RBS 2011 Annual Report Download - page 279

RBS Group 2011 277
Shareholder consultation and its impact on remuneration policy
In late 2011 and early 2012, an extensive consultation was undertaken
with institutional shareholders and other stakeholders on the Group’s
remuneration approach. Investors recognised the difficult challenge
faced by the Group Remuneration Committee in balancing the need to
pay competitively to support business goals but at the same time being
mindful of the wider economic environment and the need to show
restraint.
The shareholders gave a clear message that increases to base pay and
pension contributions for executive directors were not appropriate.
However, the overall shape of executive remuneration structure received
widespread support. Shareholders recognised the need for retention of
the current executive team and the potentially destructive effect that any
break up would have on rebuilding the Group.
This consultation included UKFI and as with other shareholders, the
Committee received their input. However, in line with the Group’s
mandate to operate commercially, the Committee did not receive formal
direction from UK Government.
The consultation process involved one-to-one meetings, a roundtable
session hosted by the Association of British Insurers and National
Association of Pension Funds and a number of follow-up letters and
meetings.
Topics discussed with investors included both Group-wide and executive
directors’ pay positioning, scale and design of incentive structures, risk
alignment of remuneration, deferral, clawback and remuneration
disclosures.
The importance of value sharing between investors and employees,
retaining capital, and taking this into account in remuneration decisions
were key themes from the shareholder consultation. As mentioned in the
letter from the Committee Chair, value sharing between investors and
employees and retention of capital have been key areas for the
Remuneration Committee during 2011. In 2011 variable compensation
was 11% of Core Bank operating profit, down from 16% in 2010. This
proportion compares favourably with other banks.
There was also concern over falling share prices across the industry.
Some shareholders proposed that LTIP award levels to employees
should be scaled back given the fall in the share price over 2011. The
Committee recognises the impact that the fall in share price has had both
on shareholders and employees. The share awards that were made to
employees at the beginning of 2011, under bonus deferral or the long
term incentive plan, have fallen in value. This is clear alignment with the
value reduction that shareholders have experienced. It is also true in the
case of prior year unvested and vested but retained awards.
The Committee has considered the LTIP award policy for 2012 in light of
the Group’s current share price and has reduced potential awards to
executive directors by capping them at 300% of salary.
The population receiving LTIP awards has also been reviewed, and for
2012, there will be a significant reduction as LTIP awards are targeted at
the Group’s most senior management. All LTIP awards are subject to
both group-wide and division/function specific performance conditions to
ensure that the leadership team is focused on both value creation and
other key objectives. Group performance targets will be aligned to the
executive director LTIP performance targets to ensure a consistent view
of performance.
The Group Remuneration Committee and the Group Board have
considered carefully their responsibilities and have applied judgement to
achieve a balance whereby remuneration policy supports business goals
without causing unacceptably high people risks.
The support received by shareholders during the consultation period has
been greatly encouraging. Shareholders have played a key role in
developing remuneration practices that support the long term goals of the
business.
Risk and regulatory environment
FSA Remuneration Code compliance
The Group has been fully compliant throughout 2011, in practice and in
spirit, with all aspects of the FSA Remuneration Code.
How risk is reflected in our remuneration process
Focus on risk is achieved through clear risk input into incentive plan
design and target setting, as well as thorough risk review of performance,
bonus pools and clawback. The Group Remuneration Committee is
supported in this by the Board Risk Committee and the Group’s risk
management function.
During 2011, a project was undertaken, co-sponsored by the Chairs of
the Group Remuneration Committee and Board Risk Committee, to
identify and implement further areas of improvement in risk/remuneration
alignment. The project focussed on three workstreams:
xrobust governance (clarify and enhance respective roles of the
Group Remuneration Committee and Board Risk Committee and the
interaction between them);
xpay-for-performance (risk input into objectives and performance
reviews and enhanced clawback process); and
xcontrol function input and risk adjusted performance measures.
How do we apply this in practice?
The assessment undertaken by the risk function and Board Risk
Committee confirmed that, for some divisions, a number of risk-related
events needed to be taken account of when determining bonus pools,
including regulatory, compliance and credit and market risk issues.