Directors' Remuneration Policy

Howdens' Remuneration Policy, as set out in our 2013 Annual Report and Accounts, was approved by shareholders at our 2014 AGM with the intention that it apply for 3 years from that date. It is also available in full on our website, at www.howdenjoinerygroupplc.com.

In order to ensure continued alignment between remuneration and the evolving strategic direction of our business, the Committee has deemed it appropriate that a new policy be proposed to shareholders for approval. This policy is set out below, with the intention that it apply for three years from the date of the 2016 AGM.

Future policy table - Executive Directors

The table below sets out the key components of Executive Directors' pay packages, including why they are used and how they are operated in practice.

Remuneration is benchmarked against rewards available for equivalent roles in a suitable comparator group. In addition to benchmarking, the Committee considers general pay and employment conditions of all employees within the Group and is sensitive to these, to prevailing market conditions, and to governance requirements.

Element and how
it supports our strategy
Operation Opportunity Performance
Measures

Base salary

Recognises the market value of the executive's role, skill, responsibilities, performance and experience.

Salaries are reviewed annually, and are effective from 1 January each year. Salaries will not be changed outside of the annual review, except for in exceptional circumstances, such as a mid-year change in role.

Increases will normally be only for inflation and/or in line with the wider employee population.

Salaries are set within a range defined by a market benchmark derived from companies of a comparable size operating in a similar sector (policy is to pay median). The peer group used is reviewed whenever benchmarking is performed, and the Committee applies judgement in identifying appropriate peer group constituent companies. The individual's level of total remuneration against the market is considered at the same time.

Reviews will also take into account the performance of the individuals, any changes in their responsibilities, pay increases for the wider workforce and internal relativities.

2015 and 2016 salary levels are detailed in the "Statement of implementation of remuneration policy in 2016" section on page 64 of the 2015 Annual Report.

None.

Benefits

Provides a competitive level of benefits.

Howdens pays the cost of providing the benefits on a monthly basis or as required for one-off events.

Benefits are based upon market rates and include receipt of a car allowance; non-exclusive use of a driver; health insurance and death-in-service insurance payable by the Company.

None.

Annual Bonus

Incentivises annual performance over the financial year.

Deferral links bonus payout to share price performance over the medium term.

Performance is assessed annually against cash flow and PBT targets.

Any bonus earned in excess of 100% of salary is deferred into shares. Shares are paid out in equal tranches on the first and second anniversary of deferral date. Payment is subject to continued employment.

Malus provisions apply for the duration of the performance period and to shares held under deferral.

Clawback provisions apply to cash amounts paid for two years following payment, and to vested deferred shares under the first tranche for one year following vesting. Therefore clawback and/or malus will operate on the award for a total period of up to two years after the performance period.

Clawback may be applied in the following scenarios:

- material misstatement of accounts;
- erroneous assessment of a performance target;
- where the number of plan shares under an award was incorrectly determined; or
- gross misconduct by a Director.

No dividend equivalents accrue on deferred shares.

The maximum opportunity under the annual bonus is 150% of salary.

The Committee has the flexibility to apply a maximum opportunity of up to 200% of salary in exceptional circumstances.

If the Committee considers it appropriate to use a maximum opportunity of over 150% of salary, we will notify our largest shareholders in advance, and discuss with them the rationale for such an exceptional award. The exceptional maximum would not be used on a retrospective basis, and would be based on pre-determined and stretching performance targets.

For 2016 the annual bonus will be based on PBT and cash flow measures.

The Committee retains the flexibility to use alternative measures during the life of this policy, subject to at least 70% of the bonus being based on financial metrics.

Performance Share Plan (PSP)

Focuses management on longer-term financial growth than addressed by the annual bonus. Long-term financial growth is key to the generation of shareholder value.

Executives have the opportunity to participate in the PSP on an annual basis. The PSP operates over a threeyear cycle.

Under the PSP, awards will be granted towards the beginning of the performance period and vest based on performance over the following three-year performance period. Malus provisions apply for the duration of the vesting period.

Vested awards are subject to a two-year holding period following vesting, during which no performance measures apply.

Clawback provisions apply for the duration of the holding period, through which vested awards may be reclaimed in the event of:

- material misstatement of accounts;
- erroneous assessment of a performance target;
- where the number of plan shares under an award was incorrectly determined; or
- gross misconduct by a Director.

No dividends accrue on unvested shares.

The maximum opportunity under the PSP is 270% of salary.

2016 awards will be based in full on PBT growth.

The Committee retains the flexibility to use alternative financial performance measures during the life of this policy.

Pension

Provides competitive long-term savings opportunities.

The Howden Joinery Group Pension Plan is a hybrid defined benefit, occupational pension plan.

The defined benefit pension accrues on a Career Average Revalued Earnings (CARE) basis at the rate of 1/50th of actual pensionable pay in each year (currently capped at £144,000; the cap increases annually in line with CPI).

In addition, the Company will match any voluntary member contribution made to the defined contribution top-up section to a maximum of 8% of pensionable pay. Alternatively, a participant may receive a salary supplement of 8% of salary in lieu of this defined contribution opportunity.

A pension supplement system operates concurrently with the Plan which recognises that pension entitlement in respect of the CARE part of the Plan is capped. This supplement is 30% of basic salary above the Plan Cap to reflect competitive market practice.

The CEO has chosen to opt out of membership of the Plan and consequently receives a salary supplement of 30% of salary in lieu of pension.

This plan is now closed to new entrants. If an Executive Director joins who is not already a member of the Plan, they will be able to participate in the new autoenrolment defined contribution scheme or to receive a supplement payment of 30% of total basic salary.

None.

All-employee share incentive scheme

To encourage share ownership across the Company.

Executive Directors are able to participate in HMRC approved share plans available to all employees of the Company.

The maximum participation levels will be set based on the applicable limits set by HMRC.

None.

Shareholding Requirement

Strengthens alignment of interests between participants and shareholders.

Executive Directors are expected to retain vested shares from deferred bonus and long-term incentive awards (net of income tax and national insurance contributions) until they reach the minimum requirements.

Unvested deferred bonus and long-term incentive shares are not taken into account. PSP shares within a holding period are counted towards the requirement.

Executive Directors are expected to build up a holding of 200% of base salary.

None.


Elements of previous policy under which unvested awards are still outstanding

Co-Investment Plan (CIP)

Previous long-term incentive plan. Awards under the CIP were granted in 2014 and 2015 and these vest in 2017 and 2018 respectively.

No awards will be made under this plan in future.

Executives had the opportunity to participate in the CIP on an annual basis. The CIP operates over a threeyear cycle. The investment was funded by Executive Directors themselves from their personal shareholding. The matching shares vest after a three-year vesting period subject to performance against PBT growth targets.

The Company has the ability to vary the performance conditions if events happen which cause the Committee to consider that they have ceased to be a fair measure of individual or Company performance.

No dividend equivalents accrue on matching shares.

The CEO could invest up to the lesser of 650,000 shares or 150% of salary.

The Deputy CEO and CFO was able to invest an equivalent proportion of salary.

Each invested share is matched by the Group with up to two shares, subject to performance. For threshold performance, 0.3 matching shares vest per invested share.

PBT performance measured over a three-year period.

Performance measures and targets

As part of the Committee's review of our remuneration arrangements, we have considered the appropriateness of the performance measures we have historically used, as well as the potential merits of incorporating measures which deliver increased focus on other elements of our financial performance. The Committee believes that the current measures continue to be appropriate for our business, and therefore no change in performance measures will be made for 2016 awards, which are cascaded across the Executive Directors, Executive Committee and senior management.

Sustainable profit growth is at the heart of the Howdens' entrepreneurial culture. It is a simple metric that is easily understood by our employees from depot managers to the CEO, and we believe that by having a profit-sharing approach that extends deep into the organisation we are able to support the motivation and wellbeing of our workforce. PBT is also a key performance indicator for the Company, and is directly correlated to the value we are able to deliver to our shareholders.

Cash flow also continues to be a key internal metric for Howdens. We believe that the incorporation of this measure in the bonus focuses our leadership on strong working capital management, supports strong sustainable profit growth and the delivery of returns to our shareholders.

Reflecting shareholder feedback, we recognise that during the life of this policy it may become appropriate to amend the performance measures used for our incentives. It is for this reason that we have added the flexibility into our policy to change performance measures, subject to 70% of the bonus and 100% of the PSP being based on financial metrics. Each year we will carefully consider our strategy and the challenges facing the business, and will review measures to ensure that they continue to drive strong alignment with the delivery of value to shareholders.

Annual bonus - 2016

The table below sets out additional information on performance conditions relating to the 2016 annual bonus:

Measure Definition How targets are set
PBT Pre-exceptional profit before tax from continuing operations. Set by the Remuneration Committee in light of Howdens' budget, brokers' forecasts and prior year PBT.
Cash flow Net cash flow from operating activities, taking into account the efficiency with which working capital is used, and adjusted for exceptional items. Cash flow targets generated by Howdens' financial model, based on modelled scenarios under which threshold, target and outperformance levels of PBT are achieved.

Commercial sensitivity precludes the advance publication of bonus targets but targets will be disclosed retrospectively in the Annual Report on Remuneration. For 2015 targets please see the annual bonus targets and outcomes table on page 59 of the 2015 Annual Report.

Performance Share Plan - 2016

The PSP has replaced the Co-Investment Plan and will also be based solely on nominal PBT performance for the 2016 award. Targets are considered by the Remuneration Committee to provide a range which represents long-term success for Howdens, and are kept under review in light of brokers' forecasts and inflation forecasts. In the event that inflation significantly increases, the Committee will reconsider the operation of this measure to ensure that the use of nominal targets is appropriate.

The intended targets for 2016 PSP grants are detailed in the "Statement of implementation of remuneration policy in 2016" section on page 64 of the 2015 Annual Report.

Remuneration policy for other employees

The remuneration policy described above applies specifically to Executive Directors of the Group. However, the Remuneration Committee believes it is appropriate that all reward received by senior management is directly linked to the performance of the Company and aligned with shareholder value. Accordingly, Executive Committee members (a further six individuals) participate in the same incentive schemes as the Executive Directors at a reduced level to ensure alignment between the leadership team with each other and with our shareholders.

Below this level, a system of profit-sharing and the encouragement of share ownership is cascaded through all tiers of management. Individuals within the upper tiers of the organisation participate in a similar bonus plan that is linked to PBT and cash flow. These individuals also participate in a PSP, which vests dependent on the same performance measures as the PSP awarded to Executive Directors.

Share grants are made at a reduced level to a wider population within Howdens that do not use performance conditions. These awards are made in order to encourage share ownership throughout the Company.

NED fee policy

The Group's policy on Non-Executive Director (NED) and Chairman fees is set out below.

Element and how it
supports our strategy
Operation Opportunity Performance
Measures

Fees for Non- Executive Directors

To attract NEDs who have a broad range of experience and skills to oversee the implementation of our strategy.

The fees for the Non-Executive Directors are determined by the Chairman and Chief Executive.

The fee for the Chairman is determined by the Remuneration Committee while the Chairman is absent.

No other services are provided to the Group by Non-Executive Directors.

Fees for Non-Executive Directors are set out in the statement of implementation of policy in the following financial year section on page 64 of the 2015 Annual Report.

The fees reflect the time commitment and responsibilities of the roles. Accordingly, committee chairmanship and Senior Independent Director (SID) fees are paid in addition to the NEDs' basic fee. Committee chairmanship fees apply only to the Audit and Remuneration Committees. The Chairman receives no fees in addition to the Chairman's fee.

Fees may be reviewed every year, and are set within a range defined by a market benchmark of comparably sized companies. Benchmarking is typically undertaken every three years.

NEDs are not eligible to participate in any performance related arrangements.

2016 remuneration scenarios

The remuneration package for the Executive Directors is designed to provide an appropriate balance between fixed and variable performance-related components, with a significant proportion of the package weighted towards long-term variable pay. The Committee is satisfied that the composition and structure of the remuneration packages is appropriate, clearly supports the Company's strategic ambitions and does not incentivise inappropriate risk-taking and reviews this on an annual basis.

The composition and value of the Executive Directors' remuneration packages in a range of performance scenarios are set out in the charts below. These show that the proportion of the package delivered through long-term performance is in line with our remuneration policy and changes significantly across the performance scenarios. As a result, the package promotes the achievement of superior long-term performance and aligns the interests of the Executive Directors with those of other shareholders. A brief description of each remuneration scenario is set out below the charts.

Value of package (£'000)

Value of Package

Statement of consideration of employment conditions elsewhere in the Group

When making decisions on executive reward, the Remuneration Committee considers the wider economic environment and conditions within the Company. In particular, the Committee considers pay conditions for the wider workforce when reviewing base salaries for Executive Directors. For 2016, salary increases for the wider workforce are around 3% of salary. The Company considers no further remuneration comparison measurements.

Additionally, some of the Company's workforce are unionised or belong to a works council. Howdens maintains open lines of communication with these bodies and the Committee is always made aware of any relevant information in relation to remuneration policy. Notwithstanding that the Committee does not specifically invite employees to comment on the Directors' remuneration policy, it does take any comments made by employees into account.

Statement of consideration of shareholder views

The Committee remains committed to maintaining an ongoing and transparent dialogue with its shareholders. This Executive remuneration policy was shared with our major shareholders and shareholder representation bodies in advance of the publication of this report, and the Chair met with key representatives from each in order to invite comment.

Feedback received was carefully considered by the Committee and incorporated where appropriate into the proposed policy.

Approach to recruitment remuneration

The treatment and design of the various elements of remuneration paid to new recruits is set out in the table below. The Committee's policy is to pay no more than is necessary to attract appropriate candidates to the role. However, in unusual circumstances, an arrangement may be established specifically to facilitate recruitment of a particular individual. Any such arrangement would be made only where critical to the recruitment of an exceptional candidate, and within the context of minimising the cost to the Company.

Component Policy

General

The Committee's approach to recruitment remuneration is to pay no more than is necessary to attract appropriate candidates to the role.

Any new Executive Director's ongoing package would be consistent with our remuneration policy as set out in this report.

Base salary and benefits

The salary level will be set taking into account the responsibilities of the individual and the salaries paid to similar roles in comparable companies (policy is to pay median). In certain circumstances the Committee may initially position the Executive Director's salary below the market level and increase it to market levels through exceptional increases over an appropriate period of time.

The Executive Director will be eligible to receive benefits in line with Howdens' benefits policy as set out in the remuneration policy table.

Should relocation of a newly recruited Executive Director be required, reasonable costs associated with this relocation will be met by the Company. Such relocation support could include but not be limited to payment of legal fees, removal costs, temporary accommodation/hotel cost, a contribution to stamp duty, replacement of non-transferable household items and related taxes incurred. In addition, and in appropriate circumstances, the Committee may grant additional support in relation to the payment of school fees and provision of tax advice.

Pension

The Executive Director will be able to participate in the new auto-enrolment defined contribution scheme or to receive a supplement payment of up to a maximum of 30% of basic salary.

Annual bonus

The Executive Director will be eligible to participate in the annual bonus scheme as set out in the remuneration policy table.

The maximum potential opportunity under this scheme is 150% of salary, although in exceptional circumstances the Committee may choose to apply a maximum of up to 200% of salary.

Long-term incentives

The Executive Director will be eligible to participate in the PSP set out in the remuneration policy table.

Accordingly, the Executive Director may be offered a maximum opportunity under the PSP of the 270% of salary in performance shares.

Replacement awards

The Committee may grant the Executive Director awards to replace awards from a previous employment that are forfeited. Should replacement awards be made, any awards granted would be no more generous overall in terms of quantum or vesting period than the awards due to be forfeited. In determining the quantum and structure of these commitments, the Committee will take into account the fair value and, as far as practicable, the timing and performance requirements of remuneration foregone.

Service contracts and letters of appointment

All Executive Directors' employment contracts have twelve months' notice of termination on both sides. In the event of termination by the Company, there will be no compensation for loss of office due to misconduct or normal resignation. In other circumstances, Executive Directors may be entitled to receive compensation for loss of office which will be paid monthly for a maximum of twelve months. Such payments will be equivalent to the monthly salary that the Executive would have received if still in employment with the Company. Executive Directors will be expected to mitigate their loss within a twelve-month period of their departure from the Company.

In their service contracts, Executive Directors have the following remuneration-related contractual provisions:

Non-Executive Director appointments are for an initial period of three years. They are subject to re-appointment annually in accordance with the UK Corporate Governance Code. Non-Executive Directors are not entitled to any form of compensation in the event of early termination for whatever reason.

Policy on payment for loss of office

The treatment of the various elements of remuneration payable to Executive Directors in a loss of office scenario is set out in the table below. In exceptional circumstances an arrangement may be established specifically to facilitate the exit of a particular individual, however any such arrangement would be made within the context of minimising the cost to the Company. The Committee will only take such a course of action where it considers it to be in the best interests of shareholders. Full disclosure of any payments will be made in accordance with the new Remuneration Reporting regulations.

Component Policy

General

When determining any loss of office payment for a departing individual, the Committee will always seek to minimise cost to the Company whilst seeking to reflect the circumstances in place at the time. As an overriding principle there should be no element of reward for failure.

Base salary and benefits

In the event of termination by the Company, there will be no compensation for loss of office due to misconduct or normal resignation. In other circumstances, Executive Directors may be entitled to receive compensation for loss of office which will be paid monthly for a maximum of twelve months. Such payments will be equivalent to the monthly salary that the Executive would have received if still in employment with the Company.

Pension

An enhanced pension is payable in the event of retirement through ill-health. There is no scope for enhancements to individuals' accrued pension entitlements for other loss of office scenarios.

Annual bonus

Where an Executive Director's employment is terminated after the end of a performance year but before the payment is made, the Executive may be eligible for an annual bonus award for that performance year subject to an assessment based on performance achieved over the period. No award will be made in the event of gross misconduct.

Where an Executive Director's employment is terminated during a performance year, a pro-rata annual incentive award for the period worked in that performance year may be payable subject to an assessment based on performance achieved over the period.

Long-term incentives and deferred annual bonus

The treatment of outstanding deferred annual bonus is governed by written agreements with individuals and the treatment of long-term incentive awards by the rules of the relevant plan. Individuals are defined as either a good or bad leaver for the purposes of outstanding incentive awards. Good leavers are those leaving under pre-specified circumstances (such as retirement, ill-health or disability) or those deemed by the Committee at its absolute discretion as a good leaver given the circumstances surrounding the loss of office. All other leavers are bad leavers.

If an individual is a good leaver or dies then they will either continue to hold the award which will vest on the normal vesting date based on Howdens' performance (where applicable), or the Committee may exercise discretion to accelerate vesting of the award, pro-rated to reflect the extent to which the performance targets have been met (allowing for the curtailed performance period). In both scenarios, the amount vesting is pro-rated for the proportion of the period elapsed when the individual leaves.

If an individual is a bad leaver then all awards to which they are conditionally entitled will lapse in full.

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