I am pleased to present our remuneration report incorporating our annual report on remuneration and remuneration policy which are both being tabled for shareholder approval at the 2017 AGM.

Alun Griffiths
Chairman of the remuneration committee

"Remuneration policy is aligned with the priorities of shareholders in incentivising management to meet demanding short-term targets and to deliver targeted profit growth over the longer term, whilst ensuring that high safety standards are achieved."

Dear shareholder

The Group has performed very well during the year with good top and bottom line growth supported by strong cash flow. This was achieved through continuing focus on operational improvement, bid and contract management, supported by continued investment in people, processes and technology.

Remuneration policy

This year we have reviewed the remuneration policy of the Group which will be put to shareholders for approval in a binding vote at the AGM. The review confirmed that our policy remains fit for purpose in aligning the interests of management with shareholders and in linking reward to performance. Nevertheless, we have taken the opportunity to make changes where appropriate to strengthen alignment and to ensure that executives are rewarded for delivering sustainable profit growth in the medium to long term.

To that end, we have increased materially the shareholding requirement for senior executives and have strengthened the malus and clawback provisions that apply both to the Performance Share Plan and Deferred Share Bonus Plan. This underscores the committee's policy of aligning director and shareholder interests and reflects the views of investor associations and good governance.

As part of the review of the annual bonus plan and its operation, coincident with strengthening the malus and clawback provisions and increased shareholding requirement, we have clarified our approach to the treatment of leavers for future awards. The rules of the plan will be modified to define the scenarios when forfeiture would apply to deferred bonus shares rather than the scenarios in which good leaver status would be granted. For instance, forfeiture would apply in the event of dismissal for misconduct, fraud and performance issues and where an executive leaves for alternative employment at a competitor. The three-year vesting period would still apply.

We will also be changing the mechanism for delivering deferred shares which for future awards will be via an Employee Benefit Trust rather than through the purchase of shares in the executives' name (at the time of deferral) and the execution of a bonus deferral agreement.

We have reviewed the structure of the Performance Share Plan and will be seeking shareholder approval for a new plan on broadly the same basis as the current plan. As part of this review, we looked in detail at award levels and targets and other than increasing the normal annual maximum award levels for the Group finance director to 100 per cent of salary, propose to make only minor changes to improve flexibility.

We have noted the increased investor focus on the further alignment with shareholder interests through the introduction of post-vesting holding periods. We are not proposing to introduce a post-vesting holding requirement for the PSP at this time, however we recognise the importance of long-term share ownership and believe for Severfield that the most appropriate way to achieve this at the current time is by increasing the shareholding requirements as set out above. We will continue to take into account any feedback from shareholders and proxies and will consider this further in the future.

Key changes to remuneration policy

  • Strengthening of malus and clawback provisions for PSP and bonus share awards.
  • Increase in shareholding requirement from 100 per cent of salary to 200 per cent for CEO and Group finance director and 150 per cent for others.
  • Increase in 'normal' PSP award for Group finance director from 75 per cent to 100 per cent of salary.
  • Clarify approach to the treatment of leavers for future bonus share awards.

Annual remuneration report

The annual remuneration report describes the implementation of this policy, in particular in relation to reward for performance in 2017.

I am pleased to report that the base financial targets set by the board were exceeded and the base safety targets met, resulting in a bonus pay-out of 95 per cent of the maximum for all of the executive directors except Derek Randall who achieved a bonus pay-out of 80 per cent.

The targets for the 2014 PSP award (EPS targets which equated to PBT of between £12m and £24m) were met resulting in the expected vesting of these awards at 74 per cent of maximum.

During the year, the directors received a 2.5 per cent salary increase which was broadly in line with that received by the UK workforce. In all cases the increases were effective from 1 July 2016.

Implementation of policy for 2018

Salaries for the directors will be reviewed later this year after the conclusion of the pay review across the Group and will be effective from 1 July 2017. A review of fees for the Chairman has concluded that the current fee level of £100,000 per annum is materially below market and we have determined that this should rise to £125,000. Furthermore, given the recent management changes implemented for the duration of Ian Lawson's absence through ill-health, we have determined that this should be increased to £175,000 for the duration of John Dodds' temporary appointment as executive chairman. This increase will be effective from 1 April 2017. There will be no change to the fees paid to non-executive directors.

The financial and safety performance targets for the 2018 bonus reflect the continued strong forward momentum of the Group. The committee considered the balance of financial and non-financial measures, as well as the appropriateness of each measure, and considers that these remain appropriate for the year ahead.

The share plan targets are intended to incentivise management to maintain this momentum and will require the Group to deliver earnings per share ('EPS') in the range of 6.76p to 7.98p in 2020. This equates to a PBT range of £25.0m to £29.5m. This represents an increase in the lower vesting threshold of £6.4m (34 per cent) and in the threshold at which maximum vesting takes place of £5.5m (23 per cent). This represents a vesting range which the committee feels is realistic, whilst remaining appropriately stretching, particularly in the context of current expectations of the external market over the next performance cycle.

Conclusion

Through the changes set out above, the committee has sought to strengthen alignment and ensure that pay remains firmly linked to performance whilst ensuring that the bonus and performance share plans provide a strong incentive for management to deliver superior performance over the short and longer term. We believe that our remuneration policy achieves these objectives.

I wrote to our top ten shareholders in early June with details of our proposed changes and will continue to engage with all shareholders before and at the AGM to answer any questions shareholders might have.

Alun Griffiths
Chairman of the remuneration committee
14 June 2017