This report is made by the Board on the recommendation of the Remuneration Committee. The first part of the report provides details of remuneration policy. The second part provides details of the remuneration, pensions and share plan interests of the Directors for the 52 weeks ended 21 March 2009. The Directors confirm that this report reflects the provisions of Schedule 7A of the Companies Act 1985.
A resolution will be put to shareholders at the Annual General Meeting (“AGM”) on 15 July 2009 asking them to approve this report.
Remuneration Committee
The Remuneration Committee is chaired by Bob Stack. The Committee comprises Bob Stack, Anna Ford and Val Gooding, all of whom are independent Non-Executive Directors. The Committee met five times in 2008/09.
Tim Fallowfield, Company Secretary, acts as secretary to the Committee. Philip Hampton, Justin King and Imelda Walsh, Human Resources Director, are invited to attend Committee meetings. The Committee considers their views when reviewing the remuneration of the Executive Directors and Operating Board Directors. They are not involved in discussions concerning their own remuneration.
The responsibilities of the Committee include:
- determining and agreeing with the Board the broad remuneration policy for the Chairman, Executive Directors and the Operating Board Directors;
- setting individual remuneration arrangements for the Chairman and Executive Directors;
- recommending and monitoring the level and structure of remuneration for those members of senior management within the scope of the Committee, namely the Operating Board Directors and any other executive whose salary exceeds that of any Operating Board Director; and
- approving the service agreements of each Executive Director, including termination arrangements.
The Committee’s terms of reference are available on the Company’s website (www.j-sainsbury.co.uk/governance).
The Committee is authorised by the Board to appoint external advisers if it considers this beneficial. Over the course of the year, the Committee was advised by Deloitte LLP (“Deloitte”) whose consultants attended four of the five Committee meetings and received copies of the relevant papers for all meetings. Deloitte also provided the Company with unrelated advice and consultancy on human resources systems development, direct tax and due diligence. Towers Perrin provided comparative data which was considered by the Committee in setting remuneration levels. Total Shareholder Return (“TSR”) calculations are supplied by UBS, who provided broking and banking services to the Company during the year.
Remuneration policy
The Committee is proud of the ongoing growth and success of the Company during these very challenging market conditions. It continues to believe that the five areas of focus within the Company’s strategy (as described in the Business Review) will generate good long-term growth. It is committed to ensuring that the management team is rewarded for continuing to deliver the Company’s growth plans and long-term shareholder value.
It remains the Committee’s intention, therefore, that Executive Directors’ and Operating Board Directors’ remuneration should be competitive, both in terms of base salary and total remuneration, taking into account the individual Director’s role, performance and experience. This approach is designed to promote the Company’s short and long-term success through securing and retaining high calibre executive talent. Basic salary is targeted around the median of the market with an opportunity to earn above median levels of total reward in return for exceptional performance. The Committee has regard to a number of factors as described below in determining Executive Directors’ salaries, including the general level of salary increases awarded throughout the Company. A significant proportion of the total remuneration package is performance-related, aligning management’s and shareholders’ interests. Remuneration policies and practices are designed to create long-term value for shareholders through their alignment with the corporate strategy, key targets and objectives.
Remuneration review
At the AGM in 2006, shareholders approved an incentive framework which was designed to support the Company’s business strategy over the medium to longer term. It was consistent with best practice and comprised the Deferred Annual Bonus Plan with a performance-related share match, and the Long-term Incentive Plan 2006 (the “Value Builder Share Plan”).
The framework was developed in order to build on the sales-led recovery plan announced in 2004 by embedding key measures of financial and capital efficiency, as well as supporting strong performance of the core business by delivering quality earnings, growing profits and generating cash for future investments and/or return to shareholders.
In the 2008 Remuneration Report, the Committee indicated its intention to conduct a review of the remuneration policy during the year. This was to ensure that the policy continued to:- support the Company’s long-term strategic goals beyond the four-year business milestones announced in 2004;
- provide a common focus for the top 1,000 managers (from Chief Executive to supermarket store managers) on critical business measures and ensure appropriate alignment of pay and incentive plans from Executive Directors to store manager level; and
- deliver market competitive reward opportunities to a high performing management team.
In addition to the above, the Committee was mindful that total quantum levels should not increase in the current climate.
The review identified the need to revise several aspects of the remuneration framework to maintain its effectiveness.
Although none of the changes necessitates formal shareholder approval, detailed proposals were issued in advance to the Company’s main investors and key institutions in respect of the Company’s intentions to:
- reduce the combined potential that could previously have been earned through the annual bonus plan and the Deferred Annual Bonus Plan from 300 per cent to 250 per cent of salary for Justin King and from 180 per cent to 160 per cent of salary for Darren Shapland, Mike Coupe and Operating Board Directors, split equally between cash and share-based awards as set out below;
- for 2009/10, retain the performance measures and leave their relative weighting unchanged in respect of the annual bonus plan’s cash-based element;
- replace the Deferred Annual Bonus Plan, which is conditional on a single TSR measure, with a deferred share-based award that is governed by a range of key financial and non-financial measures (including TSR) – these strategic measures contribute to the long-term, sustainable growth and success of the Company;
- for 2009/10, reduce awards granted under the Value Builder Share Plan from those made to Executive Directors since 2007, such that the award for Justin King is up to 200 per cent of salary (previously 250 per cent) and 160 per cent of salary for Darren Shapland and Mike Coupe (previously 200 per cent); and
- leave the performance matrix scale and performance conditions for 2009/10 Value Builder awards unchanged, but revise the way in which pension accounting costs are applied to the measurement of the Value Builder Share Plan’s performance conditions to smooth out volatility and better reflect the level of cash generated by the Company.
The Committee has ensured that each of the above changes maintains a suitable degree of stretch within the incentive plans. In accordance with the Remuneration Policy, significant outperformance is still required in order for above median levels of reward to be earned. Further details on the above changes are set out in the relevant sections of this report.
Components of remuneration
The balance between the fixed (basic salary and pension) and variable (annual bonus and long-term incentive plan) elements of remuneration changes with performance, and the variable proportion of total remuneration increases significantly for increased levels of performance. For median performance, it is anticipated that broadly 60 per cent of total remuneration for Executive Directors will be performance-related in 2009/10.
The main remuneration components for the Executive Directors and Operating Board Directors comprising basic salary, incentive plans, pensions and benefits are set out below:
i) Basic salary
Basic salary for each Executive Director is determined by the Committee, taking account of the Director’s performance, experience and responsibilities. The Committee also reviews Operating Board Directors’ salaries taking similar factors into account. The Committee considers salary levels in comparable companies by referring to relevant pay data in the UK retail sector, in companies with annual sales revenues over £5 billion and also in companies with a market capitalisation of between £3 – £10 billion. This approach ensures that the best available benchmark for the Director’s specific position is obtained. When determining Executive Directors’ salaries, the Committee also has regard to economic factors, remuneration trends and the general level of salary increases awarded throughout the Company.
The Committee approved the following basic salaries for 2009/10:
- Justin King’s basic salary was increased to £900,000 per annum (previously £872,000; 3.2 per cent uplift). This level of award is market aligned and is consistent with the percentage increases awarded for store colleagues and the wider management team.
- Darren Shapland continues to deliver an outstanding individual performance and contribution to the Company in a broad and demanding role and now takes responsibility for three additional areas of store development, procurement and corporate strategy, in addition to his ‘normal’ CFO duties. The Committee considered that his salary was no longer commensurate with his expanded role and increased experience, and in view of this, as well as market competitive practice, the Committee increased his basic salary to £560,000 per annum (previously £513,000; 9.2 per cent uplift).
- Mike Coupe has become a highly-valued member of and contributor to the Board since his appointment to it in August 2007. His role will expand in 2009/10. Accordingly, his basic salary was increased to £510,000 (previously £487,000; 4.7 per cent uplift).
By way of further context, Executive Directors’ basic salaries increased by 2.5 per cent in 2008/09, consistent with the level applied to management and central non-management colleagues.
ii) Annual incentives
2008/09
All bonus plans across the Company are aligned under a set of common principles. For 2008/09, Board and management plans retained the same key targets based on profit and sales growth, product availability, plus an element for individual performance.
In 2008/09, a profit ‘gateway’ measure was introduced rather than a sales gateway as had been applied in prior years, reflecting the increasing emphasis on growing profit. In addition, a higher weighting was applied to the profit measure.
The profit, sales and availability targets were also shared across all store colleague bonus plans. Availability is measured across all stores on a regular basis by an independent third party, conducting random and unannounced store visits.
In determining bonus payments for 2008/09, the Committee took account of performance against each of the plan’s measures in addition to individual targets. 2008/09 was a strong year financially for the Company: the profit gateway was exceeded, sales grew well in a challenging climate, and availability in our stores was improved. As such, a bonus ranging between 63 to 66 per cent of the maximum opportunity was awarded to Executive Directors in respect of 2008/09. This compares with a bonus range of 64 to 86 per cent of the maximum opportunity for 2007/08, reflecting the very stretching nature of the profit out performance targets set for 2008/09.
The 2008/09 bonus plan for store colleagues was based on the achievement of sales, availability and customer service targets measured in their individual stores, underpinned by a corporate profit target. As a result of store and corporate performance in 2008/09, around 120,000 colleagues will receive a bonus payment in respect of the 2008/09 financial year totalling around £60 million. This is a higher level of awards than was made in 2007/08, whereby around 117,000 colleagues received a bonus totalling around £47 million.
2009/10
Following the remuneration review, the Company’s annual incentive arrangements for 2009/10 will comprise a cash-based element and, for Executive Directors and senior management, a share-based element which carries a further two-year deferral period. The share-based incentive replaces the Deferred Annual Bonus Plan, thereby maintaining the alignment of Directors’ and shareholders’ interests.
The cash-based element of the annual bonus plan will remain unchanged in terms of its measures and it will continue to incentivise the achievement of stretching profit, sales and availability targets as well as individual performance measures. The greatest weighting of the measures will remain profit and it will again act as the overall ‘gateway’ target. However, the maximum cash bonus potential that can be earned for 2009/10 will reduce from 150 per cent to 125 per cent of salary in respect of Justin King and from 100 per cent to 80 per cent of salary in respect of Darren Shapland and Mike Coupe.
The share-based element will be launched to cover the top levels of management. It has been designed to reward them for achieving stretching annual targets which contribute to building sustainable, long-term growth of the Company. Share-based awards will be made to participants subject to a basket of key strategic measures which will be aligned under four broad performance categories:
- financial performance;
- returns to shareholders;
- relative performance against peers; and
- strategic goals.
At least one half of the award will be based on the delivery of financial performance (e.g. profit) as well as returns to shareholders. The balance will be based on measures which will assess the Company’s performance relative to its competitors (e.g. market share; relative sales growth) as well as key strategic/corporate goals (for 2009/10 these will be linked to the five areas of focus e.g. space targets). In addition, no shares will be awarded unless the profit gateway target (as applied to the cash annual bonus plan) is achieved.
Shares may be awarded with a value of up to 125 per cent of salary for Justin King and 80 per cent of salary for Darren Shapland and Mike Coupe. Performance will be measured over one financial year, but any shares awarded will be deferred for a further two years to ensure that management’s interests continue to be aligned with returns to shareholders.
For reasons of commercial sensitivity, the specific details of the targets for the 2009/10 financial year cannot be disclosed in this Report, but further disclosure will be made in respect of these next year. The Committee will review the performance of the targets following the 2009/10 year-end and will confirm the resulting share-based awards. Share awards in respect of that cycle will not be released until after the end of the 2011/12 financial year, and they will be subject to forfeiture if the participant resigns from the Company or is dismissed for misconduct or cause during the two year deferral period.
iii) Long-term incentives
Incentive arrangements for Executive Directors in respect of the 2008/09 financial year consisted of the Deferred Annual Bonus Plan and Value Builder Share Plan. Awards earned under each of the incentive plans are non-pensionable. This section describes these plans in detail, together with the J Sainsbury plc Share Plan 2005 (known as the ‘Making Sainsbury’s Great Again Plan’), which is now closed and no further grants will be made under it. From the 2009/10 grant cycle onwards, only annual grants under the Value Builder Share Plan will continue to be made.