that the restated performance targets will not be materially less difficult to satisfy than the original performance targets.
The Remuneration Committee values the opportunity to listen to our shareholders’ views and is committed to maintaining an open and transparent dialogue with shareholders on executive remuneration. We therefore undertook an extensive consultation exercise with our major institutional shareholders prior to determining the LTIP and bonus plan performance target restatements, involving a number of face to face meetings, to inform our approach.
During the consultation, investors recognised the significant value of the corporate actions undertaken by the Company. They were also largely supportive of the proposed approach to the restatement and acknowledged that other methods of restatement were more complicated and less transparent. There was also an understanding that these are exceptional circumstances in terms of the scale of corporate actions and their impact on targets and value creation for shareholders.
How our remuneration policy was applied in 2014
Given the performance delivered in 2014 relative to the restated 2012 Group LTIP targets, the operating profit measured against the restated 2012 target is above the maximum resulting in 100% vesting of the award. In addition, the Remuneration Committee determined that the awards granted in 2012 under the Standard Life Investments LTIP, measured against the restated targets, should vest at 83.6% of the maximum award.
Before confirming the levels of vesting the Remuneration Committee considered whether it believed that these vesting levels reflected the underlying performance of the Group. As part of these discussions the Remuneration Committee took into account the following indicators of underlying Group performance:
• The strong performance of the remaining portfolio of businesses, principally the UK business and Standard Life Investments, which have delivered against the stretch targets, adjusted as detailed above, which were set for them 3 years ago with significant outperformance of Standard Life Investments against the targets
• As detailed above the Canadian business operating profit has been removed from the Group targets, due to the impact of the sale on the 2014 operating profit numbers. However the Remuneration Committee considered that as an individual business unit over the 3 years to 2014 the Canadian business has contributed aggregate operating profits which exceed the budgets set in 2011 for 2012 to 2014.
• The level of dividends and capital returns to shareholders which since 2010 has been £3.5bn (147p per share) made up of £1.5bn ordinary dividends paid, £0.3bn special dividend paid in 2013 and the approximate £1.75bn return of value proposed from the sale of the Canadian business
• The impact of the sale which is consistent with the Group’s strategic focus on investment solutions and brings a new distribution partnership with Manulife.
Having considered the above factors the Remuneration Committee determined these vesting levels appropriately reflected the performance of the Group, the overall shareholder value delivered to investors and the strategic value created by the sale of the Canadian business.
For purposes of transparency, the Remuneration Committee can confirm that an indicative vesting of approximately 28% would have been achieved for the 2012 Group LTIP based on the original targets, including Canadian business performance, but restated for the acquisitions of Ignis and Newton Private Client, and the Canadian capital restructuring. This indicative vesting level does not consider other factors which have impacted the Canadian results, including management actions and business opportunities which could have been executed in 2014 if the sale process had not commenced. Therefore, as explained above, due to the complexity and subjectivity involved in attempting to restate the targets as if the Canadian operations had not been sold, and the significant strategic shareholder value created by the sale, it was decided that the most appropriate methodology was to remove the 2014 operating profit of the Canadian business from both the target and the 2014 financial results used to determine the vesting of the 2012 award.
As detailed in the circular to shareholders we do not expect to make any adjustment to the number of shares over which
participants have options or awards following the capital reorganisation and it is expected that the return of value and share capital consolidation will achieve a largely neutral position for holders of options.
Reflecting on the strong financial and non-financial performance including the delivery of the strategic objectives, the Remuneration Committee decided to approve payments under the Group annual bonus, for 2014, of 94.86% of the Chief
(134.7% of salary), pro-rated for the period of employment during 2014 and, for the Chief Executive, Standard Life Investments (CE, Standard Life Investments) of 95.5% of his maximum potential bonus (57.3% of salary). In addition, the Remuneration Committee approved a total of 100% of the CE, Standard Life Investments maximum potential bonus (305% of salary) under the Standard Life Investments annual bonus arrangement. The Remuneration Committee reviews the way that the performance has been achieved and receives formal input from the Risk and Capital Committee to assist with its deliberations. This is in order to ensure that the performance has been achieved in a manner consistent with the Group’s risk strategy and is an appropriate reflection of the Group’s performance. The total remuneration in respect of 2014 for the CE is £5,473k, the CFO is £1,305k (for the period from 18 August 2014), and for the CE, Standard Life Investments is £5,272k reflecting the strong performance of the Group. The breakdown is set out on page 87 of this report.
In setting salaries for 2015 for the executive Directors, the Remuneration Committee considered the individual’s skills and
performance; the size, complexity and responsibility of the role and the context of the anticipated salary increases to be awarded to employees across the Group. In recognition of his personal performance, and the typical level of salary increases across Standard Life, the Chief Executive has been awarded a 3.1% increase moving his base salary from £810,000 to £835,000 from 16 March 2015. The salary for the CFO, who joined the group on 18 August 2014, will remain unchanged at £600,000.
In setting the salary for the CE, Standard Life Investments, the Remuneration Committee considered the significant increase in size, complexity and responsibilities of the role, specifically the following:
• The role of Standard Life Investments in the development of a well-diversified global asset management business, which is one of the key growth engines for the group
• The organic growth and significantly expanded international reach of the Standard Life Investments business and growth of Standard Life Investments’ Assets Under Management and third party business
• The inorganic growth of Standard Life Investments with the successful acquisitions of Ignis and the transfer in of Standard Life Wealth and Newton’s private client management businesses into Standard Life Investments which has resulted in the creation of private market, liquid-alternatives and high net worth capabilities alongside the active management platform
• The continued expansion of our global distribution and extension of our global network of strategic partners, John Hancock and Manulife in North America, Sumitomo Trust and HDFC AMC in Asia.
The Remuneration Committee considers that given the above, a base salary adjustment from £450,000 to £500,000 (11.1%) reflects the growth and transformation of Standard Life Investments that has already taken place as well as the increasing importance of Standard Life Investments within the Group.
Remuneration policy
Our remuneration policy report is set out on pages 75 to 86 and we propose that, subject to shareholder approval, the policy is effective from 12 May 2015 – the date of the 2015 Annual General Meeting (AGM).
During 2014 we have reviewed the remuneration policy as it relates specifically to the CE, Standard Life Investments. We are proposing the removal of the discretion for the Remuneration Committee to make an award in excess of the maximum bonus payable under the Standard Life Investments’ company bonus plan in the event that stretch targets are exceeded. We are also introducing additional bonus deferral which will apply to the Standard Life Investments’ personal and company bonuses. Details of the deferral, which will apply to bonuses paid from 2016 onwards, are provided in the Directors’ remuneration policy.
Furthermore, to support our transition to becoming a global investment solutions provider and to create alignment across our most senior leadership population we are proposing, for this population, the application of a consistent long-term incentive arrangement. In order to be able to provide a consistent long–term incentive arrangement across the leadership population two rule changes to the Executive LTIP plan rules are proposed.
Increase in the maximum grant value
In line with the Group’s move towards becoming a global investment solutions provider, the leadership population to be covered by the Executive LTIP may include current participants in the Standard Life Investments LTIP. Currently such participants may receive awards up to 500% of base salary under that plan. In order to accommodate all possible leadership roles within the Executive LTIP a rule change, to increase the maximum award opportunity under the Executive LTIP from 300% to 500%, is proposed. Standard Life Investments’ participants would continue to be subject to Standard Life Investments related performance conditions to maintain their alignment to the performance of that business. Subject to the rule change being approved it is the intention of the Remuneration Committee to grant one award under the Executive LTIP to the CE, Standard Life Investments, instead of the current 200% under each of the Executive LTIP and the Standard Life Investments LTIP. This will be for grants from 2016
onwards. Performance conditions related to the performance of Standard Life Investments will continue to apply to awards made to the CE, Standard Life Investments in addition to Group performance conditions.
The rule change is not intended to result in changes to the overall grant level to participants. We are not changing the quantum of awards made to executive Directors and will not do so without consulting with our major institutional investors.
2. Governance information – Directors’ remuneration continued
Deferral into funds
A rule change to allow for the ability to make awards in the form of Standard Life Investments’ funds as well as over Standard Life plc shares is proposed. The intention behind this rule change is to accommodate any future regulatory change which requires remuneration to be deferred into funds. For the executive Directors, shares will continue to be the preferred deferral vehicle. At the same time as consulting on the restatement of the performance targets with our investors, we also consulted on the proposed rule changes. During the consultation, investors understood and were supportive of the proposed rule changes. A resolution to approve the amended plan rules will be put forward at the 2015 AGM. As a consequence our remuneration policy has been amended and is also subject to a resolution for approval.
I hope you will support these resolutions, which require your approval to take effect, and also the resolution to approve the Directors’ remuneration report.
Agenda for 2015
As the strategy and structure of the company continues to develop, and we continue to move to become a global investment solutions provider, during 2015 we will continue to review the remuneration arrangements for our executive Directors and the performance measures used to determine the vesting of the Standard Life plc Executive LTIP to ensure that the awards are aligned to the company’s strategy and structure. We will consult the Company’s major institutional investors as part of this review.