Review of SET remuneration
The 2008 Directors' Remuneration Report explained that the Company would undertake a review of total remuneration for SET members (including Executive Directors) during 2009. This review is now drawing to a close and has led to the development of the forward-looking remuneration policy disclosed in this Report.
There were a number of factors that prompted this review:
- When the PSP was approved by shareholders at the AGM in early 2005 (following the last full-scale review of executive remuneration), the Committee undertook to review its operation within a period of five years, and to take into account the views of the Company's shareholders and the needs of the business at that time.
- Shareholder approval to operate the SOP expires during May 2010. This provided the Company with a natural opportunity to review the current approach to remuneration, pay policies and incentive structures and to consider how these may best be developed to support the business strategy going forward.
- The Committee is aware that the subject of executive remuneration is much on the minds of shareholders and that, since its last review, a great deal has changed both in the general market and the corporate governance landscape and in the shape of, and strategic challenges faced by, the global pharmaceutical industry.
In conducting this review, the Committee has been mindful of shareholder views and expectations, and has sought to give major shareholders an opportunity to influence the direction of the proposals by dialogue during the course of the review.
Key remuneration principles
The Committee concluded that the following objectives should continue to define its approach to the formation and execution of AstraZeneca's remuneration policy:
- All aspects of executive remuneration should be developed in the context of shareholder views on 'best practice' and be designed to help AstraZeneca create sustainable growth in shareholder value by the successful implementation of strategy.
- Reward structures and performance measures should support a strong performance culture enabling delivery of the business strategy, where all employees have a clear understanding of the Group's objectives, how their work will impact those objectives and how they will benefit from delivering high levels of performance.
- Base pay and total compensation positioning against the market should be appropriate to attract and develop high-calibre talent and SET remuneration should continue to be referenced to competitive levels of remuneration in the relevant local markets.
Additionally, some specific objectives have been established as a consequence of the review. These support the introduction of a new incentive structure to allow us to rebalance our LTI framework and include the following:
- A clear desire in the business, supported by the Committee, to move towards a longer-term framework which will strengthen alignment with the inherently long-term nature of pharmaceutical drug development.
- Revised LTI structures, designed to provide a clear focus for the business to outperform our industry peers over time, to deliver operational efficiency and to engender a strong sense of stewardship that will deliver long-term sustainable shareholder value.
No other element of Executive Director or SET remuneration will change as a consequence of the review. In particular, there is no intention to increase the overall quantum of short-term bonus or long-term reward opportunity and the annual incentive structure remains unchanged.
The review has also concluded that the shareholding guidelines for Executive Directors and other SET members will be increased from current levels and, as such, the shareholding requirement for the CEO is being increased to 200% of base salary (from 100%) and the requirement for all other Executive Directors and SET members will be increased to 125% of base salary (from 100%).
Long-term share plans
The SOP will expire during 2010 and the review has concluded that no further grants will be made under the SOP.
From 2010 onwards, and subject to shareholder approval of the new share plan, it is proposed that the long-term share interests of Executive Directors and other SET members will be provided through two complementary share plans as detailed below.
The PSP will continue to operate. However, performance conditions will be rebalanced so that the current relative TSR performance condition will apply in respect of one half of any award made under the PSP (as opposed to 100%, as under the current terms of the PSP). The other half of the award will be subject to a new cash flow performance measure that will improve the focus on operational management of the business that is consistent with generating value for shareholders. We have chosen a cash flow measure because it will encompass all elements of operational and financial performance, represents a strong proxy through time for shareholder value-creation and is a key measure for the Group. In conjunction with this new measure, the TSR performance condition will continue to strengthen the focus on outperformance of competitors.
Shareholder approval will be sought at the AGM in April 2010 for the introduction of a new share plan called the AstraZeneca Investment Plan (AZIP) (to operate alongside the existing PSP) with an eight-year time horizon. Shareholders have been receptive to a long-term plan of this nature, conditional on sustainable shareholder returns and financial performance. Such a plan will provide annual awards to Executive Directors and other SET members which must be held for a total of eight years and are subject to a four-year performance requirement from the date of award.
The greater weighting within the LTI opportunity will be given to awards under the PSP. For 2010, awards under the PSP will be positioned so that interests under this plan can deliver 75% of the overall expected value from long-term remuneration. 25% of the overall long-term opportunity for 2010 will therefore be delivered through the AZIP. The Committee will keep under review the appropriateness of this weighting.
The combination of awards under these two plans will fundamentally improve the alignment between the time horizons over which our business investment decisions are taken and those to which our long-term remuneration vehicles relate.
Performance conditions for the PSP
To date, awards to Executive Directors and other SET members under the PSP were subject to a TSR-only performance condition.
For awards to be made in 2010 under the PSP, it is intended that:
- 50% of the award will be based on relative TSR against a selected peer group of global pharmaceutical companies, of which:
- 25% of the maximum award will vest for performance at the median of the peer group; and
- 75% of the maximum award will vest for upper quartile performance; the Committee will retain its existing discretion to determine the amount of vesting for performance significantly above upper quartile, up to 100% of the maximum award.
- 50% of the award will vest subject to the achievement of a free cash flow target, which will operate as a cumulative cash flow target over a three-year performance period.
This free cash flow measure has been chosen because it encompasses a number of important elements of operational and financial performance and helps to align executives' rewards with shareholder value-creation. The level of vesting of this element will be based on a sliding scale against a target that is intended to represent a significant challenge for the business. It is intended that the Committee should have the discretion to adjust, but on an exceptional basis only, the free cash flow target during the performance period for material factors that might otherwise distort the performance measure in either direction. This is so that performance can be assessed against targets that have been set on a consistent basis. For example, adjustments may be required to reflect exchange rate movements, significant acquisitions or divestments and major legal and taxation settlements. Any major adjustments to the calculation will be disclosed to shareholders. There will be no retesting of performance. Further information about the applicable free cash flow target will be set out in the Notice of AGM and shareholders' circular.
Performance requirement for awards under the AZIP
The AZIP will be aligned to AstraZeneca's targeted product development cycle, reflecting the long term investment horizons that are a feature of the industry. The performance requirements attached to awards under the AZIP will be a combination of dividend and dividend cover tests, assessed over a period of up to four financial years beginning at the start of the first financial year of the Company in which the award is granted. A subsequent sale restriction will apply over a period that extends to the full eight-year period, during which time forfeiture provisions will usually apply. Accordingly, participants will not generally be able to realise value until the full eight-year period has elapsed.
The Committee's intention in its choice of proposed performance tests has been to establish a performance requirement that motivates financial business performance that will generate returns for shareholders on a sustainable basis over an extended time period. Further details relating to the proposed performance requirement and targets for 2010 awards will be provided in the Notice of AGM and shareholders' circular.
