Governance
Remuneration report
This report explains what we pay to the Directors of Carillion plc and why. It has been prepared on behalf of the Board by the Remuneration Committee. It will be presented for approval at the Annual General Meeting on 5 May 2010 and David Garman, Chairman of the Remuneration Committee, will be available to answer shareholders’ questions.
Remuneration Committee members and advisers
The Remuneration Committee consists exclusively of independent Non-Executive Directors, David Garman, David Maloney, Steve Mogford and Vanda Murray. Its terms of reference can be found on the Company’s website www.carillionplc.com. The Committee determines policy for remuneration of the Executive Directors of Carillion plc and key members of the senior management team.
The Remuneration Committee is assisted in its work by Susan Morton, Group HR Director and by John McDonough, Group Chief Executive. The Group Chief Executive is consulted on the remuneration of those who report directly to him and also of other senior executives. No Executive Director or employee is present or takes part in discussions in respect of matters relating directly to their own remuneration.
Additionally, the Remuneration Committee uses Deloitte LLP to provide salary survey and benchmarking information and external and internal contextual information and analysis as required. Deloitte LLP, which was appointed in 2005, also provides internal audit services and certain specialist consultancy services but otherwise has no other connections with the Group.
The Committee adopts the principles of good governance as set out in the Combined Code and complies with the Listing Rules of the Financial Services Authority and the Directors’ Remuneration Report Regulations 2002. It met three times during the year and all members attended all meetings.
Remuneration philosophy
Carillion’s remuneration philosophy is that reward should be used to incentivise Executive Directors in a manner which is consistent with the Group’s objectives and:
| (i) | supports its strategic objective of attracting, developing and retaining excellent people and encouraging them to work in line with Carillion’s values | ||
| (ii) | aligns the interests of the Directors with those of shareholders and other stakeholders. As a result, a substantial proportion of Executive Directors’ remuneration is variable | ||
| (iii) | applies demanding performance conditions to deliver sustained profitable growth | ||
| (iv) | has due regard to actual and expected market conditions and | ||
| (v) | includes achieving high standards in respect of Carillion’s health and safety, environmental and social performance targets. |
Remuneration and other benefits are reviewed annually with regard to competitive market practice and, where considered appropriate, are supported by external independent surveys.
Elements of remuneration
Basic salary
This is reviewed annually, taking account of individual experience and performance and by reference to information provided by independent sources. The Remuneration Committee has adopted a policy of setting basic salary within the market range of salaries for equivalent roles and expects to pay around the median when the individual has been performing in the role for a reasonable period of time.
Salary increases for Executive Directors in 2009 were two per cent reflecting the economic climate and in 2010 will be zero, both in line with pay for other employees in both years.
Annual performance bonus and deferred bonus plan
The bonus plan is designed to drive and reward excellent operational performance, linking the interests of shareholder and participants by paying one half of the bonus in cash immediately and investing the other half in shares of the Company for a two year deferment period.
Long-term share incentives
These require and reward exceptional performance based on performance targets that are aligned to the interests of shareholders. Awards are made under the Carillion plc Long Term Incentive Plan 2006, known internally as the Leadership Equity Award Plan (‘LEAP’). Each Executive Director is required to hold shares acquired through LEAP until the value of their total shareholding is equal to their annual salary. ‘Good leavers’ during the performance period receive a pro-rata award at the normal release date provided the plan meets its performance requirements.
Carillion share incentives comply with the share dilution guidelines.
Pension benefits
Following the closure to future accrual of its defined benefit pension schemes in April 2009, the Company offers competitive defined contribution pensions to all Executive Directors. Pensionable salary is limited by an internal cap and salary supplements are paid on earnings above the cap.
Other benefits
These include a car or car allowance by individual choice, and private healthcare.
2009 Remuneration
The remuneration of the Directors of Carillion plc for the year ended 31 December 2009 is set out in the table below. This is audited information.
| Basic salary/fees £000 |
Annual performance bonus(v) £000 |
Other benefits £000 |
Compensation(vi) £000 |
Total 2009 £000 |
Total 2008 £000 |
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| Richard Adam | 408 | 221 | 111 | – | 740 | 908 | |
| Richard Howson* | 18 | 6 | 9 | – | 33 | – | |
| David Hurcomb* | 262 | 129 | 63 | 398 | 852 | 607 | |
| Don Kenny | 311 | 153 | 84 | – | 548 | 686 | |
| John McDonough | 632 | 342 | 188 | – | 1,162 | 1,419 | |
| Roger Robinson* | 186 | 91 | 50 | – | 327 | 820 | |
| Total for Executive Directors | 1,817 | 942 | 505 | 398 | 3,662 | 4,440 | |
| David Garman | 61 | – | – | – | 61 | 58 | |
| David Maloney | 58 | – | – | – | 58 | 56 | |
| Steve Mogford | 48 | – | – | – | 48 | 46 | |
| Vanda Murray | 48 | – | – | – | 48 | 46 | |
| Philip Rogerson | 188 | – | – | – | 188 | 183 | |
| Total for Non-Executive Directors | 403 | – | – | – | 403 | 389 | |
| Total for all Directors | 2,220 | 942 | 505 | 398 | 4,065 | 4,829 | |
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| (i) | There are no long term benefits other than pensions and share incentives (see below). | ||
| (ii) | Included in ‘Other benefits’ is a salary supplement for John McDonough of £169,788 (2008: £167,890), for Roger Robinson of £41,521 (2008: £82,210), for Don Kenny £61,832 (2008: £62,050), for David Hurcomb of £48,179 (2008: £51,970) and for Richard Adam of £94,390 (2008: £93,970) in respect of salary over the internal pensions earnings cap. | ||
| (iii) | The Board determines the fees of the Non-Executive Directors based on independent external advice. | ||
| (iv) | John McDonough retains the fee of £75,000 (including the purchase value of 2,000 ordinary shares in Tomkins plc) he was paid in 2009 as a Non-Executive Director of Tomkins plc and Richard Adam retains the fee of £50,000 paid as a Non-Executive Director of SSL International plc. | ||
| (v) | With the exception of David Hurcomb and Roger Robinson where it is paid entirely in cash, 50% of the bonus is payable in cash and the balance deferred in Carillion shares until March 2012. | ||
| (vi) | Compensation in respect of his employment contract was paid to David Hurcomb in January 2010. | ||
| (vii) | Salary and benefits for Richard Howson are pro-rata to his appointment as an Executive Director. |
2009 Bonus Plan
In 2009, Executive Directors had the opportunity to earn up to 100 per cent of their basic salary through the bonus plan comprising up to 25 per cent for personal objectives and 75 per cent for financial objectives. Awards under the personal element are based on delivery against clear and stretching objectives closely aligned to the strategic aims of the Company. The financial element is determined by outstanding performance against stretching targets based on growth in earnings per share. The 2009 plan limits the amount of any award that may be taken in cash to 50 per cent of the bonus earned overall. The balance is deferred into shares of the Company that are held in trust in the participant’s name and vest after two years. The number of shares allocated is determined by the price prevailing at the date of bonus award and by using this mechanism, the value individuals receive at the point of vesting is aligned to the value delivered to shareholders over the same period. The bonuses awarded to the Executive Directors in respect of 2009 are shown in the remuneration table above (half of these benefits being paid in cash in 2010 and the balance deferred to March 2012). Tax and national insurance is calculated on the deferred element based on the value of the shares at the vesting date and paid at that point.
Similar deferral mechanisms have operated in respect of earlier years and during 2009 the following deferred bonus shareholdings vested:
| Bonus year | Number of shares | |
| Richard Adam | – | Nil |
| Richard Howson | 2007 | 9,882 |
| David Hurcomb | 2007 | 40,000 |
| Don Kenny | – | Nil |
| John McDonough | 2006 | 75,911 |
| Roger Robinson | 2006 | 47,857 |
The price prevailing on the above shares at the date of award was 406.0 pence (2007 bonus) and 382.5 pence (2006 bonus). At the vesting date the share price was 218.0 pence.
Pension benefits
In April 2009, the Company closed the Carillion ‘B’ Pension Scheme to future accrual and the Executive Directors who were members of this scheme became deferred pensioners, their deferred benefits being based on pensionable salary and service at the date of closure. Future service accrual will be on a defined contribution basis and benefits will be delivered through the Carillion 2009 Pension Plan. This is a trust-based, contracted-in defined contribution plan set up for former members of the four closed defined benefit schemes.
Defined benefit pensions accruing during the period to 5th April 2009 to Executive Directors in their capacity as Directors of Carillion plc are set out below. This is audited information.
| Accrued pension at 31 Dec 2009(1)(2) £ per annum |
Increase in accrued pension over year excluding inflation allowance £ per annum |
Increase in accrued pension over year including inflation allowance(3) £ per annum |
Transfer value of pension accrued during the period less member contributions(4)(5) £ |
Transfer value at start of year £ |
Transfer value at end of year(5) £ |
Increase in transfer value over the period after member contributions(5) £ |
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| Don Kenny | 26,316 | 708 | 94 | (195) | 442,625 | 463,982 | 19,234 | |
| John McDonough | 32,978 | 631 | (144) | (3,397) | 644,534 | 669,549 | 22,893 | |
| Roger Robinson | 70,095 | (2,129) | (1,587) | (42,282) | 1,536,811 | 1,664,563 | 125,629 | |
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The total number of Directors to whom retirement benefits accrued during the year was 3 (2008: 3).
The Group makes contributions of 40% of the internal earnings cap to registered defined contribution plans on behalf of the Executive Directors in respect of earnings up to the internal earnings cap. Executive Directors are required to pay 10% of the earnings cap.
The contributions made to defined contribution pension plans on behalf of the Directors are set out in the table below. This is audited information.
| Plan | Amount £ | |
| Richard Adam | Carillion Pension Plan | 50,830 |
| Richard Howson* | Carillion 2009 Pension Plan | 972 |
| David Hurcomb | Carillion Pension Plan | 66,055 |
| Don Kenny | Carillion 2009 Pension Plan | 48,375 |
| John McDonough | Carillion 2009 Pension Plan | 48,375 |
| Roger Robinson | Carillion 2009 Pension Plan | 16,125 |
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Death in service benefits are provided as part of membership of these plans. Where applicable, the value of these benefits is also disclosed in the table above.
The Company agreed with the Trustees of the Carillion pension schemes to continue to operate an earnings cap after April 2006 when the external cap was removed. The Carillion cap commenced at the level of £110,000 for the tax year 2006-07 and rises in line with the published increases in HMRC’s Life Time Allowance up until 2010 in line with the table below.
| Year | Cap £ |
| 2009-10 | 129,000 |
| 2010-11 | 132,700 |
All the Executive Directors will be subject to this cap on salary in respect of their pensionable pay. Bonus and other benefits received by Executive Directors do not count towards pensionable pay.
In addition, a salary supplement of 33.6% is paid in respect of earnings over the internal cap in place of the contributions the Company would have made towards pension provision had the cap not been in place. Salary supplements are taxed at source.
The Company does not contribute to any pension arrangements for Non-Executive Directors.
Service contracts
| Name | Commencement | Notice Period | Term |
| Richard Adam | 2 April 2007 | 12 months | rolling |
| Richard Howson | 10 December 2009 | 12 months | rolling |
| Don Kenny | 1 July 2006 | 12 months | rolling |
| John McDonough | 1 January 2001 | 12 months | rolling |
Executive Directors have no additional entitlement to compensation for loss of office. Service contracts contain provision for early termination and in such cases, the Remuneration Committee will consider the specific circumstances together with the Company’s commitments under the individual’s contract and the requirement to mitigate. Mitigation is applied to reduce any compensation payable to departing directors.
Non-Executive Directors are not employed under contracts of service, but are generally appointed for fixed terms of three years renewable for further terms of one to three years, if both parties agree. Steve Mogford, who will stand for re-election at the Annual General Meeting on 5 May 2010, has a letter of appointment until 4 September 2012 subject to re-appointment at the Annual General Meeting.
Long-term (share) incentives
The Leadership Equity Award Plan (‘LEAP’)
The LEAP is offered to key people in the Company to provide an opportunity to earn a potentially higher level of reward but only where there is commitment from those individuals and stretching performance targets are met.
In any financial year, Executive Directors may receive an award under the LEAP over shares worth 150 per cent of their basic annual salary (excluding bonuses and benefits in kind), other senior executives may receive an award under the LEAP over shares worth up to 100 per cent of their basic annual salary. The extra 50 per cent awarded to Executive Directors will only vest if exceptional performance is achieved. In exceptional circumstances a first award of up to 200 per cent of salary can be made under the rules. Thereafter the maximum opportunity will be 150 per cent of basic salary.
Under the terms of the LEAP, awards of ordinary shares in the Company can be made for nil consideration.
All awards/options are subject to a minimum three-year performance period from the date of the award. The vesting of the shares is subject to the relevant participant remaining in employment and the achievement of specified stretching performance conditions based on annual average growth in earnings per share above the Retail Price Index. ‘Good leavers’ during the performance period receive a pro-rata award at the normal release date provided the plan meets its performance requirements. The progression is linear between each of the target levels specified. The requirements for current plans are as follows:
| Growth in earnings per share: | ||
| Level 1 | RPI + 3% pa | 30% vests |
| Level 2 | RPI + 7% pa | 50% vests |
| Level 3 | RPI + 12% pa | 100% vests |
| Level 4 | RPI + 25% pa | Extra 50% vests |
Levels 1 to 3 apply to all participants, level 4 applies to the Executive Directors.
Awards were made in July 2006, April 2007, April 2008 and April 2009. At 31 December 2009 a total of 3,173,881 shares were outstanding under the LEAP.
The awards held by Executive Directors of the Company under LEAP as at 31 December 2009 are shown below. This is audited information.
| As at 1 January 2009 Number |
LEAP awards granted during the year Number |
Awards vesting during the year Number |
Awards/options lapsing during the year Number |
As at 31 December 2009 Number |
Date of award |
Mid market share price on date of award Pence |
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| John McDonough | ||||||||||
| LEAP 2006 (maximum) | 218,354 | – | 189,240 | 29,114 | Nil | 06.07.2006 | 319.0 | |||
| LEAP 2007 (maximum) | 206,773 | – | – | – | 206,773 | 10.04.2007 | 420.8 | |||
| LEAP 2008 (maximum) | 242,187 | – | – | – | 242,187 | 04.04.2008 | 383.8 | |||
| LEAP 2009 (maximum) | – | 366,963 | – | – | 366,963 | 07.04.2009 | 252.25 | |||
| Richard Adam | ||||||||||
| LEAP 2007 (maximum) | 180,629 | – | – | – | 180,629 | 10.04.2007 | 420.8 | |||
| LEAP 2008 (maximum) | 156,250 | – | – | – | 156,250 | 04.04.2008 | 383.8 | |||
| LEAP 2009 (maximum) | – | 236,750 | – | – | 236,750 | 07.04.2009 | 252.25 | |||
| Don Kenny | ||||||||||
| LEAP 2006 (maximum) | 71,202 | – | 71,202 | – | Nil | 06.07.2006 | 319.0 | |||
| LEAP 2007 (maximum) | 98,039 | – | – | – | 98,039 | 10.04.2007 | 420.8 | |||
| LEAP 2008 (maximum) | 119,140 | – | – | – | 119,140 | 04.04.2008 | 383.8 | |||
| LEAP 2009 (maximum) | – | 180,522 | – | – | 180,522 | 07.04.2009 | 252.25 | |||
| Richard Howson* | ||||||||||
| LEAP 2007 (maximum) | 19,013 | – | – | – | 19,013 | 10.04.2007 | 420.8 | |||
| LEAP 2008 (maximum) | 29,296 | – | – | – | 29,296 | 04.04.2008 | 383.8 | |||
| LEAP 2009 (maximum) | – | 68,544 | – | – | 68,544 | 07.04.2009 | 252.25 | |||
| David Hurcomb* | ||||||||||
| LEAP 2006 (maximum) | 26,898 | – | 26,898 | – | Nil | 06.07.2006 | 319.0 | |||
| LEAP 2007 (maximum) | 53,475 | – | – | – | 53,475 | 10.04.2007 | 420.8 | |||
| LEAP 2008 (maximum) | 107,421 | – | – | 35,808 | 71,613 | 04.04.2008 | 383.8 | |||
| LEAP 2009 (maximum) | – | 162,765 | – | 162,765 | Nil | 07.04.2009 | 252.25 | |||
| Roger Robinson* | ||||||||||
| LEAP 2006 (maximum) | 137,658 | – | 119,304 | 18,354 | Nil | 06.07.2006 | 319.0 | |||
| LEAP 2007 (maximum) | 121,675 | – | – | 44,108 | 77,567 | 10.04.2007 | 420.8 | |||
| LEAP 2008 (maximum) | 142,578 | – | – | 83,170 | 59,408 | 04.04.2008 | 383.8 |
The LEAP 2006 performance condition was, at level 4, met at 130% with the result that John McDonough became entitled to 189,240 shares.
On 27 August 2009, 189,240 shares vested to John McDonough, 26,898 to David Hurcomb, 71,202 to Don Kenny and 119,304 to Roger Robinson. The market price of Carillion shares on 27 August 2009 was 294.0 pence. The net asset value received by these Directors/former Director was therefore, respectively, £556,366, £79,080, £209,334 and £350,753.
| * | Roger Robinson retired from the Board on 6 May 2009 and David Hurcomb on 8 December 2009. Richard Howson was appointed to the Board on 10 December 2009. |
Share options held by Executive Directors
The number of options over Carillion plc shares held by Executive Directors of the Company under the Executive Share Option Scheme (ESOS) and Sharesave scheme as at 31 December 2009 are shown below. This is audited information.
| As at 1 January 2009 Number |
Granted during the year Number |
Exercised during the year Number |
Options lapsing during the year Number |
As at 31 December 2009 Number |
Exercise price Pence |
Earliest date from which exercisable |
Expiry date |
Mid market share price on date of grant Pence |
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| John McDonough | |||||||||
| ESOS 2001 | 501,930 | – | – | – | 501,930 | 129.5 | 09.01.04 | 09.01.11 | 135.5 |
| ESOS 2002 | 254,532 | – | – | – | 254,532 | 210.7 | 19.03.05 | 19.03.12 | 197.5 |
| ESOS 2003 | 150,795 | – | – | – | 150,795 | 163.4 | 01.07.06 | 01.07.13 | 159.0 |
| ESOS 2004 | 124,728 | – | – | – | 124,728 | 184.9 | 31.03.07 | 31.03.14 | 187.0 |
| Don Kenny | |||||||||
| ESOS 2002 | 123,801 | – | 123,801 | – | Nil | 125.2 | 17.10.05 | 17.10.12 | 128.0 |
| ESOS 2003 | 60,709 | – | 60,709 | – | Nil | 163.4 | 01.07.06 | 01.07.13 | 159.0 |
| ESOS 2004 | 53,894 | – | 53,894 | – | Nil | 184.9 | 31.03.07 | 31.03.14 | 187.0 |
| David Hurcomb | |||||||||
| ESOS 2005 | 30,895 | – | 30,895 | – | Nil | 242.8 | 15.03.08 | 15.03.15 | 244.5 |
| Sharesave 2006 | 840 | – | – | – | 840 | 337.5 | 01.02.10 | 30.07.10 | 385.0 |
Don Kenny exercised Executive Share Options on 14 September 2009. The market price of Carillion Shares on this date was 293 pence. The net asset value received by Don Kenny was therefore £344,676. Similarly, David Hurcomb exercised an Executive Share Option on 25 November 2009 when the market price of Carillion shares was 300 pence. The net asset value received by David Hurcomb was £17,687.
The ESOS options were granted at an exercise price equal to the market value of the Company’s shares on the three business days immediately preceding the date of grant. Options under the Inland Revenue Approved Executive Share Option Scheme 1999 (which carries certain tax advantages for UK employees) and the Executive Share Option Scheme 1999 are exercisable normally between three and 10 years after the date of grant, subject to the achievement of the performance condition. For options granted from 2003 onwards, the following performance condition prevailed:
| Average compound annual earnings per share growth (before exceptional items) in excess of RPI over the three-year period following grant |
Percentage of option that becomes exercisable |
| Less than 4% | 0% |
| 4% | 30% |
| Above 4% and below 10% | 30% to 100% (straight-line basis) |
| 10% or more | 100% |
Grants of options using this performance condition were made in 2003, 2004 and 2005. Carillion met the performance target such that 80 per cent, 71 per cent and 100 per cent, respectively of the shares under option are now exercisable.
For options granted before 1 July 2003, the performance target required that the earnings per share of Carillion over a rolling three-year period must increase by a percentage not less than the increase in the UK Retail Prices Index over the same period, expressed as a percentage, plus four percentage points per annum. All options granted pre-2003 are excercisable.
At 31 December 2009, Executive Share Options were outstanding over 1,408,032 shares (2008: 1,754,361 shares) under both schemes at exercise prices ranging from 129.5 pence to 210.7 pence.
The option over 254,532 shares at an option price of 210.7 pence granted to John McDonough in March 2002 was made later in the year than had been specified at the time of his appointment which resulted in an increased option price of 67.3 pence. Therefore, in order to ensure that he will be in no worse nor better a position as a result of the delay in the grant, a maximum cash adjustment of 67.3 pence per share (less tax) will be made when and if the option is exercised.
Sharesave options were granted in November 1999 over 6,140,194 shares, in October 2002 over 3,995,803 shares and in November 2006 over 2,580,461 shares. At 31 December 2009, options over 1,349,565 ordinary shares of 50 pence each were outstanding under the Sharesave Scheme (2008: 1,684,664 ordinary shares of 50 pence each).
There have been no changes to the interests of Executive Directors in share incentives and options in the period 1 January to 3 March 2010.
Employee Benefit Trust
An employee benefit trust was established to acquire shares in Carillion plc and hold them for the benefit of participants (including Executive Directors) in the share incentive and share option schemes. During 2009, 1,400,000 shares were issued to the Trust. At 31 December 2009, the Trust held 362,909 Carillion shares (2008: 419,827 shares) 0.09 per cent of the issued share capital (2008: 0.11 per cent) acquired over a period in the open market and which have a carrying value of £1.1 million (2008: £1.3 million). The market value of the shares held at 31 December 2009 was £1.1 million (2008: £1.0 million).
Additionally, a Qualifying Employee Share Ownership Trust (QUEST) operates in conjunction with Carillion in providing shares to employees under its Sharesave Scheme. At 31 December 2009, the QUEST held 134,683 Carillion shares (2008: 8,904 shares) (0.03 per cent of the issued share capital (2008: 0.002 per cent) at subscription prices ranging from 115.5 pence to 296.25 pence per share, to enable it to satisfy, as and when required, options granted under the Sharesave Scheme. The market value of the shares held by the QUEST at 31 December 2009 was £409,167 (2008: £22,100).
For details of dividends paid to the above trusts see Note 24 to the consolidated financial statements.
The closing mid-market price of Carillion shares at 31 December 2009 and the highest and lowest mid-market prices during the year were as follows:
| Share price Pence | |
| 31 December 2009 | 303.8 |
| High (16 November) | 312.5 |
| Low (23 February) | 206.5 |
Total Shareholder Return (TSR) Performance Graph
The following graph shows the TSR of Carillion plc compared with the TSR of the FTSE 350 Index. The FTSE 350 was chosen as the comparator group in order to illustrate the Company’s TSR performance against a broad equity market index of the UK’s leading companies. TSR is not used as a performance measure for any benefits provided to Executive Directors.
TSR graph for period 1 January 2005 to 31 December 2009
Approved by order of the Board
D N C Garman
Chairman of the Remuneration Committee
3 March 2010