Remuneration report

Dear Shareholder

I am pleased to present the Remuneration report for the year ended 31 March 2017. It is three years since we initially sought shareholder approval for our remuneration policy so we will be seeking re-approval at the forthcoming AGM.

Performance and reward

It has been a very good year for the Group. We have delivered strong profit growth and all of our established businesses have performed well. In particular, we have seen a rapid period of expansion in North America where there have been record partner signings and significant growth in customer numbers.

The stretching financial and non financial targets for the Group have been met with improved performance in respect of customer satisfaction. In the UK, the cash target was not met and the target in respect of core renewable customers was only partially met. The other UK targets were met in full.

In respect of longer-term performance, the LTIP awards granted in 2013 vested in full during the year with HomeServe’s TSR at the end of the performance period being 114.1% compared to the FTSE 250 Index TSR of 30.1%. Based on TSR performance to 31 March 2017 of 91.9% compared to the FTSE 250 Index TSR of 25.7%, it is expected that the awards granted in 2014 will also vest in full.

Following Johnathan Ford’s appointment as COO, his salary was increased by 6.6% to £400,000. This increase reflected the change in his responsibilities and the importance of the role.

The Committee is satisfied that the remuneration paid to the Executive Directors in the year fairly reflects both corporate and individual performance during the year.

The Committee’s activities during the year are described in more detail later in this report.

Remuneration policy FY18

We will be re-submitting the remuneration policy to shareholders for approval at the AGM. The policy has been updated for a number of operational changes in respect of how it is applied but is largely unchanged from 2014. The key operational changes since 2014 have been:

  • The addition of a two year post vesting holding period to awards granted under the LTIP which provides a 5 year perspective to the incentive programme
  • An increase in the shareholding requirement for Directors from 100% of salary or fees to 200%
  • A rebalancing of the bonus objectives to increase the focus on financial measures
  • An amendment to Richard Harpin’s contract to remove the entitlement to bonus in any payment in lieu of notice.

Recovery and withholding policies are in place and we are comfortable that our approach is robust and workable should these provisions ever need to be operated.

Salaries will increase by 1.5% with effect from 1 July 2017 in line with the average increase for the UK workforce and the maximum bonus opportunity remains unchanged at 100% of salary. Bonus remains strongly linked to customer measures in line with the business strategy, subject to affordability underpins. Details of the performance targets used and performance against them will be disclosed in next year’s report.

The FY18 Performance Share award for Executive Directors will be at 150% of salary.

Share awards are granted under the HomeServe 2008 Long-Term Incentive Plan (LTIP), shareholder approval for which will expire in July 2018. The Remuneration Committee will review the long-term incentive provision during the course of the year and consult with major shareholders prior to the introduction of a replacement plan at the 2018 AGM.

The Remuneration Committee is satisfied that the remuneration policy continues to work effectively and supports our strategy as an entrepreneurial, customer focused business.

Stella David
Chairman of the Remuneration Committee

This report has been prepared in accordance with the disclosure requirements for directors’ pay - Schedule 8 of the Large and Medium Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. The report also satisfies the relevant requirements of the Listing Rules and describes how the Board has applied the principles and complied with the provisions relating to directors’ remuneration in the UK Corporate Governance Code. Unless otherwise stated, this report is unaudited.

The Directors’ remuneration policy was approved by shareholders at the 2014 AGM and as required under the regulations, will be re-submitted to shareholders for approval at the 2017 AGM. There are no material changes to the policy from that previously approved by

shareholders. Details of minor operational changes to the policy are set out in the Chairman’s letter.

Remuneration policy

The Committee’s policy for the remuneration of Executive Directors and other senior Executives is based on the following principles:

  • to align rewards with the Group’s financial and operational performance
  • to ensure that remuneration, in particular, variable pay, supports the Group’s strategy as a customer focused operation
  • to promote high levels of executive share ownership to encourage a long-term focus and alignment of interest between executives and shareholders
  • to attract, retain and motivate high calibre executives.

To that end, the Committee structures executive remuneration in two distinct parts: fixed remuneration of basic salary, pension and benefits and variable performance-related remuneration in the form of a cash bonus and long-term incentive arrangements.

Remuneration for Executive Directors is structured so that the variable pay element forms a significant portion of each Director’s package.

The Committee is satisfied that neither the structure of the remuneration packages, with the high weighting on variable pay, nor the performance measures targeted under the annual bonus and long-term incentive arrangements, encourages inappropriate risk taking.

The remuneration arrangements are designed so as to provide a strong alignment of interest between the Executives and shareholders and to support the growth and performance aspirations of the Company. The Committee is satisfied that the current arrangements meet these objectives. Furthermore there is a clawback provision in respect of annual bonuses and long-term incentive awards which helps to guard further against excessive risk-taking.

A risk review of the remuneration policy has been completed.

Summary of components of Executive Directors’ remuneration

The table below summarises the Committee’s policy for the remuneration of Executive Directors.

Element Purpose and link to strategy Performance Period Operation (including performance measures and maximum limits)
Basic salary To reflect the particular skills and experience of an individual and to provide a competitive base salary compared with similar roles in similar companies. Usually reviewed annually, with any changes normally taking effect from 1 July each year.

Individual pay is determined by the Committee taking into account the role, responsibilities, performance and experience of the individual and market data on comparable roles.

The Committee has not set a cap on the maximum salary level that may be offered. However, any salary increases will normally be no higher than the typical level of increase awarded to other UK employees.

Increases above this level may be offered in certain circumstances such as where an Executive Director has been promoted, has had a change in responsibility, to reflect increased experience in the role, or where there has been a significant change in the size and/or scope of the business.

When reviewing salary increases, the Committee also takes into account the impact of any increase to base salaries on the total remuneration package.

Details of the current salaries of the Executive Directors are set out in the Annual Report on Remuneration.

Performance related bonus The annual bonus is designed to drive and reward the short-term operating performance of the Company and encourage the delivery of consistently good customer outcomes. Annual (determined after the year end).

Annual bonuses are determined by reference to performance against a mix of financial, non financial and personal objectives. Before any bonus is payable a minimum level of both customer and financial performance must be achieved.

Bonuses are based on Group performance and, if relevant, the specific territory for which an Executive Director is responsible. Individual performance accounts for no more than 20% of the overall bonus opportunity.

The maximum potential quantum is 100% of salary.

A minimum level of both customer and financial performance must be achieved before any bonus becomes payable.

Bonuses are payable in cash but may be voluntarily deferred by the executive into shares under the matching element of the LTIP.

Long-term incentives To drive long-term delivery of the Group’s objectives, to align Directors’ interests with those of the Company’s shareholders and to encourage exceptional performance. Three years

Awards of performance and matching shares are granted under the Long Term Incentive Plan (which was approved by shareholders in 2008).

The maximum limit is 200% of salary for performance share awards (normally, awards of 150% of salary are made to the Executive Directors) and a maximum 2:1 match on voluntary investment of bonus into shares.

The maximum amount of bonus that may be invested is set at 75% of the maximum bonus potential (i.e. 75% of salary). If the bonus earned is less than 25% of salary, then the executive may invest the equivalent of 25% of salary, from their own money, in shares to receive a matching award. In determining the number of matching awards to be granted, the investment is deemed to be made gross of tax.

Dividend equivalents may be awarded on shares vesting under the Plan.

Both performance and matching awards are currently subject to the same performance conditions which are based on challenging earnings per share and relative Total Shareholder Return targets. Performance is measured over a performance period of at least three years and, for awards granted in FY16 onwards, a two year post vesting holding period applies. Different measures may be applied for future award cycles as appropriate to reflect the business strategy.

Pension To provide benefits comparable with similar roles in similar companies. N/A

Executive Directors may receive a pension allowance of up to 20% of salary, to be paid, subject to the scheme limits, into the HomeServe Money Plan (a money purchase pension scheme) and/or taken as a cash allowance in lieu.

Richard Harpin currently continues to participate in the Water Companies Pension Scheme (a defined benefit scheme which is closed to new members).

Retirement benefits under the scheme are restricted by a notional earnings cap (£136,710 for FY17). An unapproved pension contribution equal to 20% of the amount by which basic salary exceeds the notional cap is provided.

Other benefits Provides a competitive package of benefits to assist with recruitment and retention of staff. N/A

Other benefits include a fully expensed car (or cash alternative), fuel allowance, private health cover (for the individual, partner and dependant children), death in service benefits (up to 8 x salary) and permanent health insurance.

Other benefits may be provided as appropriate and Directors can access HomeServe products and services on the same terms as offered to employees.

Any reasonable business related expenses (including tax thereon) may be reimbursed.

There is no maximum limit on the value of the benefits provided but the Committee monitors the total cost of the benefit provision.

All Employee Share Plans To encourage employee share ownership. N/A The Executive Directors may participate in any HMRC tax-advantaged all employee share plans offered by the Company on the same terms as other employees, subject to limits on the level of individual participation as set by HMRC.
Chairman and Non-Executive Directors’ fees To attract and retain Non-Executive Directors of the right calibre. N/A

Non-Executive Director fees are determined by the Board. The fees for the Chairman are determined by the Remuneration Committee taking into account the views of the Chief Executive. The Chairman excludes himself from such discussions.

The fee levels are reviewed periodically and are set to reflect the responsibilities and time commitment of the role and the experience of the individual. Fee levels are set by reference to rates in companies of comparable size and complexity. The fees for the Non-Executive directors comprise a basic Board fee, with additional fees paid for chairing a Committee or for the Senior Independent Directorship. The Chairman receives an all encompassing fee for his role.

In exceptional circumstances, additional fees may be payable to reflect a substantial increase in time commitment. The fees are paid monthly in cash.

Any reasonable business related expenses (including tax thereon) may be reimbursed.

The Chairman and Non-Executive Directors may be eligible to access HomeServe products and services on the same terms as offered to employees.

Rationale behind performance metrics and targets

The Remuneration Committee works hard to ensure that the remuneration policy for the Executive Directors supports the business strategy, and that the level of remuneration received is reflective of the overall business performance and the returns received by shareholders. A significant proportion of the remuneration package comes from variable pay with careful consideration given to the choice of performance metrics to ensure that the executives are not encouraged to take inappropriate risks.

Annual Bonus

The annual bonus is designed to drive and reward strong short-term operating performance. No annual bonus is paid unless a high level of performance is achieved. The Committee reviews the annual bonus plan measures annually in order to ensure that they are aligned with the Group’s strategy and so that bonus arrangements are consistent amongst the senior executive team. Performance targets are set at the start of the financial year and are linked to the Group’s strategic and operational objectives. The customer focused culture across our business is reflected in the use of non financial metrics in the annual bonus scheme. These are balanced by the use of financial targets and personal objectives used to reflect other strategic priorities.

The Committee retains the discretion to alter the choice and weighting of the metrics for future bonus cycles to reflect the changing needs of the business. The payment of any bonus is at the discretion of the Committee and bonuses will only be paid once a minimum level of customer and financial performance is achieved.

LTIP

Long-term incentive awards will be granted in accordance with the rules of the shareholder approved HomeServe 2008 Long-Term Incentive Plan (LTIP) (and any subsequent replacement plan) and the discretions contained therein. The performance measures for the matching and performance awards are set using a sliding scale of targets and no more than 25% of the award (under each measure) will vest for achieving the threshold performance hurdle.

The choice of measures may change for future award cycles, but is currently based on the following:

Metric Link to strategy
Earnings per share (EPS) This provides an assessment of the profitability of the Group over the longer-term and is strongly aligned to the execution of the business strategy. Challenging targets are set for each award cycle based on internal and external forecasts.
Total Shareholder Return (TSR) This measures the total return to shareholders provided through share price appreciation and dividends. TSR is measured relative to the performance of the FTSE 250 Index. TSR provides a clear alignment between the value created for shareholders and the reward earned by executives.

The Committee would consult with shareholders in advance of a change in the choice or weighting of the performance measures to be applied to future award cycles.

Under the rules of the plan, the Committee has the discretion to adjust the targets applying to existing awards in exceptional circumstances providing the new targets are no less challenging than originally envisaged. The Committee also has the power to adjust the number of shares subject to an award in the event of a variation in the capital of the Company.

Awards under the LTIP may be granted as conditional allocations or nil (or nominal) cost options with, or as, forfeitable shares. The Committee may also decide to grant cash based awards of an equivalent value to share based awards or to satisfy share based awards in cash, although it does not currently intend to do so. Awards are satisfied through a mixture of either market purchase or new issue shares. To the extent new issue shares are used, the 2008 LTIP will adhere to a 5% in 10 year dilution limit.

A post vesting holding period was introduced for awards granted in FY16 onwards. There will be a minimum period of five years from the date of grant of an award before shares can be sold. To the extent that nil cost options are exercised after the three year vesting point, but before five years, the net of tax value of the vested shares must continue to be held. The dividend roll up on unexercised nil cost options will continue until five years from grant. This five year view provides a longer-term perspective to the incentive programme than the three year performance period.

Clawback

The Committee has the power to reclaim some, or all, of a cash bonus and vested LTIP awards (performance and matching) in exceptional circumstances, such as misstatement of financial results, an error in assessment of performance, the use of misleading information and/or gross misconduct on the part of the individual.

Pensions

Richard Harpin participates on a non-contributory basis in a funded, HMRC approved occupational defined benefit scheme (with benefits limited to a notional capped salary) which is closed to new members. An unapproved pension contribution is paid in respect of basic salary above the cap.

The main features of the scheme are:

  • pension at normal retirement age of one-half of final pensionable salary and a tax free lump sum of one and a half times final pensionable salary on completion of 40 years’ service at an accrual rate of 80ths plus 3/80ths cash
  • life assurance of five times basic salary
  • pension payable in the event of ill health; and spouse’s pension on death
  • normal retirement at age 60.

Shareholding guidelines

It is the Board’s policy that Directors build up and retain a minimum shareholding in the Company. Each Director is encouraged to hold shares of at least equal value to two times their annual basic salary or fee.

If the holding guideline has not been fulfilled at the point of exercise of any option or the vesting of any other long-term incentive award, the Director must retain 50% of the net proceeds in the Company’s shares until the holding requirement is achieved. Details of the current shareholdings of the Directors are provided later in this report.

How employees’ pay is taken into account

The remuneration policy for the Executive Directors is designed with regard to the policy for employees across the Group as a whole. Our ability to meet our growth expectations and compete effectively is dependent on the skills, experience and performance of all of our employees. Our employment policies, remuneration and benefit packages for employees are regularly reviewed.

There are some differences in the structure of the remuneration policy for the Executive Directors and senior management team compared to other employees reflecting their differing responsibilities, with the principal difference being the increased emphasis on performance related pay for the more senior executives within the organisation. However, there are many common themes. For example, the structure of the annual bonus, with the focus on financial, non financial and personal performance, is the same for employees at management grade and above.

Employee share ownership is encouraged and facilitated through extending participation in the LTIP to other senior leaders within the business and all eligible employees are able to participate in the HomeServe One Plan, a share incentive plan.

Although the Committee does not consult directly with employees on directors’ pay, the Committee does take into consideration the pay and employment conditions of all employees when setting the policy for directors’ remuneration. In terms of comparison metrics, the Committee takes into account the average level of salary increase being budgeted for the UK workforce when reviewing the salary levels of the Executive Directors. The Committee is also mindful of any changes to the pay and benefit conditions for employees more generally when considering the policy for directors’ pay.

How shareholders’ views are taken into account

The Committee considers shareholder feedback received regarding the Remuneration report annually and guidance from shareholder representative bodies more generally. These views are key inputs when shaping remuneration policy. The Committee consults with shareholders when considering changes to remuneration arrangements.

Overall balance of measures for variable pay for FY17

Remuneration scenarios for Executive Directors

The chart below details the composition of each Executive Director’s remuneration package and how it varies at different levels of performance under the policy set out above. It demonstrates the balance between fixed and variable pay at threshold, on-target and maximum performance levels under the normal remuneration policy for the Executive Directors.

Assumptions

Fixed fixed pay only (salary plus benefits plus pension).
On target target annual bonus of 80% of salary plus target LTIP awards of 90% of salary plus matching awards of 90% of salary.
Maximum maximum annual bonus of 100% of salary plus maximum LTIP awards of 200% of salary plus matching awards of 150% of salary.

Salary levels (on which other elements of the packages are calculated) are based on those applying from July 2017.

The value of taxable benefits is based on the actual values paid in FY17 apart for David Bower where expected benefits are shown.

Richard Harpin participates in a defined benefit scheme which has been valued according to BIS regulations. The other Executives receive a pensions allowance of 20% of basic salary. The Executive Directors may participate in all-employee share schemes on the same basis as other employees. The value that may be received under these schemes is subject to tax approved limits. For simplicity, the value that may be received from participating in these schemes has been excluded from the above charts. The chart excludes the impact of share price growth.

David Bower will not receive a matching award in FY18 having only recently been appointed to the Board.

Executive Directors’ service agreements and policy on payments for loss of office

Under the Executive Directors’ service contracts up to twelve months’ notice of termination of employment is required by either party (reduced to six months if following a prolonged period of incapacity).

Dates of current contracts are summarised in the table below:

Name Date of contract
R Harpin 18 January 2002
M Bennett 1 January 2013
D Bower 3 February 2017
J Ford 1 October 2012

Should notice be served, the Executives can continue to receive basic salary, benefits and pension for the duration of their notice period. The Company may require the individual to continue to fulfil their current duties, or may assign a period of garden leave. The Company applies a general principle of mitigation in relation to termination payments and supports the use of phased payments.

Outplacement services may be provided where appropriate, and any statutory entitlements or sums to settle or compromise claims in connection with a termination (including, at the discretion of the Committee, reimbursement for legal advice) would be paid as necessary.

The service contracts also enable the Company to elect to make a payment in lieu of notice equivalent in value to twelve months’ base salary, benefits and pension. Mr Harpin’s contract was amended during the year to remove the entitlement to bonus as part of any payment in lieu of notice.

In the event of cessation of employment, the executives may still be eligible for a performance related bonus for the period worked. Different performance measures may be set to reflect changes in the director’s responsibilities until the point of departure.

The rules of the LTIP set out what happens to outstanding share awards if a participant leaves employment before the end of the vesting period. Generally, any outstanding share awards will lapse when an Executive leaves employment, except in certain circumstances. If the Executive leaves employment as a result of redundancy, death, ill-health, injury, disability, retirement, transfer of employment or any other reason at the discretion of the Committee, then they will be treated as a ‘good leaver’ under the plan rules.

For a good leaver, any outstanding unvested LTIP awards will vest on the normal vesting date subject to an assessment of performance, with a pro-rata reduction to reflect the proportion of the vesting period served. The Committee may dis-apply the time pro-rating requirement if it considers it appropriate to do so. In the case of cessation due to death, the Committee can determine that the awards vest early. Outstanding vested but not exercised awards can be exercised by a good leaver until the expiry of the normal exercise period (or within 12 months in the case of death).

In determining whether an Executive should be treated as a good leaver and the extent to which their award may vest, the Committee will take into account the circumstances of an individual’s departure.

The treatment of share awards on a change of control is the same as that set out above in relation to a good leaver (albeit with the vesting period automatically ending on the date of the change in control).

Recruitment Policy

Base salary levels will be set in accordance with HomeServe’s remuneration policy, taking account of the executive’s skills, experience and their current remuneration package. Where it is appropriate to offer a lower salary initially, a series of increases to the desired salary positioning may be given over subsequent years subject to individual performance. Benefits will generally be provided in accordance with the approved policy, with relocation expenses and/or an expatriate allowance paid for if necessary. For an overseas appointment (which may include the relocation of an existing Director), the benefit and pension arrangements may be tailored to reflect local market practice (subject to the overall maximum limits on pension set out in the policy table).

The structure of the variable pay element will be in accordance with HomeServe’s policy as detailed above. The maximum permitted variable pay opportunity is 450% of salary (100% of salary bonus + 200% of salary LTIP + 150% of salary matching award). However, the normal award limits are a bonus of 100% of salary, a performance share award of 150% of salary and up to a 150% of salary matching award. In the case of the matching awards, a new recruit may be invited to invest up to 25% of salary from their own funds in the first year in order to receive a matching award (in determining the number of matching awards to be granted, the investment is deemed to be made gross of tax). LTIP awards may be made shortly following an appointment (assuming the Company is not in a closed period).

The performance and matching awards would be granted on a consistent basis to the other Executive Directors. In the case of the annual bonus, different performance measures may be set for the first year, taking into account the responsibilities of the individual and the point in the financial year at which they joined. If it is necessary to buy-out incentive pay (which would be forfeited on leaving the previous employer) in order to secure the appointment, this would be provided for taking into account the form (cash or shares), timing and expected value (i.e. likelihood of meeting any existing performance criteria) of the remuneration being forfeited. The LTIP permits the grant of restricted share awards to Executive Directors in the case of recruitment to facilitate this, although awards may also be granted outside of this scheme if necessary, and as permitted under s.9.4.2.2 of the Listing Rules.

The service contract for a new appointment would be in accordance with the policy for the current Executive Directors.

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.

Fees for a new Chairman or Non-Executive Director will be set in line with the approved policy.

Non-Executive Directors’ letters of appointment

Non-Executive Directors serve under letters of appointment for periods of three years. The Non-Executive Directors (including the Chairman) have a notice period of three months but no liquidated damages are payable.

Fees are determined by the Executive Directors within the limits set by the Articles of Association, and are based on information on fees paid in similar companies and the skills and the expected time commitment of the individual concerned.

Details of their current three year appointments are as follows:

Name Date of contract
J M B Gibson 1 April 2016
S David 23 November 2016
C Havemann 1 December 2015
B Mingay 1 January 2015
M Morris 27 February 2015

Outside Appointments

Executive Directors may hold one outside appointment and can retain any fees received.

Annual Report on Remuneration

This part of the report has been prepared in accordance with Part 3 of the revised Schedule 8 set out in The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, and 9.8.6R of the Listing Rules. The annual report on remuneration will be put to an advisory shareholder vote at the 2017 Annual General Meeting.

Remuneration Committee Members

Stella David (Chairman)
JM Barry Gibson
Mark Morris
Ben Mingay

All of the members are independent Non-Executive Directors. The Board determined that the Company Chairman, Barry Gibson, should remain a member of the Committee taking account of the fact that he was considered to be independent on appointment and also that, as a former Chairman of the Remuneration Committee, his knowledge of the development of the remuneration policy and practices at HomeServe is invaluable. He takes no part in discussions relating to his own remuneration.

Responsibilities

The primary responsibilities of the Committee are to:

  • determine the Group’s overall remuneration strategy
  • determine the remuneration packages of the Executive Directors and other members of the Executive Committee
  • approve the grant and exercise of executive long-term incentive arrangements and oversee the operation of other share-based plans across the Group.

In determining remuneration policy, the Committee is free to obtain such professional advice as it sees fit, and it periodically monitors both the policies of comparator companies and current market practice in order to ensure that the packages provided are sufficient to attract and retain Executive Directors of the necessary quality.

The Committee aims to develop and recommend remuneration strategies that drive performance and reward it appropriately. In determining its policy, the Committee has paid regard to the principles and provisions of good governance contained in the Code and the guidelines issued by institutions such as the Investment Association, ISS and the NAPF. The Committee operates under the delegated authority of the Board and its terms of reference are available on the website.

The remuneration of Non-Executive Directors is a matter for the Board. No Director is involved in determining his or her own remuneration.

The Committee has agreed and implemented a procedure for reviewing and assessing its own effectiveness.

Advisers

During the year New Bridge Street (’NBS‘), a firm of independent remuneration consultants, served as advisers to the Committee. NBS also provided technical implementation and accounting advice in relation to the administration of the Company’s share schemes. Other than in relation to advice on remuneration, NBS has no other connections with the Company. NBS is a trading name of Aon Hewitt Ltd, the ultimate parent company of which is Aon plc. Aon UK Ltd (another Aon company) provides insurance broking services to HomeServe and Aon Risk Services Ltd provides health and safety assurance services. The Remuneration Committee is comfortable that this does not present a conflict of interest as Aon UK and NBS operate entirely independently of one another. The fees paid to NBS during the year for services to the Committee were £31,000.

The Committee has also received assistance from Richard Harpin, Group Chief Executive, Emma Thomas, Group Legal and HR Director and Anna Maughan, Company Secretary, all of whom attended meetings of the Committee as required. No Executive took part in discussions in respect of matters relating directly to their own remuneration.

Remuneration for the year under review (Audited)

Year Salary
and Fees
£000
Taxable
Benefits3
£000
Pension4
£000
Bonus
£000
LTIP5
£000
Other6
£000
Total
FY17
£000
Total
FY16
£000
Executives                
R Harpin FY17 555 28 155 555 2,929 34 4,256  
FY16 550 26 113 539 2,127 - 3,355
M Bennett FY17 412 21 82 313 2,313 34 3,175  
FY16 406 20 81 350 1,240 - 2,097
D Bower1 FY17 46 4 8 46 - 31 135  
FY16 - - - - - - -
J Ford FY17 394 17 76 394 1,166 - 2,047
  FY16 363 17 73 368 - 10 831
Non-Executives
J M B Gibson FY17 250 - - - - - 250  
FY16 230 - - - - - 230
S David FY17 65 - - - - - 65  
FY16 63 - - - - - 63
C Havemann2 FY17 55 - - - - - 55  
FY16 18 - - - - - 18
B Mingay FY17 55 - - - - - 55  
FY16 53 - - - - - 53
M Morris FY17 73 - - - - - 73  
FY16 71 - - - - - 71
Total FY17 1,905 70 321 1,308 6,408 99 10,111
Total FY16 1,754 63 267 1,257 3,367 10 6,718

1 David Bower was appointed on 6 February 2017.
2 Chris Havemann was appointed on 1 December 2015.
3 Benefits comprise company car, fuel allowance and medical insurance.
4 Details of pension benefits and contributions can be found later on in the report.
5 LTIPs vested in full in FY16 and FY17.
6 ‘Other’ represents the value of any sharesave options exercised.

Details of variable pay earned in the year (Audited)

Annual Bonus

For FY17, the annual bonus was based on the following stretching targets:

Financial and non financial bonus targets for Richard Harpin (CEO), Johnathan Ford (COO) and David Bower (CFO)
  Weighting % Payable
at
Threshold
Threshold Target/
Stretch
Actual % Payable
Financial measures Group adjusted profit before tax 25% 25% £96.9m £102.0m £112.4m 100%
Group net debt1 5% - - £273.4m £261.4m 100%
Non financial measures Customer growth 25% 0% 7.024m 7.167m 7.530m 100%
Customer satisfaction (measured as a weighted average level of customer satisfaction across UK, US, France, Spain and Italy) 1 25% - - 8.2 8.7 100%
Financial and non financial bonus targets for Martin Bennett (UK CEO)
  Weighting % Payable
at
Threshold
Threshold Target/
Stretch
Actual % Payable
Financial measures Group adjusted profit before tax 10% 25% £96.9m £102.0m £112.4m 100%
UK adjusted profit before tax 15% 25% £60.0m £63.2m £63.2m 100%
UK net cash1 5% - - £20.4 £10.2m 0%

Non financial measures

UK customer growth 25% 0% 2.197m 2.237m 2.212m 40%
UK customer satisfaction 1 25% - - 8.2 9.3 100%

1No bonus was payable for below target performance.

Personal bonus targets

  Objectives Weighting Outcome % Payable
R Harpin Mr Harpin’s objectives related to strategic development, innovation and people development. 20%

Key achievements included:

  • Investing in Checkatrade and acquiring Habitissimo
  • Agreed a joint venture with Edison Energia in Italy
  • Developing a leadership plan and vision
100%
M Bennett Mr Bennett’s objectives related to business development, innovation, cost efficiencies and delivery of key IT programmes. 20%

Key achievements included:

  • Integrating the Home Energy Services business
  • Launching Leakbot, a smart home water leak detector
  • Establishing a cost conscious culture in the UK business
70%
D Bower Mr Bower’s objectives related to his previous role as Group Finance Director and were focused on M&A activity, cash and working capital efficiency and investor relations. 20%

Key achievements included:

  • Supporting and overseeing the integration of Utility Service Partners in the US
  • Identifying and implementing cash and working capital improvements
  • Overseeing and challenging the delivery of efficiency plans
100%
J Ford Mr Ford’s objectives related to M&A activity, operational efficiencies, digital activity and investor relations. 20%

Key achievements included:

  • Stepping up M&A activity (Checkatrade, Habitissimo, the npower ‘domestic care and maintenance’ contracts business and the Italian joint venture)
  • Rolling out a model to reduce network repair costs
  • Leading global digital development
  • Holding a successful Capital Markets Day
100%

In addition to the above, minimum customer and financial (PBT) performance levels had to be achieved before any bonuses could be paid. These were both achieved.

Following the strong performance of the business in the year and in particular, reflecting the robust customer and profit growth, the following bonuses were payable:

Name Bonus
£
%
of salary
R Harpin 555,156 100.0
M Bennett 313,399 76.1
D Bower 1 46,250 100.0
J Ford 393,750 100.0

1 David Bower was appointed on 6 February 2017.

Long-term Incentive Plan

Details of the performance conditions for the 2013 and 2014 LTIP awards are set out below.

2013 awards (vested in FY17)

The 2013 LTIP awards were granted on 24 June 2013. The performance condition for these awards was as follows:

Condition Performance
period
Threshold
target
Stretch
target
Actual
performance
Vesting
TSR (underpinned by underlying financial performance) 3 years to 24 June 2016 TSR equal to the FTSE 250 index (25% vests) TSR exceeds the index by an average of 15% p.a. (100% vests) HomeServe TSR of 114.1% compared to Index TSR of 30.1% 100% vesting

2014 awards (due to vest in FY18)

The 2014 LTIP awards were granted on 23 June 2014. The performance condition for these awards was as follows:

Condition Performance
period
Threshold
target
Stretch
target
Actual
performance
Vesting
TSR (underpinned by underlying financial performance) 3 years to 23 June 2017 TSR equal to the FTSE 250 index (25% vests) TSR exceeds the index by an average of 15% p.a. (100% vests) Performance period not yet ended -

Based on performance to 31 March 2017, which was 91.9% compared to the FTSE 250 Index TSR of 25.7%, the 2014 awards are likely to vest in full. The value of the awards on vesting will be included in remuneration for FY18.

Summary of outstanding awards (Audited)

LTIP

Details of the maximum number of shares receivable from awards made under the LTIP are as follows:

31 March
2017
Awarded
during
year
Lapsed
during
year
Vested
during
year
31 March
2016
Date
granted
Type of
award
R Harpin - - - 289,528 289,528 24.6.13 Performance
- - - 282,464 282,464 24.6.13 Matching
247,301 - - - 247,301 23.6.14 Performance
247,298 - - - 247,298 23.6.14 Matching
251,774 - - - 251,774 25.6.15 Performance
188,135 - - - 188,135 25.6.15 Matching
211,338 211,338 - - - 1.7.16 Performance
155,521 155,521 - - - 1.7.16 Matching
M Bennett - - - 202,630 202,630 24.6.13 Performance
- - - 192,038 192,038 24.6.13 Matching
184,615 - - - 184,615 23.6.14 Performance
175,958 - - - 175,958 23.6.14 Matching
186,770 - - - 186,770 25.6.15 Performance
136,825 - - - 136,825 25.6.15 Matching
  156,774 156,774 - - - 1.7.16 Performance
  115,366 115,366 - - - 1.7.16 Matching
D Bower 1 14,192 - - - 14,192 23.6.14 Performance
14,192 - - - 14,192 23.6.14 Restricted
37,766 - - - 37,766 25.6.15 Performance
31,779 - - - 31,779 1.7.16 Performance
18,975 - - - 18,975 1.7.16 Restricted
J Ford - - - 152,310 152,310 24.6.13 Performance
      75,457 75,457 24.6.13 Matching
130,096 - - - 130,096 23.6.14 Performance
130,094 - - - 130,094 23.6.14 Matching
171,664 - - - 171,664 25.6.15 Performance
111,171 - - - 111,171 25.6.15 Matching
144,094 144,094 - - - 1.7.16 Performance
106,034 106,034 - - - 1.7.16 Matching

1 David Bower was appointed on 6 February 2017.

The performance conditions are as follows:

  • 2013 and 2014 awards – 100% comparative TSR (FTSE 250 Index + 15% per annum for maximum vesting)
  • 2015 awards – 25% comparative TSR (FTSE 250 Index + 15% per annum for maximum vesting) and 75% compound annual EPS growth (15% for maximum vesting)
  • 2016 awards up to 150% of salary – 25% comparative TSR (FTSE 250 Index + 15% per annum for maximum vesting) and 75% compound annual EPS growth (15% for maximum vesting)
  • 2016 awards above 150% of salary – compound annual EPS growth of 15% to 20% (20% for maximum vesting).

David Bower has two restricted share awards which pre-date his appointment as CFO. These awards are not subject to performance conditions.

Further details on awards granted in the year

On 1 July 2016, the following performance and matching share awards were granted to the Executive Directors under the LTIP:

Performance share awards

Date of
grant
Number of
shares
Share price
used to
determine
awards
Award size
(% salary)
Face value
£
% that
vests at
threshold
R Harpin 1.7.16 211,338 £5.27 200% 1,113,751 25%
M Bennett 1.7.16 156,774 £5.27 200% 826,199 25%
J Ford 1.7.16 144,094 £5.27 200% 759,375 25%

Matching share awards

Date of
grant
Number of
Investment shares
purchased
Award Size Number of
shares subject
to Matching
Award
Share price
used to
determine
awards
Face value
£
% that
vests at
threshold
R Harpin 1.7.16 41,213 2:1 match 155,521 £5.26 818,040 25%
M Bennett 1.7.16 30,572 2:1 match 115,366 £5.26 606,825 25%
J Ford 1.7.16 28,099 2:1 match 106,034 £5.26 557,739 25%

The performance awards up to 150% of salary and the matching awards are subject to two performance conditions. 25% of the awards are subject to a relative total shareholder return performance condition that requires HomeServe’s TSR to match that of the FTSE 250 Index over a three year performance period for threshold vesting, increasing on a straight-line basis to Index + 15% pa. for full vesting. The other 75% of the awards are subject to an earnings per share condition that requires compound annual EPS growth of 6% to 15% per annum. 6% growth would result in threshold vesting, increasing on a straight-line basis to full vesting if growth of 15% per annum is achieved.

The performance awards over the remaining 50% of salary are subject to an earnings per share condition that requires compound annual growth of 15% to 20% pa. for between 0% and 100% of this part of the awards to vest.

As set out in last year’s report, the Committee considered that granting awards at this level was appropriate given the stretching performance conditions attached. Major shareholders were consulted prior to the awards being made and were supportive of the proposals.

Vesting is also subject to underlying financial performance.

Further details on awards vested in the year

Performance and matching awards granted on 24 June 2013 vested in full during the year. Awards were structured as nil cost options.

Date of
grant
Type of Award Date of
exercise
Number of
shares
Share price at
exercise
Face value at
exercise £
R Harpin 24.6.13 Performance 6.7.16 289,528 £5.12 1,482,383
24.6.13 Matching 6.7.16 282,464 £5.12 1,446,216
M Bennett 24.6.13 Performance 21.2.17 202,630 £5.86 1,187,412
  24.6.13 Matching 21.2.17 192,038 £5.86 1,125,343
J Ford 24.6.13 Performance 6.7.16 152,310 £5.12 779,827
  24.6.13 Matching 6.7.16 75,457 £5.12 386,340

Save as you earn (Sharesave) scheme

31 March
2017
Granted
during year
Lapsed
during
year
Exercised
during year
31 March
2016
Option
price
Date
granted
Date
exercisable
from
R Harpin - - - 8,152 8,152 £1.84 19.12.11 1.3.17
M Bennett - - - 8,152 8,152 £1.84 19.12.11 1.3.17
D Bower1 - - - 8,152 8,152 £1.84 19.12.11 1.3.17

1David Bower was appointed on 6 February 2017.

SAYE options are exercisable for a six month period from the date shown. Mr Harpin and Mr Bennett exercised their options on 1 March 2017. The share price on that day was £5.95.

Mr Bower exercised his option on 8 March 2017. The share price on that day was £5.635.

One Plan Matching Shares (Share Incentive Plan)

31 March
2017
Acquired during year 31 March 2016 Aggregate face value of shares awarded during the year2
R Harpin 88 88 - £523.89
M Bennett 88 88 - £523.89
D Bower 1 88 26 62 £149.82
J Ford 63 63 - £374.12

1 David Bower was appointed on 6 February 2017.
2 Based on the acquisition price of the associated Partnership Shares. The highest share price was £6.28 and the lowest share price was £5.64.

Participants receive one Matching Share for every two Partnership Shares they purchase. Shares are purchased on a monthly basis. Matching Shares are normally kept in trust for a minimum period of three years.

Shareholding Guidelines (Audited)

It is the Board’s policy that Executive Directors build up and retain a minimum shareholding in the Company. Each Director is encouraged to hold shares of at least equal value to 200% of their annual basic salary or fee.

If the holding guideline has not been fulfilled at the point of exercise of any option or the vesting of any other long-term incentive award, the Director must retain 50% of the net proceeds in the Company’s shares until the holding requirement is achieved. Details of the current shareholdings of the Directors are in the table below.

The beneficial interests of Directors who served at the end of the year, together with those of their families, in the shares of the Company are as follows:

23 May
2017
31 March
2017
31 March
2016
Outstanding
LTIP
Awards
Total
31 March
2017
Value of
shares
counting
towards
guideline
holding (as a
% of salary)1
Guideline met?
R Harpin2 39,160,715 39,160,649 38,519,655 1,301,367 40,462,016 39,732% Yes
M Bennett 533,816 533,750 353,094 956,308 1,490,058 730% Yes
D Bower 3 66,074 66,008 57,778 116,904 182,912 124% No
J Ford 171,218 171,152 82,525 793,153 964,305 255% Yes
J M B Gibson 150,070 150,070 126,070 - 150,070 339% Yes
S David 68,945 68,945 26,128 - 68,945 599% Yes
C Havemann 4 20,000 20,000 - - 20,000 205% Yes
B Mingay 57,142 57,142 37,142 - 57,142 587% Yes
M Morris 71,716 71,716 30,468 - 71,716 559% Yes

1 Calculated using the share price on 31 March 2017 of £5.65 divided by the Executive’s salary or Non-Executive’s fee on that date.
2 Includes an indirect interest of 28,500.
3 David Bower was appointed on 6 February 2017.
4 Chris Havemann was appointed on 1 December 2015.

Directors’ pensions (Audited)

Members of the Water Companies Pension Scheme

Details of the calculation of the single figures relating to Richard Harpin’s individual pension entitlements in the HomeServe plc Section of the Water Companies Pension Scheme, as required under Schedule 8 of the Large Companies Regulations and the Listing Rules, are shown below:

2017
£000
2016
£000
Accrued pension per annum at end of period 1 58 55
Accrued lump sum at end of period 1 174 165
Director’s contributions in the period - -
Single figure of pension remuneration attributable to the Scheme 2 71 30
Unapproved pension contributions paid as cash 84 83

1 The accrued pension and lump sum figures are the leaving service benefits to which the Director would have been entitled had they left the Section at the relevant date.
2 This is calculated as 20 times the increase in the accrued pension over the period after allowing for CPI inflation plus the increase in accrued lump sum (also after allowing for CPI inflation), less the contributions made by the Director over the period.

Other Directors

Martin Bennett, David Bower and Johnathan Ford received the following pension allowances:

2017
£000
2016
£000
M Bennett 82 81
D Bower 1 8 -
J Ford 76 73

1 David Bower was appointed on 6 February 2017.

Performance graph

The graph below shows the Company’s performance, measured by TSR, compared with the performance of the FTSE-250 Index (also measured by TSR) for the eight years ended 31 March 2017. This comparator has been chosen as it is a broad equity index of which the Company is a constituent and it is also the one used in assessing relative TSR performance under the LTIP.

Chief Executive’s remuneration

The total remuneration figures for the Chief Executive during each of the last eight years are shown in the table below. The figures include the annual bonus based on that year’s performance and the matching awards plus the LTIP awards based on the three year performance period ending in the relevant year. The annual bonus and long-term incentive award vesting level as a percentage of the maximum opportunity are also disclosed below:

2010 2011 2012 2013 2014 2015 2016 2017
Total remuneration (£000s) 1,030 953 559 953 1,212 1,200 3,355 4,256
Annual Bonus 100% 87% 0% 75% 100% 96% 98% 100%
LTIP awards vesting 21%1 51%2 60% 0% 0% 0% 100% 100%

1 No LTIPs were due to vest in FY10. The ESOP awards granted in 2006 lapsed as the performance conditions were not met. Awards made under the Deferred Bonus Plan vested on the basis of 1.19 shares out of a maximum of 3.
2 No LTIPs were due to vest in FY11. The ESOP awards granted in 2007 lapsed as the performance conditions were not met. Awards made under the Deferred Bonus Plan vested on the basis of 2.48 shares out of a maximum 3.

Percentage change in Chief Executive’s remuneration

The table below shows the percentage change in the Chief Executive’s total remuneration (excluding the value of any pension, matching awards and performance awards receivable in the year) between FY16 and FY17 compared to the average for all employees of HomeServe plc.

% Change from FY16 to FY17
Salary Benefits Annual Bonus
Chief Executive Officer 0.9% 6.0% 2.9%
Average of other HomeServe plc employees 10.2% 19.7% 25.3%

Relative importance of spend on pay

The following table shows the Company’s actual spend on pay (for all employees) relative to dividends, tax and retained profits:

FY16
£m
FY17
£m
change
Staff costs (£m) 190.5 237.5 25%
Dividends (£m) 37.6 40.3 7%
Tax (£m) 21.0 23.9 14%
Retained profits (£m) 61.6 74.4 21%

£7.8m of the staff costs figures relate to pay for the Executive Directors. This is different to the aggregate of the single figures for the year under review due to the way in which the share based awards are accounted for.

The dividends figures relate to amounts payable in respect of the relevant financial year.

Loss of Office Payments (Audited)

No payments have been made for loss of office in the year.

Application of the remuneration policy for FY18

Basic salary

Basic salary for each Executive Director is determined by the Remuneration Committee taking into account the roles, responsibilities, performance and experience of the individual. Salary increases are determined taking into account pay and employment conditions of employees elsewhere in the Company and market data on salary levels for similar positions at comparable companies in the FTSE 250.

Salaries are normally reviewed in July each year (unless responsibilities change). Johnathan Ford’s salary was increased by 6.6% to £400,000 following his appointment as COO to reflect his changes in responsibility. This year salaries will increase by 1.5% which is in line with the average increase for the UK workforce.

The salaries for the Executive Directors effective from 1 July 2017 will therefore be as follows:

Name of Director Salary as at
1 July 2016
Salary as at
1 July 2017
Increase
R Harpin £556,875 £565,228 1.5%
M Bennett £413,100 £419,297 1.5%
D Bower 1 £300,000 £300,000 n/a
J Ford £400,000 £406,000 1.5%

1 David Bower was appointed on 6 February 2017.

Fees for the Chairman and Non-Executive Directors

As detailed in the remuneration policy, the Company aims to set remuneration for Non-Executive Directors at a level which is sufficient to attract and retain Non-Executive Directors of the right calibre. The fees paid to the Chairman and the Non-Executive Directors are reviewed periodically. The fees for the Non-Executive Directors were last reviewed during FY15. The Chairman’s fee was reviewed in FY16.

Details of the current fees are detailed in the table below.

Chairman’s fees £250,000
Senior Independent Director additional fee £7,500
Non-Executive Directors’ base fee £55,000
Chair of Remuneration or Audit & Risk Committee £10,000

Annual bonus performance targets

The annual bonus plan for FY18 will operate on a similar basis to FY17 and is consistent with the policy detailed earlier in this report.

The bonus measures will be as follows:

Financial measures
(30% of bonus)
Non-financial
measures
(50% of bonus)
Personal objectives
(20% of bonus)
  • Profit before tax (25%)
  • Net debt (5%)
  • Customer growth (25%)
  • Customer satisfaction (25%)
  • Up to five stretching personal objectives

The financial and non financial measures for Richard Harpin, David Bower and Johnathan Ford will be based on Group performance. The financial measures for Martin Bennett will be based on Group and UK performance and the non financial measures will be based on UK performance. The Committee considers the forward looking performance targets to be commercially sensitive but more detailed disclosure will be provided in next year’s remuneration report.

The Committee has discretion to scale back any bonus payments if it is deemed appropriate.

Long-term incentives

Performance criteria

The long-term incentive plan is a mix of a Performance Share award (up to 200% of salary) and a Matching Share award (2:1 match on up to 75% of salary bonus invested in shares).

In line with the policy, the FY18 Performance Share award for Executive Directors will be at 150% of salary.

For Performance Share awards and Matching Share awards, the performance targets for FY18 grants will be:

FY18 weighting 3 year performance target Change from FY17
75% based on EPS 6% to 15% per annum EPS growth (for 25% to 100% vesting). No change
25% based on
relative TSR
25% vesting for TSR equal to that of the FTSE 250 Index increasing on a straight-line basis to full vesting for out-performance of the Index by 15% per year or more. No change

When setting the EPS target range for the FY18 grants, the Committee took into account internal projections and external forecasts. Having considered these projections and forecasts, the Committee believes that the EPS targets are appropriately stretching.

Holding period for vested shares

The net of tax value of any shares vesting under the LTIP must be held for a further two years, providing a longer-term perspective to the incentive programme.

Shareholding guidelines

The minimum required shareholding for each Executive Director will continue to be two times annual basic salary. Executives will be required to retain no less than 50% of the net of tax value of shares from vested awards until this threshold is exceeded. Shareholding guidelines at two times their fee also applies to Non-Executive Directors.

Shareholder voting at the 2016 Annual General Meeting

At last year’s Annual General Meeting held on 15 July 2016, the following votes from shareholders were received:

Remuneration report
Total number of votes % of votes cast
For 257,543,646 99%
Against 2,640,062 1%
Total votes cast (for and against excluding withheld votes) 260,183,708 100%
Votes withheld 2,279  
Total votes (including withheld votes) 260,185,987

The current remuneration policy was approved by shareholders at the 2014 AGM. 90.45% of the votes cast were in favour of the policy.

General

The market price of the Company’s shares at 31 March 2017 was £5.65 (2016: £4.306). During the year the price ranged from £4.13 to £6.30.

The shares required for share options and awards under any of the long-term incentive schemes described above may be fulfilled by the purchase of shares in the market by the Company’s Employee Benefit Trust (EBT). Awards may also be fulfilled through newly issued shares, subject to the dilution limits within each scheme (which are fully compliant with investor guidelines). As beneficiaries under the EBT, the Directors are deemed to be interested in the shares held by the EBT which at 31 March 2017 amounted to 31,026 ordinary shares.

By Order of the Board

Stella David
Chairman of the Remuneration Committee
23 May 2017