CHANGES TO KEY MANAGEMENT PERSONNEL
This year we welcomed two new Executives, Dennis Finn and Filippo Abba. Dennis commenced as Group Managing Director/Chief Executive Officer (CEO) of our Advisory business (Advisian) on 1 September 2014 and has become Key Management Personnel (KMP) effective 1 July 2015 with the launch of Advisian as a separate business line. Filippo commenced as Group Managing Director, Improve on 1 April 2015, succeeding Randy Karren who retired on 31 March 2015.
PAY FOR PERFORMANCE IN FY2015
This year’s financial results fell below the Group NPAT gate opener threshold to trigger a payment, resulting in Executives receiving no short term incentive payments.
Also, the benchmarks for shareholder return and earnings per share in our long term incentive scheme have not been met, resulting in equity grants not vesting for the third year in a row.
CHANGES TO REMUNERATION FOR FY2016 AND BEYOND
These outcomes are consistent with our philosophy that our Executives’ incentives should reflect shareholder outcomes. However, the Remuneration Committee has been considering the impact our remuneration outcomes are having on the motivation and retention of our key people, especially during periods of great volatility in the markets for our services.
We concluded that while Company performance must remain the driving force in determining short term incentives, it is also important to appropriately reward our people for significant achievements in delivering on our strategy.
With this in mind, the Board is revising the Executives’ remuneration structure for FY2016.
FIXED PAY AND PAY MIX
We have noted that many of our competitors give more weight to the incentive components in their remunerations structures. In this context, the Company’s future remuneration reviews will have a bias to increasing the incentive components.
We have thus made no adjustments to our Executives’ Fixed Pay for FY2016, except to reflect the CEO’s request that his own Fixed Pay be reduced by 10% from 1 July 2015.
We have also made no changes to Non‑Executive Directors’ fees for FY2016.
LONG TERM INCENTIVES
No adjustments will be made to the Long Term Incentive (LTI) Plan for FY2016.
COMBINED INCENTIVE PLAN
A key aspect of aligning our Executives’ interests with shareholders, to ensure they have sufficient “skin in the game”, is our minimum shareholding requirement of two times Fixed Pay (four times for the CEO). The FY2016 Combined Incentive Plan (CI Plan) will be amended to provide more certainty of growth in Executive shareholdings, while retaining the overall target pay mix of short term cash and medium term deferred equity.
CASH PORTION OF THE CI PLAN
The cash component of the CI Plan retains a focus on both financial and non‑financial Key Performance Indicators (KPIs). For FY2016 and beyond, the overall Group NPAT gate opener will be replaced by individual thresholds for each KPI to improve an Executive’s line of sight over achieving their targets. The Board retains rigorous oversight of the KPIs set, and will continue to ensure they retain sufficient stretch, and appropriate thresholds. Group NPAT remains one of the key financial KPIs, along with business line EBIT targets relevant to each business line leader, as well as cash collection targets. The non‑financial KPIs are focused on our strategic imperatives.
From FY2016 a more leveraged model will apply to financial KPIs. We have extended the scale from 90% back to 80% in recognition that we are at a very volatile point of our economic cycle and that notwithstanding the efforts of our Executives, the variability of outcomes has increased. At or below 80% of target (e.g. Group NPAT budget) no payment will be made.
A sliding scale will then apply with 5% of the target incentive awarded for each 1% achieved above 80% of budget up to a cap of 200% of target incentive if 120% or more of budget is achieved. Non‑financial KPIs will have a 100% maximum score. As the minimum weighting for financials is 50%, the combined effect restricts the overall incentive to 150% of target.
The current scale provides, for example, 91% vesting at 91% performance. The new sliding scale provides for significantly reduced payouts for performance above the threshold, but below the target. The Board considers this approach should give Executives greater incentive to overachieve.
EQUITY PORTION OF THE CI PLAN
The CI Plan will retain the deferred equity component, including a forfeiture provision if results are subsequently restated or any impropriety occurs. The equity portion will continue to be granted annually as performance rights. The vesting period for this equity will be reduced from three to two years. (The LTI remains a four year plan with no ability for re‑testing.)
The rights under the CI Plan will convert into a number of shares that depends on changes in the share price over a two year performance period. If the share price doubles (or more than doubles) over that performance period, the rights convert into twice the number of shares. If the share price halves (or more than halves), the rights do not convert into any shares and they lapse. In between double and half the share price, the rights vest on a proportionate basis. However, given the variation in the share price, the value of the shares into which the rights convert will rise or fall more than proportionately.
In the US these kinds of performance rights are sometimes known as Market Stock Units (MSUs) but for greater clarity we call them Share Price Performance Rights (SPPRs).
We provide the following four examples to help your understanding of how the SPPRs will work. Two examples are where the share price rises, and two where it falls. The four examples are based on a notional grant of 1,000 SPPRs with a notional WorleyParsons share price of $8.00 at the time the SPPRs are issued, i.e. a notional value to the executive of $8,000. In two years’ time:
Scenario 1: The opening share price rises to $20.00 (i.e. more than doubles). The 1,000 SPPRs convert to 2,000 shares and their total value = $40,000. The executive’s incentive has delivered a $40,000 reward (in shares), i.e. $32,000 above the notional $8,000 value at the time of issue.
Scenario 2: The opening share price rises to $12.00. The 1,000 SPPRs convert to 1,000 x ($12/$8) = 1,500 shares and their total value = $18,000. The executive’s incentive has delivered an $18,000 reward (in shares), i.e. $10,000 above the notional $8,000 value at the time of issue.
Scenario 3: The opening share price falls to $6.00. The 1,000 SPPRs convert to 1,000 x ($6/$8) = 750 shares and their total value = $4,500. The executive’s incentive has delivered a $4,500 reward (in shares), i.e. $3,500 below the notional $8,000 value at the time of issue.
Scenario 4: The opening share price halves or more, then the SPPRs lapse and no shares are issued.
The Board has introduced SPPRs because they bring the Company closer to the remuneration practices of our global peers with higher weightings to performance-related pay. They:
- provide our Executives with a clear goal – the increase in the Company’s share price – more closely aligning their interests with those of shareholders;
- have the potential to be a stronger executive incentive than the deferred equity component of prior years;
- replace the previous Group NPAT threshold (or “gate‑opener”) with a threshold relating to share price, giving Executives stronger shareholder alignment, while at the same time protecting shareholders on the downside by the reward cutting out if the share price halves. This cut out is not typically a feature of this type of award in other companies, but we believe it strikes a better balance between rewarding effort and requiring minimum short term outcomes which is more appropriate to current circumstances. Such a balance is important given the changes that the Company is currently making to seek to better position itself for future growth and the need to ensure executive motivation and retention during this time; and
- have the potential to increase executive shareholding “skin in the game” and shareholder alignment because, as SPPRs convert into shares in the Company, executives will be required to hold the shares to comply with the Company’s minimum shareholding requirement.
I wish to reaffirm to shareholders that the Board is resolute in its focus on appropriate remuneration for our people and ensuring we strike the right balances between short term performance and attracting and retaining the caliber of people we need to execute our strategy to “Realize our future”.
JOHN M GREEN
Chairman, Remuneration Committee