Terms of Reference - Remuneration Committee

Composition:

The Committee shall comprise all Independent Directors and the Society's Chairman (provided that the Chairman was considered independent on appointment as Chairman), for the purposes of reviewing annually and determining appropriate remuneration levels for Executive Directors, the Chairman of the Society and non Board members of the Senior Management Team as appropriate [to include the Society's Secretary].
The Chief Executive shall be in attendance at the Committee meetings as appropriate to enable the Committee to consult on their proposals relating to other Executive Directors and non Board members of the Senior Management Team as appropriate.

Duties of Committee:

The Committee to determine the remuneration of the Executive Directors and the Chairman of the Board.
The Committee shall recommend and monitor the level and structure of remuneration for non Board members of the Senior Management Team and review the general level of remuneration for all other staff.
The Independent Director(s) remuneration shall be determined annually by the Executive Directors and the Chairman of the Board in accordance with Rule 19.
No Director or non Board member of the Senior Management Team shall be involved in any decision as to their own remuneration.

Meetings:

Meetings shall be held at least annually at such appropriate time as determined by the Committee to facilitate appropriate levels of remuneration for all members of the Senior Management Team (including Executive Directors) for the twelve months following the start of the Society's financial year.
Meetings shall also be held, as necessary at any time it is felt necessary to review the remuneration package of any existing or nominated Executive Director for any reason.
Meetings shall also be held, as necessary, at any time it is felt necessary to review the remuneration package of a non-Board member of the Senior Management Team or for determining the appropriate remuneration package of a new member of the Senior Management Team.

Minutes:

Minutes will be Private Minutes and circulated to the full Board.

Terms of Reference:

To continuously monitor the remuneration packages of executives within the building society industry specifically and within the financial services and broad market-place generally.
To be responsible for considering all elements of the Senior Management Team's remuneration such that the Society attracts and retains Executive Directors and Senior Managers of sufficient calibre for its continued well-being.
To ensure that members of the Senior Management Team (including Executive Directors) are motivated and fairly rewarded for their individual contributions to the Society's overall performance and in accordance with the principles enunciated under the Society's Treating Customers Fairly policy.
The Committee to determine the appropriate remuneration package for Executive Directors and the Chairman with regard to their duties, responsibilities and performance and to review the general level of remuneration for all staff.
The Committee to recommend and monitor the appropriate remuneration package for non board members of the Senior Management Team with regard to his or her duties, responsibilities and performance.
To determine the annual remuneration of Directors in accordance with Rule 19 (1) as follows: "The annual remuneration of the Directors as members of the Board (exclusive of any remuneration paid in respect of executive duties) shall be paid at a rate to be determined by the Board from time to time but not exceeding five pence per one hundred pounds of total assets of the Society as at the first day of the Financial Year in which payment is made. This remuneration shall be divisible among them by a majority decision and, in default of agreement, in equal shares."
To ensure the Combined Code on Corporate Governance is taken into account having regard to the relevant guidance issued by the BSA.
To take into account the Higgs Suggestions for Good Practice in the Combined Code as appropriate.
If the Society's remuneration policy leads to tensions between the ability of the Society to meet the requirements and standards under the regulatory system and the personal advantage of those who act for it, these tensions, if they exist, should be appropriately managed.

General

To review annually the Terms of Reference of the Committee together with the Committee's own effectiveness [to include scope and adequacy] and recommend any necessary changes to the main Board. [A.6 Combined Code]

The Combined Code on Corporate Governance

A revised Combined Code on Corporate Governance was issued by the Financial Reporting Council in June 2008 and applies to accounting periods beginning on or after 29 June 2008.

The Combined Code is addressed to publicly quoted companies. However, in its Building Societies Regulatory Guide (BSOG) the FSA states that building societies ‘should have regard to the Combined Code when establishing and reviewing their own corporate governance arrangements’ (section 1.3.2 G of BSOG refers).

To assist building societies in having 'regard to' the Combined Code the BSA developed guidance which was updated in September 2008. The guidance for building societies follows a "by exception" approach, in that it refers only to those elements of the Combined Code which are either not considered to be relevant to building societies, or which raise particular issues for building societies considered worthy of discussion.

The guidance is in the form as text boxes, such as this one, are inserted within the relevant sections of the Combined Code.

The FSA expects that the BSA guidance will be helpful in identifying the issues to be considered by building society boards when seeking to apply the latest version of the Combined Code to the different circumstances of a building society, and to their particular society. The FSA is content that societies following the BSA guidance demonstrate that they have had regard to the Combined Code when establishing and reviewing their corporate governance arrangements, as encouraged by the FSA's own high level guidance at BSOG 1.3.2G.

For shareholders read members and for Company read Society as appropriate

B. REMUNERATION

B.1 The Level and Make-up of Remuneration

Main Principles

Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance.

Supporting Principle

The remuneration committee should judge where to position their company relative to other companies. But they should use such comparisons with caution, in view of the risk of an upward ratchet of remuneration levels with no corresponding improvement in performance. They should also be sensitive to pay and employment conditions elsewhere in the group, especially when determining annual salary increases.

Code Provisions

Remuneration policy

B.1.1 The performance-related elements of remuneration should form a significant proportion of the total remuneration package of executive directors and should be designed to align their interests with those of shareholders and to give these directors keen incentives to perform at the highest levels. In designing schemes of performance-related remuneration, the remuneration committee should follow the provisions in Schedule A to this Code.

B.1.2 Executive share options should not be offered at a discount save as permitted by the relevant provisions of the Listing Rules.

B.1.3 Levels of remuneration for non-executive directors should reflect the time commitment and responsibilities of the role. Remuneration for non executive directors should not include share options. If, exceptionally, options are granted, shareholder approval should be sought in advance and any shares acquired by exercise of the options should be held until at least one year after the non-executive director leaves the board. Holding of share options could be relevant to the determination of a non-executive director’s independence (as set out in provision A.3.1).

The Combined Code on Corporate Governance: BSA Guidance for Building Societies

Sections B.1.2 and B.1.3 refer to executive share options. Whilst it is not possible to hold share options in a building society, the references to share options would be relevant to building societies to the extent that share options in ‘connected undertakings’ (eg subsidiaries) of the society are held by building society directors. However, this is somewhat theoretical in that, the BSA is not aware that there have ever been any such holdings by building society directors.

B.1.4 Where a company releases an executive director to serve as a non executive director elsewhere, the remuneration report should include a statement as to whether or not the director will retain such earnings and, if so, what the remuneration is. (As required under Directors' Remuneration Report Regulations)

The Combined Code on Corporate Governance: BSA Guidance for Building Societies

Although the Directors' Remuneration Report Regulations do not apply to building societies the BSA encourages societies to disclose their directors' remuneration policy on an equivalent basis. (BSA Circular 6108 of 29 July 2004 refers)

Service Contracts and Compensation

B.1.5 The remuneration committee should carefully consider what compensation commitments (including pension contributions and all other elements) their directors’ terms of appointment would entail in the event of early termination. The aim should be to avoid rewarding poor performance. They should take a robust line on reducing compensation to reflect departing directors’ obligations to mitigate loss.

B.1.6 Notice or contract periods should be set at one year or less. If it is necessary to offer longer notice or contract periods to new directors recruited from outside, such periods should reduce to one year or less after the initial period.

B.2 Procedure

Main Principle

There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration.

Supporting Principles

The remuneration committee should consult the chairman and/or chief executive about their proposals relating to the remuneration of other executive directors. The remuneration committee should also be responsible for appointing any consultants in respect of executive director remuneration. Where executive directors or senior management are involved in advising or supporting the remuneration committee, care should be taken to recognise and avoid conflicts of interest.

The chairman of the board should ensure that the company maintains contact as required with its principal shareholders about remuneration in the same way as for other matters.

Code Provisions

B.2.1 The board should establish a remuneration committee of at least three, or in the case of smaller companies two, independent non-executive directors. In addition the company chairman may also be a member of, but not chair, the committee if he or she was considered independent on appointment as chairman. The remuneration committee should make available its terms of reference, explaining its role and the authority delegated to it by the board. Where remuneration consultants are appointed, a statement should be made available of whether they have any other connection with the company.

B.2.2 The remuneration committee should have delegated responsibility for setting remuneration for all executive directors and the chairman, including pension rights and any compensation payments. The committee should also recommend and monitor the level and structure of remuneration for senior management. The definition of ‘senior management’ for this purpose should be determined by the board but should normally include the first layer of management below board level.

B.2.3 The board itself or, where required by the Articles of Association, the shareholders should determine the remuneration of the non-executive directors within the limits set in the Articles of Association. Where permitted by the Articles, the board may however delegate this responsibility to a committee, which might include the chief executive.

The Combined Code on Corporate Governance: BSA Guidance for Building Societies

B.2.4 Shareholders should be invited specifically to approve all new long-term incentive schemes (as defined in the Listing Rules) and significant changes to existing schemes, save in the circumstances permitted by the Listing Rules.

Extract from June 2008 The Combined Code

SUMMARY OF THE PRINCIPAL DUTIES OF THE REMUNERATION COMMITTEE

The Committee should:

Determine and agree with the board the framework or broad policy for the remuneration of the chief executive, the chairman of the company and such other members of the executive management as it is designated to consider. At a minimum, the committee should have delegated responsibility for setting remuneration for all executive directors, the chairman and, to maintain and assure their independence, the company secretary. The remuneration of non executive directors shall be a matter for the chairman and executive members of the board. No director or manager should be involved in any decisions as to their own remuneration;
Determine targets for any performance-related pay schemes operated by the company;
Determine the policy for and scope of pension arrangements for each executive director;
Ensure that contractual terms on termination, and any payments made, are fair to the individual and the company, that failure is not rewarded and that the duty to mitigate loss is fully recognised;
Within the terms of the agreed policy, determine the total individual remuneration package of each executive director including, where appropriate, bonuses, incentive payments and share options;
In determining such packages and arrangements, give due regard to the contents of the Code as well as the UK Listing Authority’s Listing Rules and associated guidance;
Be aware of and advise on any major changes in employee benefit structures throughout the company or group;
Agree the policy for authorising claims for expenses from the chief executive and chairman;
Ensure that provisions regarding disclosure of remuneration, including pensions, as set out in the Directors’ Remuneration Report Regulations 2002 and the Code, are fulfilled;
Be exclusively responsible for establishing the selection criteria, selecting, appointing and setting the terms of reference for any remuneration consultants who advise the committee;
Report the frequency of, and attendance by members at, remuneration committee meetings in the annual reports; and
Make available the committee’s terms of reference. These should set out the committee’s delegated responsibilities and be reviewed and, where necessary, updated annually.

A smaller company is one that is below the FTSE 350 throughout the year immediately prior to the reporting year.

Some companies require the remuneration committee to consider the packages of all executives at or above a specified level such as those reporting to a main board director whilst others require the committee to deal with all packages above a certain figure.

Remuneration committees should consider reviewing and agreeing a standard form of contract for their executive directors, and ensuring that new appointees are offered and accept terms within the previously agreed level.

January 2003 Higgs Suggestions for Good Practice

Extract from Combined Code 2008

Schedule A: Provisions on the design of performance related remuneration

The remuneration committee should consider whether the directors should be eligible for annual bonuses. If so, performance conditions should be relevant, stretching and designed to enhance shareholder value. Upper limits should be set and disclosed. There may be a case for part payment in shares to be held for a significant period.
The remuneration committee should consider whether the directors should be eligible for benefits under long-term incentive schemes. Traditional share option schemes should be weighed against other kinds of long-term incentive scheme. In normal circumstances, shares granted or other forms of deferred remuneration should not vest, and options should not be exercisable, in less than three years. Directors should be encouraged to hold their shares for a further period after vesting or exercise, subject to the need to finance any costs of acquisition and associated tax liabilities.
Any new long-term incentive schemes which are proposed should be approved by shareholders and should preferably replace any existing schemes or at least form part of a well considered overall plan, incorporating existing schemes. The total rewards potentially available should not be excessive.
Payouts or grants under all incentive schemes, including new grants under existing share option schemes, should be subject to challenging performance criteria reflecting the company’s objectives. Consideration should be given to criteria which reflect the company’s performance relative to a group of comparator companies in some key variables such as total shareholder return.
Grants under executive share option and other long-term incentive schemes should normally be phased rather than awarded in one large block.
In general, only basic salary should be pensionable.
The remuneration committee should consider the pension consequences and associated costs to the company of basic salary increases and any other changes in pensionable remuneration, especially for directors close to retirement.

Guidance on Audit Committees – October 2008

Remuneration

In addition to the remuneration paid to all non-executive directors, each company should consider the further remuneration that should be paid to members of the audit committee to recompense them for the additional responsibilities of membership. Consideration should be given to the time members are required to give to audit committee business, the skills they bring to bear and the onerous duties they take on, as well as the value of their work to the company. The level of remuneration paid to the members of the audit committee should take into account the level of fees paid to other members of the board. The chairman’s responsibilities and time demands will generally be heavier than the other members of the audit committee and this should be reflected in his or her remuneration.

OCTOBER 2009