Introduction from Ian Cheshire

2012/13 highlights

Remuneration Committee - membership, key duties and advisors

Remuneration Principles and Structure for 2013/14

Long Term Incentive Plan

Annual Incentive Scheme

Other information relating to the executive directors

Introduction from Ian Cheshire

The intention of the remuneration principles is to ensure that remuneration arrangements are aligned to and support the delivery of the Group’s business strategy and shareholder value creation.

Whitbread’s strategy, which is to invest in growing its leading brands, Premier Inn and Costa, has stretching targets which, if delivered successfully, will create significant value for our shareholders. The Committee believes that the executive team should be rewarded for the achievement of the strategy and therefore incentives should be clearly aligned to delivering earnings growth and returns above our cost of capital. To this end, amendments to the Long Term Incentive Plan (LTIP) performance conditions were proposed and approved at the 2012 AGM. 

Along with profit and returns targets, the WINcard remains a key element of our remuneration structure. It is designed to ensure that executives are incentivised on both non–financial and financial measures. The Customer Heartbeat schematic shows how we intend to deliver our strategic aims by providing a great place to work for our people, so that they care for our customers and provide them with an experience that will make them come back time and time again. We intend to deliver these aims whilst being a force for good in the communities in which we operate. This diagram (PDF, 80kB) shows how elements of the remuneration package are linked to this model. 

A significant proportion of the incentives available to executives are paid in shares, a material element of which are deferred. The Remuneration Committee believes that executives should use the incentive schemes to build a significant shareholding in the Company in order to provide greater alignment between executives and shareholders. We also strengthened our shareholding guidelines in relation to the retention of a proportion of vesting share awards until the guidelines have been met.

2012/13 highlights

Performance in 2012/13

Whitbread has once again delivered an excellent set of results in 2012/13, with double–digit growth in sales, profits and dividend. As explained above, the Group’s strategy is to grow its leading brands with a clear focus on returns in order to create substantial shareholder value. The Committee is pleased to note that, as well as the strong trading performance, the Group remains on track to achieve its growth milestones, whilst continuing to grow returns and shareholder value. The Group’s return on capital increased to 14% from 13.6% in the prior year.

Last year, we reported that the Company had performed well, but had not quite achieved its profit target. As a result, incentive awards were at a reduced level in 2011/12. This year, the improved performance has led to a well–deservedincrease in awards. In addition, the Group’s sustained performance over the last three years has led to a significant proportion of the 2010 LTIP awards vesting.

Executive directors’ service contracts

During the year we implemented the policy that the executive directors’ service agreements be in consistent form and reflecting best practice in relation to termination payments.

Total Shareholder Return

The Total Shareholder Return (PDF, 65kB) looks at the value over five years of £100 invested in Whitbread PLC compared with that of £100 invested in the FTSE 100 Index based on 30 trading day average values.

Changes to the Board

Christopher Rogers began his new role as Managing Director of Costa in July 2012. He continued as Group Finance Director until Nicholas Cadbury joined the Company in November. As disclosed last year, Christopher remained on the Board and his remuneration package was unchanged, except that with effect from 1 September 2012 his incentive targets became based on the Costa WINcard, with the profit element split 50:50 between Costa PBIT and Group underlying profit.

Nicholas Cadbury and Louise Smalley joined the Board during the year. In each case the Remuneration Committee based the packages offered to the new directors on the remuneration principles.

Nicholas Cadbury joined the Board as Group Finance Director on 14 November 2012. Nicholas’s remuneration package includes:

• a salary of £460,000;

• a potential award under the Whitbread Incentive Scheme (subject to the achievement of Group underlying profit targets and Group WINcard measures) to a maximum value of 167% of salary (on a pro–rata basis in 2012/13);

• an annual award to the value of 125% of salary under the Long Term Incentive Plan; and

• a pension contribution (or cash in lieu of a pension contribution) to the value of 25% of salary. 

Louise Smalley, Group HR Director since 2007, was appointed to the Board on 1 November 2012. Louise’s remuneration package includes:

• a salary of £300,000;

• a potential award under the Whitbread Incentive Scheme (subject to the achievement of Group underlying profit targets and Group WINcard measures) to a maximum value of 167% of salary (on a pro–rata basis in 2012/13);

• an annual award to the value of 125% of salary under the Long Term Incentive Plan; and

• a pension contribution (or cash in lieu of a pension contribution) to the value of 25% of salary. 

Pension

There has been a change to the policy on pension contributions during the year. Previously, the executive directors were entitled to a Company pension contribution of 25% of salary, with these contributions increasing by a further 2.5% of salary after each of five and ten years’ service up to a maximum of 30%.

The Remuneration Committee reviewed this policy in the light of best practice and determined that there would be no future pension contributions in excess of 27.5% of salary for current executive directors. It was further agreed that any new executive directors would receive a contribution of 25% of salary with no further increases for service.

2013 salary review

When reviewing the salaries of the executive directors the Committee takes into account a range of factors including changes to salaries across the Group, the personal performance of the director measured against agreed objectives, current trading circumstances and our remuneration policy.

The general salary increase across Whitbread in May 2013 will be 2.25%. Andy Harrison and Christopher Rogers will each receive an increase at this rate. The Committee awarded Patrick Dempsey an increase of 5.6% in recognition of his significant contribution to the Board. Nicholas Cadbury and Louise Smalley will not be entitled to a salary review until 2014.

The basic salaries of the executive directors with effect from 1 May 2013 will be as follows:

Patrick Dempsey                £450,000

Andy Harrison                   £733,644

Christopher Rogers           £516,056

Nicholas Cadbury               £460,000

Louise Smalley                  £300,000

Total remuneration received by executive directors

The following table shows the total amount of remuneration received by each of the executive directors in 2012/13. This includes the director’s salary and bonus (both the cash element to be paid in May 2013 and the deferred shares to be awarded in 2013 under the Annual Incentive Scheme), any cash paid in lieu of pension or other benefits, an amount representing LTIP awards made in 2010 and vesting in 2013 and any profit made on the exercise of Sharesave options during the year. The value given for the LTIP awards is based on the average market value over the last quarter of the financial year (2525.64p).

Patrick Dempsey                £1,624,258

Andy Harrison                   £3,408,219

Christopher Rogers           £2,202,256

Nicholas Cadbury               £319,814

Louise Smalley                   £251,289

There are two main reasons for the increase in Andy Harrison’s remuneration over the prior year. Firstly, LTIP awards have vested to him for the first time. As disclosed in 2010/11 Andy received an LTIP award of 175% salary on his appointment three years ago. 89% of this award has vested as a result of the Company’s EPS growing in excess of RPI + 10% p.a. and TSR being between median and upper quartile versus the comparator group over the three–year performance period. (During the performance period the share price has risen from £14.14, being the price used to calculate the award, to £25.25.)

Secondly, the improved performance of the Company in 2012/13 led to a bonus of £897,198 (more than half of which is deferred for a further three years) compared with £545,990 in the prior year.

These rewards, as well as the rewards received by other executives, are a direct result of the delivery of the Group’s business strategy and the creation of shareholder value and, as such, are a good example of how the Company’s remuneration strategy is aligned with the interests of shareholders.

Remuneration Committee – membership, key duties and advisers

Remuneration principles and structure for 2013/14

In November 2011, the Committee approved the following remuneration principles:

Overall remuneration principles

Our approach to senior executive remuneration is designed to:

• be aligned to the business strategy and the achievement of planned business goals;

• support the creation of sustainable long–term shareholder value;

• provide an appropriate balance between remuneration elements that attract, retain and motivate the right calibre of executive talent; and

• encourage a high–performance culture by ensuring performance–related remuneration constitutes a substantial proportion of the remuneration package and by linking maximum payout opportunity to outstanding results.

The Remuneration Principles table (PDF, 50kB) outlines the principles behind each key element of remuneration, the opportunity for each director in the year ahead and a brief summary of how it works.

Long Term Incentive Plan (LTIP)

Structure

The LTIP is designed to closely align the interests of senior executives with shareholders. It operates as follows:

• executives receive an annual LTIP award based on a percentage of salary;

• there is a three–year performance period;

• at the end of the three–year performance period, the vesting levels for the awards are determined based on the extent to which performance targets have been met; and

• any vested awards become nil–cost options and executives have up to seven years to call for the vested shares.

Performance conditions

The Remuneration Committee reviewed the performance conditions for the LTIP in 2012 and determined that it would be appropriate to change them in order to align the LTIP more closely with the Group’s strategic aims. After consulting with major shareholders, as well as with the ABI and RREV, shareholders were asked to approve the new performance conditions at the 2012 AGM. 99.4% of shareholders voted in favour of the amended performance conditions.

As a result, the awards made in 2012, were made on the new basis with performance conditions operating as follows:

• EPS and ROCE measures on a matrix basis;

• the ROCE measure operates both as a hurdle and as a multiplier to a base award generated by performance against the EPS measure;

• up to 75% of awards are dependant on EPS growth over the three–year performance period, subject to a satisfactory ROCE performance;

• ROCE will be used as a multiplier on a straight–line sliding scale basis to increase the EPS element by up to a further third;

• no element of the award will vest if a minimum level of ROCE of 12% is not achieved in 2014/15; and

• the Committee will have the discretion to reduce the vesting levels if it believes that performance has not been sufficiently value–enhancing during the performance period.

Clawback

Unlike the Annual Incentive Scheme, for which clawback provisions were introduced, the Committee decided that clawback provisions would be impractical for the LTIP. This is because awards are typically exercised shortly after performance conditions are calculated and vesting is confirmed. As such, the Committee was unconvinced that clawback provisions would be enforceable in practice. However, the Committee confirmed that it would consider reducing the vesting of future LTIP awards in the event of a mis–statement of results leading to an increased vesting level.

Awards to be made in 2013

LTIP awards will be made to the executive directors in 2013 to the value of 125% of salary. The awards will be subject to the same performance conditions as those awards made in 2012. This matrix (PDF, 18kB) shows how performance conditions will operate.

Awards vesting in 2013

The LTIP awards made to executives in 2010 were subject to independently operating performance conditions as set out in the table below.

As a result 89.77% of the shares awarded under the 2010 LTIP have vested. The awards vesting to the executive directors are as follows:

                                        Number of shares vested

Andy Harrison                    64,772

Patrick Dempsey                25,379

Christopher Rogers           35,310

Louise Smalley                   871

Annual Incentive Scheme

Structure

The Annual Incentive Scheme is the Company’s bonus scheme, which applies to approximately 80 executives. The scheme has been designed to incentivise outstanding performance across a number of key stakeholder measures and it rewards executives with both a cash payment and an award of deferred shares. The scheme operates over a four–year period as follows:

• the performance in the first year is measured against both financial and non–financial measures to determine the level of awards;

• the measures are set by the Remuneration Committee so that ‘on–target’ performance has in–built stretch;

• at the end of the first year cash payments are made and any deferred shares are awarded as appropriate;

• there is a further three–year holding period for the deferred shares before they vest to the executive; and

• clawback provisions apply to the deferred share awards in the event of a material misstatement of results.

There are two types of measure used to determine the level of awards under the scheme. There is a profit measure and there are a number of WINcard measures. The scheme is designed to incentivise executives to deliver great results by providing an excellent environment for our people, and giving them the tools to make everyday experiences special for our customers. The team engagement and guest heartbeat measures are up–weighted to reflect the importance of those elements to Whitbread’s success. In addition, there is a health and safety measure, which acts as a hurdle, demonstrating our determination to provide a safe environment for employees and customers alike. The profit measure is the most incentivised element with an award to the value of 137% of salary available for stretch performance.

Profit measure 2013/14

The profit measures set for the executive directors for 2013/14 are appropriate to each director’s role. Nicholas Cadbury, Andy Harrison and Louise Smalley have a Group underlying PBIT measure. Patrick Dempsey will have a profit measure split on a 40:60 basis between Group Underlying PBIT and Whitbread Hotels & Restaurants PBT, whilst Christopher Rogers will have a profit measure split on a 40:60 basis between Group Underlying PBIT and Costa PBT.

The Profit Performance graph (PDF, 12kB)  shows the percentage of salary received at different levels of profit performance, as well as the split between cash and deferred equity in respect of the profit element.

WINcard measures 2013/14

Each executive director will be incentivised based on six WINcard targets appropriate to the director’s role. The targets include two up–weighted measures (each worth 9% of salary for a green score and 4.5% of salary for an amber score) and four standard measures (each worth 3% of salary for a green score and 1.5% of salary for an amber score). 80% of any awards made in relation to these WINcard measures are made in cash, with the remaining 20% being deferred equity.

Awards for 2012/13

In 2012/13, the executive directors earned awards under the Annual Incentive Scheme as follows:

Awards based on WINcard measures

The WINcard targets in 2012/13 were appropriate to the director’s role. For example, Patrick Dempsey had WINcard measures specific to Whitbread Hotels & Restaurants. For the first half of the year Christopher Rogers had Group targets and, following his appointment as Managing Director of Costa at the half–year, he had Costa measures in the second half of the year. The award to be made to Nicholas Cadbury has been calculated on a pro–rata basis from the date of his appointment, whilst the award to be made to Louise Smalley is partly based on her salary prior to her appointment to the Board and partly based on her new salary. Nicholas Cadbury, Andy Harrison and Louise Smalley each had 100% Group targets.

All executive directors had five green WINcard scores in the year, two of which were up–weighted. Christopher Rogers also had one amber score.

Total Awards

Other information relating to the executive directors

Pension

Like all employees, the executive directors are entitled to participate in the Company’s pension scheme. The scheme is a defined contribution scheme. The levels of contribution for employees vary depending on the job grade of the individual, with employees at the entry level able to contribute 2% of their salary and receive a Company contribution of 3% of salary. Life assurance is provided to employees who choose to join the pension scheme. Employees who do not choose to participate may be automatically enrolled with contributions in line with the automatic enrolment regulations.

There was a change to the policy on pension contributions for the executive directors during the year, with a reduction in the upper limit for Company contributions from 30% to 27.5% of salary. No future executive director will receive contributions above 25% of salary.

Executives are able to elect to receive a monthly amount in cash (less an amount equal to the employer’s national insurance contribution) in lieu of the pension contribution. Currently, Andy Harrison and Christopher Rogers have elected to receive a cash payment, while Nicholas Cadbury, Patrick Dempsey and Louise Smalley each receive a pension contribution and a cash supplement representing the balance over and above the annual allowance set by HMRC for pension contributions.

Other benefits

All executive directors are entitled to a company car or a cash allowance. They also receive private health cover.

Shareholding guidelines for executives

The Committee believes that the shareholding guidelines for executives play an important role in the alignment of the interests of executives and shareholders and help to incentivise executives to deliver sustainable long–term performance.

Executive directors are required to build and hold a shareholding at least equal to 100% of salary within five years of appointment, whilst other senior executives are expected to reach a holding to the value of 50% of salary. Until they reach this level, executives are expected to retain a proportion of vesting awards. The table below shows the holdings of executive directors as at 28 February 2013:

Terms of executive directors’ service contracts

The key terms of the executive directors’ service contracts, which have been standardised during the year, are as follows:

• notice period — six months by the director and 12 months by the Company;

• termination payment — under none of the contracts is any specific compensation payable on termination of employment. For the executive directors, the Company may terminate the director’s contract by paying the salary, together with pension contributions (or cash in lieu of pension) and benefits for a 12–month period. Payments would reduce or cease in the event that the director obtained another job in that time;

• sickness — full salary for a maximum of 12 months in any three–year period or for a maximum of nine consecutive months; and

• non–compete — for six months after leaving.

The dates of the executive directors’ service contracts are as follows:

Andy Harrison                     3 March 2010

Nicholas Cadbury                 3 September 2012

Patrick Dempsey                 26 March 2013

Christopher Rogers            18 February 2013

Louise Smalley                    25 October 2012

Executive directors – fees from external directorships

The executive directors are entitled to retain fees from external directorships. Christopher Rogers served as a non–executive director of HMV Group plc until he stepped down from that Board on 30 June 2012. He received £15,000 during the year as a result of that directorship. None of the other executive directors received any fees from external directorships.

Employee Share Ownership Trust (ESOT)

The Company funds an ESOT to enable it to acquire and hold shares for the Annual Incentive Scheme, the LTIP and the matching share award made to Andy Harrison on his appointment in 2010. As permitted, the Company transferred 320,000 shares from its treasury shares account to the ESOT during the year to be utilised for the future satisfaction of LTIP awards.

As at 29 April 2013, the ESOT held 1,145,387 shares. The executive directors each have a technical interest in these shares as potential beneficiaries of the Trust, but no shares in the ESOT have been earmarked to any individual. All dividends on shares in the ESOT are waived by the trustee. During the period from 1 March 2013 to 29 April 2013, no director has exercised an option to call for the transfer of shares from the ESOT.

Share price information

The mid–market price of a Whitbread PLC share on 28 February 2013 was 2523p (1 March 2012: 1687p). The highest and lowest price paid for ordinary shares during the year were 2694p and 1633p respectively.

Changes since 28 February 2013

There have been no changes in the directors’ interests in ordinary shares since 28 February 2013.

Dilution limits

Whitbread’s share plans comply with the recommended guidelines on dilution limits and the Company has always operated within these limits. The current Association of British Insurers (‘ABI’) guidance on headroom limits provide that overall dilution under all plans should not exceed 10% over a ten–year period in relation to the Company’s issued share capital, with a further limitation of 5% in any ten–year period on executive plans. Assuming none of the extant options lapse and will be exercised, and having included all exercised options as well as shares transferred from treasury in order to settle LTIP awards, the Company has utilised 3.50% of the 10% in ten years limit and 1.41% of the 5% in ten years limit.

2012 Annual General Meeting

At the Annual General Meeting in 2012 the advisory resolution to approve the remuneration report was passed, with 97.4% of votes received being in favour of the resolution. There were no questions raised by shareholders at the meeting relating  to the Company’s remuneration policy.

I am pleased with the progress we have made this year in further aligning our remuneration policies with the Company’s strategy and the creation of improved shareholder value.