RBS 2012 Annual Report Download - page 325

RBS GROUP 2012
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Performance evaluation process
An external review of the effectiveness of the Board and Senior
Committees, including the Group Performance and Remuneration
Committee, was conducted during 2012. The Committee considered the
outcomes of the evaluation and is satisfied with the way in which the
evaluation has been conducted.
The review concluded that the Committee continued to operate effectively
and the continued importance of the remuneration agenda and the
commitment of the Committee members was recognised. The outcomes
of the evaluation have been reported to the Board. As Board interest in
remuneration matters remains intense and all directors understand the
sensitivities involved, reporting on remuneration matters to the Board will
be further enhanced during 2013.
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,
variable pools and clawback. The Committee is supported in this by the
Group Audit Committee, the Board Risk Committee and the Group’s risk
management function.
A robust process is used to assess risk performance. A range of
measures are considered, including funding, liquidity, credit, regulatory,
operational and market risk. The steps we take to ensure appropriate and
thorough risk adjustment continue to be refined and are fully disclosed
and discussed with the FSA.
Variable pay pool determination
The process for determining variable pools is discretionary, to avoid the
unintended consequences of formulaic systems. However, the
Committee's discretion is applied within a structured framework which
starts with an assessment of risk adjusted financial performance
measured against budget, prior year and long-term strategic plans. This
analysis is used to adjust for performance and then consider outcomes in
the context of competitive variable pay funding levels.
Risk is taken into account in the performance assessment through a
thorough risk analysis carried out by the Group’s risk management
function to a pre-agreed framework. Performance assessments may be
adjusted in situations where risk performance is outside risk appetite or
strategic plans. Non-financial factors such as progress on customer
issues, turnover, succession planning, market environment and franchise
development are then taken into account in developing a final variable
pay proposal. Variable pay proposals are reviewed in the context of key
compensation framework ratios including: compensation to revenues,
compensation to pre-compensation profit and variable pay to pre-
variable pay profit. These ratios help to ensure appropriate sharing of
value between employees and shareholders. Finally, variable pay
proposals are reviewed against our capital adequacy framework to
ensure that regulatory requirements are met.
Accountability review process
A summary of the accountability review process is as follows:
x Exists to enable RBS to respond in instances where current and/or
new information would change the annual incentive and/or LTIP
decisions made in previous years, and/or the decisions made in the
current year.
x The process for review assessments (which consider material risk
management, control and general policy breach failures,
accountability for those events and appropriate action against
individuals) is operated across divisions and functions. Divisional
reviews are undertaken on a quarterly basis.
x A Group Accountability Review Panel ensures consistency of
decision making across the Group.
x Decisions must take into account not only any financial losses but
also behavioural issues and reputational or internal costs.
x Actions may include recommendations for compensation
adjustments (e.g. current year variable pay reduction, clawback)
disciplinary investigations and performance adjustments (e.g. a
change to performance rating).
x Clawback may be up to 100% of unvested awards and can be
applied regardless of whether or not disciplinary action has been
undertaken.
x A key principle is that clawback quantum should not be formulaic.
x Collective responsibility may be considered where a committee or
group of employees are deemed to have not appropriately
discharged their duties.
x These principles apply to all of our people and any leavers with
unvested awards.
How have we applied 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 variable pay
pools, including regulatory, compliance and credit and market risk issues.
The Board Risk Committee has concluded that the accountability review
assessments approach is robust and complete from a perspective of all
known material events having been considered.
The accountability review process is now fully embedded and during
2012 a number of issues were considered under the framework.
The outcomes for the 2012 performance year cover a range of actions
and have included: reduction of current year variable pay awards;
dismissal; clawback of previously awarded deferred and LTIP awards;
and suspended vesting pending further investigation.