Directors’ remuneration report
I am pleased to present the Remuneration report for 2008/09. The report is made by the Board on the recommendation of the Remuneration Committee and sets out the policy and disclosures on directors’ remuneration as required by schedule 7A of the Companies Act 1985. In addition to these requirements, the Remuneration Committee has followed the principles of good governance set out in the Combined Code and complied with the Listing Rules.
During the year the Remuneration Committee undertook a wider review of the remuneration policy that resulted in it adopting, for executive directors, similar long-term incentive plans to that used for Ian Cheshire and which are detailed later in this report. The long-term incentive plans for the members of the Retail Board were also similarly aligned.
We welcomed Kevin O’Byrne to the Board on 1 October 2008. Details of Kevin’s remuneration can be found later in this report.
A resolution will be put to the shareholders at the Annual General Meeting on 3 June 2009 asking them to approve this report.
Chairman of the Remuneration Committee
25 March 2009
Information subject to audit
- Components of executive directors’ remuneration – Annual bonus and long-term incentives under the PSP – the summary of performance criteria upon which the vesting of performance shares are conditional;
- Executive directors’ remuneration overview;
- Kingfisher Incentive Scheme (KIS) Share Awards;
- Performance Share Awards;
- ShareSave Option Scheme;
- Closed incentive plans – except for compliance with guidelines on dilution limits;
- Directors’ pension benefits; and
- Non-executive directors’ remuneration table and notes.
The Remuneration Committee
|Committee members||Michael Hepher|
|Chief Executive||Ian Cheshire|
|Group HR Director||Tony Williams|
|Head of Group Reward||Kevin Blake|
No member or attendee is present when his or her own arrangements are considered.
The Remuneration Committee has authority to obtain the advice of external independent remuneration consultants and is solely responsible for their appointment, retention and termination, and for approval of the basis of their fees and other terms.
- Hewitt New Bridge Street (HNBS) advises on the ongoing operation of employee and executive share plans and executive remuneration generally;
- Allen & Overy LLP provides legal advice on service and employment contracts and for other employment and remuneration issues in relation to executive directors. They also provide advice to the Company on other legal matters; and
- Watson Wyatt advised on the wider review of remuneration policy and provides advice and benchmarking on the market competitiveness of remuneration for executives in the UK and overseas. They also provide advice to the Company on pensions and related matters
Remuneration policy for executive directors
The aim of the Company’s policy on executive directors’ remuneration is to ensure that senior executives are rewarded for their contribution to Kingfisher and are motivated to enhance returns to shareholders. Executive director remuneration should be competitive by reference to the experience of the executive concerned, the role fulfilled, internal relativities and the markets in which the Company competes, and is designed to promote business success through the recruitment, retention and motivation of the highest quality executives.
The Remuneration Committee consults with shareholders to ensure their views are understood and taken into account in its deliberations, particularly in relation to changes in Kingfisher employee share scheme arrangements and wider trends in executive remuneration.
The remuneration strategy for executive directors and other senior executives is tailored to emphasise the delivery of strong earnings growth as well as sustained performance in the longer term. Long-term performance is rewarded through the delivery of shares (the Performance Share Plan (PSP)) and short-term performance through a combination of cash and an element of compulsory deferred shares (the KIS Cash and KIS Share schemes). The Remuneration Committee believes that this structure is weighted towards the achievement of stretching, individually targeted annual bonus measures but also aligns the interests of executives with those of shareholders through a continued emphasis on strong annual performance combined with long-term executive share ownership, providing a strong link between the incentives received and shareholder value delivered. The Remuneration Committee intends to continue this policy and is satisfied that there is an appropriate balance between the different elements of pay (including the split between fixed and variable pay).
Following the extensive review of the Group Chief Executive’s remuneration with the assistance of HNBS, which had received a favourable response in discussions with shareholders and was reported in the 2007/08 remuneration report, the Company undertook a wider review of senior executive remuneration during the year. As a result of this review, the Remuneration Committee determined that it was appropriate to provide the Retail Board members with long-term goals aligned to those of the executive directors and therefore awarded PSP grants with performance conditions to 2012, aligned with those of the executive directors’, in respect of the specific regions or functions. Kevin O’Byrne’s long-term remuneration is based on the same criteria and performance conditions used for Ian Cheshire.
Executive directors’ service contracts
All executive directors have service contracts terminable by no more than 12 months’ notice by either side. The contracts for all executive directors provide that termination payments would be paid on a phased basis at a monthly rate of 15% of annual salary for a maximum of 12 months from the termination date. Lower amounts are payable if the director commences lower-paid employment during the 12-month period, and payments cease immediately when employment providing the same or higher value remuneration is started. Details of the executive directors’ contracts are summarised below:
|Executive director||Date of last contract||Notice period (months)|
|Duncan Tatton-Brown||01/02/2004||Terminated on 14/10/20081|
Executive directors’ remuneration
Kevin O’Byrne received a recruitment award under the PSP of shares worth 300% of salary with 50% subject to the same TSR conditions as those used for the award to Ian Cheshire and the other 50% subject to the same EPS conditions in respect of the special award to Ian Cheshire on his recruitment as Group Chief Executive (for details of these performance conditions see Pension provision). Kevin O’Byrne also received a cash award of £250,000 to compensate him for his losses from leaving DSG International and to further encourage him to join the Company at the earliest opportunity. He used the net proceeds of the £250,000 he received to purchase the Company’s shares in the open market. He subsequently placed the shares in the Group SIPP and has committed to purchasing and placing further shares in the Group SIPP when he receives the tax refund from the earlier purchase.
Components of executive directors’ remuneration
Remuneration packages for executive directors consist of the following elements: salary, annual bonus including the deferred KIS Share award with a maximum potential of 200% of salary, long-term incentive under the PSP at 200% face value of salary at maximum vesting, the ShareSave Option Scheme for all employees, pension contributions; and non-cash benefits.
Relative proportions of each executive director’s remuneration (%): 2008/09
* Annual bonus figure assumes maximum payment and LTIP figure assumes maximum vesting.
A summary of the remuneration package and the applicable performance measures for executive directors for the 2008/09 financial year is set out in the table at the bottom of this page.
Salaries are reviewed annually in August, taking into account market conditions, affordability, the level of increases awarded to staff generally and the individual’s contribution. Ian Cheshire did not receive an increase in his base salary other than the increase he received on his appointment as Group Chief Executive.
Future annual bonus objectives for the executive directors and the Retail Board will continue to focus on key strategic goals, rather than solely on the annual budget, and indicative targets pre-set for four years during 2007/08 will be confirmed annually. In particular, in the current climate and with the focus on debt financing, the Committee intends to continue to incentivise the executive directors to ensure that the business is focused on good cash management and minimising its requirement for external credit facilities.
Annual bonuses are awarded under the KIS. The KIS comprises the Kingfisher Cash Incentive Scheme 2003 (KIS Cash scheme) and the Kingfisher Incentive Share Scheme 2003 (KIS Shares scheme). Under these arrangements senior executives may receive a performance related cash bonus under the KIS Cash scheme and a contingent share award under the KIS Shares scheme equal to half the value (at the time of award) of the cash bonus. The contingent share award must normally be held for three years before it vests, with the shares being normally subject to forfeiture should the executive leave Kingfisher during the three-year deferral period as a result of voluntary resignation or dismissal for cause. In line with ABI best practice, contingent share awards from April 2007 receive a dividend roll-up on vesting calculated on the basis of a notional purchase of shares on each relevant ex-dividend date using that day’s closing mid-market price.
Substantial awards under the KIS Cash scheme and the KIS Shares scheme are only payable to executives on achievement of the performance targets agreed by the Remuneration Committee at the beginning of each year, based on Kingfisher’s strategic and financial planning process, and the economic and competitive environment in which the Company and its principal businesses operate.
Maximum vesting under the KIS and PSP result in up to approximately 75% of total remuneration being performance-related, an approach the Remuneration Committee believes is appropriate for Kingfisher as a dynamic international retailer.
Base salary (set annually on 1 August)
Role, individual contribution to business and market forces
To attract and retain talented people
Objectives relating to:
Ensures a commitment to delivering on Group recovery and meeting debt targets, delivering on strategic objectives and ensures alignment with shareholder interests
Performance Share Plan
Delivering value on:
Ensures a focus on long-term business success and shareholder returns
The PSP remains the primary long-term incentive for the top senior executives. Following the wider review of remuneration policy undertaken after Ian Cheshire’s appointment and as disclosed last year, the Remuneration Committee decided to increase the annual limit to 200% of salary, with the performance measures made correspondingly more demanding, in order to bring long-term incentive provision into line with median practice in other FTSE100 companies and other retailers of a similar size.
The review by the Remuneration Committee concluded that all future PSP awards should be subject to performance targets that are based equally on EPS and TSR. The combination of TSR and EPS measures was selected as the most appropriate combined performance measure for the PSP. This combination is robust and simple to understand, provides an effective measure of management performance, aligns executives’ interests with those of shareholders and is generally favoured by the Company’s major shareholders. The FTSE100 was chosen as the comparator group because there is a general lack of directly quoted home improvement businesses against which to compare the Company’s TSR specifically. HNBS independently carries out the relevant TSR calculations for the Remuneration Committee.
- amend the range of EPS targets set out in the table below to take account of any material change in the retail prices index over the performance period or any change to, or event that affects, the structure or business of the Kingfisher Group or any other material change in circumstances; and
- vary the performance condition if an event has occurred which causes it to consider that it would be appropriate, provided the varied condition is considered fair and reasonable and not materially less challenging than the original condition would have been but for the event in question.
Any such amendments will be disclosed in the relevant Directors’ remuneration report.
The TSR and EPS performance targets for all PSP awards are:
|50% TSR at the end
of the Performance Period
|Percentage of this part of the award of performance shares that will vest||50% EPS at the end of the Performance Period||Percentage of this part of the award of performance shares that will vest|
|Less than median plus 1 percentage point||Nil||Less than 15.9p||Nil|
|Median plus 1 percentage point||15.625%||15.9p||15.625%|
|Between median plus 1 percentage point and upper quintile plus 1 percentage point||Straight-line vesting between 15.625% and 100%||Between 15.9p and 17.0p||Straight-line vesting between 15.625% – 50%|
|Upper quintile plus 1 percentage point||100%||17.0p||50%|
|Between 17.0p and 19.6p||Straight-line vesting between 50% – 100%|
Performance Shares receive a dividend roll-up calculated on the basis of a notional purchase of shares on each relevant ex-dividend date using that day’s closing mid-market price. Shares used to satisfy awards under a plan are normally purchased in the market through an employee benefit trust.
Under the PSP, provisional awards of Performance Shares have been granted to selected senior executives following the publication of the annual results. Awards were made on 21 April 2008.
As part of the terms of his recruitment, awards were made to Ian Cheshire on 1 February 2008 in respect of his 2008/2009 allocations under the plan using the TSR performance target only and therefore no further awards were made to him during the financial year. Awards were also made to Kevin O’Byrne as part of his recruitment on 1 October 2008 in respect of his 2008/2009 allocations under the plan. Kevin O’Byrne’s awards are subject to the TSR (50%) and EPS (50%) performance targets. Although the EPS performance condition was over a four-year period in respect of the above awards, the Committee intends to revert to the normal three-year period going forward.
Other long-term incentive plans
Apart from the ShareSave Option Scheme, all other option and incentive arrangements have been discontinued, but awards made under these schemes in previous years will vest over time in accordance with the rules governing the various plans. The details are shown in the section entitled Closed Incentive Plans.
Ian Cheshire is a member of the main defined benefit funded arrangement, the Kingfisher Pension Scheme and subject to the scheme cap, which was closed to new employees of the Group on 1 April 2004. Following his appointment as Group Chief Executive, Ian Cheshire also receives a 30% Company contribution, on his salary above the pension cap, into defined contribution arrangements. Kevin O’Byrne receives a 20% Company contribution into his defined contribution arrangements. Duncan Tatton-Brown was also a member of the defined benefit arrangement, subject to the scheme cap and received a 15% Company contribution to defined contribution arrangements and a cash supplement of 5% on his salary above the pension cap. Details of individual arrangements for the executive directors are set out in Directors’ pension benefits.
The Company provides a range of additional benefits, including medical insurance, a subsidised staff canteen, a staff discount card, 30 working days’ holiday per year and a company car or cash allowance.
Share ownership guidelines
The formal share ownership guidelines prohibit executive directors selling shares obtained through the KIS Shares scheme and long-term incentive plans including the PSP (except to meet tax obligations) until they hold shares costing or worth at least two times base salary for the Group Chief Executive and at least one times base salary for the Group Finance Director. The Remuneration Committee believes that this will provide a longer-term retention mechanism and means that, over time, executives will have a significant personal interest in Kingfisher shares. The Remuneration Committee believes these arrangements align executives’ and shareholders’ interests effectively and encourage a long-term view of performance.
Executive directors’ remuneration overview
The current annual base salaries of the executive directors as at 25 March 2009 are £800,000 for Ian Cheshire and £575,000 for Kevin O’Byrne.
The internally set profit targets for the 2008/09 annual bonus awards have been partially achieved. Group net debt has significantly reduced beyond our stated objective of maintaining it at the 2007/08 year-end level (excluding proceeds from the sale of Castorama Italy). Further progress has also been made in other strategic areas aligned to our seven steps to ‘Delivering Value’ and therefore bonuses will be paid against those targets that have been achieved.
The actual remuneration for the executive directors for the 2008/09 financial year is set out in the table below:
|£000||Base salary||Total benefits1||Cash bonus2||2008/09||2007/084|
Outside appointments for executive directors
Subject to the rules governing conflicts of interest, the Company encourages its executive directors to hold one non-executive role outside the Group as it recognises that such roles can broaden experience and knowledge which can benefit the Group. Non-executive directorships and fees retained by the relevant individual during 2008/09 are set out below:
|Director||Company in which non-executive role is held||Fee retained by director in 2008/09|
|Ian Cheshire||Bradford & Bingley plc||£36,0001|
|Kevin O’Byrne||Land Securities Group plc||£55,0002|
|Duncan Tatton-Brown||Rentokil Initial plc||£54,999|
KIS Share awards
Awards of contingent shares, in respect of the financial year ended 31 January 2009, are due to be made on 21 April 2009, vesting in April 2012, to Ian Cheshire and Kevin O’Byrne under the KIS Shares scheme to the value of £400,800 and £102,414, respectively, at the average mid-market price over the three dealing days, 16, 17 and 20 April 2009. As the awards will be made after publication of the accounts for the financial year ended 31 January 2009, the detail will be disclosed fully in next year’s Annual Report.
Once the contingent share award is made in respect of the bonus earned, the only qualifying condition for the award normally to vest is to be in the employment of the Company at the vesting date. In respect of bonuses paid in 2004, 2005 and 2006, an additional Multiplier Award of shares was potentially receivable by certain executive directors – details of these are shown under Closed Incentive Plans. Following the introduction of the PSP, no further Multiplier Awards have been granted.
|Name||Number of contingent shares at start of year||Number of contingent shares awarded in year||Price per share||Dividend roll-up shares1||Number of contingent shares exercised in year2||Number of contingent shares at end of year||Vesting date||Lapse date|
Performance Share awards
Performance Shares will normally vest subject to the Company’s TSR performance relative to the constituents of the FTSE100 over a fixed three-year performance period. The awards for Kevin O’Byrne are subject to the TSR (50%) and EPS (50%) performance targets. Further details of the performance targets are outlined on page 40.
|Name||Number of Performance Shares at start of year||Number of Performance Shares awarded in year||Date of grant||Price per share||Dividend roll-up shares1||Number of contingent shares at end of year||Vesting date||Lapse date|
Award of Matching Shares to Ian Cheshire on 1 February 2008
|Type of award1,2||At start of year||Awarded during year||Vested during the year||Lapsed during the year||At end of year||Market price of shares when award made||Qualifying conditions||Vesting date3,4||Lapse date|
|Matching shares granted pursuant to Listing Rule 9.4.2||1,114,206||–||–||–||1,114,206||143.6p||EPS||1 February 2012||1 August
ShareSave Option Scheme
A UK ShareSave Option Scheme is open to all eligible employees, including executive directors. As is the case with all savings-related share option schemes open to all employees, there are no performance criteria.
|Number of options|
|At start of year||Granted during year||Exercised during year||Lapsed during year||At end of year||Option price||Date from which exercisable||Lapse date|
Closed incentive plans
There are outstanding awards under the Executive Share Option Scheme, as well as Multiplier Awards made in previous years under the KIS Shares scheme that may become exercisable or vest at the end of their respective deferral periods. These are plans that are now closed and under which no further awards will be made. The full details of each can be found in previous annual reports. The outstanding awards are as follows:
Executive share options
The last grants under the Executive Share Option Scheme were made on 17 April 2003. The options vest from three to 10 years of the grant date subject to the satisfaction of a performance condition which generally requires the growth in the Company’s EPS over a three-year period to have exceeded that of the Retail Price Index (RPI) plus 6%. The criteria were set and approved by shareholders when the scheme was established in 1993 and were judged at the time to be appropriate criteria.
|Number of options|
|At start of year||Exercised during year||Lapsed during year||At end of year||Option price||Date from which exercisable||Lapse date|
In the period 3 February 2008 to 31 January 2009, the highest and lowest market price for Kingfisher shares was 153.6p and 91.8p respectively. The market price at close of business on 31 January 2009 was 139.1p.
Multiplier awards relating to prior year KIS Share awards
Bonuses paid under the KIS Shares scheme in April 2005 and 2006 were matched at a ratio of 0.4:1 by a conditional Multiplier award of shares. Vesting of these awards is subject to the TSR performance of the Company against the constituents of the FTSE100 over the three-year period following the year for which the bonus was earned. No vesting will occur at or below median performance. 25% of these shares will vest at above median performance, increasing on a straight-line basis to 100% at above upper quartile performance. In addition, the Remuneration Committee must also be satisfied that the TSR performance is reflective of underlying Company performance for such awards to vest.
|Name||Multiplier awards at start of year||Multiplier awards granted in year||Price per share||Market price per share on date awarded||Multiplier awards lapsed during the year||Multiplier awards at end of year||Vesting date1||Lapse date|
Kingfisher share plans comply with recommended guidelines on dilution limits and the Company has always operated within these limits. Assuming none of the extant options lapse and will be exercised and having included all exercised options, the Company has utilised 2.5% of the 10% in 10 years and 1% of the 5% in 10 years in accordance with the Association of British Insurers (ABI) guidance on dilution limits.
Directors’ pension benefits
Ian Cheshire and Duncan Tatton-Brown have entitlement to part of their pension benefits through the Kingfisher defined benefit pension scheme (subject to the scheme cap) and partly through defined contribution schemes. Kevin O’Byrne only has entitlement to a defined contribution pension.
- accrued pension benefits at the relevant dates;
- the increase in the amount of accrued pension during this year;
- the transfer value amounts as at 2 February 2008 and 31 January 2009;
- the increase in transfer value between those dates, net of member contributions paid.
|Directors’ remuneration report regulations 2002||Additional listing rules|
|Accrued pension||Transfer value||Pension cost|
|As at the year-end||Age||Years of service||Increase in accrued pension £000 pa||2009 £000 pa||2008 £000 pa||Increase in transfer value £000 (net of director's contributions)||2009 £000||2008 £000||Increase in accrued pension £000 pa (net of inflation)||2009 £000||2008 £000|
The following table shows the employer contributions made to the defined contribution schemes:
Remuneration policy for non-executive directors
The Board determines the fees paid to non-executive directors under a policy which seeks to recognise the time commitment, responsibility and technical skills required to make a valuable contribution to an effective Board. During 2008 the basic non-executive director’s fee was increased from £51,500 to £53,300 per annum with effect from 1 August 2008 in line with the 3.5% inflationary increase that was granted to all UK employees. No additional fees are paid for membership of committees. The fee paid for chairing the Audit Committee is £15,000, and the fee paid for chairing the Remuneration Committee is £10,000, each per annum. The fee for the Senior Independent Director is £13,000 per annum.
The fee paid to Daniel Bernard as Deputy Chairman was increased from €206,000 to €213,200 per annum (£142,344 to £172,394) with effect from 1 August 2008 in line with the 3.5% inflationary increase that was granted to all UK employees. The increase in the pound sterling figure for 2008/09 is driven by the change in average exchange rates and reflects that Daniel Bernard is paid in Euros.
The Chairman’s fees are set by reference to his time commitment and relevant benchmark data. The fee paid to Peter Jackson was increased from £284,000 to £294,000 per annum with effect from 1 August 2008.
Daniel Bernard will be appointed as Chairman and John Nelson as Deputy Chairman with effect from 3 June 2009 whereupon their fees will increase to €450,000 and to £110,000 respectively, which have been set with due regard to their time commitments and relevant benchmark data.
Non-executive directors have letters of engagement and not service contracts. The Chairman’s letter of engagement allows for six months’ notice up to the age of 65 when the appointment ends without the need for notice. Other non-executive directors are appointed for an initial period of three years. Their position can be revoked without compensation at any time at the discretion of the Company.
|Date of last letter||Unexpired term||Total length of service|
|Peter Jackson||12/02/2009||35 months||3 years and 3 months|
|Daniel Bernard||17/03/2009||36 months||2 years and 10 months|
|John Nelson||20/03/2008||22 months||7 years and 3 months|
|Phil Bentley||12/02/2009||35 months||6 years and 6 months|
|Hartmut Krämer||12/02/2009||35 months||6 years and 5 months|
|Michael Hepher||19/03/2007||5months||11 years and 7 months|
|Janis Kong||17/10/2006||8 months||2 years and 4 months|
The directors who held office at 31 January 2009 had the following interests in the shares of the Company:
31 January 2009
2 February 2008
or, if later, on appointment
Between 31 January 2009 and 25 March 2009 there was no change in the relevant interests of the directors.
The Company’s TSR (share price growth plus dividends paid) for the five years to 31 January 2009 is shown in the graph below, which plots the value of £100 invested in Kingfisher over the last five financial years, assuming shares awarded in Kesa, when demerged, were sold and the proceeds re-invested in Kingfisher shares. The other line on the graph shows the performance of the FTSE100 Index over the same period.
The Company chose the FTSE100 Index as an appropriate comparator for this graph because the Company has been a constituent of that index throughout the period and its constituents are used as the comparator group for the PSP.
Total shareholder return
By order of the Board
Chairman of the Remuneration Committee
25 March 2009