Remuneration report 2007
This report sets out the role and remit of the Remuneration Committee and its membership. It describes the Group's overall remuneration policy and gives details of the compensation arrangements for Directors for the year ended 31 December 2007. The report has been prepared on behalf of the Board in accordance with the Companies Act 1985 (as amended) and the Combined Code on Corporate Governance.
Role of the Committee
The Committee's role is to review and approve the remuneration strategy and policies for the Group including the approach for the Group's annual compensation review. It is also responsible for determining the remuneration of the executive Directors, and monitoring the level and structure of remuneration for senior management generally.
The Committee reviewed its terms of reference in October 2007 and proposed certain minor amendments, to bring them in line with those of the other Board Committees, that were approved by the Board on 22 November 2007. The full terms of reference of the Committee are available at www.schroders.com or from the Company Secretary.
Composition of the Committee
The current members of the Committee, unchanged throughout 2007, are:
Sir Peter Job (Chairman)
Andrew Beeson
Kevin Parry
The Committee met on four occasions during 2007 and there was full attendance at all meetings.
Other non-executive Directors as well as the Chief Executive, Chief Financial Officer and senior Human Resources executives attend by invitation but they play no part in the determination of their own remuneration arrangements.
The Committee has appointed New Bridge Street Consultants LLP, McLagan Partners Inc. and Hewitt Bacon & Woodrow Limited as its external advisers. New Bridge Street Consultants LLP provided advice to the Committee on equity incentive plans and to the Group on the implementation of these plans. McLagan Partners Inc. provided the Committee with an interpretation of external market compensation levels and practices and also provided information and advice to management on the external market. Hewitt Bacon & Woodrow Limited provide advice to the Committee and the Group on domestic and international pensions issues, as well as acting as the actuarial advisers to, and administrators of, the UK pension scheme. McLagan Partners Inc. attended two meetings of the Committee during 2007.
Remuneration policy
The Group's remuneration policy is designed to attract, motivate and retain the talent the Group needs in order to help it to achieve its strategic objectives, while ensuring that the ratio of total compensation costs to a measure of net operating revenues for the Group is within a target determined by the Board. The Board determines the target aggregate ratio ahead of the performance year as part of the annual Budget process, and an analysis of competitor ratios is provided to the Board. At the end of each financial year the Committee is advised of the level of fixed compensation expense and then approves the amount distributable as variable compensation across the Group. The ratio of total compensation costs to operating revenues in 2007 was 46 per cent. (2006: 47 per cent.). The broader context for this ratio is covered in the business review.
The Committee believes that total compensation must reflect the global competition for talent in an industry in which successful people are highly rewarded and mobile. The Group compensates all of its employees, including executive Directors, by balancing fixed and variable compensation. Fixed compensation, in the form of base salary, pensions and other benefits, continues to be low for the executive Directors relative to other companies in the FTSE 100 Index and market competitive against a broader base of asset management competitors. In years of strong performance, however, variable compensation, in the form of cash bonuses and deferred bonuses, can be high.
The remuneration of executive Directors is structured in a manner which reflects performance, at both an individual and Group level, and results in them accumulating rights to shares in the Company and exposure to the performance of Schroders investment funds.
Group policy is not to guarantee compensation levels but to recognise that there will be times when this forms part of the initial package necessary to recruit senior employees. No executive Director has such a guarantee.
It remains the Committee's practice and intention to grant share options sparingly, mainly to assist in recruitment where necessary.
Key developments
During the year the Committee considered papers presented on a variety of topics including the following:
- 2006 and 2007 annual compensation reviews;
- Impact of age discrimination legislation on the share plans;
- Changes to the UK defined contribution pension scheme.
The Committee reviewed the existing remuneration policy and, among other factors, considered the guidelines of investor bodies on policies and practices in executive remuneration. The Committee considered that the Group's reward policy was appropriately aligned to the business strategy and that the policy within the Group was therefore fit for purpose. No changes were made to the existing policy. Discussions were initiated on ways of encouraging greater employee share ownership and a longer-term view of performance for senior executives and these discussions are ongoing.
Developments since the last report:
- In June 2007 the Committee increased the base salaries of the executive Directors. This is the first increase to the salary of the Chief Executive since his appointment in November 2001 and to the salaries of the other executive Directors since the later of April 2004 and their appointment.
- A global review of the pension benefits offered by the Group was undertaken. The core employer contribution to the Defined Contribution section of the Schroders Retirement Benefit Scheme increased to 14 per cent. for UK-based employees with effect from 1 March 2008. Prior to this change, UK-based employees in the Defined Contribution section received a core contribution of 7 per cent. or an age-related contribution, depending on the date on which their employment started.
Elements of the compensation package
Base salary
The Committee reviews the base salary of executive Directors annually. During 2007 the Committee agreed to increases for each of the executive Directors to address market relativities and salary compression accruing with respect to other senior executives. Details are set out in Remuneration report. Base salary is the only element of remuneration that is pensionable, with the level of contribution into the UK pension scheme being subject to a notional earnings cap (see note 5).
Benefits
Executive Directors can participate in the flexible benefits plan on the same basis as other UK employees. Benefits entitlements, including pension, for the executive Directors are shown in the tables in Remuneration report.
In response to the changes in pensions legislation that came into effect in April 2006 in the UK, employees who choose not to accrue benefits in the pension scheme apart from life assurance cover receive a taxable cash allowance in lieu. This allowance is set at a level to ensure that the cost impact to the Group (including employer National Insurance) is neutral. Two of the executive Directors are in receipt of such an allowance.
Variable compensation
Discretionary bonus awards are delivered in two forms: a cash bonus and a deferred bonus. The deferral is mandatory and delivered via the Equity Compensation Plan. There are two types of Equity Compensation Plan award: a share award and a fund award. These are described more fully in Remuneration report.
The bonus awards are determined with regard to the performance of the individual and the area or function of the business in which the individual works or for which the individual is responsible, the profitability of the Group and the external market within the overall limit determined by the ratio of compensation to revenue as explained earlier. Given that our remuneration structure places a high degree of emphasis on variable compensation, the Committee does not consider it appropriate to set a cap on discretionary bonus awards at the individual level. Variable compensation is dependent upon responsibilities, business contribution and individual performance and is not linked to base salary. As is referred to in the section starting from corporate responsibility in the business review dealing with our corporate responsibility, the Committee considered the impact of these factors on our corporate performance when determining the overall reward to the executive Directors. The Committee can confirm that the discretionary nature of our variable compensation means that senior management are not inadvertently motivated to behave irresponsibly.
Part of the cash bonus award for the senior management of the Group is directly linked to annual improvements in the profitability of the Group.
The balance between the fixed and variable elements of the total compensation package for each of the executive Directors is shown in the diagram below (extracted from the tables in Remuneration report). Less than 12 per cent. of their individual total compensation was fixed, and more than one third of the 2007 variable compensation for each of the executive Directors in 2007 has been deferred for three years on a mandatory basis via the Equity Compensation Plan.
Proportions of 2007 fixed and variable compensation for each executive Director
Michael Dobson
Jonathan Asquith
Alan Brown
Massimo Tosato
- * Fixed includes base salary, other cash payments, benefits-in-kind and pension entitlements.
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