Remuneration report

We pay for performance in a transparent and simple way, aligned clearly to client and shareholder interests.

Lord Howard of Penrith, Chairman of the Remuneration Committee (photo)

Lord Howard of Penrith
Chairman of the
Remuneration Committee

Committee membership (meeting attendance is in chapter The Board and its Committees)

Lord Howard (Chairman)

Robin Buchanan

Nichola Pease

Another year of record net income and profits gives us confidence that our employees are motivated to perform above expectations for clients and shareholders. Since our current Directors’ remuneration policy was approved in 2014, over 96% of shareholder votes cast have been in favour of our remuneration report each year. Over that period, retention of high performing employees has averaged 95%. We believe this policy of aligning employee pay with the interests of clients and shareholders while keeping total pay levels competitive with our predominantly international competitors meets our stakeholders’ needs.

As we ask shareholders to approve a new policy at the 2017 AGM, the success of our current approach might suggest limited policy change. However, we recognise that much has changed in the past three years. We have revisited our remuneration philosophy, reviewed our remuneration strategy from the top down and listened to views from shareholders, the government and regulators. The resulting changes to our Directors’ remuneration policy are outlined opposite. We have also managed significant internal change – the transition to a new Group Chief Executive and changes in leadership in Distribution. It is important at this time to provide stability for our employees.

We also recognise the significant challenges that our industry faces, as outlined in our Group Chief Executive’s statement in chapter Group Chief Executive’s statement. In light of this, it is right to be prudent on pay levels. Although profits are up, we have maintained the total compensation ratio at 44%, below our target range of 45% to 49%, and higher fixed pay costs mean the bonus pool is down on last year.

Our remuneration philosophy

In 2016, the Committee carried out a fundamental review of our remuneration philosophy and the resulting pay structures. We continue to believe in our current approach, where the remuneration policy for our executive Directors is aligned with that for other employees. Remuneration is clearly aligned to the performance of the Group and the value delivered for our clients and shareholders. Long-term thinking is core to Schroders, as our success depends on helping our clients meet their long-term financial goals. Our philosophy is to reward value creation and recognise appropriately employees who do the right thing, delivering good outcomes for our clients, fund investors and shareholders.

We compete for talent in a global marketplace, with employees in 27 countries and with 42 nationalities employed in our London headquarters. Most of our key competitors are headquartered outside the UK, particularly in the US, and many are not publicly listed and are therefore subject to lower standards of transparency. It is against this backdrop that we determine both our pay structures and levels of pay, to ensure that we are able to attract, motivate, reward and retain the best people. In chapter Annual report on remuneration we set out the competitiveness of pay for the executive Directors.

We charge the Group Chief Executive with maintaining a total cost ratio of 65%. Within that we set a target range for remuneration, our largest cost item, capping overall spend within a total compensation ratio range of between 45% and 49% depending on market conditions. We also look at a profit share ratio* to manage variable remuneration spend, to align remuneration further with the Group’s financial performance. These ratios are simple to understand and clear for both shareholders and employees. Our approach allows us to keep base salaries relatively low, ensuring we are able to control our cost base when times are challenging, and we believe maintaining this approach is important at a time when the asset management industry is undergoing significant change. The salaries of our executive Directors are among the lowest in the FTSE-100 and we have only increased them twice in the last ten years. Benefits and retirement savings for the executive Directors are also low compared to the FTSE-100, though for most employees the benefits we offer are competitive when compared to market norms.

We believe in a discretionary approach to assessing performance and determining annual bonus awards, as opposed to formulaic incentives. For the executive Directors, this includes taking a balanced approach to growing the business profitably and sustainably, encouraging the longevity of client relationships while retaining and developing our talented people who are key to organisational stability and long-term success. Formulaic pay can often drive the wrong behaviours and the wrong long-term outcomes for clients and shareholders. We look to reward appropriately all employees who adhere to the firm’s values – excellence, innovation, teamwork, passion and integrity – and who demonstrate the behaviours we expect in a client-centric culture. Our discretionary approach also ensures we assess performance on management of risks and adherence to compliance controls (chapter Annual report on remuneration).

Our remuneration philosophy supports our long-term approach by deferring a significant part of annual variable remuneration into fund and share awards, which provides clear alignment with the long-term interests of clients and shareholders, through awards under the Long Term Incentive Plan (LTIP) and by requiring executives to acquire and maintain significant shareholdings in the Group.

Structure of the remuneration report

Directors’ remuneration policy changes

While maintaining our overall remuneration philosophy, we propose some important changes to our Directors’ remuneration policy to strengthen the alignment of executive pay to the financial performance of the Group and the interests of clients and shareholders, including:

Element of pay

Changes proposed for three years from the 2017 AGM

Annual incentive

  • Increasing the proportion of executive Directors’ annual bonus awards that is deferred from approximately 50% to approximately 60%
  • Introducing greater disclosure of executive Directors’ targets and performance in determining variable pay
  • Applying deferral into ECP to any payment to a departing Director for their contribution in their final year, as with annual bonus awards

LTIP

  • Introducing a discretionary override for LTIP vesting, so the Remuneration Committee may reduce the extent to which awards vest if the Group has suffered a material failure of risk management or if the outcome from the performance conditions does not appropriately reflect underlying performance
  • Introducing a 12-month holding period following vesting, during which awards cannot be exercised and malus terms continue to apply

Personal shareholding policy

  • Increasing the Group Chief Executive’s shareholding requirement from 300% of salary to 500% of salary
  • Requiring executive Directors on stepping down to maintain a level of shareholding for two years

We face continued regulatory uncertainty, which could affect our future remuneration approach. If policy changes are required then we will consult with shareholders at that time.

Shareholder engagement

At last year’s AGM, shareholders showed strong support for our Remuneration report, with 96% of votes cast in favour. Each year, the Committee reviews how shareholders voted on remuneration, together with any feedback received. Concerns raised by a small minority of shareholders and the policy changes proposed are in chapter Directors’ remuneration policy. I met with a number of our shareholders recently to discuss our remuneration philosophy and the policy changes we propose to make.

2016 performance and remuneration outcomes

Schroders has again delivered record results in 2016 and it is in this context that the remuneration of all employees, including the executive Directors, has been determined. Profit before tax and exceptional items was up 6% to £644.7 million. The Board has recommended a 7% increase in the total dividend per share for the year. The Board approved a total compensation ratio of 44%, unchanged from 2015, and a profit share ratio of 36% (2015: 37%).

Information on the annual bonus awards for the executive Directors is outlined in chapter Annual report on remuneration. Other than the Group Chief Executive, the year-on-year change in variable pay for the executive Directors varies from a decrease of 68% to an increase of 2%, compared to a decrease in the average annual bonus award across our employees of 11%.

We have awarded Peter Harrison a bonus of £5.5 million, reflecting his increased responsibilities following his appointment as Group Chief Executive on 4 April 2016. He succeeded Michael Dobson, who received a bonus of £7.9 million for 2015. Peter has made an excellent start in his new role, ensuring a smooth transition in the senior leadership of the Group and maintaining the strong financial performance of the business in volatile market conditions. Investment performance is a key measure of success and we remain significantly ahead of target, with 74% of assets outperforming over three years and 85% over five years. Talent retention through this period of transition has been well-managed and good progress has been made against target growth opportunities, including in the development of our North American business. The Group Chief Executive’s pay is 33 times the employee mean and 60 times the employee median, as shown in chapter Annual report on remuneration.

The Committee believes the LTIP performance conditions are highly demanding. In March 2017, we expect LTIP awards granted in 2013 to vest at 50%, as the earnings per share target will not be met. This is despite the strong performance of the Group, generating earnings per share growth of 76% over the four-year performance period. The net new business target was significantly exceeded, with a total of £46.8 billion of net new business over the performance period (see chapter Annual report on remuneration).

Departing executives

The Committee awarded Michael Dobson an annual bonus award of £2.0 million, reflecting his performance as Chief Executive for part of 2016 and his work in ensuring a smooth transition of his responsibilities. Michael waived his contractual rights to £7.5 million on stepping down as Chief Executive. He is not eligible for a bonus in respect of his role as Chairman. The Committee awarded Massimo Tosato an annual bonus award of £1.3 million, reflecting his contribution during 2016, and a payment of £3.0 million in settlement of his rights on stepping down, which were equal to one year’s salary plus bonus or £4.7 million, from his 2001 employment contract. These payments to Michael and Massimo were made in cash in February 2017 and clawback terms apply.

On 1 March 2017, Philip Mallinckrodt relinquished his executive responsibilities. He continues on the Board as a non-executive Director. Page 96 outlines the approach the Committee has taken to his remuneration in light of this.

Diversity

As one of the first signatories of the Women in Finance Charter in the UK, we are committed to increasing the representation of women within senior management. We targeted 30% representation by 2019. Having made significant progress, moving from 25% at the end of 2015 to 29% this year, we have increased our target to 33%. This year we have disclosed gender pay gap data for the first time, in chapter Annual report on remuneration, in advance of UK disclosure rules coming into effect in April 2017. This shows a gap of 31% to 33% for salary and other cash allowances per hour and 59% to 66% for bonus, though these figures may be misleading. Our analysis of comparable roles shows that we reward men and women fairly for similar work and that the gap reflects the lower representation of women at senior levels within the organisation.

Lord Howard of Penrith
Chairman of the Remuneration Committee