As Ross says, we are building a simple, safe bank that is truly focused on customers. To do that, we need to ensure that remuneration and incentives for our colleagues – regardless of level – are aligned to our values and the culture of the bank we are trying to build.
The current Directors’ Remuneration Policy expires at today’s AGM.
As Chairman of the Remuneration Committee, I would like to provide a summary of our new remuneration policy for Directors. This is proposed for approval by shareholders under resolution 2 in the Notice of Meeting.
The Committee has spent a great deal of time considering evolving views on executive pay. This includes potential reforms by the UK government and calls from investors for companies to develop more tailored policies. We started the process over a year ago and have taken great care in developing a construct that aligns with our strategy, the long-term interests of shareholders and new regulatory requirements, while still being sufficiently attractive to executives.
Our current remuneration arrangements include a number of adaptations to meet various challenges faced at RBS over recent years. These have led to a degree of complexity and lack of alignment with the bank RBS has become. The Committee believes the time is right for a new, simpler approach, developed specifically to align with RBS’s culture and our thinking on pay.
We are therefore proposing a number of changes as part of our new Directors’ Remuneration Policy.
The Committee has been looking to develop a plan that aligns executives with shareholders predominantly through long-term shareholding. It also aims to discourage the potential for excessive risk-taking through being built around more meaningful and achievable performance tests.
Therefore the shareholding requirements for executive directors will rise significantly, from 250% to 400% of salary for the Chief Executive and from 125% to 250% of salary for the Chief Financial Officer.
The maximum long-term incentive award will be reduced by up to 40%, in line with the growing consensus on the need to restrain executive pay.
As now, there will be a single long-term incentive, with no annual bonus. Performance tests are designed around factors more within the control of management, encouraging safe and secure growth within risk appetite. The plan incentivises executives to deliver performance against targets in the year prior to grant, over the three years prior to vesting, and then to continue increasing the share price. Shares will be released between four and eight years following grant.
While it is intended with the proposed construct to remove some of the uncertainty and unpredictability inherent in traditional LTIPs, the new variable element of pay is still subject to rigorous performance assessment. Underperformance or risk failings would lead to a proportionate reduction of awards, or cancellation in the case of significant issues. Overall, we have removed a significant degree of ‘upside’ through reduced award levels while the potential for downwards adjustment remains in place.
Another change is that long-term incentive awards will not be subject to pro-rating for good leavers. One factor in this decision is the regulatory restriction which has the effect of preventing long-term incentive awards being granted in the first year of employment. In addition, RBS is unusual in having no annual bonus for executive directors. Applying pro-rating where the construct is solely based on long-term incentive awards means that no variable pay can be awarded in respect of the final year of employment.
We believe the removal of pro-rating is appropriate in our particular circumstances. It also ties in with the long-term aims of our policy, helping to ensure individuals are motivated right up to the point of departure as well as creating a higher level of shareholding that persists for up to eight years post departure. It’s very important that executives can be held accountable for, and are financially exposed to, the long-term consequences of their actions.
The changes also ensure that executives can, on average, during the entirety of their tenure, earn broadly what they could under the previous policy. This is necessary to ensure that we can continue to attract and retain high calibre executives.
Regulatory developments have also been taken into account. There are longer deferral periods and clawback can be operated for up to ten years if payments are not justified. Given that variable pay for executive directors at RBS is delivered solely in long-term incentive awards, our construct is much longer term than both minimum regulatory requirements and the market norm.
A further change is that the pension allowance for new executive directors will be reduced from 35% to 25% of salary. This brings the rate closer to that of the wider employee population and more in line with peers as well as FTSE100 companies.
A thorough consultation process has been undertaken during the development of the proposed policy. And feedback from our major shareholders has been taken into account in the final design.
I would like to thank shareholders who participated in the consultation and my fellow Committee members for their constructive comments and support while developing the new proposals.
You may be aware of the press commentary following the publication of proxy advisor reports, in particular the recommendations against the new remuneration policy by ISS and PIRC. We disagree with the conclusions reached in these reports and strongly challenged the view from ISS that the level of discount was insufficient under the new construct.
We subsequently re-engaged with a number of our major shareholders, and I am pleased to say that the vast majority indicated their continued support for our proposals. In addition, Norges Bank, one of our major shareholders, has recently issued a public statement confirming support for the new policy highlighting the simplified structure and reduced maximum award levels. They also commended the Board’s “willingness to challenge conventional thinking on remuneration”.
In summary, we believe that the policy encourages sustainable long-term performance, is strongly aligned with shareholders both during and after employment, and, while offering reduced maximum pay, will be more highly valued by executives.
It is also aligned with some of the emerging guidance from investors on pay. A number of investor guidelines now accept that, in the right strategic context, long-term shareholding can be an appropriate alternative to conventional long-term incentive plans.
RBS has, since the financial crisis, been a market leader in showing restraint in executive pay and in seeking to move away from the unintended consequences of highly geared financial incentives.
We believe we have designed a construct that builds on this approach, delivering a remuneration structure that is simpler and longer term, with significantly reduced maximum award levels.
I hope that all shareholders will support the new remuneration policy at today’s AGM.