Remuneration philosophy

The key principles of our approach to executive remuneration are:

To provide strong alignment with the interests of our shareholders and other stakeholders in incentivising management to achieve sustainable long-term value creation, whilst ensuring that high safety standards are achieved.

This report complies with the provisions of the Companies Act 2006, the Large and Medium-sized Companies and Groups Regulations 2008 as amended in 2013, the UK Corporate Governance Code 2018 and the UKLA Listing Rules and the Disclosure and Transparency Rules. The remuneration committee has also taken into consideration guidelines published by institutional investor advisory bodies such as the Investment Association and the NAPF.

The report is in two parts:

  • A summary of the directors' remuneration policy (Directors' remuneration report). This section contains details of the remuneration policy and is subject to approval at the 2020 AGM.
  • The directors' annual remuneration report. This section sets out the details of remuneration earned by directors for performance in the year ended 31 March 2020 and how the policy was implemented. It sets out how we intend to apply the policy for the year ending 31 March 2021. The directors' remuneration report is subject to an advisory vote at this year's AGM.

Part 1 – Remuneration Policy

The table below sets out each element of the Remuneration Policy for the executive directors, explaining how each element operates and the links to the corporate strategy. If approved, the policy will be effective from the date of the Company's 2020 AGM. The proposed policy has been determined after reviewing the impact of the previous policy, considering the Company's strategy, remuneration philosophy and business model and taking into account the new Corporate Governance Code and updated shareholder and proxy guidelines and wider best practice.

It is intended this policy will remain in place until the 2023 AGM. The Company's remuneration policy supports the business strategy by ensuring that the overall remuneration package is set at a competitive level while ensuring that additional reward is only paid for high performance over a sustained period.

The remuneration report details how the existing approved remuneration policy has been implemented over the previous year and how the proposed policy will be implemented in the following year, subject to approval by our shareholders.

The Policy differs from the previous Policy in the following areas:

  • pension allowances for new executive director appointments, and for executive directors changing role, will be set at the level of the majority of the UK monthly paid workforce in the United Kingdom; currently 7 per cent of base salary.
  • pension allowances for existing executive directors will be reduced to 15 per cent of salary on a phased basis over the life of the policy;
  • a formal post-cessation shareholding policy has been introduced requiring executive directors to retain a shareholding equal to the full in-employment shareholding for a period of two years post-employment;
  • rather than specifying a fixed time period to reach the required shareholding level, we now require directors to retain all deferred bonus and vested PSP shares until the shareholding requirement has been met.

The key principles of the policy are:

  • Clarity: maintain transparency of our competitive total remuneration structure that is driven by our business strategy and model, focuses on sustained long-term value creation and is aligned with the interests of shareholders;
  • Predictability: to ensure that targets set each year result in stretching ambitions and that the scale of the reward is proportionate; support the Group's business strategy: a reward package that balances short and long-term performance, rewarding Group and personal performance;
  • Simplicity: ensure the remuneration structure avoids unnecessary complexity;
  • Risk is appropriately managed. The remuneration of executive directors provides an appropriate balance between fixed and performance-related pay elements: restraint on fixed pay, with a substantial proportion of total remuneration based on variable pay linked to performance;
  • Alignment to culture: the remuneration principles encourage behaviour that the committee expects; and
  • Proportionality: the link between individual awards, the delivery of strategy and the long-term performance of the Group is clear.

The remuneration committee has determined that the remuneration of executive directors will provide an appropriate balance between fixed and performance-related pay elements. The remuneration committee will continue to review the remuneration policy to ensure it takes due account of remuneration best practice and that it remains aligned with shareholders' interests.

Remuneration policy table for executive directors

The following table sets out each element of the remuneration policy for the executive directors, explaining how each element operates and links to the business strategy.


For international assignments, the Group may be required to make additional payments to comply with local statutory requirements.

Base salaries
Purpose and link to strategy
To provide the core reward for the role recognising knowledge, skills and experience, in addition to the size and scope of the role.
Sufficient to recruit and retain directors of the calibre necessary to execute the Group's strategy.
Operation
Base salaries are normally reviewed annually by the committee, with changes typically effective from 1 July.

Base salaries are pensionable.

Our review takes into account levels of increase across the broader workforce, changes in responsibility, and a periodic remuneration review of comparable companies.
Maximum opportunityPerformance conditions
There is no prescribed maximum base salary or salary increase.

Current salaries are disclosed in the annual report on remuneration.

Salary increases are awarded at the discretion of the committee. Salary increases (in percentage of salary terms) will ordinarily be considered in relation to those applied to the broader employee population.

The committee retains discretion to award a lower or a higher increase to recognise, for example, significant changes in the scope and/or responsibilities of the role, a material change in the size and scale of the Group and/or to take account of relevant market movements.

Where an executive director's salary is set below market levels at appointment, a series of increases may be given (in addition to the factors listed above) in order to achieve the desired salary positioning, subject to satisfactory individual performance.
None, although the committee considers individual salaries each year having due regard to the factors noted in operation of the policy.

No recovery provisions apply to salary.
Benefits
Purpose and link to strategy
Cost-effective benefits, sufficient to recruit and retain directors of the calibre necessary to execute the Group's strategy.
Operation
The Group currently provides the following employee benefits:
  • Life assurance at four times salary
  • Medical insurance for self with option to purchase for family
  • Company car and fuel allowance
Relocation expenses may be offered if considered appropriate and reasonable by the committee.

In circumstances where an executive is deployed on an international assignment, their arrangements will be managed in a way that is consistent with good practice for international organisations. Additional allowances may also be paid, e.g. to cover any increase in cost of living, tax equalisation and/or additional accommodation costs.

Any reasonable business-related expenses can be reimbursed (including the tax thereon if determined to be a taxable benefit). The committee may wish to offer executive directors other employee benefits on broadly similar terms as those offered to other employees from time to time, provided within the maximum opportunity limit, including participation in any all-employee share plans operated by the Group, in line with the prevailing HMRC guidelines (where relevant).
Maximum opportunityPerformance conditions
The value of insured benefits can vary from year to year based on the costs from third party providers. The committee reviews the cost of the benefits provision on a regular basis to ensure that it remains appropriate.

The total value of benefits (excluding relocation and international assignment allowances) will not exceed more than 15 per cent of salary in any year.

The maximum level of participation for all-employee share plans, if relevant, is subject to the limits imposed by HMRC from time to time (or a lower cap set by the Group).
No performance conditions or recovery provisions apply to benefits.
Pension
Purpose and link to strategy
Cost-effective long-term retirement benefits, sufficient to recruit and retain directors of the calibre necessary to execute the Group's strategy.
Operation
Group contribution to defined contribution scheme (own or the Group's), a cash supplement or a combination of both up to the maximum value.
Director has no obligation to match Group contributions.
Maximum opportunityPerformance conditions
For new executive director appointments after the 2020 AGM, the Group pension contribution/allowance will be aligned to that available to the majority of the UK monthly paid workforce, from time to time. The current pension contribution being 7 per cent of base salary.
For incumbent directors, the pension contribution levels will be reduced to 15 per cent by July 2023 as follows:
No recovery provisions apply to pension benefits.
CurrentFrom 1/4/21From 1/4/22From 1/4/23
CEO20%19%17%15%
Others18%17%16%15%
For international assignments, the Group may be required to make additional payments to comply with local statutory requirements.
Annual bonus
Purpose and link to strategy
To focus attention on achieving short-term corporate objectives, incentivise outperformance of targets and provide a deferred element to reinforce the impact of long-term performance.
Operation
Annual awards based on targets set by the committee at the beginning of each financial year.

The extent to which the performance measures have been achieved is determined by the committee after the end of the performance period. The level of bonus for each measure is determined by reference to the actual performance relative to that measure's performance targets, on a pro-rata basis.

All bonus payments are at the ultimate discretion of the committee and the committee retains an overriding ability to ensure that overall bonus payments reflect its view of corporate performance during the year when determining the final bonus amount to be awarded.

Any annual bonus award is made 50 per cent in cash and 50 per cent in shares, deferred for three years under the rules of the Group's deferred share bonus plan ('DSBP'). The plan incorporates a malus and clawback mechanism for instances of financial misstatement, error, substantial failures in risk control, serious misconduct or any other exceptional circumstances determined by the remuneration committee, for a period of three years from the bonus payment date. The malus and clawback provisions extend to the cash element of the annual bonus.

Dividends may accrue on deferred bonus shares, to the extent they have vested. Any dividend equivalents would normally be delivered in shares.
Maximum opportunityPerformance conditions
Maximum 100 per cent of base salary per annum.The committee will review the appropriateness of performance measures on an annual basis and consider whether there is a need to rebalance or amend the performance measures, targets and weightings to reflect the business objectives at the time. The committee retains the discretion to set alternate measures, as appropriate. However, the majority of the annual bonus will be subject to financial targets.

Currently, the business uses a combination of underlying profit before tax ('PBT') targets and accident frequency rate ('AFR') targets.

Performance is measured over one financial year.

No more than 50 per cent of the maximum bonus opportunity will be payable for on-target performance.

The actual measures and weightings are set out in the annual report on remuneration.
Performance Share Plan ('PSP') (approved by shareholders in 2017)
Purpose and link to strategy
Incentivise and reward for long-term sustainable performance linked to corporate strategy and provide alignment with shareholders' interests.
Operation
Discretionary awards of performance shares are normally granted annually. The committee reviews the quantum of awards annually and monitors the continuing suitability of the performance measures.

The awards will, in normal circumstances, vest subject to continued service and the achievement of performance conditions over a prescribed period, normally measured over three financial years.

A two-year post-vesting holding period requirement, which continues to apply post-employment applies for shares that vest, net of sales to settle tax or other withholding due on the vesting or exercise of awards.

Malus and clawback provisions apply to allow recoupment for a period of three years following the vesting of an award, in the event that the value of a vested award is subsequently found to have been overstated as a result of financial misstatement, error, substantial failures in risk control, serious misconduct or any other exceptional circumstances determined by the remuneration committee.

Dividends may accrue on vested awards. Any dividend equivalents accrued will normally be delivered in shares.

All awards are subject to the discretions contained in the relevant plan rules.
Maximum opportunityPerformance conditions
Maximum annual award level is 150 per cent of salary.The committee will determine each year the appropriate award levels and performance conditions based on the corporate strategy at the time. However, a financial measure such as underlying earnings per share ('EPS') will be used for at least half of any award.

Currently, the awards are subject to an EPS growth target, the details of which are set out in the annual remuneration report.

No more than 25 per cent of an award will vest for performance at the lower threshold of EPS targets increasing to 100 per cent vesting at maximum on a straight-line basis.

The committee retains discretion to override formulaic outcomes in deciding the level of vesting to reflect wider Group performance. Any exercise of discretion will be fully disclosed to shareholders.

A two-year post-vesting holding period applies.
All-employee share plan
Purpose and link to strategy
To foster wider employee share ownership.
Operation
The Group currently operates a share incentive plan and a sharesave scheme. Participation in any all-employee share plans operated by the Group is in line with HMRC guidelines. Executive directors are entitled to participate on the same basis as for other eligible employees.
Maximum opportunityPerformance conditions
The Group has discretion under the all-employee share plans to issue awards up to the HMRC approved limits as set from time to time.No recovery provisions apply to all-employee share awards.
Shareholding requirements
Purpose and link to strategy
To strengthen the alignment between the interests of the executive directors and those of shareholders.
Operation
In accordance with best practice, shareholding requirements apply during and post-employment.

In-employment shareholding requirement
Executive directors will normally be required to retain a shareholding of at least 200 per cent of their PSP award opportunity. Executive directors are required to retain shares acquired under equity incentive schemes, net-of-tax, until such time as they have built up the required holding.

Deferred bonus shares, vested but unexercised PSP awards, shares subject to a holding period and open market purchase shares, including shares held by a spouse or children under 18 count towards this limit, on a net-of-tax basis.

Post-employment shareholding requirement
Executive directors will normally be required to retain a shareholding, at the level of the in-employment shareholding or the actual shareholding on cessation, if lower, until the second anniversary of the date they ceased to be an executive director.

The post-cessation shareholding requirement will apply to shares acquired (net-of-tax) under awards granted under this policy. Shares acquired under all-employee share plans or purchased from the executives' own funds would not be included.
Maximum opportunityPerformance conditions
Executive directors are required to build up and maintain an in-employment shareholding of at least 200 per cent of their PSP award opportunity.

Executive directors will normally be required to retain a post-employment shareholding at the level of the in-employment shareholding requirement, or the actual shareholding on cessation, if lower, for a period of two years post-employment.
No performance conditions or recovery provisions apply.
Policy of payment for departure from office
ProvisionPolicy
Salary, pension and benefitsIf no breach of service agreement – termination payment based on the value of base salary that would have accrued during the contractual notice period* taking into account mitigation when appropriate as circumstances dictate.
Annual bonusDiscretionary payment based on the circumstances of the termination and after assessing performance conditions and only for the service period worked. DSBP will be forfeited for dismissal for misconduct, fraud and performance issues and where executive director leaves for alternative employment at a competitor.
PSPOutstanding awards will lapse unless good leaver (death, disability, retirement, the sale of the business or company that employs the individual or for any reason at the discretion of the committee (which may take into account the circumstances of an individual's departure)). A good leaver's unvested awards will vest on the normal vesting date subject to the achievement of any relevant performance condition (other than in the case of death when vesting will be immediate), with a pro-rata reduction to reflect the proportion of the vesting period served.

* The committee will have the authority to settle any legal claims made against the Company, for example for unfair dismissal, that may arise on termination.

Notes to the policy table

Choice of performance conditions and metrics

Our role as the remuneration committee includes the establishment of performance goals through long-term incentive plans which are challenging but achievable through superior performance, thereby incentivising and rewarding success.

The long-term incentive plan currently incorporates an EPS performance measure, which is a key financial metric that is aligned with shareholder interests. The committee has considered and taken advice on alternative performance measures, such as total shareholder return ('TSR'), to substitute for (all or part of) the use of the EPS range used in the past. Lack of a suitable peer group of similar listed companies made this approach impracticable and, to date, we have found no better benchmark.

The remuneration committee has retained flexibility on the measures which will be used for future award cycles to ensure that the measures are fully aligned with the strategy prevailing at the time the awards are granted. Notwithstanding this, the remuneration committee would seek to consult with major shareholders in advance of any material change to the choice or weighting of the PSP performance measures.

No performance targets are set for any share incentive plan or sharesave plan awards since these form part of all-employee arrangements that are purposefully designed to encourage employees across the Group to purchase shares in the Company.

Details of all the outstanding share awards granted to existing executive directors are set out in the annual remuneration report.

The discretions retained by the committee in operating the annual bonus and the PSP

The committee will operate the annual bonus (including the deferred share element) and the PSP according to their respective rules and in accordance with the Listing Rules where relevant.

The committee retains discretion, consistent with market practice, in a number of regards to the operation and administration of these plans.

In relation to both the Group's PSP and annual bonus plan, the remuneration committee, consistent with market practice, retains discretion over a number of areas relating to the operation and administration of the plans. These include, for example, selecting the participants, the timing and quantum of awards and setting performance criteria each year, determining "good leaver" status, determining the extent of vesting based on the assessment of performance, form of payment, discretion to retrospectively amend performance targets in exceptional circumstances (providing the new targets are no less challenging than originally envisaged) and in respect of share awards, to adjust the number of shares subject to an award in the event of a variation in the share capital of the Company.

Any use of the above discretions would, where relevant, be explained in the annual report on remuneration and may, as appropriate, be the subject of consultation with the Group's major shareholders.

Illustration of application of the policy

The remuneration package comprises core fixed pay (base salary, pension and benefits) and performance based variable pay (annual bonus and the PSP). The chart below illustrates the composition of the executive directors' remuneration packages under the proposed policy for threshold, on-target and stretch performance.

A significant proportion of remuneration is linked to performance, particularly at maximum performance levels. The charts below show how much each executive director could earn under Severfield's remuneration policy (as detailed above) under different performance scenarios.

The following assumptions have been made:

  • Minimum (performance below threshold) — Fixed pay only with no vesting under the annual bonus or PSP.
  • Target (performance in line with expectations) — Fixed pay plus a bonus at the mid-point of the range (i.e. 50 per cent of the maximum opportunity) and a PSP award of 100 per cent of salary for the chief executive officer and chief operating officer and 75 per cent of salary for other executives and an assumption of vesting at 50 per cent of the maximum.
  • Maximum (performance meets or exceeds maximum) – Fixed pay plus maximum bonus and maximum PSP award vesting.
  • Maximum plus 50 per cent share price appreciation: illustrating the effect of a 50 per cent growth in the Company's share price on the value of the PSP awards.

Fixed pay comprises:

  • Salaries – salary effective as at 1 July 2020;
  • Benefits – amounts expected to be received by each executive director in the 2021 financial year;
  • Pension – amount that will be received by each executive director in the 2021 financial year based on the policy set out in the table above.

The scenarios for minimum, target and maximum performance do not include any share price growth.

Chief executive officer


Chief operating officer


Group finance director


Executive director


Fixed

Bonus

LTIP

Share price appreciation

Executive directors' service agreements

All executive directors' service agreements run on a rolling basis. Notice periods of 12 months are required to be given by all parties. Payment to be made in lieu of notice on termination is equal to 12 months' salary or to any proportion of unexpired notice period.

Full details of the contracts of each director, including the date, unexpired term and any payment obligations on early termination, are available from the Company secretary at the annual general meeting.

Our recruitment remuneration policy

Base salary levels will be set in accordance with our approved remuneration policy prevailing at the time of appointment, taking into account the experience and calibre of the individual and the relevant market rates at the time. Where it is appropriate to offer a lower salary initially, progressive increases (possibly above those of the wider workforce as a percentage of salary) to achieve the desired salary positioning may be given over the following few years subject to individual performance and continued development in the role. Salary will be considered in the context of the total remuneration package.

Benefits will be provided in line with those offered to other employees, with relocation expenses/arrangements provided for if necessary.

Should it be appropriate to recruit a director from overseas, flexibility is retained to provide benefits that take account of those typically provided in their country of residence (e.g. it may be appropriate to provide benefits that are tailored to the unique circumstances of such an appointment).

Pension contributions or a cash supplement up to the maximum level indicated in the policy table will be provided, although the committee retains the discretion to structure any arrangements as necessary to comply with the relevant legislation and market practice if an overseas director is appointed.

The aggregate ongoing (i.e. after the year of appointment) incentive opportunity offered to new recruits will be no higher than that offered under the annual bonus plan and the PSP policy to the existing executive directors. In the year of appointment, the annual bonus opportunity will be no higher than that offered to existing executive directors, prorated for the period of service (i.e. 100 per cent of salary on an annualised basis). The committee may award up to 150 per cent of salary under the PSP, although in exceptional circumstances, in order to facilitate the buy-out of existing awards the committee may go above this limit.

Different performance measures may be set initially for the annual bonus, taking into account the responsibilities of the individual, and the point in the financial year that they joined.

The above policy applies to both an internal promotion to the board and an external hire.

The maximum level of variable pay which may be awarded to new executive directors, excluding the value of any buy-out arrangements, will be in line with the policy set above. In addition, the remuneration committee may offer additional cash and/or share-based elements to replace deferred or incentive pay forfeited by an executive leaving a previous employer when it considers these to be in the best interests of the Company and its shareholders. It will, where possible, ensure that these awards are consistent with awards forfeited in terms of the form of award, vesting periods and expected value. Such elements may be made under section 9.4.2 of the Listing Rules where necessary. Shareholders will be informed of any such arrangements at the time of appointment.

The remuneration committee may apply different performance measures, performance periods and/or vesting periods for initial awards made following appointment under the annual bonus and/or long-term incentive arrangements, subject to the rules of the plan, if it determines that the circumstances of the recruitment merit such alteration. A PSP award can be made shortly following an appointment (assuming the Company is not in a closed period).

In the case of an internal hire, any outstanding variable pay awarded in relation to the previous role will be allowed to pay out according to its terms of grant (adjusted as relevant to take into account the board appointment).

On the appointment of a new chairman or non-executive director, the fees will be set taking into account the experience and calibre of the individual and the expected time commitments of the role. Where specific cash or share arrangements are delivered to non-executive directors, these will not include share options or other performance-related elements.

External appointments

The Board allows executive directors to accept appropriate outside commercial non-executive director appointments provided the aggregate commitment is compatible with their duties as executive directors. The executive directors concerned may retain fees paid for these services, which will be subject to approval by the board. No non-executive directorships in a listed company were held by the executive directors during the year.

How are the non-executive directors paid?

The chairman and non-executive directors receive an annual fee (paid in monthly instalments by payroll). The fee for the chairman is set by the remuneration committee and the fees for the non-executive directors are approved by the board, on the recommendations of the chairman and the chief executive officer.

ElementPurpose and link to strategyOperation (including maximum levels)
FeesTo attract and retain a high-calibre chairman and non-executive directors by offering market competitive fee levels.
  • Current fee levels are disclosed in the annual report on remuneration.
  • The chairman and the other non-executive directors receive a basic board fee, with supplementary fees payable for additional board responsibilities.
  • Non-executive directors will be reimbursed for any normal business-related expenses and any taxable benefit implications that may result.
  • The non-executive directors do not participate in any of the Group's incentive arrangements or pension scheme.
  • The fee levels are normally reviewed on a periodic basis, and may be increased, taking into account factors such as the time commitment of the role and market levels in companies of comparable size and complexity. Fee increases may be greater than those of the wider workforce in a particular year, reflecting the periodic nature of increases and that they take into account changes in responsibility and/or time commitments.
  • Additional fees may be payable to reflect exceptional time commitments.
  • No benefits or other remuneration are provided to non-executive directors.

What are the terms of appointment of the non-executive directors

The chairman's and non-executive directors' terms of appointment are recorded in letters of appointment. The required notice from the Company is one month in all cases. The non-executive directors are not entitled to any compensation on loss of office. Appointments are subject to annual re-election by shareholders at the AGM.