Remuneration committee

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I am pleased to present the Howden Joinery Group Remuneration Committee Report for 2017. We have used the same simplified reporting format as last year, which we believe supports ease of use whilst maintaining compliance with the requirements of the Large and Medium-sized Companies and Groups Regulations 2013. The main body of the report continues to highlight the key areas that we believe will be of primary focus to the reader, such as pay outcomes for the year and details of how our policy will be implemented in 2018. All relevant supporting information required under the reporting regulations is set out in an Appendix to the report.

Through the year the Committee has continued to focus on ensuring that the approach to executive remuneration at Howdens meets best practice requirements and maximises alignment to the Company's strategy. We have also focused on ensuring that our approach to pay is fair, and that pay in the wider workforce is considered and reflected in the Committee's deliberations. The next UK Corporate Governance Code is expected to increase the remit of the Committee to include a level of oversight for the wider workforce, and we believe we are well placed to incorporate this additional responsibility - the Committee already regularly receives updates from the Interim Group Human Resources Director on pay and conditions throughout the workforce.

An aligned approach to rewarding performance throughout the business is a central part of the Company's ethos, with monthly bonuses paid to our depot staff based on profitability measures. This helps to embed our entrepreneurial culture and supports the engagement, motivation and performance of our employees. Howdens' Remuneration Committee already determines the structure and targets of incentives for the Executive Committee, and these targets also apply to members of the senior management team that do not participate in depot incentives.

CEO Transition

A key part of our work in the year has been supporting the Nominations Committee in CEO succession planning, and ensuring that the approach to retirement and recruitment remuneration for our outgoing and incoming CEOs were appropriate, aligned with best practice and compliant with our policy and relevant plan rules. We also sought to ensure that a competitive offering was made to Andrew Livingston once he was identified by the Board as the clear choice for the Company's next Chief Executive.

Matthew Ingle will retire on 2 April 2018. Matthew has been a pivotal figure for Howdens, transforming the business and leading us in delivering exceptional market leading performance throughout his tenure.

Matthew will continue to support the Company through the transition until 31 July 2018, after which his services will be retained under a consultancy agreement (with all fees paid disclosed in the relevant remuneration report). The Board is pleased to appoint Matthew as Honorary Life President, a role for which he will receive no remuneration. Andrew Livingston was appointed CEO designate on 29 January 2018, and will take on the role of CEO from 2 April.

Andrew forfeited awards on leaving his previous role, including performance based awards and awards of restricted stock not subject to performance conditions. In accordance with our approved recruitment remuneration policy the Committee have sought to replace these awards with those of equivalent fair value and timing insofar as possible. Restricted stock awards have been replaced by restricted Howdens shares with similar vesting periods. Recognising that Andrew's previous performance based awards had a period of less than one year remaining prior to vesting, the Committee felt it appropriate to make the associated replacement awards in the form of restricted shares with an equivalent expected value.

Andrew also forfeited his 2017 cash annual bonus upon leaving his previous role. In line with our recruitment remuneration policy, the bonus forfeited was replaced with a cash award based on an appropriate estimate of the value foregone, and pro-rated for time.

2017 reward outcomes

2017 was the second year of operation of our revised remuneration policy, which was approved by shareholders at the 2016 AGM (see chart below for AGM voting outcomes), and applies for three years from that date. This policy is summarised on page 74 of the 2017 Annual Report. It is available to view in full on our website at remuneration/remuneration-policy.asp.

Howdens has again delivered strong levels of growth. Faced with low levels of consumer confidence and unfavourable exchange rates, sales increased 7.4% on 2016, with a gross margin of 63.3% and Profit Before Tax (PBT) of £232.2m. Despite the challenging market conditions, we have continued to invest in strategic improvements in capacity and capability, including investment in manufacturing, warehousing, distribution, depot operations and organisational development across the Group. Given the capital expenditure associated with these investments (approximately £50m), and the impact of foreign exchange pressures, the £232.2m PBT and £239.9m cash flow delivered in 2017 represent strong performance for the Company.

As in 2016, it speaks to the level of stretch in our incentive targets that the outcomes under the annual bonus fell short of target for both the profit element and the cash element, resulting in a payment of 52% of base salary to our Executive Directors.

Over the three year period of the 2015 Co-Investment Plan cycle, our PBT has grown by 7.1% p.a. However, due to the stretching performance targets for this award (8% per annum PBT growth was required to achieve threshold vesting), this award will lapse in full. The 2015 Co-Investment Plan award was the final award of this type granted to the Executive Directors.

There are two in-flight awards under the Performance Share Plan (PSP), which replaced the Co-Investment Plan in the last policy review. The 2016 Plan uses the same target range as the 2015 Co-Investment Plan (8%-20% PBT growth p.a.), while the 2017 award operates under a revised range of 3%-15% PBT growth p.a.

The CEO and CEO Designate will not receive a salary increase for 2018. The Deputy CEO and CFO has been awarded a salary increase of 3% for 2018. This is in line with inflation and the average increase awarded to the wider workforce in 2017.


2018 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 Committee concluded that a focus on PBT across our incentives remains appropriate. It is our primary performance indicator and is directly aligned with the value we deliver to shareholders. The 2018 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. Howdens has a track record of market leading performance (with an average profit growth over the last five years of 15.7% p.a.) and as a result has historically set sector leading performance ranges. In order to reflect the increasingly challenging external market conditions we reduced the range for the 2017 PSP grant such that the level of PBT growth to achieve threshold performance was 3% p.a. (at which point 15% of award vests) with maximum vesting requiring 3 year growth of 15% p.a. (reduced from 8%-20% p.a. in 2016).

The Committee was conscious of the importance of maintaining the alignment between pay and performance, and therefore made a reduction to the maximum award level for 2017 to reflect the reduction in the performance range. Awards for 2017 were reduced by 50% of salary, such that grants to Executive Directors under the PSP in 2017 had a maximum opportunity of 220% of salary.

For the 2018 PSP we have again carefully considered analyst expectations and our own internal projections, as well as the feedback we received from some investors. As such, we have increased the threshold performance target under the LTIP to 5% p.a., while maintaining a maximum performance level of 15% p.a. The maximum opportunity under the plan will therefore remain unchanged on 2017, at 220% of salary.

Our new CEO will undertake a comprehensive review of our strategy in the coming year. Where appropriate the Committee will seek to reflect the outcomes of this review into remuneration arrangements, and in particular into our performance measures for 2019. Our current policy expires at our 2019 AGM, and therefore towards the end of 2018 we will consult with our largest shareholders on a proposed policy for 2019 onwards that is fit for future purpose and aligned with our strategic priorities.

I hope the information presented in this report provides a clear explanation as to 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.


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.

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


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