Good afternoon ladies and gentleman. As Ed outlined earlier, in my role as Chairman of the Remuneration Committee, I would like to take you through the issue of remuneration in some detail.
Our approach to the level of pay for the executive directors and the other senior managers – which, incidentally, is the same approach we have to all of our staff - is to aim to pay market competitive remuneration packages, which are linked to both Society and individual performance.
As some of you may be aware, the Financial Services Authority following the financial crisis, established a Remuneration Code. This requires firms to apply ‘remuneration policies, practices and procedures that are consistent with and promote effective risk management’. It applies to the largest banks and building societies and naturally our policies strictly follow the Code.
Let me first outline the principles of our overall policy on remuneration for executive directors and other senior managers, and in particular those which the FSA now calls Code Staff, these are as follows:
The Remuneration Committee has been mindful that over the last 12 months the executive directors’ roles have become broader in scope, more demanding and more complex. It is worth noting that in terms of regulation we are regarded by the FSA as a Tier 1 organisation alongside the major high street banks. This group only has two building societies in it – ourselves and Nationwide, and it also includes the enlarged Co-operative Financial Services.
I would like to make clear that the executive directors do not participate in any discussions relating to the review of their individual salaries or their performance pay. These are matters which are determined solely by the Remuneration Committee which in 2010 was made up of four non-executive directors – myself, Ed Anderson, David Paige and Indira Thambiah, until her resignation from the Board in September last year. From 2011 Roger Burden has joined this committee.
Before outlining the level of pay and bonuses in more detail, I would like to provide some context. As I mentioned we aim to pay market competitive remuneration packages and this is an area we have examined over the past 12 months.
In 2010, the Committee initiated a comprehensive review of the remuneration of senior managers which was carried out by an independent external company, Towers Watson. This gave us some clear conclusions, in particular that;
As a result of this comprehensive review and of our actual experience of external recruitment, and in recognition of the broader accountabilities of executive directors compared to their peer group as well as the scale of the Society, the Committee took the decision to adjust executive directors’ basic pay. The average increase for directors, other than the Chief Executive, is in the region of 8% which we believe is reasonable and appropriate given the Towers Watson findings and also that the Yorkshire is an almost 50% larger organisation following the Chelsea merger. The Chief Executive’s basic pay was increased by 16% to rectify the significant gap between his salary and that of equivalent Chief Executive roles, as identified by the Towers Watson survey.
Turning to variable pay or bonuses, the Yorkshire’s policy, as I mentioned, is to set challenging objectives for executive directors and senior managers to give them the incentives to perform at the highest level, but crucially in a manner consistent with the best interests of our members. This means that there is no guaranteed minimum bonus, while the maximum which can be awarded is set as a fixed percentage of an executive director’s individual salary.
Our executive director bonus scheme naturally reflects profitability, but it also includes a range of other measures giving a balanced view of our financial strength and member benefits. In 2010 these included:
We believe that this broad range of measures reflects the required all-round performance, strength and stability of the Society.
The review found that variable pay at the Yorkshire generally lags the financial services market as a whole, though it is broadly competitive against other building societies. One of the main reasons for this is that, unlike external shareholder-owned companies and a number of other financial institutions, we do not operate a standalone long term incentive scheme, which provides an additional layer of remuneration.
However, despite these findings, the Committee took the decision not to increase the earning potential for executive directors through variable pay. The maximum percentage of salary that can be awarded as a bonus will not be increasing for 2011. Additionally, if the profit performance in any year is less than 25% of the profit target, or if the capital and liquidity ratio thresholds are breached, then no bonuses will be paid to executive directors or senior managers in that year.
We believe the current ratio of fixed and variable pay strikes the right balance between incentivising financial performance and managing risk as well as being in line with the letter and the spirit of current regulations.
The Remuneration Committee awarded bonuses to all staff, including executive directors, in respect of 2010 in accordance with the policy set out above. A comparison of underlying bonus payments made to executive directors in 2010 increased by an average of 21% compared to 2009, however this is far less than the increase in the Society’s core operating profits.
As we flagged up a year ago, the Society has now put in place measures to reward performance over a longer period of time by deferring a significant portion of any bonus. For executive directors 60% of the total bonus is now deferred over a three year period. It is important to emphasise that the deferred payments are not only conditional on the achievement of future profits, but also on the achievement of risk measures in future years, as well as on-going individual performance, ensuring these payments are clearly linked to the sustained performance of the Society and individual over a longer period.
We have gone far further than the minimum requirements set out under the FSA’s Code by including a larger proportion of senior managers in deferral provisions than strictly required and all general managers, including those who are not executive directors, have had 60% of their bonus deferred, rather than the 40% that is required by the rules, as we think this is the right thing to do.
We believe we have a clear, robust and fair policy on remuneration. We will continue to do so and while the detail of our policy will no doubt evolve, we are committed to our principles and adhering to and often going far beyond best practice.
As you have heard from Iain, the Yorkshire has made excellent progress over the past 12 months and, unlike many former societies which have fallen by the wayside, stands in a position where we can face the future with even greater confidence. We are also mindful that we operate in a much more complex and challenging environment. Bearing these factors in mind it is the Board’s view that this senior team has performed extremely well over the last year and that the levels of pay and bonuses are therefore entirely appropriate for the scale of performance delivered during 2010.
I will now hand back to Ed. Thank you.
View the voting AGM 2011 results.
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