directors' remuneration report
This report, which has been prepared in accordance with Schedule 7A to the Companies Act 1985 (the 'Act') as supported by the Directors' Remuneration Report Regulations 2002 and the Listings Rules of the Financial Services Authority, outlines the membership and workings of the Remuneration Committee (the 'Committee') and provides an explanation of the components of the Group's remuneration policy together with details of Directors' remuneration in respect of the year ended 31 December 2007. As required by the Act, a resolution to approve this Report will be proposed at the forthcoming Annual General Meeting.
The Auditors are required to report to shareholders regarding Directors' remuneration, descriptions of the Group's Long-Term Incentive Arrangements and Sharesave Scheme and the information contained in Tables 1 and 2 in this Report (the 'auditable parts') and to state whether, in their opinion, these parts of the Report have been properly prepared in accordance with the Act.
In preparation for the Company's admission to the London Stock Exchange ('Admission'), the Company changed the membership of its Board and its Remuneration Committee. The following commentary relates to the period from Admission on 29 October 2007 to the year end (the 'Period').top
Membership of the Remuneration Committee
The Committee is comprised solely of non-executive Directors and has been chaired since Admission of the Company to the Official List of the London Stock Exchange by John O'Reilly. Other members of the Committee who served during this period are John Hughes, Ian Nolan and Simon Batey. John Hughes was appointed as a member of the Committee in accordance with Combined Code which permits the Chairman of a company, where he is deemed independent on appointment as Chairman, to be a member of the Remuneration Committee.
The Committee met once during the Period to consider the employment terms and remuneration of executive Directors and remuneration policy matters generally. The Committee is also responsible for reviewing the fee level of the Group's Chairman. The fees of non-executive Directors are determined by the Board itself.
Whilst the Chief Executive Officer may at the invitation of the Chairman attend Committee meetings, the other executive Directors do not normally attend. No Director has any involvement in decisions regarding his own remuneration. Ernst & Young LLP provided independent external advice during the period to assist the Committee in formulating its recommendations to implement the remuneration policy. Ernst & Young LLP was appointed by the Committee and only provides advice to the Group in respect of Directors' remuneration.top
Remuneration policy
The key policy objective of the Committee is to secure and retain high-calibre executive Directors with the skills, experience and motivation necessary to direct and manage the affairs of the Group so as to maximise shareholder value on a sustainable basis. The Committee aims to align its remuneration policies with the Group's medium and long-term strategy. This is achieved by a combination of:
- a basic salary package, including benefits in kind, which recognises the responsibilities of individual Directors;
- the Annual Bonus Scheme, which provides rewards which reflect the performance of the Group and the contribution of individual Directors in a particular year;
- long-term incentives which incentivise executives to deliver sustained improvement in financial performance and shareholder returns over a period of years; and
- a pension contribution, which funds retirement benefits.
In determining the components of total remuneration, the Committee at the time of the Company's IPO put in place a remuneration policy for executive Directors that is strongly linked to performance. In doing so, it set salary levels and annual bonus potentials for these individuals that are below the median level for a business of this size and complexity. However, it set relatively high caps on salary multiples for grants under the Telecity Group Performance Share Plan. The intention is that, in absolute terms, executive Directors are entitled to a median level total remuneration package comprising a below median salary and an above median long-term incentive package. Should the Remuneration Committee change its policy on the level of salaries paid to executive Directors, then it would review both salary levels and the salary multiple for grants under the Telecity Group Performance Share Plan. A review of the Group's policy on executive remuneration is planned for 2008, which will include consideration of independent advice. top
Terms of employment
Each executive Director's employment is terminable on six months' notice by the executive Director and twelve months' notice by the Company. The Company may elect to terminate the employment of an executive Director by making a payment equal to basic salary, Company pension contributions, contractual benefits and, in respect of annual bonus, an amount equal to 40% of annual basic salary for the twelve months' notice period or any unexpired portion thereof.
Details of the executive Directors' service contracts are set out below:
Date of contract |
Effective date |
|
| Michael Tobin | 5 October 2007 |
5 October 2007 |
| Brian McArthur Muscroft | 5 October 2007 |
5 October 2007 |
Executive Directors are permitted to accept external appointments with the prior approval of the Board and where there is no impact on their role with the Group. Any fees arising from such appointments may be retained by the executive Director where the appointment is unrelated to the Group's business. Fees from external appointments are disclosed in this report.top
Salaries, benefits and pension arrangements
The annual salaries for the executive Directors were set at Admission at £300,000 and £200,000 for Michael Tobin and Brian McArthur Muscroft respectively. The first review of these salaries is scheduled to be effective from 1 January 2009 at which point it is intended that market information provided by the Committee's independent advisor will be considered along with the individual's performance and experience in their role.
The benefits provided to each executive Director are life assurance, medical insurance (for themselves and family) and permanent health insurance. The Group makes a pension contribution of between 5% and 7% of basic salary in respect of each executive Director. Beyond this, the Group has no further obligation in respect of funding Directors' pensions.top
Annual Bonus Scheme
Each executive Director is entitled to an annual bonus. From 1 November 2007, each of the executive Directors will be entitled to an annual bonus of 40% of annual base salary for on-target performance and, where performance exceeds this level, a bonus up to a total of 50% of annual basic salary may be paid. Bonus payments will be based on the extent that the corporate or individual performance targets set by the Remuneration Committee are achieved or exceeded in the relevant year. The targets for 2008 are based on a number of challenging financial measures. The bonus is not pensionable.top
Long-Term Incentive Arrangements
The Telecity Group Performance Share Plan (the 'PSP')
The PSP permits the grant of two different types of incentive, performance-related awards of Ordinary shares and performance-related grants of options to acquire Ordinary shares at fair market value at the date of grant. The Remuneration Committee will not both award Ordinary shares and grant options under the PSP in the same year to any one individual. The first award of Ordinary shares or options are expected to be made following the preliminary announcement of the Company's results for the year ended 31 December 2007. It is anticipated that awards will generally be made on an annual basis thereafter.
Executive Directors and employees of the Company and its subsidiaries who are required to devote substantially the whole of their working time to the business of the Group are eligible to participate in the PSP. Participation is at the discretion of the Remuneration Committee. The Committee will decide whether to grant options or awards, and the level of options and awards to be granted. It will also set the policy for the operation of the PSP, for example by agreeing performance targets and individual grant levels.
Under the PSP, eligible employees may be granted performance related awards entitling them, at the end of a three-year period (the 'Vesting Date'), to a number of Ordinary shares determined by reference to performance over that period. The maximum number of Ordinary shares which may be awarded to an eligible executive Director in any financial year (calculated by reference to the market value of those Ordinary shares at the date of the award) shall not exceed 250% of annual basic salary save in exceptional circumstances where the Remuneration Committee determines in its discretion that it is necessary and appropriate to exceed this limit. In relation to awards of options, each executive Director's participation will be limited so that the aggregate price payable on the exercise of all options granted to him or her in any year under the PSP will not exceed 450% of the participant's annual basic salary at the date of grant, save in exceptional circumstances where the Remuneration Committee determines in its discretion that it is necessary and appropriate to exceed this limit.
Prior to the granting of awards on any occasion, the Remuneration Committee will determine a performance target for awards which it considers to be appropriately demanding and which will be described to shareholders in the Directors' Remuneration Report for the relevant year. For 2008, it is intended that the performance targets will be based around Total Shareholder Return as compared with other FTSE 250 companies, excluding investment trusts. Vesting is expected to be based on a sliding scale ranging from median to upper quartile performance.
To the extent that new Ordinary shares are to be issued to satisfy share awards under the PSP, or sharesave scheme described below, no awards may be granted if it would cause the aggregate number of Ordinary shares capable of being awarded under those schemes (together with any new schemes in the future) during the preceding ten years to exceed 10% of the Company's share capital at the proposed date of grant.
The Telecity Group IPO Share Option Plan (the 'SOP')
The SOP enabled the Company to grant options to acquire Ordinary shares at the offer price at the time of the IPO to eligible key employees. The purpose of the SOP is to provide an incentive to key employees which will vest at appropriate dates in the period prior to the vesting of the first awards under the Performance Share Plan, expected to be in or around March 2011. The Remuneration Committee considered that the most appropriate way to incentivise and retain key employees during this period was to grant options which vest in tranches in 2009 and 2010. Each option will vest in two equal tranches; the first half in September 2009, and the remaining half in September 2010. In view of their retention objective, the vesting of these options will be dependent on continued service, but not subject to any corporate performance target. Options will remain exercisable until ten years after the date of grant. This is the only grant of options to be made under the SOP and no further grants will be made under it in the future.
The market value of Ordinary shares over which options could be granted to an executive Director under the SOP was 450% of the executive Director's annual basic salary at the date of grant. Options granted under the SOP will be satisfied using Ordinary shares issued for this purpose to the Group's Employee Benefit Trust at Admission to the Official List of the London Stock Exchange.
Sharesave Scheme
Under the Sharesave Scheme, employees may be granted an option to acquire Ordinary shares at a fixed exercise price.
Participating employees are required to save each month into a savings account for a period of either three or four years, the
proceeds of which they may use to exercise the option. The employee will have a right to acquire the number of Ordinary shares
which he or she can acquire at the exercise price using the savings in his or her savings account. A tax-free bonus is payable on
the savings in the savings account on completion of the relevant savings contract. At the end of the savings period the employee
may either exercise the option within six months of the end of the savings period using the savings contributions and bonus
which he or she has accumulated or have the savings and bonus repaid to him or her.
The maximum amount that an employee may save each month over the three year or four year period is £250.
The option exercise price may be set at a discount (of up to 20%) to the market value of the Ordinary shares at the time of grant. However, no discount has been applied to date.top
Non-executive Directors
Fees payable to non-executive Directors are determined by the Board and will be reviewed periodically within the limits set by the Articles of Association. Fees of independent non-executive Directors are intended to reflect the time commitment and responsibilities of individual non-executive Director's roles and are set at broadly market median levels to ensure individuals of the necessary calibre and experience are recruited and retained. The non-executive Directors do not accrue any other benefits in addition to their annual fee and do not participate in the Group's pension schemes. No fees are payable to the non-independent non-executive Directors, Robert Morse, Ian Nolan and Sergei Riabtsov.
The Group has letters of appointment with each of the non-executive Directors which set out, amongst other things, their duties and expected time commitment. The Company's Chairman, John Hughes, has an appointment letter dated 5 October 2007. His appointment is terminable by the Company on twelve months' notice within the first two years of the term and six months' notice thereafter. The Chairman may terminate the appointment at any time on six months' notice. The appointment letters of the other non-executive Directors are for an initial period of three years but may be terminated at any time by either party on one month's written notice.
Table 1 - Remuneration (audited)
Directors' remuneration in respect of the year ended 31 December 2007 was as follows:
Basic salary/fees £'000 |
Annual bonus £'000 |
Benefits in kind £'000 |
Pension £'000 |
Total £'000 |
|
| Executives | |||||
| Michael Tobin (1) | 131 |
83 |
3 |
8 |
225 |
| Brian McArthur Muscroft(1) | 87 |
50 |
2 |
4 |
143 |
| Non executives | |||||
| John Hughes(2) | 24 |
— |
— |
— |
24 |
| Simon Batey(3) | 9 |
— |
— |
— |
9 |
| John O'Reilly(2) | 10 |
— |
— |
— |
10 |
| Robert Morse | — |
— |
— |
— |
— |
| Ian Nolan | — |
— |
— |
— |
— |
| Sergei Riabtsov | — |
— |
— |
— |
— |
| Bo Bendtsen(4) | — |
— |
— |
— |
— |
| Oliver Grace(4) | — |
— |
— |
— |
— |
| Boris Jordan(4) | — |
— |
— |
— |
— |
| Jennifer Dunstan(4) | — |
— |
— |
— |
— |
| Glenn August(4) | — |
— |
— |
— |
— |
| Total | 261 |
133 |
5 |
12 |
411 |
(1) appointed 1 July 2007
(2) appointed 5 October 2007
(3) appointed 16 October 2007
(4) resigned 5 October 2007
In the previous year, the Company's Directors consisted entirely of non-executive Directors who did not receive any emoluments.
In recognition of the Chairman's services in the period prior to 5 October 2007 (when payment of the annual fee under his letter of appointment commenced) and for work in connection with the Admission of the Company to the Official List of the London Stock Exchange, the Remuneration Committee determined that the Chairman should receive a one-off payment of £150,000 (less statutory deductions). The Chairman agreed to invest £120,000 (as nearly as may be) to acquire Ordinary shares at Admission at the offer price (of which approximately £30,000 was from his own funds). The Board considers that neither this payment nor this investment compromised the Chairman's independence on appointment.
The basic salaries and fees of the Directors with effect from 1 January 2008 are as follows:
£'000 |
|
| John Hughes | 100 |
| Michael Tobin | 300 |
| Brian McArthur Muscroft | 200 |
| Simon Batey | 40 |
| John O'Reilly | 40 |
| Robert Morse | — |
| Ian Nolan | — |
| Sergei Riabtsov | — |
| Total | 680 |
Table 2 - Share options (audited)
At 1 January 2007 ('000) |
Granted ('000) |
Exercised ('000) |
At 31 December 2007 ('000) |
Vested ('000) |
Not vested ('000) |
Exercise price (£) |
Exercise period begins |
Exercise period ends |
|
| Michael Tobin | — |
161 |
— |
161 |
— |
161 |
2.20 |
Sept 2009 |
Sept 2017 |
— |
161 |
— |
161 |
— |
161 |
2.20 |
Sept 2010 |
Sept 2017 |
|
| Brian Muscroft | — |
101 |
— |
101 |
— |
101 |
2.20 |
Sept 2009 |
Sept 2017 |
— |
100 |
— |
100 |
— |
100 |
2.20 |
Sept 2010 |
Sept 2017 |
|
| Total | — |
523 |
— |
523 |
— |
523 |
The above options were granted under the Telecity Group IPO Share Option Plan, and are not subject to performance conditions, other than continued employment, for the reasons set out in the explanation of that plan.
The highest and lowest prices for the Company's shares during the year, following their Admission to the Official List of the London Stock Exchange were 342.00p and 254.00p respectively.top
Total shareholder return
The graph below shows the total shareholder return for the Company compared with the FTSE 250 (excluding investment trusts), which is considered to be the most appropriate comparative index, and the FTSE All Share.
Fees from external appointments
Michael Tobin received and retained fees in the year ended 31 December 2007 in respect of his non-executive Directorships of two companies unconnected with the Group's business totalling £40,000 (2006: £25,000).top
On behalf of the Board
John O'Reilly
Chairman of the Remuneration Committee
7 March 2008