Directors’ remuneration

This is a summary of the remuneration committee report from the Annual Report for the year ended 31 December 2008.  The Full Annual Report can be downloaded as a pdf file HERE.

The Remuneration Committee determines the remuneration of the Chairman and the Executive Directors on behalf of the Board. It has formal Terms of Reference set by the Board modeled on the Combined Code, which are displayed on the Company’s website.

The Committee’s membership is shown HERE. In accordance with the Company’s policy of refreshing the membership on Committee’s every two years, David Coltman stood down as Chairman at the year’s Annual General Meeting (AGM), on 21 May 2009 and was replaced by Iain Napier.

The Company Secretary is the secretary of the Committee. Paul Dollman, Group Finance Director, who also has responsibility for advising on Executive remuneration, attends meetings as appropriate. Research commissioned from Kepler Associates was used by the Committee in its determination of Executive remuneration, bonus payments and incentive schemes. Legal advice, from Maclay Murray & Spens LLP, was sought by the Committee during the year where it felt appropriate.

Members of the Committee have no personal financial interest (other than as shareholders) in the matters to be decided and no day-to-day involvement in the running of the business of the Group.

Committee review

The Board extended its review of its own performance to the performance of the Committee during the year, and as part of the independent boardroom evaluation, an external evaluator undertook a survey of the Committee members. Both the Company Chairman and the Committee Chairman held individual and confidential discussions with each member of the Committee where they were invited to raise any concerns or issues that they felt needed addressing.

Annual General Meeting

A resolution to approve this report on Directors’ remuneration was be tabled at the AGM. The Chairman of the Committee will be available to answer questions from shareholders on the report.

Remuneration Policy & Practice

The Group recognises that its continuing success depends on the quality and motivation of its employees. The Group aims to ensure that its remuneration packages are competitive, thereby enabling it to attract, retain and motivate Executives who have the experience, skills and talents to operate and develop its businesses to their maximum potential. This total pay position is analysed by looking across each of the different elements of remuneration, including salary, pension, the annual bonus plan, and long-term incentives to provide a total remuneration rather than just the competitiveness of the individual elements. Pay, salary increases and employment conditions elsewhere in the Group are taken into account by the Committee in determining the remuneration packages for Executive Directors, along with current external market conditions and package competitiveness.

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Salary Spread/package mix

The total remuneration package is designed to include performance and non-performance-related elements. Non-performance elements include salary, taxable benefits and pension entitlements. In addition, Executive Directors are entitled to participate in the Company’s savings-related share option scheme.

All other parts of the package are performance related, and combine a mixture of cash and share based incentives, described in detail below. The performance-based schemes also adopt a variety of performance criteria rather than one criteria used over all the schemes. This is to ensure that the Directors provide a broadly-based growth and development plan for the business. The schemes are designed to reward improvements within divisional performance (such as the Divisional Performance Share Plan), as well as the performance of the Company against external factors, such as Performance Share Plan which measures the Company’s TSR against that of the FTSE250. The Committee believes that by using a combination of internal and external targets across the various schemes, it can better align the Directors’ interests with the interests of the shareholders.

It is intended that on-target performance payouts should be made where the Company achieves its objectives for the year, which will be a combination of financial performance of the Group and divisions, cost savings, business development and other divisional objectives. Stretch performance will be paid where the objectives set for the Group have been exceeded, as well as Executive Directors’ individual targets as set by the Board.

Governance

Directors’ salaries are maintained at competitive levels for comparable positions (based on information provided by Kepler Associates) reflecting, where appropriate, the international nature of the business. Additional rewards for success are built into the remuneration package through incentives designed to share with Directors’ profitability of the Group and wealth generated for shareholders.

In considering and determining suitable remuneration packages for the Executive Directors the Committee has given full consideration to the relevant best practice provisions set out in the Combined Code. The Committee also determines the extent to which all performance targets are met, using research findings as described above.

It is expected that Executive Directors will build up a holding of at least 50,000 shares in the Company over a period of time. Both Paul Dollman and Craig Smyth hold in excess of 50,000 shares in the Company. To assist in building up a shareholding, Directors are encouraged to invest up to 50% of their bonus in the Bonus Co-Investment Scheme.

Basic Salary & Benefits

Salaries are reviewed annually, on appointment, or on change in position or responsibility. In conducting annual reviews of the Executive Directors salaries’, the Committee considers the pay awards and employment conditions across the Group, the Executive Director’s individual performance, experience, as well as the external competitive levels for comparable positions.

In addition to salary, the Executive Directors may receive additional benefits covering car allowance, private medical insurance and life cover. Craig Smyth and Ellis Watson also received a cash allowance in place of any pension entitlement above the ‘earnings cap’. Paul Dollman has an unfunded pension undertaking from the Company to provide in total the same level of pension as if the ‘earnings cap’ did not apply.

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Annual Bonus Scheme

The Executive Directors participate in a discretionary bonus scheme which is subject to the achievement of challenging Group and Divisional and personal targets designed to encourage excellent performance. Bonus payments are non-pensionable. The 2008 bonus scheme contained performance targets that include threshold and stretch levels derived from a review of the historical and projected performance of the Group and its peers, together with an analysis of City analysts’ expectations. Bonuses at the higher end of the range are payable only for demonstrably superior Group and individual performance and the stretch level represents upper quartile performance.

Executive Directors receive a bonus payment of £nil on achieving below threshold performance, increasing on a straight-line basis to a maximum payment of £200,000 for stretch performance. Up to 20% of any entitlement is dependent on the extent to which identified personal Key Result Areas (KRAs) are achieved.

Whilst all Directors were entitled to receive a bonus payment in respect of their individual KRAs, they have each waived their entitlement to receive the payment for 2008.

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Transitional Incentive Plan

Following the restructuring of the Board in 2007, and acknowledging the unique set of circumstances and extra responsibility placed upon the Executive Directors and the Divisional Operating Boards, the Company introduced a Transitional Incentive Plan. Designed to promote retention and stability during a period of change, this one-off plan operated over a one-year period which commenced on 1 January 2008 and run concurrently with the Company’s accounting year.

The performance conditions were based on the achievement of targeted Divisional Financial Results (DFR). The DFR was set at threshold and stretch level; at the stretch level, the performance target has been set by the Remuneration Committee as being suitable and challenging and as being equivalent to achieving upper quartile performance.

A threshold performance receives a payout of 25% of the individual’s salary rising on a straight-line basis to a maximum payout of 100% of salary (capped with a maximum potential payout of £250,000) at stretch level.

At Menzies Distribution, the DFR was based on a combination of the division’s operating profit, reduction in operating costs and income from new revenue streams. At Menzies Aviation the DFR was based on the division’s operating profit and at Group the DFR was based on a profit before tax.

Transitional Incentive Plan table
DFR Measure
Threshold
target
£m
Stretch
target
£m
Actual
result
£m
Aviation operating profit
24
27
14.1
Distribution operating profit
22
25
23.9
Distribution reduction in operating profit
3.0
4.5
6.2
Distribution income from new revenue streams
2.0
4.7
2.1
Group - profit before tax
35.3
40.3
30.7

Actual payouts under the scheme are detailed on the Directors’ remuneration table HERE.

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Bonus Co-Investment Plan

Under the Bonus Co-Investment Plan, Executive Directors may elect to invest up to 50% of their annual bonus in shares of the Company (net of tax) which qualify for an award of up to 2:1 matching shares (based on the gross invested salary) dependent on achieving a performance target set prior to election.

The performance target for the Plan is for real per annum Earnings Per Share (EPS) growth above the Retail Price Index growth over a three-year period, with the number of shares vesting being calculated on a straight-line basis from a nil award at 3% to a full award at 8% or above. Any dividends accrued on shares which vest are paid in cash on vesting.

The maximum number of shares which could vest under the PSP to Executive Directors are shown HERE.

An award of conditional matching shares was made during the year (subject to performance conditions as noted above) at a market price of 534p (2007: 515.5p). They will vest on the day on which the Company announces its preliminary results for the year to December 2010 (2007 share awards: December 2009). The figures shown above are maximum entitlements and the actual number of shares which vest will depend on the performance conditions being achieved, as set out above. An award made in 2005 matured in December 2007. The real per annum growth in EPS for the Company over the performance period of the award did not meet threshold levels, and therefore no matching shares vested.

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Performance Share Plan

Executive Directors may be awarded a number of conditional shares annually under the Performance Share Plan (PSP) as determined by the Committee. The maximum number of conditional shares which may be awarded to any individual under the rules of the PSP in any year is 100,000. At the 2007 AGM it was the Committee’s stated intention that no individual would receive an award from both the PSP and the Divisional Performance Share Plan (DPSP) in any given year. However, on reflection and having reviewed feedback from shareholders, the Committee decided that an award split between the two schemes is appropriate. For the avoidance of doubt, under no circumstances will any individual receive combined awards of more than 100,000 conditional shares (the stated annual maximum for each participant in each scheme) in any one year as a result of awards under both schemes.

The shares awarded in 2008 will vest after three years if the Company’s Total Shareholder Return (TSR) is equal to or outperforms the FTSE250 Index (the Index) TSR for the three years to December 2010. The number of shares to vest will be based on the extent of any outperformance, with shares vesting on a straight-line basis up to 100% of the award for performance at 30% above the Index’s TSR. Any dividends accrued on shares which vest are paid in cash on vesting.

The maximum number of shares which could vest under the PSP to Executive Directors are shown HERE.

An award of conditional shares was made during the year (subject to performance conditions as noted above) at a market price of 487p (2007: 576p). These will vest on the day on which the Company announces its preliminary results for the year to December 2010 (2007 share awards: December 2009). The figures shown are maximum entitlements and the actual number of shares which vest will depend on the performance conditions being achieved, as set out above. The award of conditional shares made in 2005 which had a performance period from January 2005 to December 2007 lapsed during the period with the performance criteria not being met.

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Divisional Performance Share Plan

The DPSP is the same in practically all respects as the PSP, except that the performance conditions are based on the achievement of targeted Divisional Financial Results (DFR), rather than TSR within the PSP. The PSP therefore aligns each divisional Director to the performance of the Group while the performance criteria within the DPSP is set against future divisional profitability and is appropriate given the structure of the Group to incentivise each Divisional Managing Director.

When the DPSP was proposed to shareholders at the 2007 AGM it was the Committee’s stated intention that no individual would receive an award from both the PSP and DPSP in any given year. However, on reflection and after reviewing feedback from shareholders, the Committee has decided that an award split between the two schemes would be more appropriate. It is therefore the intention of the Committee to split the overall award to each Divisional Managing Director equally between the DPSP and the PSP. For the avoidance of doubt, under no circumstances will any individual receive combined awards of more than 100,000 conditional shares (the stated annual maximum for each participant in each scheme) in any one year as a result of awards under both schemes.

The DFR are set at threshold and stretch level. At threshold, 25% of the award will be paid to an individual, increasing on a straight-line basis to 100% for stretch or greater achievement. At stretch level, the performance targets have been externally verified by Kepler Associates as being equivalent to achieving upper quartile performance.

For Menzies Distribution, the DFR are based on a combination of three factors: operating profit; reduction in operating costs; and income from new revenue streams. For Menzies Aviation the DFR are based on operating profit. As the disclosure of these targets could be considered as a profits forecast and are viewed by the Committee to be both price and commercially sensitive, the Committee has decided that it will retrospectively disclose the threshold and stretch targets for an award in its report following the end of the performance period. Disclosure of the performance targets made during 2008 will therefore be made in the Committee’s Report for the financial year ending 2010.

The maximum number of shares which could vest under the DPSP to Executive Directors are shown HERE. An award of conditional shares was made during the year (subject to performance conditions as noted above) at a market price of 487p (2007: 576p). These will vest on the day on which the Company announces its preliminary results for the year to December 2010 (2007 share awards: December 2009). The figures shown above are maximum entitlements and the actual number of shares which vest will depend on the performance conditions being achieved, as set out above.

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2009 Performance Share Plan

The Committee has decided to recommend the introduction of a one-off three-year Performance Share Plan (2009 PSP), which will offer Executive Directors the opportunity to benefit from the potential success of the Company over the forthcoming three years, as measured by an increase in the Return On Capital Employed (ROCE). It will provide for a conditional award to be made of up to 450,000 ordinary shares for each participant, over a three-year period. Vesting is based on attainment of a prescribed performance criteria (ROCE) and continued employment over a three-year period. On the Committee’s recommendation, the Board is proposing to adopt the 2009 PSP to augment the Company’s existing share incentive plans as part of the Company’s policy of ensuring that its remuneration practices remain competitive.

Further details of the 2009 PSP are set out in the Notice of Annual General Meeting.

Share Options

Executive Share Option Scheme
Prior to the introduction of the above share and incentive schemes, share options were granted to each Executive Director normally on an annual basis at a level of one times salary. All grants were discretionary, and awards could be varied depending on specific circumstances. Paul Dollman was granted options at three times salary in 2002, reflecting market conditions at the time of his recruitment, and an award of one times salary in 2004.

The number of shares held in the scheme are shown HERE, and the cost to the Company is shown in Note 20 to the accounts. The options are exercisable on a sliding scale if growth in underlying earnings per share exceeds RPI plus 3%-8% per annum in the three years from grant, adjusted to normalise pension and tax charges.

The performance conditions attaching to these options have been met in full.

Savings Related Share Option Scheme The Company operates a H.M. Revenue & Customs approved Savings Related Share Option Scheme (the SAYE Scheme) available to all UK-based employees in the Group, including Executive Directors. The Company believes that the SAYE Scheme is an important tool in the motivation and retention of staff and at the AGM in 2008 the Company approved the introduction of a new SAYE Scheme to replace the one which was due to expire in September 2008. Further details of the SAYE Scheme and the cost to the Company are shown in Note 20 to the accounts.

The interests of the Directors in the SAYE Scheme are set out HERE.

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Service Contracts

The Executive Directors have service contracts with the Company, the dates of which are listed in the Directors’ Emoluments table HERE. The Group’s practice on notice periods is that they should be for a period of 12 months’ notice. It is the Company’s policy that any termination payment be restricted to the actual loss incurred by the Director.

All Executive directors who served during the year have service contracts on this basis. The Committee considers that the notice periods are reasonable and in the interests of shareholders having due regard to prevailing market conditions and practice among companies of comparable size.

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Non-Executive Directors

The Chairman and each of the Non-Executive Directors have letters of appointment. The letters of appointment do not contain any contractual entitlement to a termination payment and the Directors can be removed in accordance with the Company’s Articles of Association. The Chairman and all Non-Executive Directors are subject to re-election by shareholders at least every three years, with the exception of any Director whose appointment exceeds nine years, in which case there is a requirement for annual re-election.

Salary

The salary mix for Non-Executive Directors comprises a basic payment, and additional payments for being Chairman or a Committee member, or the Senior Independent Director. It is intended to be a competitive mix broadly in line with comparable companies.

Payment £32,229
Committee Chairmanship £6,000
Committee Membership £2,500
SID fee £14,061

External Appointments

The Board recognises the benefits to the individual and to the Company of involvement by Executive Directors as Non-Executive Directors on other companies. Prior to accepting an invitation to become a Non-Executive Director of another company, an Executive Director must receive approval from the Chairman. This approval will not be denied where the Chairman is confident that the appointment will not interfere in any way with the Director’s ability to perform his duties for the Company or provide a conflict of interest. Executive Directors are entitled to retain any fees received under these appointments.

During the year, Paul Dollman accepted an external non-executive appointment with Scottish Amicable Life Association Society.

Details of fees received by Executive Directors are as follows:
Paul Dollman £25,986 (Scottish Amicable Life Association Society)

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Payments to outgoing Directors

No Directors left the Board during the year, and so the Company did not make any payments. It is the Company’s policy that any termination payments that are made to a Director are mitigated wherever possible, and will not exceed their entitlement based on their service contract.

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Pensions

Scheme Benefits
Paul Dollman and Craig Smyth are members of the Menzies Pension Fund, a defined benefit scheme which provides pension on retirement at age 60 of up to two-thirds of pensionable earnings, or the ‘earnings cap’ if lower, together with additional benefits as detailed below. Pensionable earnings are based on salary excluding bonuses. Ellis Watson is a member of the defined contribution pension scheme.

Unfunded Arrangement
The pensionable salary of Paul Dollman is restricted as a consequence of the ‘earnings cap’. He has an unfunded pension undertaking from the Company to provide in total the same level of pension as if the ‘earnings cap’ did not apply. This entitlement is effective from his date of appointment as a Director.

In the case of Craig Smyth and Ellis Watson they both receive a cash payment equal to 20% of their respective salaries above the earnings cap which is included in other benefits. Pension details are shown HERE.

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