Remuneration report

The report

The report has been prepared by the DLC remuneration committee (the ‘Committee’) and approved by the boards of Mondi Limited and Mondi plc (together ‘the Boards’). Deloitte & Touche and Deloitte LLP have independently audited the items stipulated in the regulations:

Directors’ remuneration policy

This part of the directors’ remuneration report sets out the remuneration policy for the Group and has been prepared in accordance with The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. The policy has been developed taking into account the principles of the governance codes in South Africa and the UK and the views of our major shareholders and describes the policy to be applied from 2014 onwards. The policy report will be put to a binding shareholder vote at the 2014 annual general meetings and if approved the policy will take formal effect from that date.

The Group’s remuneration policy has been set with the objective of attracting, motivating and retaining high calibre directors, in a manner that is consistent with best practice and aligned with the interests of the Group’s shareholders.

Remuneration policy for executive directors is framed around the following key principles:

  • remuneration packages should be set at levels that are competitive in the relevant market;
  • the structure of remuneration packages and, in particular, the design of performance-based remuneration schemes, should be aligned with shareholders’ interests and should support the achievement of the Group’s business strategy and the management of risk;
  • a significant proportion of the remuneration of executive directors should be performance-based;
  • the performance-based element of remuneration should be appropriately balanced between the achievement of short-term objectives and longer-term objectives; and
  • the remuneration of executive directors should be set taking appropriate account of remuneration and employment conditions elsewhere in the Group.

Executive directors’ remuneration policy table

The following table summarises key elements of the remuneration of executive directors in accordance with reporting regulations:

  Purpose and link to strategy Operation Maximum opportunity
Base salaryTo recruit and reward executives of a suitable calibre for the role and duties required.

Reviewed annually by the Committee, taking account of Group performance, individual performance, changes in responsibility and levels of increase for the broader employee population.

Reference is also made to market median levels in companies of similar size and complexity.

The Committee considers the impact of any base salary increase on the total remuneration package.

Salaries (and other elements of the remuneration package) may be paid in different currencies as appropriate to reflect their geographic location.

There is no prescribed maximum salary or annual increase. However, increases will normally be no more than the general level of increase in the UK market or the market against which the executive’s salary is determined. On occasions a larger increase may be needed to recognise, for example, development in role or change in responsibility.

Details of the outcome of the most recent salary review are provided in the annual report on remuneration.

BenefitsTo provide market competitive benefits. The Group typically provides:
  • Car allowance or company car.
  • Medical insurance.
  • Death and disability insurance.
  • Limited personal taxation and financial advice.
  • Other ancillary benefits, including relocation and assistance with expat expenses (as required).

The policy authorises the Committee to make minor changes to benefits provision from time to time, including if appropriate implementing all-employee share plans up to the limits approved by tax authorities.

Maximum values are determined by reference to market practice, avoiding paying more than is necessary.
PensionTo provide market competitive pension contributions.Defined contribution to pension, or cash allowance of equivalent value. Only base salary is pensionable.Company contribution of 30% of base salary for the chief executive and 25% of base salary for other executive directors.
Bonus Share Plan (BSP) To provide incentive and reward for annual performance achievements. To also provide sustained alignment with shareholders through a deferred
component.

Awards are based on annual performance against a balanced scorecard of metrics as determined by the Committee from time to time such as EBITDA and percentage Return on Capital Employed (ROCE) and safety. These have the highest weighting (currently 70% of the total). Individual performance is also assessed against suitable objectives, and currently has a 30% weighting.

The policy gives the Committee the authority to select suitable performance metrics, aligned to Mondi’s strategy and shareholders’ interests, and to assess the performance outcome.

Half of the award is delivered in cash and half in deferred shares which normally vest after three years (subject to service conditions), and with no matching element. On vesting of deferred shares participants receive a bonus of equivalent value to the dividends that would have been payable on those shares between the date when the awards were granted and when they vest.

Claw-back provisions apply to awards made since January 2011.

The policy permits a maximum annual bonus of up to 150% of base salary.

The Committee’s practice has been to apply a limit of 150% for the chief executive, and 120% (ie. below the policy maximum) for other executive directors.

Long-term Incentive Plan (LTIP)To provide incentive and reward for the delivery of the Group’s strategic objectives, and provide further alignment with shareholders through the use of shares.

Individuals are considered each year for an award of shares that normally vest after three years to the extent that performance conditions are met and in accordance with the terms of the plan approved by shareholders.

Under the plan rules, the Committee has the ability to cash-settle awards, if necessary, in exceptional circumstances. There is no current intention for awards to the executive directors to be delivered in this way.

Awards are granted subject to continued employment and satisfaction of challenging performance conditions measured over three years, which are set by the Committee before each grant.

For awards to be granted in 2014, metrics comprise Total Shareholder Return against a suitable peer group, and percentage ROCE, each with a 50% weighting. The vesting outcome can also be reduced, if necessary, to reflect the underlying or general performance of the Group. Performance is measured over three calendar years, starting with the year of grant.

For awards granted from 2013 onwards, an amount equivalent to dividends that would have been payable on the unvested share awards are rolled-up and paid out (in cash and/or additional shares) at the end of the vesting period based on the proportion of the award that actually vests.

Claw-back provisions apply to awards made since January 2011.

The maximum grant limit in the plan rules and under this policy is 200% of base salary (face value of shares at grant), to any individual in a single year.

Individual awards, up to this limit, are determined each year by the Committee. The Committee’s practice has been to make grants below this policy maximum as detailed in the annual report on remuneration.

25% of the grant is available for threshold performance, rising on a straight-line scale to 100% of the grant for performance at the ‘stretch’ level.

Share Ownership PolicyTo align the interests of executive directors with those of shareholders.

The chief executive officer is required to build a shareholding, in ‘unfettered’ shares, equivalent to at least 150% of base salary, and other executive directors equivalent to 100% of base salary, over a period of not more than 5 years from the date of appointment to the Boards.

Executive directors are required to retain at least 50% of any vested shares, other than as necessary to meet tax obligations, under Mondi’s various share plans until the requirement is met.

Not applicable.

Choice of performance measures and approach to target setting

Bonus Share Plan (BSP)

The table below shows the metrics for 2014, why they were chosen and how targets are set.

Metric Why chosen? How targets are set
EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) A key indicator of the underlying profit performance of the Group, reflecting both revenues and costs. Targets and ranges are set each year by the Committee taking account of required progress towards strategic goals, and the prevailing market conditions.
ROCE (%) (Return on Capital Employed) A key indicator of the effective use of capital. Targets and ranges are set each year by the Committee taking account of the required progress towards strategic goals, and the prevailing market conditions.
Safety One of the key indicators of whether the business is meeting its sustainability goal of 'zero harm'. The Committee considers input from the Board's sustainable development committee, and sets appropriate standards and goals.
Personal performance An indicator of the contribution each executive director is making to the overall success of the management team. Targets are set each year by the Committee, based on the specific priorities, and areas of responsibility of the role.

The policy gives the Committee the authority to select suitable performance metrics, aligned to Mondi’s strategy and shareholders’ interests.

Long-term incentive plan (LTIP)

The table below shows the metrics for 2014 grants, why they were chosen and how targets are set.

Metric Why chosen? How targets are set
Total Shareholder Return (TSR), relative to a peer group of competitors TSR measures the total returns to Mondi's shareholders, so provides close alignment with shareholder interests. The Committee sets the performance requirements for each grant. A peer group of packaging and paper sector companies is used. Nothing vests below median. 25% vests for median performance; 100% vests for upper quartile performance, with a straight-line scale between these two points.
ROCE (%) (Return on Capital Employed) A key indicator of the effective use of capital.

The Committee sets threshold and stretch levels, aligned to the Group’s strategic targets for ROCE.

Nothing vests below threshold. 25% vests for threshold performance; 100% vests for stretch performance, with a straight-line scale between these two points.

The policy gives the Committee the authority to select suitable performance metrics, aligned to Mondi’s strategy and shareholders’ interests.

Differences in remuneration policy for executive directors compared to other employees

There are differences in the structure of the remuneration policy for the executive directors and employees, which are necessary to reflect the different levels of responsibility and market practices. The key difference is the increased emphasis on performance-related pay in senior roles. Lower maximum incentive pay opportunities apply below executive level, driven by market benchmarks and the relative impact of the role. Only the most senior executives in the Group participate in the LTIP and the BSP as these plans are targeted on those individuals who have the greatest responsibility for Group performance.

Executive directors’ existing service contracts, and policy on loss of office

David Hathorn and Andrew King are employed under service contracts with both Mondi Limited and Mondi plc. Peter Oswald is employed in Austria under a service contract with Mondi Services AG.

The service contracts for David Hathorn and Andrew King provide for one year’s notice by either party. They include pay in lieu of notice provisions which may be invoked at the discretion of the Group. The payment in lieu of notice would comprise base salary, benefits and pension contributions for the notice period and an amount in compensation for annual bonus only for that part of the financial year the individual has worked.

Peter Oswald was recruited, and is based, in Austria. His service contract is required under Austrian law to be for a fixed period, which renewable fixed period expires on 30 April 2016. However, the contract has also been structured as far as possible to conform to the accepted practice for directors in the UK, and can be terminated on one year’s notice by either party. Prior to 2008, he did not have a notice period, and was entitled to receive compensation on termination equivalent to remuneration for the unexpired term of the five-year fixed term contract. The Committee re-negotiated this contract in 2008 to substantially reduce the Group’s potential liabilities, and introduced a standard 12-month notice period, together with an accompanying lump sum payment on termination, which was necessary to facilitate the transition from the previous contract. In the event of termination by Mondi, other than for ‘cause’, the current contract provides for payment of base salary, benefits and pension contribution in respect of the 12-month notice period and eligibility for annual bonus in respect of the period he has worked. He would also be eligible for a lump sum amount calculated as €908,800 plus interest on this amount accrued at the Euribor interest rate for the period since 1 January 2008.

Any share-based entitlements granted to an executive director under the Group’s share plans will be determined based on the relevant plan rules. The default treatment is that any outstanding awards lapse on cessation of employment. However, in certain prescribed circumstances, such as death, disability, retirement or other circumstances at the discretion of the Committee (taking into account the individual’s performance and the reasons for their departure) ‘good leaver’ status can be applied. For good leavers, vesting of BSP awards that are not subject to performance conditions is accelerated to as soon as practical after employment termination. LTIP awards remain subject to performance conditions (measured over the original time period) and are reduced pro-rata to reflect the proportion of the performance period actually served. The Committee has the discretion to disapply the application of performance conditions and/or time pro-rating if it considers it appropriate to do so. However, it is envisaged that this would only be applied in exceptional circumstances. In determining whether an executive should be treated as a good leaver or not, the Committee will take into account the performance of the individual and the reasons for their departure.

Details of the service contracts of the executive directors who served during the period under review are as follows. These contracts were all signed prior to 27 June 2012.

Executive director Effective date of contract Unexpired term/notice period
David Hathorn 3 July 2007 Terminable on 12 months’ notice
Andrew King 23 October 2008 Terminable on 12 months’ notice
Peter Oswald 1 January 2008 A fixed term expiring on 30 April 2016 but terminable at any time on 12 months’ notice

A director’s service contract may be terminated without notice and without any further payment or compensation, except for sums accrued up to the date of termination, on the occurrence of certain events such as gross misconduct.

Service contracts for new appointments

Normally, for any new executive director appointments, the Group’s policy is that the service contracts should provide for one year’s notice by either party. The contract would provide that, in the event of termination by the company, other than for ‘cause’, the executive would be eligible for:

  • payment of the base salary, pension contribution and benefits in respect of the unexpired portion of the 12-month notice period;
  • annual bonus only in respect of the period they have served, payable following the relevant performance year-end and subject to the normal performance conditions for annual bonus;
  • share-based awards they hold, subject to the plan rules, which include arrangements for pro-ration of LTIP awards and continued application of performance conditions.

The Group would seek to apply the principle of mitigation to the termination payment by, for example, making payments in instalments that can be reduced or ended if the former executive wishes to commence alternative employment during the payment period.

In exceptional circumstances, such as to secure for the Group the appointment of a highly talented and experienced executive in a market such as Germany or Austria where it is common for the most senior executives to have three-year or five-year fixed term contracts, the Committee may need to offer a longer initial notice period that reduces progressively to one year over a set time period. In such exceptional circumstances, the Committee would seek to ensure that any special contract provisions are not more generous than is absolutely necessary to secure the appointment of such a highly talented individual. The Committee would also take account of the remuneration and contract features that the executive may be foregoing or relinquishing in order to join Mondi, in comparison with the overall remuneration package that Mondi is able to offer.

Approach to remuneration for new executive director appointments

The remuneration package for a newly appointed executive director would be set in accordance with the terms of the Group’s approved remuneration policy in force at the time of appointment. The variable remuneration for a new executive director would be determined in the same way as for existing executive directors, and would be subject to the maximum limits on variable pay referred to in the policy table above.

For an internal appointment, any legacy pay elements awarded in respect of the prior role would be allowed to pay out according to their terms.

For internal and external appointments, the Group may meet certain relocation expenses, as appropriate.

For external appointments, the Committee may also offer additional cash and/or share-based elements when it considers these to be in the best interests of Mondi and shareholders, to replace variable remuneration awards or arrangements that an individual has foregone in order to join the Group. This includes the use of awards made under section 9.4.2 of the UK Listing Rules. Any such payments would take account of the details of the remuneration foregone including the nature, vesting dates and any performance requirements attached to that remuneration.

Remuneration scenarios at different performance levels 1

The charts below illustrate the total potential remuneration for each executive director at three performance levels.

Remuneration scenarios at different performance levels [graph]
  1. 1 Assumptions:
    Below Target = fixed pay only (salary + benefits + pension)
    On-target = 70% vesting of the annual bonus and 44% for LTIP awards
    Maximum = 100% vesting of the annual bonus and LTIP awards
    Salary levels (on which other elements of the package are calculated) are based on those applying on 1 January 2014.

Remuneration policy for non-executive directors

Element Purpose and link to strategy Operation Maximum opportunity
Non-executive chairmen fees To attract and retain high-calibre chairmen, with the necessary experience and skills. To provide fees which take account of the time commitment and responsibilities of the role. The joint chairmen each receive an all-inclusive fee.

The joint chairmen’s fees are reviewed periodically by the Committee.

While there is not a maximum fee level, fees are set by reference to market median data for companies of similar size and complexity to Mondi.

Other non-executive fees To attract and retain high-calibre non-executives with the necessary experience and skills. To provide fees which take account of the time commitment and responsibilities of the role.

The non-executives are paid a basic fee.

Attendance fees are also paid to reflect the requirement for non-executive directors to attend meetings in various international locations.

The chairmen of the main board committees and the senior independent director are paid additional fees to reflect their extra responsibilities.

Non-executive directors’ fees are reviewed periodically by the joint chairmen and executive directors.

While there is not a maximum fee level, fees are set by reference to market median data for companies of similar size and complexity to Mondi.

All non-executive directors have letters of appointment with Mondi Limited and Mondi plc for an initial period of three years. In accordance with best practice, non-executive directors are subject to annual re-election at the annual general meetings. Appointments may be terminated by Mondi with six months’ notice. No compensation is payable on termination, other than accrued fees and expenses.

Statement of consideration of employment conditions elsewhere in the Group

The Group’s remuneration policy for the remuneration of executive directors and other senior executives is set taking appropriate account of remuneration and employment conditions of other colleagues in the Group.

The Committee annually receives a report from management on pay practices across the Group, including salary levels and trends, collective bargaining outcomes and bonus participation. At the time that salary increases are considered the Committee additionally receives a report on the approach management propose to adopt for general staff increases. Both these reports are taken into account in the Committee’s decisions about the remuneration of executive directors and other senior executives.

The Group does not engage in formal consultation with employees on directors’ remuneration policy. However, employees of the Group are encouraged to provide feedback on the Group’s general employment policies, and, in some countries where the Group operates, more formal consultation arrangements with employee representatives are in place, relating to employment terms and conditions, in accordance with local custom and practice. The Group also conducts periodic employee engagement surveys which gauge employees’ satisfaction with their working conditions. The Mondi Boards are given feedback on these survey results.

Shareholder context

The Committee considers the views of shareholders in its deliberations about the remuneration of executive directors and other senior executives, and consults directly with major shareholders when any material changes to policy are being considered.

Legacy arrangements

For the avoidance of doubt, in approving this policy report, authority is given to the Group to honour any commitments entered into with current or former directors that have been disclosed to shareholders in previous remuneration reports. Details of any payments to former directors will be set out in the annual report on remuneration as they arise.