During the coming year, we will be considering and developing our Remuneration Policy for the period 2020-23. We will also be embedding the key changes to the Committee's responsibilities following the recent changes arising from the 2018 UK Corporate Governance Code.

Jonathan Brooks

Committee chairman

On behalf of your Board, I am pleased to present our Directors' Remuneration Report (DRR) for the year ended 31 May 2019.

The Report is divided into three sections: an Annual Statement, a summary of our Directors' Remuneration Policy and the Annual Report on Remuneration(which sets out the actual application of the Policy).

Annual Statement

During the year, we operated within the Remuneration Policy that was approved by shareholders at the 2017 AGM, a copy of which can be found in the next section of this Report.

There was one Board change during 2018/19 which was the appointment of a new Chief Financial Officer, Tim Kowalski.

Tim Kowalski joined the business as our new Chief Financial Officer on 23 July 2018. He was awarded a base salary of £275,000 and benefits and incentives in line with our Policy. This salary was 10% higher than the £250,000 salary of the previous Chief Financial Officer Brian Tenner, which had been set on his appointment as CFO in February 2017, before he took on the role of interim CEO. Upon Brian's departure, he received a payment representing six months' basic salary in lieu of notice which was a contractual payment relating to his departure. Brian received a bonus payment in respect of the 2017/18 financial year and the Committee elected not to defer 35% of this into shares for two years. Brian will not receive any bonus in relation to the 2018/19 financial year. The Committee determined he would be treated as a good leaver for the LTIP granted to him in 2017. Full details of this are disclosed in the notes to the single total figure of remuneration in the Annual report on remuneration.

For the 2019/20 financial year, both the Chief Executive Officer and the Chief Financial Officer have been awarded an increase in base salary of 2.5%.

By reference, the average salary review awarded to all other UK-based employees was 3%.

In line with Policy, Non-Executive Director fees are also reviewed annually. Following a review of expenses and the expense claim process for Non-Executive Directors, a simplification was proposed and approved which would remove the ability to claim expenses, but introduce with effect from 6 April 2019, an expense allowance which would be incorporated into base fees. As a result, base fees would not be adjusted for the coming year, other than the uplift for the new expense allowance.

Details of these fees and allowances are given in the Annual Report on Remuneration.

Performance related pay – bonus

The annual bonus for the year ended 31 May 2019 for both the Chief Executive Officer and Chief Financial Officer was based on the satisfaction of stretching financial and strategic targets. This resulted in an overall payment of 48% of base salary for the CEO and 44% of base salary for the CFO. With respect to the financial targets, these were set last year at an adjusted operating profit1 from continuing operations of between £33.0m and £36.0m and by delivering an adjusted operating profit1 of £33.7m. This resulted in a bonus of 28% out of a maximum of 75% of base salary being achieved. With respect to the strategic objectives which comprised 25% of the available bonus opportunity, the bonus earned was judged to be 20% for the CEO and 16% for the CFO, with the components of these figures broken down as follows:

2018/19 Objectives for both the CEO and CFO

Implement ERP and CRM systems for the business: Bonus potential 7.5%; Actual bonus achieved 7.5%.

Develop KPI reporting: Bonus potential 5%; Actual bonus achieved 0%.

See note 3 to the Financial Statements for an explanation of Alternative Performance Measures (APMs) and adjusting items. See note 3 to the Financial Statements for a reconciliation to statutory information.

CEO only

Develop and implement a strategic plan for Fox-IT and certain of its product offering: Bonus potential 12.5%; Actual bonus achieved 12.5%.

CFO only

Build a fit for purpose Finance Team: Bonus potential 7.5%; Actual bonus achieved 5%.

Simplify financial reporting: Bonus potential 5%; Actual bonus achieved 3.5%.

For both the CEO and CFO, 35% of the actual bonuses achieved will be deferred into nominal cost share options and will vest after two years.

For 2019/20, the Committee intends to keep the same annual bonus structure, with up to 75% being attributed to the achievement of financial targets and 25% for strategic targets.

The adjusted operating profit ¹ target for 2019/20 will be reported on within the 2020 Remuneration Report but as in previous years the adjusted operating profit target will be set within a tight range with bonuses of between 15% and 75% of base salary being calculated by linear interpolation.

Strategic targets for 2019/20 include:

CEO

  • Employee engagement, diversity and inclusion (8%)
  • Continued delivery of efficiencies through the Securing Growth Together programme (7%)
  • Develop and implement a strategic plan for Escrow and EaaS growth (10%)

CFO

  • Employee engagement, diversity and inclusion (5%)
  • Best in class finance and administration functions (10%)
  • Develop and streamline KPI reporting (10%)

As in prior years, the bonus will continue to be self-funding and as such, no bonus will be payable, even for strategic targets, unless the minimum profit target is met. 35% of any bonus earned will be deferred into nominal cost share options and after a vesting period of two years, these shares must be retained until the shareholding guideline is achieved. Clawback and malus provisions are in place for the annual bonus.

Performance related pay – LTIP

No LTIP vested in the year for the Executive Directors as neither executive has been employed for more than three years.

With respect to the LTIP for 2019/22, the Committee intends to make awards of up to 100% of base salary and these will vest after three years as long as a number of demanding performance targets are satisfied. 60% of the potential award will be based on the achievement of a demanding EPS target, 30% on the achievements of certain cash targets and 10% on relative TSR targets.

Clawback and malus provisions are in place for the LTIP.

In order to further align executives with shareholders, executives are required to retain any vested shares (net of tax) for a period of two years. After this holding period, vested shares must also be retained if the shareholding guideline has not been met.

At the Annual General Meeting in September 2018, 99.25% of shareholders voted in favour of the adoption of the Annual Report on Remuneration. The 2019 Annual Statement and Annual Report on Remuneration will be put to an advisory vote at the Annual General Meeting on 25 September 2019, providing shareholders with the opportunity to voice their opinions on how the Committee has implemented the Remuneration Policy this year. As always, the Committee remains committed to engagement and transparency and I welcome the opportunity for discussion of the Group's remuneration with any shareholder, at our AGM or at any other time during the year.

During the coming year, we will be considering and developing our Remuneration Policy for the period 2020-23 which we will put to shareholders at the 2020 AGM. As part of this process, in the event we were proposing any significant changes to our Remuneration Policy and structure, we would consult with our major shareholders.

We will also be embedding the key changes to the Committee's responsibilities following the recent changes arising from the 2018 UK Corporate Governance Code. We will report on this in the 2020 Remuneration Report but some of the areas which the Committee will now consider and review are as follows:

  • Ensuring that the remuneration policy continues to support and incentivise the achievement of our strategy.
  • Setting the remuneration for the ExCom (i.e. ExCom the layer of senior management immediately below Board level).
  • Ensuring that the Committee takes into account workforce remuneration and related policies when setting executive remuneration and that executive awards are aligned with culture.
  • Reviewing share plan rules to allow the use of discretion to override formulaic outcomes in respect of variable pay.
  • Developing our formal policy for post-employment shareholding requirements for vested and unvested shares.
  • Reviewing and reporting on the CEO to employee pay ratio between our CEO and UK workforce.
  • Including further scenario charts and narrative on our potential LTIP vesting outcomes to show the effect of a 50% increase in the share price.
  • Reviewing our approach to Post-Employment shareholdings and developing our policy on this which we will include as part of 2020 Remuneration Policy.

Jonathan Brooks

Chairman, Remuneration Committee

24 July 2019