The Directors' Remuneration Report sets out the Group's policy on remuneration. The report also sets out for each Director the remuneration earned in 2012, their interests in long-term incentive plans and their contractual relationship with the Company.
The Directors' Remuneration Report, which has been approved and adopted by the Board of Directors, will be put to shareholders at the Annual General Meeting for approval. The Report sets out how the principles of the Code have been applied.
"In 2012 the Remuneration Committee focused on keeping the right balance between performance and remuneration with particular attention to long-term performance. Fair and effective reward and retention arrangements are designed to support Colt's strategic objectives by motivating and maintaining a high performing senior management team."
The Group's policy is to put in place remuneration arrangements that support and motivate the delivery of our corporate strategy and reward value creation. We place a significant emphasis on performance-related elements of total remuneration for Executive Directors and senior management and we aim to align their interests with those of shareholders. We recognise the portability of global senior talent and the importance of retention of a motivated senior team.
Base salary reflects an Executive's experience, responsibility and market value. Pay elsewhere within Colt and in the external market is considered in determining Executive Directors' remuneration. Each year, performance targets that are clearly aligned to the Group's strategy and objectives are set for the Annual Incentive Plan. These targets include both financial goals and non-financial measures such as customer satisfaction.
The policies relating to each of the components of total remuneration are subject to regular review in order to ensure that they remain competitive, motivating and challenging. Increasingly we are adjusting the balance of Executive incentives to reward and motivate performance over the longer term. The value of long term incentives is linked to both targets derived from key performance indicators and share price appreciation. As recommended by the UK Corporate Governance Code we have implemented a Clawback Policy to enable recovery of annual bonus or long term incentive plan payments in exceptional circumstances of misstatement or gross misconduct.
Colt's reward philosophy
The key objective is to align remuneration strategy with business strategy whilst properly taking account of external best practice and developments in the regulatory environment. This includes ensuring that remuneration policy and plans are driving appropriate behaviours and priorities to deliver the strategic goals and improved shareholder value, management of risk and opportunity and ensuring linkage of awards to both short and long-term performance. We aim to create a culture of high performance, engagement and trust in which our people can realise their personal potential and effectively contribute to driving Colt forward in line with our values. High quality reward plans and processes that are well integrated into our overall approach to developing and managing our talent are critical in ensuring our success.
Colt's reward principles
Rewarding competitively – We aim to reward competitively to ensure we attract, motivate and retain the right talent.
- We regularly benchmark compensation levels in the markets in which we operate and from where we would attract talent, and internally, to ensure that we reward competitively but not excessively. In addition to benchmarking, we consider internal peer comparisons, role criticality, role fit, retention risk and remuneration history. We also have regard to the pay and conditions of employees across the Group.
Linked to performance – We set ambitious goals and reward successful delivery whilst resisting excessive or undeserved remuneration.
- We aim to ensure there is scope in the Colt package to provide outstanding rewards for outstanding performance to incentivise our people and reward their contribution.
- We operate a high quality performance management process with internal calibration of employees that is linked to reward.
- Sales commission plans are clearly linked to robust targets and demonstrate a high correlation between performance and rewards.
- Executive incentive plans are subject to clawback arrangements.
Transparent and fair – We deliver rewards in a transparent, equitable and consistent way.
- Our reward processes are fair, clear, transparent and well communicated.
- We ensure that reward supports and integrates with other key HR processes including performance management, career development and talent management and that the Colt approach to reward is well communicated internally and externally.
Supporting our values – We use reward to recognise how we do things as well as what we do and demonstrate our commitment to our values.
- Colt has developed a set of values and supporting behaviours based on Customer, Ownership, Leadership and Teamwork. We recognise that in order to succeed we have to live these values and use all our people processes, including reward, to embed them in the culture of our Company.
Key developments for 2013
At the AGM in 2013 we are planning to seek shareholder consent for additional long term incentives. Awards would be in addition to annual awards under the current Share Grant Plan. Our objectives would be to incentivise the delivery of Colt's growth strategy appropriately during this period of substantial transformation for Colt and establish the opportunity to fairly reward value creation. The intention would also be to rebalance the remuneration package by increasing the proportion of longer term and performance related pay. Whilst it is acknowledged that the CEO is significantly below the International market benchmark, the Remuneration Committee has decided not to adjust his basic pay. 2013 will be the seventh successive year that the CEO's basic pay has been subject to a pay freeze. The decision to freeze basic pay was taken having regard to pay in other parts of Colt. This position is subject to annual revision. Please see the AGM notice for details.
In 2012 the members were Andreas Barth, Vincenzo Damiani, Gene Gabbard and Sergio Giacoletto. Vincenzo Damiani is the Chairman of the Committee. Sergio Giacoletto joined the Remuneration Committee on1 October 2012.
|Meetings attended||Percentage attended|
|Average % attendance||88%|
Remuneration Committee 2012 Activities
The Terms of Reference of the Remuneration Committee are set out on the www.colt.net website.
During 2012, the Committee approved the 2011 Annual Incentive Plan bonus award achievement level for the CEO and members of the senior management team. The Committee approved the design of the 2012 Annual Incentive Plan. There was a review of basic pay across Colt and for senior management. A salary freeze was in place in most areas of our operations.
The Committee approved the 2011 Remuneration Report and considered Shareholder representative groups' feedback on aspects of the Remuneration Report. The Committee agreed extensions of the Secondment Agreements for the CEO and CFO. The Committee approved the metrics for the 2012 Share Grant Plan together with the metrics for year 3 of the 2010 Share Grant Plan and year 2 of the 2011 Share Grant Plan. The Committee reviewed and approved the 2009 Share Grant Plan award result which vested and was released in March 2012. The Committee also approved the performance for year 2 of the 2010 Share Grant Plan and year 1 of the 2011 Share Grant Plan. Other activities included reviewing the design and performance of Colt's Sales Incentive Plans. The Committee reviewed the Remuneration Risk Register.
The Executive Vice President, HR and Vice President, Performance & Reward normally attend meetings of the Remuneration Committee in an advisory capacity. The Remuneration Committee also received advice from FIT Remuneration Consultants, Aon Hewitt and Towers Watson on salary, benefits and other remuneration trend data. This was used when considering the appropriate level of remuneration for the Executive Directors and other Colt employees and also the development of long term incentives. In addition, Slaughter and May provided guidance on the rules of the long-term incentive plans.
Elements of remuneration for Executive Directors
Executive Directors receive base salary, annual performance bonus, long-term incentives, defined contribution pensions and other usual benefits payable to secondees. Payment of bonus and vesting of long-term incentives are dependent upon the achievement of performance targets that are set beforehand by the Committee.
Base salaries for the Executive Directors are set when they are appointed to the role, are reviewed annually and reflect experience, responsibility, market value, market conditions and pay levels across the rest of the organisation. The Remuneration Committee acknowledges that base salaries for the Executive Directors are below market benchmark, partly because salary freezes across Colt have been taken into account. The CEO has not received an increase in base salary since January 2008 and the CFO since he was appointed in March 2011; notwithstanding this, base pay is also frozen in 2013. As stated above, it is Colt's strategy to place more emphasis on variable pay; however base pay will continue to be under review each year.
Bonus amounts are based upon demanding financial targets and the achievement of personal predetermined business objectives. Bonuses are subject to upper limits of 200% of salary for Rakesh Bhasin and 175% for Mark Ferrari. Annual bonuses do not form part of pensionable earnings.
Executive Directors' bonus payments for 2012 were as follows:
|2012 Achievement (as a % of maximum potential)||2011 Achievement (as a % of maximum potential)||2012 Achievement (as a % of base salary)||2011 Achievement (as a % of base salary)|
The Bonus metrics for 2012 were set as follows:
|Financial goals*||70%: Revenue|
* Each component of the financial goals was subject to challenging performance thresholds: to achieve 100% payout for each component it was necessary to achieve 100% of the target and there was a nil payout if the achievement level was less than 90% of the target.
Individual Business goals including customer satisfaction (40%)
Mr Bhasin: Delivering the objectives of the annual plan and the updated growth plans, leading strategic priorities and key projects, driving operational excellence and developing overall leadership capability at Colt.
Mr Ferrari: Improving management and Board reporting, developing the forecast process, reviewing Finance organisation structure and ensuring high performance and delivery of the Capital Markets Day for analysts and investors.
Colt utilises three main customer satisfaction methodologies to ensure we receive robust and complete feedback from our customers; Customer Loyalty Index (CLI), Transactional Satisfaction (TSAT), Net Promoter Score (NPS). All three showed improvement during 2012.
Further details of Rakesh Bhasin's and Mark Ferrari's remuneration are set out within this report.
Proportion of fixed and variable remuneration
The table below shows the approximate targeted proportion of fixed and variable remuneration for the Executive Directors. The annual cash bonus plan supports financial and operational performance, whilst the long-term incentive element is reward for superior performance over the longer term and the numbers in the table take into account the likelihood of payment. It is anticipated that from 2013 the proportions will be adjusted to increase the percentage attributable to variable long-term incentives.
* Variable long-term incentive proportion is based on the 2009 Share Grant Plan award vested in March 2012 (as a percentage of base salary).
The Company has four plans currently available for long-term incentive awards. Share awards under the plans to Directors are set out in the table in Audited Information. Further details of the plans are set out in note 17.
The maximum vesting targets are challenging relative to performance. The vesting scales are geared towards higher performance.
Share Grant Plan
The Share Grant Plan provides for awards to be made over Company shares. Awards are made to senior management and are designed to attract and retain senior employees. Subject to meeting performance conditions which are challenging and reflect a real and meaningful improvement in performance, awards ordinarily vest on the third anniversary of the date of grant. The maximum individual limits for awards are capped at 200% of base salary. However, the Remuneration Committee can grant awards in excess of this limit if it is of the view that there are exceptional circumstances to justify such awards. To date there have been no such awards.
Shareholder consent is required for amendments to the Share Grant Plan (other than those of an administrative nature). The Remuneration Committee has the discretion to determine payouts in the event of a takeover.
The financial performance on which metrics are based is subject to audit by the independent auditor. No payments are made before the audit is complete and the Clawback Policy applies. Adjustments are made for foreign exchange movements against target.
2012 Share Grant Plan Award
The 2012 awards have been granted subject to three-year performance metrics. In previous years three single year metrics were applied as the business strategy was being developed and flexibility was important.
In 2012 the Committee made awards to senior management at the Company including Messrs Bhasin and Ferrari. Mr Bhasin received an award equivalent to 150% of basic salary and Mr Ferrari 100%. Details of awards under the Share Grant Plan are set out in the Audited Information. It is anticipated that Mr Ferrari's 2013 award will be raised to 150% of basic salary.
For the 2012 award under the Share Grant Plan, three year performance metrics were set comprising the following elements and weighting:
|Total revenue less Voice and DCS asset sales||60%|
|EBITDA less DCS asset sales||40%|
These metrics were selected to support Colt's long-term growth strategy. The Board excluded Voice revenue from the target to reflect the focus on higher margin products and services. DCS asset sales were also excluded as these are of a non-recurring nature and can be irregular in size and timing which could disproportionately affect the reward. The targets relate to performance at the end of three years, i.e. as at 31 December 2014. These absolute metrics are business sensitive and the performance will be disclosed at the end of the performance period. It is not Colt's current policy to disclose absolute performance metrics in advance.
2010 and 2011 Share Grant Plan Awards
For the 2010 award (year 3) and the 2011 award (year 2) under the Share Grant Plan single year performance metrics were set comprising the following elements and weighting:
|Total revenue less DCS asset sales||60%|
|EBITDA less DCS asset sales||40%|
It is not the Committee's intention to use single year performance metrics annually once the 2011 Share Grant Plan award has vested.
|Share Grant |
|Year one||Year two||Year three||Final vested %|
* Payable in or around March 2013.
Overall, a weighted performance payout level of 56% was achieved in respect of the 2010 Share Grant Plan award for Mr Bhasin, equivalent to 213,357 shares with a market value as at 31 December 2012 of €0.3m. It is anticipated that these shares will be released to Mr Bhasin in March 2013.
As reported last year, the 2009 award for Mr Bhasin vested at 49% being 250,586 shares with a market value as at 31 December 2011 of €0.3m. These shares were released to Mr Bhasin in March 2012.
At the end of each three-year vesting period for each Share Grant Plan award the Committee has discretion to adjust the number of shares vested up or down by up to 20% to reflect any exceptional circumstances, provided that the maximum is the number of shares over which the award was made. To date the Remuneration Committee has not exercised such discretion.
It is anticipated that the Committee will grant awards on an annual basis.
Detailed Summary of 2010 Share Grant Plan Performance
|Year one||Year two||Year three|
|Metrics/Weighting||Target achieved||Metrics/Weighting||Target achieved||Metrics/Weighting||Target achieved|
|Data revenue||25%||94%||Total revenue||50%||96%||Total revenue (less DCS asset sales)||60%||95%|
|Managed Services revenue||25%||87%||EBITDA||30%||96%||EBITDA (less DCS asset sales)||40%||99%|
|Free cash flow||20%||88%|
|2010 SGP Achievement||Pay-out||Year one pay-out||Year two pay-out||Year three pay-out||Pay-out for 2010|
|Less than 95%||0%|
Share Option Plan
The Share Option Plan is divided into two parts: the 'Approved Part' approved in the UK by HM Revenue & Customs for the purposes of the Income and Corporation Taxes Act 1988 and the 'Unapproved Part' which is not so approved. Options are granted at an option price which is not less than the market value of the ordinary shares on the date of grant. Subject to meeting performance conditions which are challenging and reflect a real and meaningful improvement in performance, awards ordinarily vest on the third anniversary of the date of grant. The maximum individual limit for an award is 150% of base salary; however, the Remuneration Committee can grant awards up to 300% of base salary if it is of the view that there are exceptional circumstances to justify such an award. There are no awards to Executive Directors outstanding under the Share Option Plan.
Deferred Share Bonus Plan
The Deferred Share Bonus Plan allows grants of awards over matching shares based on shares purchased by participants with monies earned under the annual bonus plan. The rules permit up to two thirds of the annual bonus to be deferred and a maximum multiple share match of x2 the number of shares represented by the deferred bonus. Awards of matching shares would be subject to challenging performance conditions. There are no awards outstanding under the Deferred Share Bonus Plan.
Share Incentive Plan
The Share Incentive Plan enables eligible employees to acquire shares monthly through a one-year savings plan, or through the award of free shares and/or matching shares. The aggregate market value of free shares may not exceed £3,000 per annum.
No awards were made during 2012. There are no awards outstanding to Executive Directors under the Share Incentive Plan.
Pension contributions and other benefits
Pension contributions are made to defined contribution schemes.
Rakesh Bhasin and Mark Ferrari do not participate in the Colt pension plans as they are secondees. The fees payable by Colt to FMR in respect of the secondments include pension contributions of approximately 2%–4% of base salary (see table in Audited Information).
Benefits include: housing benefit and private health insurance.
Subject always to approval by the Chairman, Colt's policy on external Non-Executive Directorships permits Executive Directors to hold one such directorship provided any conflict of interest is declared in advance; the relevant fee may be retained by the Executive. Consent may be withdrawn by the Chairman at any time. Rakesh Bhasin and Mark Ferrari are Non-Executive Directors of KVH and do not receive additional fees from the directorship.
Non-Executive Directors' fees, notice and termination arrangements
The remuneration of Non-Executive Directors is reviewed periodically by the Board. Non-Executive Directors abstain from voting on their own remuneration.
The basic fee was last increased in January 2008. There was no fee increase in 2012. It is anticipated that the basic fee will be increased from €60,000 to €62,500 in 2013. All details are set out in the table below.
|Type of Fee||2012 |
|2013 proposed annual|
|Senior Independent Director||7,500||7,500|
|Chairman of Audit Committee||15,000||15,000|
|Chairman of Remuneration Committee||15,000||15,000|
|Member of Audit Committee||7,500||7,500|
|Member of Remuneration Committee||7,500||7,500|
No fees are paid to non-independent Non-Executive Directors.
Non-Executive Directors' remuneration is paid wholly in cash. It is not Colt's policy to pay Non-Executive Directors' remuneration in the form of options, pensions, benefits or other incentives.
The Chairman and Non-Executive Directors are engaged on letters of appointment that set out their duties and responsibilities. The appointment of the Chairman and the Non-Executive Directors can be terminated by them or by the Company giving three months' notice. In every case, there is no right to compensation in the event of termination.
Directors' service and secondment agreement dates
Rakesh Bhasin's and Mark Ferrari's services are provided under a secondment agreement with FMR LLC. The secondments can be terminated by FMR LLC or Colt at any time for any reason without compensation payable by Colt. Therefore, the termination cost for Colt in respect of Rakesh Bhasin and Mark Ferrari would be nil.
|Name||Current contract cessation date||Notice period applicable at any time||Termination Cost to Colt|
|Rakesh Bhasin||31 December 2015||nil||nil|
|Mark Ferrari||31 December 2015||nil||nil|
All contracts and appointment letters summarised above are available for inspection at the Registered Office of the Company.
Termination Policy for Executives
For all senior Executive contracts the following provisions will apply:
- maximum twelve months' notice
- no entitlement to unearned bonus
- provisions for use of mitigation and phased payments
- no entitlement to vesting or retention of long-term incentive plans
Share Grant Plan and Annual Incentive Plan awards for members of the senior management team are made subject to the Compensation Recovery Policy. This Policy provides discretion to the Remuneration Committee to reclaim any or all payments made (net of tax) relating to variable remuneration (including but not limited to the annual bonus and the Share Grant Plan) in the event of dismissal for gross misconduct or a material misstatement of financial results notified to the Executive within three years of the relevant performance period for the payment.
Colt v MSCI Europe Telecom Services Index
The graph below shows the Company's share performance against the Morgan Stanley MSCI Europe Telecom Services Index (both rebased to 100 as at 1 January 2008). This index was selected because it is the principal index of European Telecom Service providers.