I am pleased to present the Directors’ Remuneration Report for the year ended 30 June 2022. Following this letter we have set out the following additional information:
- Our Pay Principles, which we adopted in 2020, together with a summary of the market reference points considered by the Committee and our approach to wider workforce remuneration.
- Remuneration Philosophy: The link between our Directors’ Remuneration Policy and our Strategy.
- Governance: How our Remuneration Policy is aligned with the requirements of the UK Corporate Governance Code.
- Remuneration at a glance: Summary of Executive Directors' Total Remuneration for the 2021 and 2022 financial years.
There then follows the two principal sections of the Remuneration Report: the Annual Report on Remuneration and an abbreviated form of the Directors’ Remuneration Policy (the Policy) (the full version can be found at www.dechra.com). The Annual Report on Remuneration provides details of the amounts earned in respect of the 2022 financial year and how the Policy will be implemented in the 2023 financial year.
The Directors’ Remuneration Report (excluding the Policy) will be subject to an advisory vote at the 2022 Annual General Meeting.
Our Directors’ Remuneration Policy
The Policy was approved by shareholders at the Annual General Meeting on 27 October 2020, with 90.81% of all votes cast in favour, and will remain in force until 2023. We review the application of this Policy regularly, with a view to it remaining appropriate, linked to strategy and reflective of developing market practices. No changes to the Policy are proposed for the forthcoming year.
Further details on how the Policy was implemented during the 2022 financial year and our approach to the implementation of the Policy in the 2023 financial year, including our approach to performance measures for the annual bonus and LTIP awards, are described later in this letter.
Remuneration Committee Decisions in 2022
Our 2022 financial year has been another one of success for Dechra, with continued strong progress and a move into the FTSE100. On remuneration, our aim is to always consider the wider workforce, our shareholders and other stakeholders by taking a fair, prudent and balanced approach. The table below summarises the implementation of the Policy for Executive Directors in respect of the 2022 financial year.
As discussed with shareholders during our consultation process last year, Ian Page’s salary was increased to £612,000 and Paul Sandland’s to £405,000. The increases were effective from 1 January 2022. The 2022 base salary increase for Ian Page and Paul Sandland moved their base to around 90% of the market median of companies ranked 51 to 150 in the FTSE 350 and companies with a market capitalisation of £2.5 billion to £4.5 billion (based on 12 month average market capitalisation to 31 December of 2020). Tony Griffin’s salary was increased by 3% to €385,043, which was broadly in line with the average range of increases awarded to employees throughout the Group.
Company pension contribution/cash in lieu of pension of 8% of salary for Ian Page and 6% of salary for Paul Sandland. Tony Griffin received an employer’s contribution of 7.7% of salary into the Netherlands pension scheme. In line with the commitment made in our 2020 Remuneration Report, the employer pension contribution rate for our UK employees was increased to 8% from 1 July 2022.
Maximum opportunity for the 2022 financial year of 125% of base salary.
The bonus for the 2022 financial year was based on underlying profit before tax (as regards up to 110% of salary), personal objectives (up to 10% of salary) and ESG measures (up to 5% of salary).
We have delivered underlying profit before tax during the year of £170.0 million, an improvement of 15.5% at constant exchange rates (13.3% at actual exchange rates) on the prior year. Reflecting the performance of the Group in relation to profit targets and the performance of Executive Directors against personal objectives and ESG measures as described on pages 134 to 136, bonuses for the year equal to 92.0% of salary have been earned by Ian Page and Paul Sandland.
The profit element of Tony Griffin’s bonus is calculated by reference to the underlying operating profit of Dechra Veterinary Products EU (up to 55% of salary) and Group underlying profit before tax (up to 55% of salary). His bonus earned for the year is 76.5% of salary, which reflects the financial performance and the satisfaction of his personal objectives and ESG measures.
The Committee considers the level of payout is reflective of the overall performance of the Group in the year and is appropriate.
The bonus is subject to a bonus deferral, requiring that 20% of any bonus earned is deferred into Dechra shares for two years. The annual bonus is subject to malus and clawback provisions.
Long Term Incentive Plan
Awards of 200% of base salary for Ian Page, 150% of base salary for Paul Sandland and 100% of base salary for Tony Griffin were granted in September 2021. All of these awards are subject to a two year post vesting holding period.
LTIP awards granted on 6 September 2019 are scheduled to vest on 5 September 2022:
- as to 96% of the TSR element (one third of the total award) reflecting just under upper quartile performance; and
- as to 50.3% of the underlying diluted EPS element (two thirds of the total award) reflecting that the compound annual growth in the underlying diluted EPS at 11.0%, whilst strong, was below the maximum threshold of 17% (with the assessment of underlying EPS taking into account the Akston licensing agreement, as referred to below).
In aggregate, taking into account the ROCE underpin (reflecting that the ROCE at 19.5% had not fallen below 10.0%), the LTIP awards will vest as to 65.5%. The Committee considers the level of payout is reflective of the overall performance of the Group over the three year performance period ended 30 June 2022 and is appropriate. See page 139 for further details.
Awards made under the LTIP are subject to malus and clawback provisions
In last year’s Remuneration Report we reported that we decided to increase the Chair’s fee in two stages, with an increase to £159,000 (which included the fee for being Chair of the Nomination Committee, £5,000) from 1 January 2021 and to £188,000 from 1 January 2022.
As part of the Shareholder Consultation on Remuneration, which was undertaken between February and July 2021, we highlighted that we would revisit the appropriate fee level in the event of Dechra becoming a constituent of the FTSE 100, or in the event of a change of Chair. On the appointment of Alison Platt as Chair in January 2022 the Chair’s fee was set at £200,000. This positions the Chair fee below lower quartile compared to the FTSE 30–100 and around lower quartile of the FTSE 100–150. As at 1 July 2022, Dechra was ranked 95 in the FTSE 100.
Performance Conditions for LTIP Awards
As detailed in the Directors’ Remuneration Report last year, the impact of the Akston licensing agreement is relevant for the 2020 Grant (three year performance period to 30 June 2022) and 2021 Grant (three year performance period to 30 June 2023). In order to measure performance on a fair and consistent basis, the Committee has adjusted the final year underlying EPS for the 2020 Grant to reflect the actual Akston R&D costs incurred at the vesting date. This adjustment recognises that these R&D costs were not included in the base year of the performance period and maintains the overall level of stretch in the targets so the targets are not less difficult to satisfy. For the 2022 Grant (three year performance period to 30 June 2024) and future years, the Committee is mindful that the base year will have some R&D actual costs from the Akston deal. Therefore, the actual Akston R&D costs will be adjusted for both the base year and the year of vesting to enable performance to be measured on a like-for-like basis as was agreed for the 2021 Grant. The Committee believes that this is the right approach as the payments for the development of Akston are lumpy and uncertain as to timing between financial years.
Forward Looking: Implementation of Policy for 2023 Financial Year
We will apply the Policy in the 2023 financial year as follows (more information is given on page 144 of the 2022 Annual Report):
- Salary: Executive Directors’ salaries will continue to be reviewed in January. It is planned that any increases to Executive Directors’ salaries will be in line with the range of any increases proposed for the wider workforce.
- Pension: From 1 July 2022 the employer pension contribution for the wider UK workforce (including Paul Sandland) was increased to 8%. This aligns the pension contribution to that of Ian Page (who may receive cash in lieu). Tony Griffin received an employer’s contribution of 7.7% of salary, in line with the wider Dutch workforce.
- Bonus: Our Policy, approved by shareholders at the 2020 Annual General Meeting, allows for a maximum annual bonus opportunity of 150% of base salary. Taking into account the growth in the size and complexity of the Group since the Policy was approved, the maximum bonus opportunity for the 2023 financial year with respect to the Chief Executive Officer and the Chief Financial Officer will increase from 125% to 150% of salary. This positions the maximum bonus at lower quartile compared to the FTSE 30–100 for the Chief Executive Officer (around median for the Chief Financial Officer) and around median of the FTSE 100–150. The value of the total package continues to be modest against the market norm for a company of our size and complexity. The value of total package for our Chief Executive Officer and Chief Financial Officer continues to be positioned towards the lower quartile of the market.
In line with our Policy for the Chief Executive Officer and the Chief Financial Officer, the level of bonus deferred into Dechra shares for two years will increase from 20% to 33% of any bonus earned (and not just any additional bonus earned). The increase in the level of deferral alongside the increase in the maximum bonus opportunity means that the amount of cash earned for any level of performance is not increased. The increase in the bonus opportunity is, therefore, delivered in deferred shares, which further enhances the alignment with shareholders. The bonus will be based on a mix of stretching underlying profit before tax targets (in respect of a bonus of up to 130% of salary), personal objectives (in respect of a bonus of up to 10% of salary) and an ESG measure (in respect of a bonus of up to 10% of salary).
The bonus opportunity for Tony Griffin will remain at 125%. The level of bonus deferred into Dechra shares for two years will be 20% of any bonus earned (and not just any additional bonus earned). The bonus will be based on a mix of stretching underlying profit targets (in respect of a bonus of up to 105% of salary), personal objectives (in respect of a bonus of up to 10% of salary) and an ESG measure (in respect of a bonus of up to 10% of salary). For Tony Griffin, and consistent with the approach for the 2022 financial year, half of the opportunity based on underlying profit (i.e. up to 52.5% of salary) will be assessed by reference to the underlying operating profit of Dechra Veterinary Products EU, reflecting his responsibility for that part of our business, and the other half of the profit based opportunity by reference to Group underlying profit in line with the other Executive Directors, so that a significant part of the profit based opportunity is aligned with the shareholder experience in respect of overall Group performance.
The Committee has also reviewed the level of stretch in the annual bonus targets to reassure itself that the higher maximum opportunity for the 2023 financial year will only be earned for delivery of appropriately stretching levels of performance.
- LTIP: No changes are proposed to the maximum LTIP opportunity for the 2023 financial year. Awards for the 2023 financial year will be granted at the level of 200% of salary for Ian Page, 150% of salary for Paul Sandland and 100% of salary for Tony Griffin.
The Remuneration Committee is aware that, despite strong performance in line with expectations, the Company’s share price is lower than the £49.09 share price used to determine the number of shares subject to the LTIP awards granted on 19 September 2021. It is intended that the LTIP awards for the 2023 financial year will be granted in the 42 days following the announcement of the Company full year results. The Committee will finalise the quantum of the grants at that time having regard to business and share price performance and market conditions at that time. Taking into account the fact that the current share price is higher than the share price used for the LTIP awards granted in 2020 and 2019 (£32.37 and £25.06 respectively) our current intention is that LTIP awards for the 2023 financial year will be granted in line with our standard approach (with the number of shares to be awarded based on the three day average middle market quotation preceding the grant).
Any shares that vest will be subject to a two year holding period. The performance measures remain as per the grant of LTIP awards made on 19 September 2021, details of which can be found on page 139. The upper target for the underlying diluted EPS performance condition will be 15% CAGR. Taking account of internal forecasts of performance over the performance period including the impact of the recent acquisitions, the markets in which the Group operates, our long term growth ambitions and the expectations of the investment community of the Group’s future potential performance, this upper target is considered to be a stretching and ambitious upper target, which requires significant out-performance. The strong performance delivered in the 2022 financial year, which is the base year for the 2023 LTIP grant, also adds to the stretch.
Chair and Non-Executive Directors
A review of the Chair and Non-Executive Directors’ base and additional fees will also be undertaken in January 2023 along with the pay review process for the wider workforce.
Wider Workforce Remuneration and Employee Engagement
We recruit and promote people on the basis of their personal ability, contribution and potential. We are committed to promoting, supporting and maintaining a culture of fairness, respect and equal opportunity for all. We are also committed to fair employment practices and comply with national legal requirements regarding wages and working hours.
The Group aims to provide a remuneration package that is competitive in an employee’s country of employment and which is appropriate to promote the long term success of the Group. The Company’s SAYE scheme and Employee Stock Purchase Plan (ESPP) encourage share ownership by qualifying employees and enable them to share in value created for shareholders. In the 2022 financial year, we offered SAYE to 1,636 employees in 19 countries, and received a 38.57% take up. In the 2023 financial year, we propose to offer the SAYE to our employees in Brazil, so offering 270 additional employees the opportunity to acquire shares in Dechra.
Further details on our pay principles and workforce remuneration are set out on page 129 of the 2022 Annual Report.
As the Non-Executive Director designated under the 2018 Code for employee engagement, Lisa Bright engages directly with employees on a range of topics of interest to them. As discussed on page 101, workforce engagement activities during the 2022 financial year included seven discussions with cross function teams in the EU and US. These have provided an upward channel for views, comments and debate, as well as an opportunity to provide positive feedback on the Group’s decision not to furlough employees during the pandemic. The Committee provided an update on the Remuneration Review, including the Executive Directors’ remuneration increases, to the wider workforce via the OneDechra intranet.
We are pleased to report that, as a result of our proactive management with regards to our gender pay gap in Dechra Limited (who employ 69.3% of our UK employees), the gap has reduced from 17.7% in 2017 to 2.8% in 2021. However, the latest decrease relates largely to the payment of COVID-19 bonuses to all site-based staff at the Skipton site during the pandemic and will rise again next year as this is not applicable on an ongoing basis.
Looking Ahead: Key Focus Areas for the Committee for 2023
During the course of the 2023 financial year, we will be reviewing our Policy to check that it continues to support our strategic priorities. The Committee is mindful of the need to attract and retain high calibre individuals in an increasingly competitive market and to remunerate executives fairly and responsibly. As part of this review, and alongside the development of our science based climate targets, we will also consider the extent to which we should enhance the focus on ESG targets in the reward framework. We will consult with our shareholders in advance of the next triennial shareholder vote on the policy at the 2023 Annual General Meeting.
I will also transfer Remuneration Committee responsibilities to a new Committee Chair during the course of the year.
We greatly appreciate the feedback and the level of support we have received from shareholders regarding our approach to remuneration.
We remain committed to a responsible approach to executive pay, as I trust this Directors’ Remuneration Report demonstrates. We believe that the Policy operated as intended and consider that the remuneration received by the Executive Directors in respect of the 2022 financial year was appropriate, taking into account Group performance, personal performance and the experience of shareholders and employees.
I trust that we will continue to receive your support at the Annual General Meeting later this year. Should you have any queries in relation to this report, please contact me or the Company Secretary.
Remuneration Committee Chair
5 September 2022