Remuneration report

“The philosophy of the Remuneration Committee is to reward performance fairly, which normally means paying around the median market rate for good performance, providing the opportunity for greater rewards for extraordinary performance and ensuring that we do not pay additional reward where performance is below par.”

“The Committee recognises the importance of taking account of shareholders’ views and believes they can add considerable value to the process of policy formulation.”

Graham Holden and Tony Illsley

Graham Holden
Former Chairman,
Remuneration Committee

Tony Illsley
Interim Chairman,
Remuneration Committee

Statement from the Chairmen of the Remuneration Committee

Dear shareholder

This has been a relatively quiet year for the Remuneration Committee in terms of remuneration decisions; there have been no long-term incentive schemes vesting in the year and there have been no significant changes to the Remuneration policy in the year.

This is the first year of the new disclosure requirements in relation to remuneration and therefore the Committee has spent time reviewing the requirements and the disclosures made to ensure that we present our information as clearly and fully as possible.

The Committee has focused during the year on reviewing the Remuneration policy in place and ensuring that this meets the requirements of the business, aligns with the expectations of our shareholders and also enables us to continue to attract and retain the right individuals to the Board.

The philosophy of the Remuneration Committee is to reward performance fairly, which normally means paying around the median market rate for good performance, providing the opportunity for greater rewards for extraordinary performance and ensuring that we do not pay additional reward where performance is below par. The Committee is mindful of the need for balance between risk and reward and has risk mitigation elements in place through clawback provisions and share ownership guidelines for Executive Directors.

In looking at performance we consider both the current performance of the Group and the longer-term sustainability of the business. This is reflected through our policy to have an annual bonus linked to the performance of the Group in the year and a long-term incentive scheme that rewards Total Shareholder Return (TSR) performance over a three year period. We ensure that the final decision over vesting of LTIP awards is dependent on the Committee agreeing that the performance of the Group over the three years is representative of the continued success of the business into the future.

Decisions made

There have been no pay increases for the Executive Directors since 1 July 2011. In the meantime the performance of the Group has remained strong and the share price has moved from 77.75 pence as at 30 June 2011 to 99.2 pence as at 31 March 2014. Across the Group, all employees have been eligible for a pay award, based on performance and the market rate for the role which they perform. The average pay award given to employees will be 1.66 per cent, which will take effect from 1 July 2014. All employees, other than the Executive Directors and senior management, also received a two per cent increase on 1 July 2012. Taking these factors into consideration, along with individual performance, the Remuneration Committee has proposed that an increase of 2.75 per cent is awarded to both Bill Halbert and Paul Simpson, with effect from 1 July 2014. The same award has not been proposed for Kevin Walsh as he has indicated his plans to retire from the company in the summer of 2014 and will not be standing for re-election at the AGM.

The annual bonus scheme for the forthcoming year has been reviewed by the Committee and it has been agreed to retain the current metrics operated, with a slight increase in the targets for the 2014/15 year, which are set out in more detail below. During the year the Group achieved EBITDA above the target level required to trigger a bonus payment and bonus payments for the year of 14 per cent of the on-target bonus entitlement have been awarded. The Committee has considered this and believes that this is a fair reflection of the performance of the business in the year; it is also consistent with the average percentage of bonus entitlement that has been triggered for bonus scheme participants across the Group.

No LTIP awards were due to vest based on performance ending in, or substantially ending in, 2013/14. During the year new awards were granted under the LTIP scheme to each of the Executive Directors, equivalent to 100 per cent of base salary. This is consistent with awards made in the previous year and was considered by the Committee to reflect the continued good performance of the Group, and to provide a longer-term incentive to the Executive Directors as these awards will not vest until 2016 and are dependent on TSR measured over a three year performance period from the date of grant. The Committee is happy that TSR remains appropriate as the performance measure for the LTIP scheme.

Change of Committee Chairman

From 1 April 2014, Graham Holden has been appointed as Chairman of KCOM Group PLC, which means that he has had to step down from the role of Chairman of the Remuneration Committee in order to comply with the requirements of the UK Corporate Governance Code. Graham remains a member of the Committee and will provide support to the new Chairman. From 1 April 2014, Tony Illsley has stepped up to take on the role of Committee Chairman. Tony has significant experience as a Non-Executive Director and has performed the role of Remuneration Committee Chairman at three other listed companies, therefore bringing considerable experience to the role. The Board is currently actively seeking a new Non-Executive Director and on appointment the new Director may take on the role of Chairman of the Remuneration Committee, subject to experience.

Director retirement

On 26 November 2013, Kevin Walsh indicated to the Board that he will be retiring from the Group in the summer of 2014 and he will therefore not be standing for re-election at the AGM. The policy of the Committee is to reward retiring colleagues fairly for the period for which they work, whilst avoiding significant payments in lieu of notice wherever possible. In line with the policy, it has been agreed with Kevin that he will sign a new service contract in the summer of 2014 which will reduce his notice period from 12 months to three months, therefore relieving the Group from the obligation to make a 12 month payment in lieu of notice from the date on which he formally tenders his resignation and ensuring that his notice period does not extend beyond 26 November 2014, which would be 12 months from the date of his initial indication.

In order to ensure an orderly succession, Kevin continues to offer support to the KC brand and the rest of the business and will continue to do so until late summer 2014.

New reporting requirements

Last year we adopted early some of the new reporting requirements in relation to remuneration. This is the first year in which we have been required to comply fully with the new disclosure requirements and we welcome the move towards greater transparency and clearer reporting.

Views of the shareholders

The Committee recognises the importance of taking account of shareholders’ views and believes they can add considerable value to the process of policy formulation. Any feedback would therefore be welcomed and may be directed to the Chairman of the Committee or to our Company Secretary, Kathy Smith.

Graham Holden

Former Chairman, Remuneration Committee
18 June 2014

Tony Illsley

Interim Chairman, Remuneration Committee
18 June 2014

This Directors’ Remuneration report sets out details of the Remuneration policy for Executive and Non-Executive Directors, describes the implementation of the policy and discloses the amounts paid for the year ended 31 March 2014. The report complies with the provisions of the Companies Act 2006 and Schedule 8 of the Large and Medium-Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 and has been prepared in line with the recommendations of the UK Corporate Governance Code and the requirements of the UKLA Listing Rules.

Policy report

This part of the Directors’ Remuneration report sets out the proposed Directors’ Remuneration policy of the Group. The Policy report will be put to a binding shareholder vote at the AGM on 29 July 2014, in accordance with Section 439A of the Companies Act 2006. If approved, the policy will then take effect from that date.

Policy overview

In designing the Remuneration policy for the Executive Directors, the Committee seeks to align the policy to the strategic objectives of the Group and reward strong performance to ensure the long-term success of the business, whilst not encouraging unnecessary risk taking or irresponsible behaviour.

The Committee also considers the pay and employment conditions of employees across the Group when setting the Remuneration policy for the Executive Directors, to ensure that these are aligned where appropriate.

The Committee does not consult directly with employees when drawing up the Directors’ Remuneration policy; however, a regular employee satisfaction survey is conducted across the Group, which includes questions around remuneration. The latest survey was held in March 2013. The results of this are taken into consideration when making decisions around remuneration.

The Committee is always open to hearing the views of shareholders in relation to Directors’ remuneration and any views expressed will be considered as part of the process when setting the Remuneration policy.

Executive Directors’ policy table

Element and how it supports the KCOM Group strategy How does this operate and what is the maximum that may be paid? What performance measures are used and why? Are there any provisions to recover sums paid?

Base salary

Setting the base salary at the right level enables us to attract and retain the right individual for the role, whilst reflecting appropriately the status, responsibility and experience of the individual.

Base salaries are normally reviewed at least annually. Salaries are typically set following comparison with broad industry based peer companies and companies of a similar size. We aim to pay salaries around the median; however we also take into account a number of other specific factors, including the experience and performance of the individual, the criticality of the individual to the success of the Group, pay and conditions throughout the Group and the wider economic climate.

Increases will not ordinarily exceed the general level of increase for the Group’s employees however, increases beyond those awarded to the Group’s employees may be awarded in certain circumstances, for example, where there is a change in responsibility, progression in the role, experience, or where there is a significant increase in the scale of the role or the size and/or complexity of the Group.

Details of the base salary for each of the Executive Directors are shown in the Annual report on remuneration.

No specific performance measures are used in relation to determining base salary, but individual and business performance are considered as part of the discussion when setting the base salary levels.

There are no provisions to recover any sums paid.

Benefits

Paying the right amount of benefits helps us to attract and retain the right individual for the role.

The provision of benefits is set based upon market practice at similar companies, taking into account also the benefits available to other employees across the Group.

The benefits available to all Executive Directors are:

  • private medical insurance for the Executive and their immediate family;
  • income protection;
  • life assurance;
  • car allowance of up to £16,000 per annum for the Chief Executive and £14,000 per annum for other Executive Directors, or an equivalent company car;
  • fully expensed fuel card;
  • medical screening; and
  • the opportunity to participate in any all-employee share plans operated by the Company, in line with HMRC guidelines.

The cost of insured benefits may vary from year to year and there is no maximum level set. Additional benefits can be purchased through the flexible benefits arrangements available to all employees.

Benefits are not performance related.

There are no provisions to recover any sums paid.

Retirement benefits

Retirement benefits are paid as part of a market competitive package which, in turn, helps us to attract and retain high calibre individuals.

All Executive Directors are entitled to receive an employer pension contribution of 20 per cent of base salary. This can either be paid as a contribution direct to the Group Stakeholder Pension Plan or as cash to the individual. Contributions to the Group Stakeholder Pension Plan are dependent on a minimum employee pension contribution of three per cent per annum.

Retirement benefits are not performance related.

There are no provisions to recover any sums paid.

Annual bonus

The annual bonus is designed to reward the achievement of stretching Group objectives and therefore drive operational excellence.

All payments are at the discretion of the Committee. Payments are considered and approved by the Committee and are payable annually following publication of the Group’s full year results. Up to 10 per cent of maximum bonus is dependent on achieving the threshold hurdle with sliding scale targets set for payments above this level.

Target performance receives up to 50 per cent of salary. Performance above-target results in a higher percentage up to a maximum of 100 per cent of salary.

The performance measures will be financial measures, such as EBITDA. The measures chosen will be those that the Committee believes most closely align Executive Director and shareholder interests and are important to the long-term success of the Group.

Clawback may be invoked for the annual bonus for:

  • material misstatement of the accounts;
  • error in assessing performance conditions; or
  • gross misconduct.

Long-term incentives

Long-term incentive schemes are used to drive growth in shareholder value and to ensure that there is a direct link between reward and superior shareholder returns.

Awards are normally made annually and performance is measured over a three year period.

The plan rules state that a maximum of 150 per cent of salary per annum may be awarded (200 per cent of salary may be made in exceptional circumstances). In the first year of the policy awards will be made at 100 per cent of salary. In later years actual award levels will be disclosed in the Annual report on remuneration.

The performance measure used in the LTIP is Total Shareholder Return (TSR). The Committee believes that a relative TSR measure offers a robust measure of performance over the long-term as it takes into account changes in the economic cycle, while maintaining a focus on shareholder returns.

KCOM Group’s TSR must rank at least median to the TSR performance of the companies within a comparator group. Performance at median would result in 25 per cent of the awards vesting, with performance between median and upper quartile resulting in vesting of awards on a straight-line basis with 100 per cent vesting at upper quartile performance.

In addition, there is an underpin that the Committee must be satisfied that the Group’s financial and non-financial performance over the performance period warrants the level of vesting, having regard to a number of factors such as share price progression, dividend policy and Earnings Per Share (EPS) performance.

Clawback may be invoked for the LTIP for:

  • material misstatement of the accounts;
  • error in assessing performance conditions; or
  • gross misconduct.

Awards granted prior to the effective date

For the avoidance of doubt, in approving this Policy report, authority is given to the Company to honour any commitments entered into with current or former Directors that have been disclosed to shareholders in previous Remuneration reports. Details of any payments to former Directors will be set out in the Annual report on remuneration as they arise.

Discretion retained in operating incentive plans

The annual bonus plan and LTIP will be operated according to the rules of each respective plan and consistent with normal market practice and the Listing Rules. The quantum and performance targets applicable to awards will be within the parameters described above. Subject to that, the Committee has certain flexibility and the ability to exercise judgement in a number of regards, including:

  • who participates in the plans;
  • when to make awards and payments;
  • how to determine the size of an award, a payment, or when and how much of an award should vest;
  • how to deal with a change of control or restructuring of the Group;
  • whether a Director is a good or bad leaver and whether and what proportion of awards vest at the time of leaving and at the original vesting date(s);
  • how and whether an award may be adjusted in certain circumstances (e.g. for a rights issue, corporate restructuring or special dividend); and
  • what the weighting, measures and targets should be for the annual bonus and LTIP from year to year.

The Committee also retains the discretion within the policy to adjust targets and/or set different measures and alter weightings for the annual bonus plan and to adjust targets for the LTIP if events happen that cause it to determine that the conditions are unable to fulfil their original intended purpose. However, varied performance conditions must in the Committee’s opinion not be materially easier or more difficult to satisfy than the original conditions were when they were set.

All historic awards that were granted under any current or previous share schemes operated by the Company but remain outstanding remain eligible to vest based on their original award terms.

Share ownership requirement

The Committee’s policy is to have shareholding requirements for the Executive Directors which create greater alignment between their interests and those of shareholders and reduce the potential for behaviours and actions which are detrimental to the long-term health of the Company. The required level is set at 100 per cent of salary.

Non-Executive Directors’ policy table

Element and how it supports the KCOM Group strategy How does this operate and what is the maximum that may be paid?

Fees

Fees are set to recognise the responsibility and experience of the individual and enable us to attract and retain the right calibre of individual.

Fees are normally reviewed at least annually and may be adjusted as necessary to align with market rates in companies of a comparable size and to take account of factors such as the time commitment of the role.

The Chairman is paid an all-encompassing fee to take account of all Board responsibilities. The other Non-Executive Directors receive a base fee with additional fees paid for additional responsibility, such as the chairing of a Committee and performing the role of Senior Independent Director.

No Non-Executive Directors participate in any of the Company’s incentive arrangements and no benefits or other remuneration are provided. Non-Executive Directors will be reimbursed for any normal business related expenses.

What performance measures are used and why?

Fees are not performance-related; however performance is addressed through regular one-to-one meetings between the Chairman and each Non-Executive Director.

Are there any provisions to recover sums paid?

There are no provisions to recover any sums paid.

How does the Remuneration policy for Executive Directors differ from that of other employees?

Overall, the Remuneration policy set for the Executive Directors ensures their remuneration is more heavily weighted towards performance-related variable pay than for other employees. As such, a greater proportion of their remuneration is dependent upon the successful delivery of the business strategy.

Base salary

  • As for the Executive Directors, the basic pay for each employee is reviewed at least annually in comparison to market rate information and individual performance and increased if appropriate, also taking into account the overall financial performance of the Group.

Benefits

  • Flexible benefits can be purchased each year by all employees and include dental cover, childcare vouchers, additional life assurance, additional income protection and employees also have the opportunity to buy or sell holiday entitlement. In addition senior employees are entitled to private medical insurance, either as part of their package or as an option to purchase as a flexible benefit.

Retirement benefits

  • All employees are entitled to pension contributions from the Group, which increase as the employee contribution increases.

Annual bonus

  • All employees, other than those eligible for commission payments, are entitled to participate in the bonus scheme in which the Executive Directors participate, with maximum awards set as a percentage of salary, depending on seniority. Performance is measured in the same way as for the Executive Directors but with more challenging targets for the Executive Directors to achieve maximum pay-out.

Long-term incentives

  • Long-term incentive awards are reserved for those individuals most able to directly influence Company strategy. Along with the Executive Directors, selected senior managers are also invited to participate in the LTIP scheme. The performance targets and performance period for these awards are the same as those for the Executive Directors.

What might Executive Directors be paid under the Remuneration policy?

Executive Directors pay under the Remuneration policy chart

Chart assumptions

The charts above show how much Bill Halbert and Paul Simpson could earn under KCOM Group’s Remuneration policy as detailed above. The different scenarios shown in the graphs are:

  • fixed, where performance is below threshold and Executive Directors receive fixed pay only with no vesting under the LTIP and no annual bonus;
  • on-target, where Executive Directors receive their fixed pay plus a bonus at the mid-point of the range, representing 50 per cent of the maximum opportunity and vesting of 25 per cent of the maximum under the LTIP; and
  • maximum, where performance meets or exceeds the maximum and the Executive Directors receive their fixed pay plus the maximum bonus and maximum vesting of the LTIP.

Fixed pay comprises:

  • salaries, with an increase of 2.75 per cent effective from 1 July 2014;
  • benefits, equivalent to the amount received by each Executive Director in the year to 31 March 2014; and
  • pension, equivalent to 20 per cent of the base salary for the year.

It should be noted that since the analysis above shows what could be earned by the Executive Directors based on the 2014/15 financial year Remuneration policy described above, the numbers will be different to the values included in the table below detailing what was actually earned by the Executive Directors in the year to 31 March 2014, since these values are based on the actual levels of performance to 31 March 2014.

The charts above do not include what Kevin Walsh might be paid given that he will no longer be a Director on the date the policy becomes effective.

Recruitment policy

This table sets out the Company’s policy on recruitment of new permanent Executive Directors for each element of the remuneration package.

Remuneration element Policy on recruitment
Base salary

The Remuneration Committee will typically offer salaries around the median market level for comparative roles, but salaries above or below this level may be set to recognise the experience of the individual, the wider economic climate and pay and conditions throughout the Group.

Where it is appropriate to set a lower salary initially, a series of increases above the level awarded to the wider workforce may be given over the proceeding few years until the desired positioning is achieved, subject to individual performance. This may apply to those promoted internally in the Group as well as to those recruited from outside.

Benefits

The Remuneration Committee will offer a benefits package that will be set in line with its policy for existing Executive Directors.

In addition to the benefits currently available to existing Executive Directors, the Committee may also offer an allowance to cover relocation expenses as appropriate.

Retirement benefits

The maximum pension contribution will be set in line with the Company’s policy for existing Executive Directors at 20 per cent of base salary.

Annual bonus

The Remuneration Committee will offer an annual bonus in line with its policy for existing Executive Directors of up to 100 per cent of salary.

Different performance measures may be set initially depending on the point in the financial year at which the individual joined. The opportunity for an annual bonus will be pro-rated for the period of employment.

Long-term incentives

On an ongoing basis awards will be made in line with the policy for other Directors. In the year of recruitment a higher award may be made within the approved limits of the plan (200 per cent of salary in exceptional circumstances, such as recruitment).

‘Buy-outs’

The Committee may offer additional cash and/or share-based elements when it considers these to be in the best interests of shareholders and the Company. Any such payments would be based solely on remuneration relinquished when leaving the former employer and would reflect (as far as possible) the nature and time horizons attaching to that remuneration and the impact of any performance conditions.

The Remuneration Committee’s policy on the ‘buying-out’ of existing incentives granted by the Executive’s previous employer will depend on the circumstances of recruitment and will be negotiated on a case-by-case basis. There will not be a presumption in favour of buy-out but it will be considered if necessary to attract the right candidate.

In total the maximum variable pay level in the year of appointment – excluding the value of any buy-out awards – will be 300 per cent of salary.

For an internal executive appointment, any variable pay element awarded in respect of the prior role would be allowed to pay out according to its terms, adjusted as relevant to take into account the appointment. In addition, any other ongoing remuneration obligations existing prior to appointment would continue.

Non-Executive Directors

On the appointment of a new Non-Executive Chairman or Non-Executive Director, fees will be set to take account of the calibre and experience of the individual, prevailing market rates in companies of a similar size and the expected time commitment associated with the role.

Service contracts and letters of appointment policy

Service contracts

It is the policy of the Group that the notice period for Executive Directors is set at six months for either party. Prior to 2008, the notice period for Executive Directors was set at 12 months. The decision has been taken not to retrospectively alter the notice period for those Directors appointed with a 12 month notice period.

Letter of appointment

Non-Executive Directors are appointed by letters of appointment rather than service contracts and the notice period in all letters of appointment is set at six months for either party.

Copies of the Directors’ service contracts and letters of appointment are available for inspection during office hours at our head office at 37 Carr Lane, Hull, HU1 3RE. There are no obligations on the Group in any of the service contracts or letters of appointment to make payments beyond those disclosed in this report.

Payments for loss of office

This table sets out the policy on exit payments in relation to each remuneration element for Executive Directors.

The Committee is clear that there will be a consistent approach to exit payments and no reward for poor performance. No amount is payable if an Executive Director is dismissed for serious breach of contract, serious misconduct or under-performance or acts that bring the Executive Director or Group into serious disrepute.

The Non-Executive Directors’ letters of appointment do not include any compensation for loss of office.

Remuneration element Treatment on exit
Base salary

Salary will be paid over the contractual notice period. In all cases the Company will seek to mitigate any payments due and the Executive Directors have a contractual duty to use reasonable endeavours to obtain alternative income, which can then be used to reduce the salary if being paid by instalments. However, the Company has discretion to make a lump sum payment on termination in lieu of notice.

Benefits and retirement benefits

Benefits and retirement benefits will normally continue to be provided over the notice period. In all cases the Company will seek to mitigate any payments due. However, the Company has discretion to make a lump sum payment on termination equal to the value of the benefits payable during the notice period.

Annual bonus

Whether an annual bonus payment is made is entirely at the discretion of the Remuneration Committee and would be pro-rated to the time of active service in the year of cessation. The decision of the Committee would take into consideration the performance of the individual, the circumstances of the departure and the financial performance of the Group.

LTIP

Normally awards will lapse on cessation of employment, unless the Company determines and the Remuneration Committee agrees that the Executive is a good leaver. Good leaver status is usually conferred for one of the following reasons; death, ill-health, injury or disability, retirement, redundancy, or other circumstances at the discretion of the Committee. Good leavers will be treated in accordance with the rules of the LTIP, as approved by shareholders. In these circumstances a participant’s awards vest on a time pro-rata basis subject to the satisfaction of the relevant performance criteria over the original period, with the balance of the awards lapsing. The Committee retains discretion to decide not to pro-rate, to alter the basis of time pro-rating, and to alter the date on which performance is calculated if it feels such decisions are appropriate in particular circumstances.

Payments on a change of control, where a Director’s employment is adversely changed, will be as on termination. There will be no enhanced provisions on a change of control.

Policy on outside appointments

We believe that where Board members hold directorships in other companies the Group can benefit from their experience. As a result, and subject to the Board’s prior approval, Executive Directors may take on more than one external non-executive directorship and retain the fees earned.

Annual report on remuneration

This part of the Directors’ Remuneration report sets out the amounts paid to Directors for the year ended 31 March 2014 and describes how policy will be implemented in 2014/15. The Annual report on remuneration, along with the statement from the Chairman of the Remuneration Committee, will be put to an advisory vote at the AGM on 29 July 2014.

Implementation of policy for 2014/15

The table below sets out how the Remuneration policy will be implemented for the 2014/15 financial year:

Executive Directors

Bill Halbert Paul Simpson Kevin Walsh
Base salary From 1 July 2014 Bill’s base salary has been increased to £396,872. This is an increase of 2.75 per cent. From 1 July 2014 Paul’s base salary has been increased to £262,126. This is an increase of 2.75 per cent. Kevin’s base salary will remain the same as in 2013/14, up to the date of his retirement, at £242,050.
Benefits The benefits to be provided remain unchanged from 2013/14. These include private medical insurance for the Executive and his immediate family, income protection, life assurance, a car allowance of £16,000 per annum for Bill and £14,000 per annum for Paul and Kevin or an equivalent company car, a fully-expensed fuel card, medical screening and the opportunity to participate in the all-employee Share Incentive Plan. The Executive Directors are also able to purchase additional flexible benefits which are available to all employees. The benefits for Kevin in 2014/15 will be pro-rated to his date of retirement.
Retirement benefits Each Executive Director is entitled to an employer pension contribution of 20 per cent of base salary.
Annual bonus The performance measures for the annual bonus scheme are growth in EBITDA and growth in revenue, measured for the 2014/15 financial year. Both Bill and Paul have a target annual bonus entitlement of 50 per cent of base salary. Up to 20 per cent of the target entitlement, equivalent to 10 per cent of base salary, is triggered upon exceeding a specific targeted level of EBITDA. If the EBITDA achieved in the year is greater than that required to trigger the full 20 per cent payment then further bonus payments begin to accrue, however payment of any bonus beyond the 20 per cent is dependent on an underpin of revenue growth in the year. Even more stretching financial targets are in place for a bonus of between 50 per cent and 100 per cent of base salary. The exact targets set are commercially sensitive and therefore cannot be disclosed here. Kevin will not be entitled to a bonus for the 2014/15 financial year, given his indication of his intention to retire in the summer of 2014.
Long-term incentives It is proposed to award LTIP awards to Bill and Paul in July 2014 under the current scheme, which will be equivalent to 100 per cent of their base salary at the date of grant. These awards will have a three year performance period and therefore will be due to vest in July 2017. Kevin will not be eligible for an LTIP award in July 2014, given his intention to retire in the summer of 2014.

Base salary increases

The base salaries of the Executive Directors have not increased since 1 July 2011. On 1 July 2012 all employees, excluding Executive Directors and senior managers, were awarded a two per cent increase. From 1 July 2014 an average pay rise of 1.66 per cent will be awarded to employees across the Group based on individual performance and the market rate for their role.

The Remuneration Committee has reviewed the performance of the Group, the individual performance of the Executive Directors and the pay awards made elsewhere in the Group since the last increase for Executive Directors in 2011 and has proposed a 2.75 per cent increase for Bill Halbert and Paul Simpson effective from 1 July 2014. Following this increase we can confirm that the salaries for Bill and Paul are consistent with median market rates.

Non-Executive Directors

Graham Holden Tony Illsley Martin Towers
Fees From 1 April 2014, Graham was appointed to the role of Chairman and from that date his fee became £125,000 per annum, which is in line with the median market rate for his role. The fee for Tony will be increased to £43,000 from 1 July 2014 to reflect an increase in the median market rate for the role. This is an increase of 2.4 per cent and is the first increase in three years. Tony will also receive an additional fee of £11,000 for his role as Senior Independent Director. The fee for Martin will be increased to £43,000 from 1 July 2014 to reflect an increase in the median market rate for the role. This is an increase of 2.4 per cent and is the first increase in three years. Martin will also receive an additional fee of £6,000 for his role as Chairman of the Audit Committee.

Executive Directors

Bill Halbert Paul Simpson Kevin Walsh Total
Single total figure table (audited) FY2014
£’000
FY2013
£’000
FY2014
£’000
FY2013
£’000
FY2014
£’000
FY2013
£’000
FY2014
£’000
FY2013
£’000
Fixed pay
Base salary 386 386 255 273 241 242 882 901
Taxable benefits 16 16 24 17 17 26 57 59
Pension-related benefits 66 66 49 51 47 46 162 163
Sub-total 468 468 328 341 305 314 1,101 1,123
Performance-related pay
Bonus receivable for the year 27 18 17 62
Long-term incentives 4,323 413 699 413 699 826 5,721
Sub-total 27 4,323 431 699 430 699 888 5,721
Total 495 4,791 759 1,040 735 1,013 1,989 6,844

Non-Executive Directors

Graham Holden Tony Illsley Martin Towers Total
Single total figure table (audited) FY2014
£’000
FY2013
£’000
FY2014
£’000
FY2013
£’000
FY2014
£’000
FY2013
£’000
FY2014
£’000
FY2013
£’000
Fees 47 47 52 52 47 47 146 146
Total 47 47 52 52 47 47 146 146

Explanatory notes

Salary

In 2012/13 Paul Simpson’s salary included an annual allowance for dual responsibility of £18,000 in relation to his temporary responsibility for the Kcom brand. This allowance was not pensionable or subject to bonus and ceased on 1 April 2013.

The salary for Kevin Walsh has remained consistent with the prior year at £242,050; however his actual pay in the year was slightly lower due to some unpaid leave that Kevin requested to take in the year.

Taxable benefits

Bill Halbert received a car allowance of £16,000 but elected not to receive any other benefits from the Group. The taxable benefits for Paul Simpson and Kevin Walsh include private medical insurance, income protection, life assurance, medical screening, a company car equivalent to a £14,000 per annum car allowance, fully-expensed fuel cards and membership of the all-employee Share Incentive Plan.

Pension-related benefits

Bill Halbert has elected not to be a member of the Group pension scheme and, accordingly, the Group made no contributions on his behalf. Instead he received cash payments totalling £65,905 (2013: £65,905) which are disclosed above within pension-related benefits.

Paul Simpson and Kevin Walsh elected to receive part of their pension contribution entitlement in cash due to their Pension Lifetime Allowance contributions being reached. These amounts were £15,000 (2013: £5,000) and £12,000 (2013: £14,000) respectively and are included in the table above within pension-related benefits.

None of the Directors have any prospective entitlement to defined benefits or cash balance benefits in respect of qualifying services.

Bonus receivable for the year

The annual bonus was dependent on the achievement of Group financial performance targets around growth in Group EBITDA and Group revenue. Up to 20 per cent of the target bonus entitlement (of 50 per cent of salary) was dependent on exceeding a targeted level of Group EBITDA. Further bonus awards would then accrue on a straight-line basis up to 50 per cent of salary, dependent on the amount of Group EBITDA achieved and with an underpin of Group revenue growth. Even more stretching targets were then in place to achieve a bonus above the targets bonus entitlement, up to 100 per cent of salary.

The performance in the year exceeded the targeted level of Group EBITDA required to trigger a bonus and indicated that a bonus of 14 per cent of the target bonus entitlement (equivalent to seven per cent of salary) was payable. This was reviewed by the Remuneration Committee, along with the individual performance of the Executive Directors, and it was agreed that 14 per cent of the target bonus entitlement should be awarded.

Long-term incentives

In the prior year, two long-term incentive schemes vested: the Long-Term Co Investment Plan (LTCIP) and the Executive Incentive Plan (EIP). In the year under review further shares were released from the EIP to Paul Simpson and Kevin Walsh. Further details on these schemes are included below.

Included within the EIP vesting figures were dividends of £Nil (2013: £485,000) for Bill Halbert, £58,000 (2013: £78,000) for Paul Simpson and £58,000 (2013: £78,000) for Kevin Walsh.

Non-Executive Directors

The fees for the Non-executive Directors were set at £42,000 per annum with an additional £5,000 per annum for the responsibility of chairing the Remuneration or Audit Committee and an additional £10,000 for the role of Senior Independent Director.

Share awards outstanding at the year end

The Long Term Incentive Plan (LTIP)

On 19 July 2012 a new long-term incentive scheme, the LTIP, was approved by shareholders. The scheme authorises the Remuneration Committee to grant nil-cost share options to the Executive Directors and selected senior managers on an annual basis.

Awards made under the LTIP scheme (audited)

Date of
grant
Share price
at date of
grant
Nil cost options
outstanding on
1 April 2013
000’s of
options
Nil cost
option
awarded in
the year
000’s of
options
Nil cost options
outstanding on
31 March 2014
000’s of
options
Face
value of
maximum
award1
£’000
Award that
would vest at
threshold
performance2
000’s of
options
End of
performance
period
Bill Halbert 19 July 2012 76.35p 518 518 396 130 19 July 2015
17 July 2013 82.50p 468 468 386 97 17 July 2016
Paul Simpson 19 July 2012 76.35p 342 342 261 86 19 July 2015
17 July 2013 82.50p 309 309 255 64 17 July 2016
Kevin Walsh 19 July 2012 76.35p 325 325 248 81 19 July 2015
17 July 2013 82.50p 293 293 242 60 17 July 2016

1. Face value has been calculated using the share price at the date of grant.
2. Threshold performance is 25 per cent.

The scheme measures TSR performance over a three year performance period from the date of grant, relative to the TSR performance of each company within a comparator group, comprising those companies within the FTSE 250 (excluding investment trusts) as at the start of the performance period.

No part of the awards may vest unless the Company’s TSR performance ranks at least median to the TSR performance of the comparator group. Performance at median would result in 25 per cent of the awards vesting, with performance between median and upper quartile resulting in a vesting of awards on a straight-line basis with 100 per cent vesting at upper quartile performance.

In addition, regardless of TSR performance, no awards shall vest unless the Remuneration Committee is satisfied that the Company’s financial and non-financial performance over the performance period warrants the level of vesting set out in the vesting schedule. The Committee will consider the Company’s share price progression, dividend policy and EPS performance as part of this review.

The first awards under the scheme were made on 19 July 2012 with a second award made on 17 July 2013. The maximum award granted to each Director at each award date was equivalent to 100 per cent of base salary at the time of the award.

Shares released during the year

EIP

The EIP was introduced in 2009 at the request of shareholders, as the Group’s main long-term incentive scheme. All the Executive Directors participated in this scheme and were granted a conditional right to a number of ordinary shares in the Group which would vest after three years to the extent that the associated TSR performance condition was met. No further awards will be made under the EIP.

The maximum awards and amounts vested for the EIP (audited)

Date of
grant
Market
price at
date of
grant
Maximum
award
000’s of
shares
Actual
award
vested at
24 July
2012
000’s of
shares
Market
price at
date of
vesting
Released
on 24 July
2012
000’s of
shares
Value of
shares
released on
24 July
2012
£’000
Released
on 24 July
2013
000’s of
shares
Value of
shares
released on
24 July
2013
£’000
To be
released on
24 July
2014
000’s of
shares
Current Directors
Bill Halbert 24 July 2009 28.25p 7,480 5,187 74.0p 5,187 3,838
Paul Simpson 24 July 2009 28.25p 2,420 1,678 74.0p 839 621 420 355 420
Kevin Walsh 24 July 2009 28.25p 2,420 1,678 74.0p 839 621 420 355 420
Previous Director
Paul Renucci 24 July 2009 28.25p 1,028 713 74.0p 357 264 178 151 178

For full vesting, KCOM Group’s average TSR over any three month period in the three years to 24 July 2012 had to equal or exceed 100 pence. This reduced to 10 per cent vesting on a straight-line basis for a TSR of 45 pence, with no vesting below 45 pence. During the performance period the highest rolling three month TSR achieved was 81.26 pence which meant that 69.34 per cent of the maximum awards vested on 24 July 2012.

Vesting was also subject to the Remuneration Committee being satisfied that there had been a demonstrable and sustainable improvement in the Group’s financial and non-financial performance over the performance period. This was considered and the Remuneration Committee took into account the increase in shareholder value over the same period, comparing the market capitalisation of the Group at 24 July 2009 of £145.9 million with the market capitalisation of the Group at 24 July 2012 of £382.3 million, showing a 162.0 per cent increase.

In addition over the performance period, dividends of £48.3 million had been paid, resulting in a total increase in shareholder value over the performance period of £284.7 million. The awards granted to the Executive Directors on the vesting of the scheme on 24 July 2012 had a market value on vesting of £6.8 million, representing just 2.4 per cent of the total increase in shareholder value over the three years of the scheme.

The vested shares were released in full to Bill Halbert at the end of the performance period as, at the time the scheme was introduced, this timescale was better aligned to his expected tenure in his role.

Paul Simpson, Kevin Walsh and former Director, Paul Renucci, all received 50 per cent of their vested shares on 24 July 2012 and 25 per cent on 24 July 2013. The remaining 25 per cent is due to be released on 24 July 2014.

Share scheme vesting in prior year

LTCIP

The LTCIP was established in 2007 with participation restricted to the Executive Directors at that time. The scheme required an Executive Director to purchase and hold KCOM Group shares for up to five years (either by transferring existing shares or through new share purchases). Purchased shares and transferred-in shares had to be held in the plan for a minimum of 12 months. Following the introduction of the EIP in 2009 no further shares could be lodged in the LTCIP.

There were three performance periods for TSR and absolute share price growth, all starting from the adoption date of the plan on 1 September 2007, and ending consecutively on 31 August 2010, 2011 and 2012. The performance periods ended on 31 August 2010 and 31 August 2011 did not result in any shares vesting. The outcome for the performance period ended on 31 August 2012 resulted in the vesting shown in the table below. Further information on the performance measures and vesting of the scheme can be found in the Directors’ Remuneration report in the 2013 Annual report and accounts.

Date of grant Market price at
date of grant1
Maximum
potential
vesting at
31 March 2012
000’s of shares
Vested on
31 August 2012
000’s of shares
Lapsed on
31 August 2012
000’s of shares
Market price at
date of vesting
Current Directors
Paul Simpson 1 September 2007 40.86p 2,159 1,267 892 81.5p
Kevin Walsh 1 September 2007 40.86p 3,281 2,097 1,184 81.5p
Previous Director
Paul Renucci 1 September 2007 40.86p 1,376 732 644 81.5p

1. The price on grant is an average price based on the share price at the date when purchased or transferred-in shares were entered into the plan and potential share awards were granted.

Remuneration of the Chief Executive Officer

Bill Halbert became the Chief Executive of the Group on 1 April 2014, having previously been the Executive Chairman and performing a dual role of both Chief Executive and Chairman. The table below sets out the remuneration for Bill Halbert in his role as Executive Chairman in each of the last five years:

FY2014
£’000
FY2013
£’000
FY2012
£’000
FY2011
£’000
FY2010
£’000
Total remuneration 495 4,791 522 476 523
Annual bonus paid against maximum opportunity 7% 0% 10% 0% 40%
Long-term incentive vesting against maximum opportunity N/A1 69.34% N/A1 N/A1 N/A1

1. There was no long-term incentive scheme scheduled to vest based on performance ending in the financial years ending 31 March 2010, 2011, 2012 or 2014.

Relative Group performance

The graph below shows, for the financial year ended 31 March 2014 and for each of the previous four financial years, the TSR on a holding of the Group’s ordinary shares compared with a hypothetical holding of shares in the FTSE Fixed Line All-Share and the FTSE 250. These indices have been chosen as appropriate comparators because they reflect the performance of other companies most similar to KCOM Group in terms of product and service offering and market capital.

TSR performance since 31 March 2009

KCOM Group vs. FTSE Fixed Line All-Share and FTSE 250

Value of £100 invested at 31 March 2009

TSR performance since 31 March 2009

The table below sets out the increase in the remuneration of the Executive Chairman from the prior year in comparison to the average percentage change in respect of the employees of the Group as a whole:

Bill Halbert Average per
employee1
Percentage change in the year to 31 March 2014
Base salary 0% 1%
Benefits 0% 10%
Annual bonus 100% 100%

1. The average per employee has been calculated on a per head basis using all of the employees in the Group who have remained in the same role throughout the year, excluding the Executive Directors. This group has been selected to enable a like-for-like comparison with the Executive Chairman.

Relative spend on pay

The table below sets out the relative spend on pay for the entire KCOM Group in comparison to distributions to shareholders:

Year ended
31 March 2014
£’000
Year ended
31 March 2013
£’000
Percentage change
Total remuneration cost for all employees1 85,450 84,618 1%
Dividend payments to shareholders 23,764 21,387 10%

1. The total remuneration cost for all employees is taken from note 8 to the accounts and includes wages and salaries, social security costs, other pension costs and share scheme costs.

Service contracts and letters of appointment

Date of Board
appointment
Date of current service contract
or letter of appointment
Notice period
(months)
Executive Directors
Bill Halbert 1 September 20061 17 June 2011 6
Paul Simpson 24 May 2004 20 June 2011 12
Kevin Walsh 24 May 2004 6 June 2011 122
Non-Executive Directors
Graham Holden 27 November 20073 13 May 2014 6
Tony Illsley 2 June 2009 29 May 2009 6
Martin Towers 2 June 2009 1 June 2009 6

1. Bill Halbert was a Non-Executive Director of the Group from the date of his Board appointment until 25 November 2008, when he became Executive Deputy Chairman. On 24 July 2009 he moved into the role of Executive Chairman. From 1 April 2014 the role of the Executive Chairman was split and Bill moved into his current role as Chief Executive.

2. In November 2013 Kevin Walsh indicated that it was his intention to retire from the Group in the summer of 2014. Kevin has worked closely with the rest of the Board and the Senior Management team within the KC brand since that time to ensure a smooth and seamless transition in his operational responsibilities. As part of the planning for his departure, Kevin has agreed to sign a new service contract in the summer of 2014 which will reduce his notice period to just three months; therefore relieving the Group from the obligation to make a 12 month payment in lieu of notice from the date that he formally tenders his resignation and ensuring that his notice period does not extend beyond 12 months from the date of his initial indication.

3. Graham Holden was a Non-Executive Director of the Group from the date of his Board appointment until 1 April 2014, when he was appointed as Non-Executive Chairman.

The Remuneration Committee

The Remuneration Committee has three scheduled meetings a year and meets for additional meetings as and when required. For the year under review there were no additional meetings held.

The membership and attendance at Committee meetings is shown on the Corporate governance page. Meetings were attended also during the year by the Executive Chairman, the Group HR Director and the Company Secretary, although none were present when their own reward was under discussion.

During the year under review, the Committee received advice on all aspects of remuneration from independent remuneration consultants New Bridge Street, a trading name of Aon Hewitt Limited, an Aon plc company, who were appointed by the Committee in August 2011 following a comprehensive tender process. New Bridge Street is a signatory to the Remuneration Consultants Group Code of Conduct and any advice received is governed by that code. The fee paid to New Bridge Street during the year for this advice was £45,000 which is charged as a fixed annual fee for recurring work, with separate fees agreed as appropriate for additional adhoc work.

The Committee has reviewed the operating processes in place at New Bridge Street and remains satisfied that the advice it receives is independent and objective. Aon Hewitt also provide actuarial and investment consultancy advice to the Trustees of the Group’s two defined benefit pension schemes, which the Committee considers does not produce a conflict of interest.

In accordance with its Terms of Reference, the Committee is responsible for:

  • determining and agreeing the Remuneration policy for the Executive Chairman or Chief Executive, the Executive Directors and senior management across the Group;
  • having regard to remuneration trends across the Group and remuneration in other companies when setting Remuneration policy, as well as to environmental, social and governance matters when appropriate;
  • selecting, appointing and setting the Terms of Reference for any remuneration consultants who advise the Committee;
  • approving the design of, and determining targets for, any performance-related pay schemes operated by the Group and approving the total annual payments made under such schemes;
  • reviewing the design of all share incentive plans for approval by the Board and shareholders and determining each year whether awards will be made and, if so, the overall amount of such awards, the individual awards and the performance targets to be used;
  • determining the policy for, and scope of, pension arrangements for each Executive Director and senior management; and
  • ensuring that contractual terms on termination, and any payments made, are fair to the individual and the Group, that failure is not rewarded and that the duty to mitigate loss is fully recognised.

The Committee’s Terms of Reference are in line with the recommendations in the UK Corporate Governance Code and the Institute of Chartered Secretaries and Administrators’ Guidance on Terms of Reference for Remuneration Committees. Copies of the Terms of Reference are available from the Company Secretary or on our website, www.kcomplc.com.

The specific matters considered by the Committee during the year were:

Description What the Committee has done
Reviewing the Executive Directors’ remuneration packages The Committee reviewed benchmark analysis of the remuneration packages of the Executive Directors and the Senior Management team against comparable roles and considered market trends in remuneration across the industry and in similar sized companies.
Reviewing the proposed annual bonus scheme for the 2013/14 financial year and performance against the scheme for 2012/13 The proposed scheme for 2013/14 was reviewed by the Committee with particular emphasis on the need to ensure that the proportion of retained profit above the bonus target was appropriate. The Committee confirmed that the financial performance of the Group had not triggered a bonus payment for 2012/13 and that therefore it was correct that no bonus should be paid.
Reviewing progress on the LTIP scheme and determining the awards for 2013 The awards made in July 2013 under the LTIP scheme were reviewed and approved by the Committee. There was also a review at each meeting of progress against the performance measures, as well as a discussion around the appropriateness of the use of TSR as a single measure and the peer group used, which concluded that these were still appropriate.
Reviewing the Directors’ Remuneration report in the annual report and accounts The Directors’ Remuneration report in the 2013 annual report and accounts was reviewed by the Committee during the year. Post year end the Committee has reviewed the new disclosures required under Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 and has approved the current Remuneration report as compliant with the new requirements.
Reviewing the approach to pay reviews across the Group and specifically for senior management The approach to pay reviews across the Group was discussed by the Committee, in particular in relation to how it aligned with the pay review approach for Executive Directors.
Reviewing the leaving arrangements in relation to the retirement of Kevin Walsh On 26 November 2013, Kevin Walsh indicated his intention to retire in the summer of 2014 which prompted a review of the leaving arrangements in place for retiring Directors. It was agreed between Kevin Walsh and the Committee that, upon formally retiring, his notice period would reduce to just three months to relieve the Group of the obligation to pay 12 months’ notice from the date of his formal notice and to ensure that his notice period does not extend beyond 12 months from the date of his initial indication.

Directors’ interests in shares (audited)

As at 31 March 2014
Shares owned
outright
Shares subject to
deferral
Nil-cost share
options subject
to performance
conditions2
Actual share
ownership as a
percentage of
salary on
31 March 20143
Required share
ownership as a
percentage of
salary
Requirement met?
Executive Directors
Bill Halbert 2,482,371 986,637 638% 100% Yes
Paul Simpson 520,2051 419,507 651,654 202% 100% Yes
Kevin Walsh 608,7721 419,507 618,292 250% 100% Yes
Non-Executive Directors
Graham Holden 50,000
Tony Illsley
Martin Towers 237,990

1. This includes matching shares awarded under the SIP which may be subject to forfeiture in certain circumstances.
2. These are awards made under the LTIP scheme, further details of which can be found above.
3. Calculated using the closing mid-market price of KCOM Group PLC shares on 31 March 2014 and only those shares owned outright by the Executive Directors and their connected persons.

The table above sets out the interests of all the Directors (as listed on the Board of Directors pages) and their connected persons in the Group’s shares.

The Group Share Incentive Plan (SIP) is open to all employees and offers free matching shares on a sliding scale from 2:1 for monthly contributions of £20 to 1:3 for monthly contributions over £51. Currently over 850 employees participate in the scheme, including two of the Executive Directors.

There has been a change since the end of the year where the Executive Directors participate in the SIP, for which we make monthly announcements as required under Section 5.6.1 of the Disclosure and Transparency Rules. This has resulted in the following additional shares being held:

Shares owned outright
Executive Directors
Paul Simpson 7001
Kevin Walsh 7691

1. This includes matching shares awarded under the SIP which may be subject to forfeiture in certain circumstances.

Shareholder views

At the 2013 AGM there was an advisory vote taken on the Directors’ Remuneration report as a whole, in accordance with the previous legislation. The outcome of this vote was:

Total votes cast1

366,547,373

Votes pie chart

Votes for

361,403,839 (98.6%)

Votes against

5,143,534 (1.4%)

Votes withheld2

6,507,672

1. The total votes cast represents 70.95% of the total issued share capital.

2. A ‘vote withheld’ is not a vote in law and is therefore not counted in the calculation of the proportion of votes ‘for’ and ‘against’.

Outside appointments

In 2013/14 Bill Halbert received no direct remuneration for his external non-executive positions. On 10 February 2014 Kevin Walsh was appointed as chairman of Manx Telecom Plc. His remuneration for the period to 31 March 2014 was £11,360, which the Board has agreed he should retain.

General information (audited)

The closing mid-market price of KCOM Group PLC shares on 31 March 2014 was 99.2 pence. The high and low closing mid-market share prices during the year were 105.00 pence and 76.85 pence respectively.

Signed on behalf of the Board.

Kathy Smith

Company Secretary
18 June 2014