RBS 2009 Annual Report Download - page 228

RBS Group Annual Report and Accounts 2009226
Directors’ remuneration report continued
Compliance and governance
Reward design and delivery should comply with appropriate policy,
standards, be aligned to industry best practice, meet relevant
regulators’ criteria and be consistent with effective risk management
and the long term interests of shareholders.
The remuneration policy as regards individual elements of employees’
remuneration packages are as follows:
Base salary
Base salaries are generally set around market median competitiveness,
in the context of competitive annual compensation and total
compensation. Base salaries are appropriate in the specific market for
the business in which an individual works and for the talents, skills and
competencies that the individual brings to the Group. The level of fixed
pay should be sufficient so that inappropriate risk-taking is not
encouraged.
Short-term incentives
The policy in respect of short-term incentives is to reward good financial
and non-financial performance that supports the business strategy,
taking into account the Group’s risk appetite and personal contribution
in a clear and reasonable way against targets that are specific,
measurable, set at the beginning of the year and communicated to the
employees.
Specific design principles for short-term incentives are in place, with
strict governance procedures that ensure that all existing and future
incentive schemes support the Group’s business strategy and risk
appetite. All short-term incentives are subject to appropriate
governance, including review by the risk management, finance and
human resources functions.
The way in which expenditure on short term incentives is linked to
business performance has been significantly amended to take account
of FSA principles in both design and delivery to individual employees.
Expenditure will be reviewed by the Remuneration Committee, against
the context of a range of performance metrics. The key metric that will
be considered is risk-adjusted profit in excess of the cost of capital,
with the cost of liquidity and all of the risks associated with the
underlying business performance also taken into account. Where risk
factors do not readily lend themselves to quantitative analysis then these
may be factored in as adjustments, on the recommendation of Group
Risk Management. The Board Risk Committee will also provide
assurance, on an arms-length basis, as to the appropriateness of the
proposed adjustments for these additional risk factors. Allocation of the
expenditure will depend on individual performance and on each
employees’ performance rating. Ratings are based on an assessment of
performance during a single year, against a full range of measures
including both financial and non-financial measures which take risk into
account. The Group discourages the use of guaranteed bonuses and
will not agree to any that span longer than a single financial year.
Performance awards for 2009 to those earning over £39,000 will be
deferred and paid in three tranches over the period to June 2012.
Selected senior individuals in Global Banking & Markets will receive part
of their awards for performance in 2009 in shares which require to be
held by recipients until January 2015. Participants will be able to sell
sufficient shares to cover their tax liabilities which are incurred on vesting,
but conditions remain on any further sales before 2015. In order for any
further sales to occur prior to 2015, participants would need to hold
shares under Group Schemes to at least the gross value of their awards.
Deferred award
The purpose of deferred awards is to support a performance culture
where employees recognise the importance of sustainable Group,
business and individual performance. A significant proportion when
compared with the fixed component of selected individual awards will
be deferred over a three year period.
A new deferral plan was approved by shareholders on 15 December
2009. Under the new plan, short-term incentives will be deferred into
bonus awards vesting over a three year period in the form of RBS
shares for the outer years. Deferral into shares helps to align the reward
of participants with the long-term interests of shareholders. The terms
of the deferral plan provides for “clawback” which allows the
Remuneration Committee retrospectively to limit any compensation at
the time of vesting if it considers that the performance factors on which
reward decisions were based have later turned out not to reflect the
corresponding performance in the longer term. The intention is to allow
the Group to adjust historic compensation for unforeseen issues arising
during the deferral period, particularly those that do not easily lend
themselves to quantitative measurement.
Long-term incentive plans
The Group provides employees in senior roles (executive level and
senior managers by nomination) the opportunity to receive annual
awards of long-term incentives. The objective is to encourage the
creation of value over the long term and to align the rewards of the
participants with the returns to shareholders.
Shareholder approval will be sought at the Annual General Meeting on
28 April 2010 for a new long term incentive plan, which will replace the
existing Medium Term Performance Plan and Executive Share Option
Plan. The key design features of the new long term incentive plan are:
•awards will be structured as performance-vesting deferred shares;
•at the discretion of the Remuneration Committee recipients will be
able to elect whether they receive their award in the form of shares,
or convert a portion of their award into market-value share options
with the same performance conditions. The conversion rate between
shares and options will be set so as to be broadly cost neutral. It is
not the intention of the Remuneration Committee to offer this choice
to participants for the initial award;