Remuneration committee

To view the Terms of Reference for this committee, please click here

To view the Remuneration Policy, please click here

CHAIRMAN

Tiffany Hall

MEMBERS

Mark Allen
Andrew Cripps
Geoff Drabble
Richard Pennycook
Michael Wemms

REMUNERATION COMMITTEE MEETINGS


  Attendance No. of meetings
Tiffany Hall 5 5
Mark Allen 5 5
Andrew Cripps* 4 5
Geoff Drabble 5 5
Richard Pennycook** 2 2
Michael Wemms*** 4 5

* Andrew Cripps was unable to attend the Committee meeting on 15 February 2016 due to ill health.
** Richard Pennycook ceased being a member of the Committee following his appointment as Chairman of the Board on 5 May 2016.
*** Michael Wemms was unable to attend the Board meeting on 3 November 2016 due to a conflict with another appointment.

In compliance with the UK Corporate Governance Code and the Committee's terms of reference, during the year the Remuneration Committee consisted wholly of independent Non-Executive Directors. Subject to successful annual re-election to the Board, appointments to the Remuneration Committee are for a period of three years, which may be extended by the Committee provided the Director remains independent.

MEETING ATTENDANCE

The Committee meets at least three times a year and at any other such time as the Chairman of the Committee requires. Only the attendance of members of this committee is shown in the table below, although other Directors, where appropriate, have often also attended at the invitation of the Committee Chair.

INTRODUCTION BY THE COMMITTEE CHAIRMAN

On behalf of the Board, I am pleased to present the Report of the Remuneration Committee for 2016, prepared in compliance with the reporting requirements of the Large and Medium-sized Companies and Groups Regulations 2013. We have restructured our report this year to support ease of use and to highlight the key areas that we believe will be of primary focus to the reader. As such, pay outcomes for the year, together with details of our implementation of policy in 2017, are provided in the main body of the report. All relevant supporting information required under the reporting regulations now sits in an Appendix to the report.

Executive pay is currently subject to increased levels of media and political scrutiny. Over the past year, the Committee kept fully abreast of the evolving views of shareholders on pay and in particular the recent UK Government consultation on corporate governance. The associated themes have provided important context to our discussions and decision making process. Our continuing intention is to follow a strategically aligned approach to remuneration that reflects Howdens' business model, remains in line with best practice and maintains a continued strong link between pay and performance.

One of the emerging external themes that the Committee has been mindful of over the last year has been the increased focus by shareholders on the alignment of approach between Executives and the wider workforce. The Committee and the management team are focused on ensuring a fair approach to pay across Howdens. We are regularly updated on wider workforce pay, and we make our decisions relating to the remuneration of senior Executives in the context of reward across the business. An aligned approach to rewarding performance is a central part of the Company's ethos, with monthly bonuses paid to our depot staff based on profitability measures. This plays a key role in embedding our entrepreneurial culture and supporting the engagement, motivation and fantastic performance of our employees.

2016 reward outcomes

2016 was the first year of operation of our revised remuneration policy, which was approved by shareholders at the 2016 AGM, and applies for three years from that date. This policy is summarised on page 70 of the 2016 Annual Report, and is available to view in full on our website at www.howdenjoinerygroupplc.com/investors/governance/ remuneration/remuneration-policy.asp.

Howden's again delivered strong growth over the year. Group sales increased 7.1% on 2015, while maintaining a similar level of gross margin, 64.2%. The UK referendum on EU membership has, however, created a number of challenges for us, resulting in negative volume growth in the second half of the year and having an unfavourable impact on foreign exchange rates. We believe that despite the current market conditions it is important to continue our strategic improvements in capacity and capability. We have therefore continued to invest in manufacturing, warehousing, distribution, depot operations and organisational development across the Group.

Given the capital expenditure associated with these investments, around £65m, and the impact of foreign exchange pressures, the 7.9% increase in PBT and £268.0m cash flow delivered in 2016 represent very strong performance for the Company. This has enabled the Board to recommend a final dividend of 7.4p, resulting in a full year dividend of 10.7p - an increase of 8% on 2015.

It speaks to the level of stretch in our incentive targets that, despite this sector leading performance, the outcomes under the annual bonus fell slightly short of target for the profit element, and just above target for the cash element, resulting in a payment of 72% of base salary to our Executive Directors.

Over the three year period of the 2014 Co-Investment Plan cycle, our PBT has grown by 20.6% p.a., demonstrating exceptional long term performance. This award will therefore vest at maximum, with two matching shares being released for each originally invested share. One award from the Co-Investment Plan and one award from the Performance Share Plan, which replaced the Co-Investment Plan in the last policy review, remain in-flight. Both awards require 8% per annum PBT growth to achieve threshold vesting and 20% per annum growth to achieve maximum vesting. The CEO and Deputy CEO and CFO have been awarded salary increases of 1.6% for 2016. This is in line with inflation, and below the increases awarded to the wider workforce. It forms the first increase received by the CEO in four years.

2017 incentives

In line with the commitment we made to investors ahead of the introduction of our new policy in 2016, we have reviewed the performance measures underlying our plans. The Board continues to believe that a focus on PBT across our incentives remains appropriate, particularly given the challenges we will face in the coming year. It is our primary performance indicator and is directly aligned with the value we deliver to shareholders. 2017 PSP awards will therefore continue to be based on PBT growth, with the annual bonus based on a combination of PBT and cash flow performance. We have reviewed the targets for 2017 incentives in light of the much tougher economic and cost pressures anticipated over the coming period, as well as the investments we intend on making across the business.

Howdens has a track record of strong performance (with an average profit growth over the last five years of 16.6% p.a.) and as a result has historically set sector leading performance ranges. The 2015 and 2016 grants under our long-term plans had a threshold to maximum growth range of 8% – 20% p.a. As highlighted elsewhere in this report, the business is now facing substantial headwinds over the next period. To maintain the appropriate level of stretch in targets, whilst ensuring incentives continue to be motivating for management to deliver strong performance, the Committee has determined that a reduction in this range is appropriate.

We have reduced the range for the 2017 PSP grant such that the level of PBT growth to achieve threshold performance will be 3% p.a. (at which point 15% of award vests) with maximum vesting requiring 3 year growth of 15% p.a. In determining this range the Committee made reference to current analyst expectations (which are positioned close to threshold performance), and to maintaining a maximum level of performance which remains positioned between the upper quartile and upper decile levels of performance required by our peers in the FTSE 250.

The Committee was conscious of the importance of maintaining the alignment between pay and performance, and has therefore made a reduction to the maximum award level for 2017 to reflect the reduction in the performance range. Awards for 2017 have been reduced by 50% of salary, such that grants to Executive Directors under the PSP in 2017 will have a maximum opportunity of 220% of salary. We intend to revisit the appropriate measures, targets and the opportunity level under the PSP ahead of 2018 awards being made as the business continues to evolve.

I am pleased to report that the external Board evaluation conducted during the year concluded that the Remuneration Committee is well run, and that it had handled the change in Remuneration policy in a most efficient and effective way. It also confirmed that the Committee receives good support from the Interim Group HR Director, the Company Secretary and its external advisors. I hope the information presented in this report enables our shareholders to understand both how we have operated our remuneration policy over the year and the rationale for our decision making. We continue to be committed to an open and transparent dialogue with our investors, and the Committee would welcome any feedback or comments you have on this report or the way in which we implement our remuneration policy.