Chairman of the Remuneration Committee
Franz Humer (Chairman)
As Chairman of the Remuneration Committee (the "Committee") I am pleased to introduce our 2018 Directors' Remuneration Report.
As discussed elsewhere in the Annual Report, Arix made significant progress during 2018, with significant increase in net asset value, driven by solid portfolio growth. The Company also underwent a period of management transition, culminating in the reappointment of Joe Anderson as CEO in February 2019, Jonathan Peacock becoming Non-Executive Chairman and Sir Chris Evans retiring from the Board.
The Committee has had a busy year. Early in 2018 we finalised our approach to the Executive Directors' pay arrangements for the year. We embarked on a detailed review of the Directors' remuneration policy to ensure that it remains fit for purpose in the context of Arix's development over the period since IPO and to take into account developments in corporate governance good practice. Korn Ferry were appointed as independent advisers to assist with this review and with other Committee matters. The appointment was made after a competitive selection process, and they have been retained on a clear mandate to provide objective and independent advice to the Committee.
After the year end we met to agree bonus outcomes in respect of 2018 and among other things set the parameters of the long-term Executive Incentive Plan ("EIP") award to be made in 2019. We also agreed the remuneration packages of Joe Anderson and Jonathan Peacock in their new roles and the termination arrangements for Sir Chris Evans.
Business Performance and Remuneration Outcomes for 2018
During the year, Arix's gross portfolio value increased by £122m, while four portfolio companies successfully listed on Nasdaq during or just after the year-end. Taking into account the performance achieved, the Committee determined that bonuses for the Executive Directors should be paid at levels of 75% of the maximum. A full breakdown of the performance conditions and level of performance achieved can be found in the Directors' Remuneration Report. The Committee considered whether to require a portion of the bonus to be deferred into shares but agreed that this was not necessary at the current time given the significant shareholdings of the majority of the management team.
No shares vested under the EIP in respect of 2018 as the first grant under this three-year plan was made in 2017.
EIP grants are made to reflect performance in the preceding year and we made a further EIP grant in June 2018. Vesting of this award will take place in 2021 subject to the satisfaction of performance targets based on the growth in Arix's share price over the three-year vesting period. Share price remains a key barometer of Arix's success and is clearly aligned with shareholder interests. The award starts to vest for compound growth of 7% per annum, rising to full vesting for compound growth of 20% per annum. These targets are lower than those which applied to the 2017 EIP grant to recognise the impact of the capital raise in early 2018 which introduced a substantial amount of cash onto the balance sheet, thus potentially limiting the growth in the share price in the immediate term. The Committee believes that those targets remain very challenging.
Changes to the Board of Directors
During 2018 the Committee also agreed the termination of employment arrangements for Joe Anderson at the time of his change of role from CEO to CIO, a non-Board position. In early 2019 the Committee agreed new arrangements for Joe in light of his reappointment as CEO. Full details of what was agreed are set out in the Directors' Remuneration Report. In brief, we have reappointed Joe on similar terms to those under which he served as CEO prior to moving to the CIO role. His basic salary and annual bonus opportunity remain the same and he will continue to be eligible for annual grants under the EIP. We considered carefully the appropriate treatment for his outstanding equity awards, and decided to preserve the arrangements which were entered into in good faith at the time Joe left the Board in 2018. A portion of the awards, therefore, retain the good leaver status we assigned to Joe in 2018 so that he has not been penalised for agreeing to return to the CEO role. As part of negotiating Joe's return as CEO and to provide a further incentive to him to drive performance at Arix over the coming years, the Committee also agreed an amendment to his Founder Options such that the exercise price for these options will reduce on a gradual basis over the next five years. The Founder Options were a legacy arrangement granted prior to Arix's IPO in 2017 and are not part of the remuneration policy approved by shareholders at the 2017 AGM. The Committee believes that these arrangements are fair and appropriate in the context of Joe's return to the Board and will help ensure his ongoing alignment with shareholder interests.
We also agreed new remuneration terms for Jonathan Peacock following his move from Executive to Non-Executive Chairman in February 2019. In his new role, Jonathan will receive an annual fee of £100,000. He will not be eligible for a bonus for any part of 2019 or in any future year. He will receive an EIP award in 2019 as the grant of this award is considered by the Committee to be an element of his compensation in respect of 2018, when he served as an Executive Director. The award will be made at a level of 100% of the basic salary he received as an Executive Director in 2018. He will receive no further grants under the EIP.
Jonathan received a payment of £200,000 (less than his contractual entitlement) in respect of the termination of his executive service agreement without the notice being served. This was deemed appropriate in light of the other Board changes taking place at the time. The Committee has deemed Jonathan to be a good leaver for the purposes of his outstanding EIP awards; these will vest in the normal course, subject to the satisfaction of the relevant performance conditions. His unvested Founder Options will continue to vest provided that he remains a Director.
As also announced in February 2019, Sir Chris Evans stepped down from the Board although remains as a consultant to the Company. He received a payment in lieu of notice of £250,000, equivalent to 12 months' basic salary, in connection with the termination of his service agreement with the Company. The Committee took the view that a payment in lieu of notice was appropriate given the other changes taking place and the desire to move forward with a new Board structure. We also agreed how Sir Chris's outstanding share awards would be treated. In addition, he will be engaged on an amended consultancy agreement after April 2019 at a rate of £4,166 per month (equivalent to £50,000 per annum), which is significantly lower than his current consultancy fee. We look forward to continuing to having access to Sir Chris's expertise in his new role.
Full details of the above arrangements are included later in this report.
Our Revised Remuneration Policy and Its Implementation in 2019
As noted above, we have reviewed the Directors' remuneration policy during the year and we will be asking shareholders to approve a revised policy at the AGM on 3 June 2019. The policy remains based on the key principles agreed prior to approval of the current policy in 2017. These principles include ensuring strong alignment with shareholder interests, supporting a high-performance culture with appropriate rewards for superior performance and providing competitive remuneration which is set at an appropriate level to attract, retain and motivate high-quality executive management.
We are not proposing radical changes to the policy, and nor are we asking shareholders to approve any material increases to the current limits on incentive opportunities within the policy. The only change to quantum is to increase the individual annual bonus opportunity from 100% to 125% of basic salary. The purpose of this is to provide an appropriate level of flexibility for the Committee during the three-year period covered by the new remuneration policy. There is no current intention to apply a bonus limit beyond 100% of salary, which will be the maximum opportunity for 2019. We are also proposing a number of changes to reflect developments in corporate governance best practice, to increase the level of alignment with shareholders and to ensure that the policy is up to date. The changes include formally introducing a two-year post-vesting holding period to EIP awards (applying with effect from the awards granted in 2019), reducing the amount of an EIP award which vests for threshold performance from 66.7% to 25% of an award and introducing a provision which permits the Committee to use its discretion to override the formulaic outcomes of incentive schemes. A full list of the changes is set out in the Directors' Remuneration Report.
At the time of writing, the Committee is in the process of consulting with major shareholders on these changes. In the notice to be published in advance of the AGM we will confirm whether any amendments to the policy have been agreed following the shareholder consultation exercise.
The Committee has considered carefully how the remuneration policy should apply throughout the organization and has determined that the principles and the overall structure of reward should be the same for other employees as for Executive Directors.
For 2019, it is our intention to implement the remuneration policy for Directors as follows:
- Joe Anderson's salary as CEO is set at £500,000, the same as he was paid prior to moving to the role of CIO in 2018. The salary of the CFO, James Rawlingson, has been increased by 3% with effect from 1 January 2019 and is now set at £278,100. This increase is consistent with (and in some cases less than) increases across the workforce as a whole.
- The annual bonus scheme will operate in the same way as in previous years. Bonuses for Executive Directors will be limited to 100% of basic salary and will be based on the achievement of tailored performance targets which are clearly linked to the short-term priorities of the business. Given the stage of Arix's development, the Committee continues to believe that this is more appropriate than using financial metrics. The specific bonus objectives and performance against them will be disclosed next year.
- Awards under the EIP will be granted to the Executive Directors at levels of 200% of basic salary for the CEO and 150% of basic salary for the CFO. For 60% of the award, we will apply a similar share price performance condition as used for the 2018 grant. The level of share price growth required for threshold vesting will remain at 7% per annum compound and the growth required for maximum vesting will be 15% per annum compound. The Committee has considered these targets carefully and believes that they are suitably challenging for a company at Arix's stage of development, particularly in the context of the current market environment and in recognition of the material reduction in the proportion of the award vesting for threshold performance under the revised remuneration policy. For the remaining 40% of the award, we have decided to introduce a new performance condition based on growth in NAV per share. This will require 7% per annum compound growth over the three-year period for threshold vesting, rising to 15% per annum compound growth for full vesting. The purpose of introducing this new measure is to incentivise and reward management for growing the value of Arix's assets, a critical measure of business performance. NAV per share growth will be calculated based on audited accounts. The Committee will exclude the funds raised during the performance period and their associated investment returns. The performance will be a true assessment of the performance of the assets including cash within the business at the start of each three-year period. Future fund raising will impact future award cycles. This approach reflects the significant lead time that typically exists between fund raising, investment and the first valuation change on the investment. Full disclosure will take place of this NAV performance calculation. To the extent that the 2019 EIP awards vest, they will be subject to a two-year post-vesting holding period.
- As noted above, the fee for Jonathan Peacock as Non-Executive Chairman has been set at £100,000. It has also been agreed that the fee for the Senior Independent Director role will reduce to £80,000. We will continue to pay additional fees for chairing the key Board Committees but, in line with common practice for companies of a similar size, we will no longer pay extra fees for membership of the Committees.
Legislative and Regulatory Developments
The Committee has considered the changes to the reporting regulations on Directors' remuneration which were finalised in 2018. These changes will apply to the 2019 Directors' remuneration report published next year and we will comply with the changes where relevant. The Committee is also aware of the changes brought about by the 2018 UK Corporate Governance Code. As a company with a standard listing, Arix is not required to adhere to the Code but the Board feels that it is entirely appropriate to do so. As a result, the Committee will adopt the new provisions in the Code or will explain where it does not feel that to comply would be in the interests of shareholders. The Committee will continue to make sure that our executives' pay reflects performance achieved and corporate governance best practice as it develops, while ensuring that an exceptional management team is appropriately retained and motivated.
I hope that you find the information contained in this report helpful, thoughtful and clear. I welcome any feedback from shareholders and look forward to answering any questions at the Company's AGM, where we will be asking shareholders to approve resolutions on the revised Directors' Remuneration Policy and, separately, the Annual Report on Remuneration. I look forward to your continued support.
Chairman of the Remuneration Committee
28 March 2019
The base salaries for the Executive Directors for 2019 are as follows:
- Joe Anderson £500,000
- James Rawlingson £278,100
The Executive Directors are eligible to receive private health cover, life assurance, income protection and a company car or car allowance.
A maximum contribution of 10% gross base salary for UK employees
- 100% of salary for the Executive Directors
- Bonuses for 2019 will be based on a range of challenging strategic measures aligned with the company's KPIs
- Up to 50% of the annual bonus can be deferred and invested into shares which must be held for a period of 3 years
|Long term incentive|
- For 2019, the Committee intends to grant awards to the Executive Directors at a level of 200% of basic salary for the CEO and 150% of basic salary for the CFO.
- For awards to be granted in 2019, awards will vest after three years subject to performance conditions based on share price (60% of the award) and NAV per share growth (40% of the award).
- Any awards which vest will be subject to a two-year post-vesting holding period
200% of salary for all Executive Directors