Annual Financial Report - 4 of 6

Annual Financial Report - 4 of 6

Directors’ Remuneration Report

Annual Statement by the Chair of the Group Remuneration Committee

2019 was a transformational year for OSB following the Combination with CCFS.

Dear Shareholder,

I am pleased to present the 2019 Directors’ Remuneration Report which sets out details of Directors’ remuneration in respect of 2019, our new Policy for financial years 2020 to 2022 and how

we intend to implement the Policy in 2020.

New Remuneration Policy

The Combination of OSB and CCFS completed with effect from

4 October 2019. This is transformational for OSB, nearly doubling its size and enhancing its ability to compete in its core markets. As a result, the Board and Group Remuneration Committee have considered the Remuneration Policy for the newly formed Group Executive team, which comprises both legacy CCFS and OSB Executives.

The current Directors’ Remuneration Policy was approved at the AGM in May 2018 and we had planned to operate it for the full three years; however, the Combination will accelerate the Bank becoming a FCA Level 2 Firm under the regulations applicable to the financial services sector. Accordingly, we will be seeking shareholder approval for a new Policy in line with the more
stringent regulatory requirements applicable to FCA Level 2 Firms at the May 2020 AGM, a year earlier than planned.

We are also taking the opportunity to incorporate into the Policy, the recommendations in the 2018 UK Corporate Governance Code and latest investor guidance on matters such as executive pension and executive shareholdings.


The key change to the Policy as a FCA Level 2 Firm is that the value of variable pay (annual bonus and performance shares) is limited to one times the value of fixed pay (base salary, benefits and pension). This limit may be increased under the FCA regulations from one times to two times fixed pay, with

shareholder approval. Accordingly, alongside seeking shareholder approval for the new Policy, we will also be seeking shareholder approval to increase this regulatory limit imposed on variable pay to two times fixed pay. In order to retain the competitiveness of the overall total remuneration package, a direct consequence of this regulatory requirement means that the package had to be
re-weighted so that the annual bonus and performance shares are reduced from 150% of salary each, to 110% of salary each with a corresponding increase to base salaries.

We will also be required to comply with the FCA regulations on deferral and holding requirements for variable pay, as follows:

  • At least 60% of variable remuneration will be deferred over a seven year period, with no vesting earlier than three years after the award is granted, and pro-rated for the remaining years.
  • When each tranche of deferred remuneration vests, shares will be required to be held for a further year.


In practice this means that:

  • In most instances annual bonus will be paid at least 50% in shares and the remainder in cash following the publication of the audited results, with the shares subject to a holding period. Whilst under the FCA regulations the shares are only required to be held for a minimum of one year, to enhance the shareholder alignment of Directors’ pay further, this has been extended to three years (in line with the current bonus deferral horizons).
  • Performance Share Plan (‘PSP’) awards will continue to be subject to a three-year performance period, with vesting pro-rated between years three and seven. Shares delivered

on each vesting date will also be subject to a one year holding period, taking the overall time horizon for each PSP award to eight years.

The structure of the deferral and holding requirements is set out in the diagram below.

There will be enhanced clawback and malus for up to seven years after the grant of an award (ten years in exceptional circumstances).

Other structural changes to ensure compliance with the Code and investor guidelines are as follows:

- The pension provision for the Executive Directors has been reduced from 13% of salary to 8% of salary, which is at the same percentage level as the majority of the workforce.
For any new Executive Directors, the Policy will be the same.
 - The minimum required shareholding level will remain at 250% and 200% of salary respectively, for the CEO and CFO. Added to this will be a new requirement so that after ceasing employment, Executive Directors will be required to retain
a shareholding at the lower of the in-service shareholding requirement and the actual level of shareholding on cessation, for a two year period.

Operation of the Policy for 2020

As well as restructuring the packages as a consequence of becoming a Level 2 Firm, which of itself would result in a re- weighting of the package from variable pay to fixed pay; subject to shareholder approval, we are increasing the overall level of remuneration in light of the increased scope of the roles and increased legal and fiduciary responsibility entailed in managing and overseeing a significantly larger business. In particular,

this includes leading a series of long-term strategic initiatives to ensure that the full anticipated benefits of the Combination are actually realised.

The Board considers that Andy Golding and April Talintyre, our CEO and CFO respectively, have been instrumental in the
exceptional performance delivered to shareholders since OSB’s Initial Public Offering (‘IPO’) and will be critical in relation to the successful integration of CCFS and delivering the longer-term strategy for the combined business. Since the IPO in 2013, the CEO and CFO have overseen continued growth in underlying earnings of OSB, with an attractive net interest margin and loan

book growth achieved whilst providing ongoing investment in the business and controlling costs. Significant shareholder value

has also been delivered since listing, well above the FTSE All Share Index despite uncertain economic times and Brexit headwinds specifically affecting our market.

The Committee has carefully considered the appropriate pay levels for the roles of CEO and CFO of the combined Group that will be appropriate for the scope of the roles following the integration of the two businesses. As a consequence of becoming a FCA
Level 2 Firm, even if the value of the total package was to remain unchanged, there would still need to be a significant increase
to base salary to offset the required reduction in bonus and PSP opportunity, from 150% of salary each, to 110% of base salary. On top of this adjustment, the salary will be increased further, to deliver the targeted overall level of remuneration, recognising that the value of the salary increase flows through to the other elements of the package.

For the CEO, rather than moving to the targeted package immediately from 1 January 2020, following investor feedback during the consultation, we are proposing a two-stage increase, with the first stage representing 50% of the increase. On this basis, from 1 January 2020 his overall package will increase by just over 12%. The Committee will validate the second stage increase, which will be effective from 1 January 2021, taking into account (i) the performance against the integration plan, (ii) the level of cost savings against published guidance, (iii) whether the desired culture and customer focus has been delivered across the whole organisation and (iv) the performance against the compliance plan. For the CFO, where the increase to the overall package is lower, we propose to increase the package in one step, by just over 13%.

On this basis, subject to shareholder and regulatory approval, we propose that the remuneration packages would change as summarised below:



   

Salary
£’000s
 

Pension (% salary)
Maximum Annual Bonus (% salary) Maximum PSP
Award (% salary)
Increase  to total remuneration
Chief Executive Officer          
Current package £520 13% 150% 150%  
With effect from 1 January 2020 £735 8% 110% 110% 12.1%
With effect from 1 January 2021 £815 8% 110% 110% 24.2%
Chief Financial Officer          
Current package £350 13% 150% 150%  
With effect from 1 January 2020 £500 8% 110% 110% 13.2%


Proposed changes to Directors’ remuneration packages

The Committee recognises the stakeholder sensitivity in increasing Executive Directors’ pay and has debated this issue at length and consulted with significant shareholders. We believe that the proposed new packages are commensurate with the additional complexity of each role and greater responsibility for managing a significantly larger and more complex business and, as part of this, delivering the successful integration of the two businesses. Following the Combination, the combined business will have total assets of £21.4bn (£10.5bn previously), total headcount of around 1,800 employees (around 1,000 previously), an increase in the number of products offered, an increase in the number of customers served and a near doubling of shareholders’ funds for which we are responsible. The combined business will also be subject to materially higher regulatory scrutiny, including being a FCA Level 2 Firm.

The proposed remuneration levels also ensure that there are appropriate relativities compared to other Executives within the combined Group and the rest of the workforce where, within prudent cost constraints, other employees’ packages are being adjusted, as appropriate, for increased role complexity and responsibility.

We have also considered carefully pay levels within the limited number of peers in the financial services sector and the FTSE more generally and we are comfortable that the proposed packages would deliver a total remuneration equivalent to
a broadly mid-market position.

In summary, we believe that this level of pay is appropriate remuneration for the task in hand and will be appropriately competitive to ensure that their services are retained.

Overview of 2019 performance

2019 was a transformational year for OSB following the Combination with CCFS, which completed on 4 October 2019. The business maintained momentum during the extended transaction process and has made strong progress in the period since the Combination. Statutory pre-tax profit was up 14% to

£209.1m, although statutory basic EPS decreased 5% as a result of the increased share count post Combination. During 2019, OSB also returned to the securitisation market through the Canterbury Finance programme, and the Combination with CCFS strengthened our expertise in the area. Financial results were delivered whilst maintaining a focus on customers (customer NPS of +66 at OSB and +72 at CCFS) and we were included in
The Sunday Times 100 Best Companies to Work For list.

Incentive outcomes for 2019

The 2019 Executive Bonus Scheme was based 90% on the Business Balanced Scorecard, which measures corporate performance against financial, customer, quality and staff metrics and 10% on personal objectives. Targets for each measure were set and assessed by the Committee following the end of the financial year. As the Combination completed late in the year, performance was based on OSB alone, with the Committee having the ability to adjust the outcome to reflect the overall combined Group performance for the remainder of the year, if appropriate.

The Executive team delivered strong performance across the Business Balanced Scorecard with above-target levels of
performance in all categories other than the cost to income ratio and broker satisfaction. In particular, underlying profit before tax of £199.1m was achieved against a target of £196.9m (an increase of c.3% versus 2018), with an improved customer satisfaction score and low levels of complaints. There were also no ‘high severity’ operational incidents in the year and a low number
of overdue management actions and staff metrics for diversity and employee engagement were both achieved in full. As such, the Executive Directors earned 65.89% out of the 90% of bonus assessed against the scorecard.

As previously noted, given the Combination with CCFS completed late in the year, the scorecard was assessed based on OSB’s performance as a standalone entity. The Committee maintained discretion to adjust the outcome based on performance of the Group as a whole; however, having considered this, confirmed that the outcome did not require adjusting and was reflective of Group performance over the period. In combination with strong
performance against individual targets, the Committee determined that 75.89% of the bonus was earned by each of the CEO and CFO. Full details are provided on page 137. As in previous years, 50% of the bonus will be deferred into shares for three years.

The 2017 Award under the PSP will vest in March 2020 at 75.1% of maximum based on performance over the three-year performance period ending on 31 December 2019. As most of the three year performance period relates to the performance of OSB before the Combination, the earnings per share (‘EPS’) performance relates to OSB alone. The total shareholder return (‘TSR’) performance will naturally include the share price impact
of the transaction over the final three months of the performance period. Performance against the EPS targets exceeded the maximum threshold and so 100% of the EPS part of the award vested. The TSR of 37.4% placed OSB between the median and upper quartile of the FTSE 250 peer group and 50.2% of the TSR part of the award vested. Overall, the Committee is comfortable that there has been a clear and strong link between reward and performance and that discretion should not be exercised to adjust the incentive outcome.

Implementation of Policy in 2020

As explained above, the CEO’s salary will be increased from

£520,000 to £735,000, as the first stage of a planned increase; and the CFO’s salary will be increased from £350,300 to £500,000.

The pension contribution has been reduced from 13% to 8% of base salary under the new Policy, aligning the rate with the majority of the workforce.

The 2020 annual bonus will be subject to a maximum limit of 110% of salary and will be based on 90% of performance against the Business Balanced Scorecard and 10% on personal objectives. Across all measures there will be a strong focus on the successful integration of the two businesses. 50% of any bonus will be delivered in shares, which may not be sold for at least three years.

PSP awards of 110% of salary will be made to the Executive Directors with performance being measured over the period to 31 December 2022 based on TSR (35% weighting), EPS growth (35% weighting), return on equity (‘ROE’) (15% weighting), and as required by the regulations applicable to a Level 2 Firm, a newly- introduced risk-based measure (15% weighting). Furthermore,
at the time of vesting the Committee will assess whether the formulaic vesting outcome is aligned with the underlying
performance, risk appetite and individual conduct over the period.

The targets for each measure are set out in this report and the Committee is satisfied that these provide the appropriate

stretch, taking into account the business plan, external operating environment and market expectations.

Awards will vest 20% each year between three and seven years after grant, with each vested tranche subject to a one year holding period.

Chairman and Non-Executive Director fees

The Committee also reviewed and agreed the fees payable to the Chairman and Deputy Chairman following the Combination and these are set out on page 144 along with the details of the NEDs’ fees, which were agreed by the Board.

Consideration of shareholder views and response to the new UK Corporate Governance Code

The Committee undertook extensive engagement with shareholders during the review of the Policy and made several changes to the Policy following investor feedback.

The Committee has also considered the updated UK Corporate Governance Code (the ‘Code’) and updates to shareholder
and proxy advisor guidelines and we believe that the new Policy is fully in line with the Code requirements and the latest investor guidelines.

Consideration of employee policies and views

I am pleased to have been appointed as the NED representing the workforce on the Board. As a result, I regularly meet with employees, individually and through forums such as the Primary Talent Group, the Women’s Networking Forum and the newly established Workforce Advisory Forum, known as OneVoice, to understand their views and report those to the Board. Further details on the activities of OneVoice can be found on pages 146 and 147.

As part of the Policy review connected with the Combination, the Committee oversaw a review of pay and benefits across the Group to ensure coherence with the Executive Directors’ Policy and FCA Level 2 regulatory compliance.

Concluding remarks

I would like to welcome new members to the Committee; Noël Harwerth and Rajan Kapoor who have joined since completion  of the Combination; and Sarah Hedger who joined in March 2020. Rod Duke has stepped down from the Committee and I would like to thank him for the significant contribution he made to the formulation of these Policy proposals.

I look forward to your support for the binding resolutions to approve the new Remuneration Policy; the increase of the limit to variable pay to two times fixed pay and the advisory resolution to approve the Annual Report on Remuneration at the 2020 AGM.

Mary McNamara

Chair of the Group Remuneration Committee

19 March 2020


Remuneration Policy

This section describes our Directors’ Remuneration Policy, for which shareholder approval will be sought at the AGM on
7 May 2020 and will formally come into effect from that date. It is intended that this Policy will last the three financial years, 2020 to 2022.

Changes to the Policy

The following changes have been made to the Remuneration Policy.

Base salary

The salary review date will be changed from 1 April to 1 January, to align Executive Directors’ pay with the financial year.

Pension

The pension contribution rate (for incumbent and new Directors) has been reduced to 8% of base salary, in line with the rate applicable for the majority of the workforce.

Annual bonus

The maximum limit has been reduced from 150% to 110% of salary.

In line with the regulations applicable to a Level 2 Firm, the policy on deferral will be changed so that instead of 50% of any bonus being deferred in the form of an award over shares, which vest after three years, the shares will be subject only to a holding period for the same length of time. In the event of a
near maximum bonus there could be an additional requirement that part of this bonus would need to be deferred in line with the deferral arrangements for the PSP described below in order to comply with the FCA requirement that 60% of total variable pay must be deferred over a seven year period.

Performance Share Plan

The maximum value of PSP awards has been reduced from 200% to 110% of base salary.

Instead of PSP awards vesting after three years and then being subject to a two year holding period, awards will vest from the third anniversary of grant and in tranches of 20% over years three to seven. A one year holding period will apply following the vesting of each tranche.

Share ownership guidelines

A requirement has been added so that the CEO and CFO must retain shares equivalent to the in-service shareholding guideline requirement (250% of salary for the CEO and 200% for the CFO) or, if lower, the actual shareholding on cessation of employment, for two years after cessation of employment (other than in exceptional circumstances).

Clawback and malus

Enhanced provisions ensure that incentive payments may be recovered for up to seven years (ten years in exceptional circumstances).

Policy overview

This Policy has been prepared in accordance with the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, as amended in 2013. The Policy has been developed taking into account a number of regulatory and governance principles, including:

- The 2018 UK Corporate Governance Code

  • The regulatory framework applying to the Financial Services Sector (including the Dual-regulated firms Remuneration Code and provisions of CRD IV)
  • The executive remuneration guidelines of the main institutional investors and their representative bodies

Approach to designing the Remuneration Policy

The Committee is responsible for the development, implementation and review of the Directors’ Remuneration Policy. In addressing this responsibility the Committee works with management and external advisers to develop proposals and recommendations. The Committee considers the source of information presented to it, takes care to understand the detail and ensures that independent judgement is exercised when making decisions. The Group Risk Committee considers whether the Remuneration Policy and practices are in line with the risk appetite and the Group Audit Committee confirms incentive plan performance results, where appropriate.

The Code sets out principles against which the Committee should determine the Remuneration Policy for Executives. These are shown in the first column of the table below, together with the Committee’s approach, in the second column:

Principle Committee approach
Clarity remuneration arrangements should be transparent and promote effective engagement with shareholders and the workforce.
  • We aim to set out our approach to remuneration in this report as transparently as possible.
  • We will engage with our Workforce Advisory Forum (OneVoice) to explain the alignment of the Executive Director Remuneration Policy with that of the workforce.
Simplicity remuneration structures should avoid complexity and their rationale and operation should be easy to understand.
  • Within the required regulatory framework and in line with investor guidance, we have structured the Remuneration Policy to be as simple as possible.
  • We have a simple policy offering pension at the same rate as employees, an annual bonus plan which cascades to most employees and, for senior employees, performance shares to provide alignment with longer-term performance.
  • There is however, a degree of complexity required for Executive Director packages to ensure a robust link to performance and to avoid reward for failure and to comply with investor and Code requirements.
Risk remuneration arrangements should ensure reputational and other risks from excessive rewards, and behavioural risks that can arise from target-based incentive plans, are identified and mitigated. } We have mitigated these risks through careful policy design, including long-term performance measurement, the use of specific risk-based measures, deferral and shareholding requirements (including post cessation of employment) and discretion and clawback provisions if incentive payment levels are inappropriate.
Predictability the range of possible values of rewards to individual directors and any other limits or discretions should be identified and explained at the time of approving the Policy. } We look carefully each year at the range of likely performance outcomes for incentive plans when setting performance target ranges for threshold, target and maximum payouts and would use discretion where necessary where this leads to an inappropriate pay outcome.
Proportionality the link between individual awards, the delivery of strategy and the long-term performance of the Company should be clear. Outcomes should not reward poor performance.
  • Incentive plans are determined based on a proportion of base salary so there is a sensible balance between fixed pay and performance-linked elements.
  • There are provisions to override the formula-driven outcome of incentive plans deferral and clawbacks to ensure that poor performance is not rewarded or if incentive payments are too high for the performance delivered, in the view of the Committee.
  • As illustrated by the chart showing our TSR performance and historic CEO remuneration on page 140, we believe that there has been a strong link between Directors’ pay
and performance.
Alignment to culture – incentive schemes should drive behaviours consistent with company purpose, values and strategy. } The Business Balanced Scorecard used for the annual bonus is based on a wide range of measures linked to financial performance, customer, quality and employees,
to ensure that payments are aligned to Company culture and values.
} Bonus plans operate widely throughout the Company and are approved by the Committee to ensure consistency with Company purpose, values and strategy.

How the views of employees and shareholders are taken into account

The Committee does not formally consult directly with employees on Executive pay but receives updates in relation to the remuneration structure throughout the Group and salary and bonus reviews each year. As set out in the policy table, in setting remuneration for the Executive Directors, the Committee takes note of the overall approach to reward for employees in the Company and salary increases will ordinarily be in line (in percentage of salary terms) with those of the wider workforce. Thus, the Committee is satisfied that the decisions made in relation to Executive Directors’ pay are made with an appropriate understanding of the
wider workforce.

The Committee undertook extensive engagement with shareholders during the review of the Policy. The Committee will seek to engage with major shareholders and the main shareholder representative bodies and proxy advisory firms when it is proposed that any material changes are to be made to the Remuneration Policy or its implementation. In addition, we will consider any shareholder feedback received in relation to the AGM.

The Remuneration Policy for Executive Directors

The table below and accompanying notes describe the Policy for Executive Directors.

 

Element
Purpose and link to strategy Operation and performance conditions  

Maximum
Salary To reward Executives for the role and duties required.

Recognises individual’s experience, responsibility and performance.
Paid monthly.

Base salaries are usually reviewed annually, with any changes usually effective from 1 January.

No performance conditions apply to the payment of salary. However, when setting salaries, account is taken of an individual’s specific role, duties, experience and contribution to the organisation.

As part of the salary review process, the Committee takes account of individual and corporate performance, increases  provided  to the wider workforce and the external market for UK listed companies both in the financial services sector and across all sectors.
Increases will generally be broadly in line with the average of the workforce. Higher increases may be awarded in exceptional circumstances such as a material increase in the scope of the role, following the appointment of a new Executive (which could also include internal promotions) to bring an initially below-market package
in line with the market over time or in response to market factors.
Benefits To provide market competitive benefits to ensure the
well-being of employees.
The Company currently provides:
  • car allowance
  • life assurance
  • income protection
  • private medical insurance
  • other benefits as appropriate for the role
There is no maximum cap on benefits,
as the cost of benefits may vary according to the external market.
Pension To provide a contribution to retirement planning. Directors may participate in a defined contribution plan, or, if they are in excess of the HM Revenue & Customs (‘HMRC’) annual or lifetime allowances for contributions, may elect to receive cash in lieu of all or some of such benefit. In line with the rate receivable by the majority of the workforce, which is currently 8% of salary.
Annual bonus To incentivise and reward individuals for the achievement of pre-defined, Committee-approved, annual financial, operational and individual objectives which are closely linked to the corporate strategy. The annual bonus targets will have a 90% weighting based on performance under an agreed balanced scorecard which includes an element of risk appraisal. Within the scorecard, at least 50% of the bonus will be based on financial performance. 10% of the bonus will be based on personal performance targets.

The objectives in the scorecard, and the weightings on each element will be set annually, and may be flexed according to role. Each element will be assessed independently, but with Committee discretion to flex the payout (including to zero) to ensure there is a strong
link between payout and performance. On top  of this, there is a general discretion to adjust the outturn to reflect other exceptional factors at the discretion of the Committee.

50% of any bonus earned will be delivered in shares, subject to a three year holding period.
In exceptional circumstances of high bonus payments there may be a requirement to defer a proportion of bonus with vesting staggered over three to seven years, in line with the deferral arrangements for the PSP described below.

Updated clawback/malus provisions apply, as described in note 1 overleaf.
The maximum bonus opportunity is 110% of salary per annum.

The threshold level for payment is up to 25% of maximum for any measure.

Remuneration Policy 

 

Element
Purpose and link to strategy Operation and performance conditions  

Maximum
Performance Share Plan To incentivise and recognise execution of the business strategy over the longer term.

Rewards strong financial performance over a sustained period.
PSP awards will typically be made annually at the discretion of the Committee, usually following the announcement of full year results.

Usually, awards will be based on a mixture of internal financial performance targets, risk- based measures and relative TSR. At least 50% of the PSP award will ordinarily be based on financial and relative TSR metrics.

The performance targets will usually be measured over three years.

Any vesting will be subject to an underpin, whereby the Committee must be satisfied;
(i) that the vesting reflects the underlying performance of the Company; (ii) that the business has operated within the Board’s risk appetite framework; and (iii) that individual conduct has been satisfactory. On top of this, there is a general discretion to adjust the outturn to reflect other exceptional factors at the discretion of the Committee.

Awards granted after 1 January 2020  will vest  in five equal tranches of 20%, following the Committee’s determination of performance and annually thereafter. At the time each tranche vests, a one year holding period will apply. (Awards granted before this date will vest
in accordance with the terms of the previous Policy).

Clawback and malus provisions apply as described in note 1 below.
The maximum PSP grant limit is 110% of salary in respect of grants in any financial year.

The threshold level for payment is 25% for any measure.
All-employee share plan (Sharesave Plan) All employees, including Executive Directors, are encouraged to become shareholders through the operation of an all-employee share plan. Tax-favoured plan under which regular monthly savings may be made over a three or five year period and can be used to fund the exercise of an option, where the exercise price is discounted
by up to 20%.
Maximum permitted savings based on HMRC limits.
Share ownership guidelines To increase alignment between Executives and shareholders. Executive Directors are expected to build and maintain a minimum holding of shares.

Executive Directors must retain at least 50% of the shares acquired on vesting of any share awards (net of tax) until the required holding is attained.

On cessation of employment, Executive Directors must retain the lower of the in-service shareholding requirement, or the Executive Directors’ actual shareholding, for two years.
At least 250% of salary for the CEO and at least 200% of salary for the CFO or such higher level as the Committee may determine from time to time.

The net of tax value of any unvested deferred awards (which are not subject to any future performance condition) may count towards the definition of a shareholding for this purpose.

      1.     Clawback and malus provisions apply to both the annual bonus, including amounts deferred into shares, and PSP awards. These provide for the recovery of incentive payments within seven years in the event of; (i) a material misstatement of results, (ii) an error, (iii) a significant failure of risk management, (iv) regulatory censure, (v) in instances of individual gross misconduct, (vi) corporate failure, (vii) reputational damage or (viii) any other exceptional circumstance as determined by the Board. A further three years may be applied following such a discovery, in order to allow for the investigation of any such event. In order to effect any such clawback, the Committee may use a variety of methods: withhold deferred bonus shares, future PSP awards or cash bonuses, or seek to recoup cash or shares already paid.


Choice of performance measures for Executive Directors’ awards

The use of a balanced scorecard for the annual bonus reflects the balance of financial and non-financial business drivers across the Company. The combination of performance measures ties the bonus plan to both the delivery of corporate targets, risk measures and strategic/personal objectives. This ensures there  is an appropriate focus on the balance between financial and non-financial targets and risk, with the scorecard composition being set by the Committee from year to year depending on

the corporate plan.

The PSP is based on a mixture of financial and risk measures and relative TSR, in line with our key objectives of sustained growth in earnings leading to the creation of shareholder value over the long term within an appropriate risk framework. TSR provides
a close alignment between the relative returns experienced by our shareholders and the rewards to executives.

There is an underpin in place on the PSP to ensure that the payouts are aligned with underlying performance, financial and non-financial risk and individual conduct.

Annual bonus and PSP targets are set taking into account the business plans, shareholder expectations, the external market and regulatory requirements.

In line with HMRC regulations for such schemes, the Sharesave Plan does not operate performance conditions.

How the Group Remuneration Committee operates the variable pay policy

The Committee operates the share plans in accordance with their respective rules, the Listing Rules and HMRC requirements where relevant. The Committee, consistent with market practice, retains discretion over a number of areas relating to the operation and administration of certain plans, including:

- Who participates in the plans.

  • The form of the award (for example, conditional share award or nil cost option).
  • When to make awards and payments; how to determine the size of an award; a payment; and when and how much of an award should vest.
  • Whether share awards will be eligible to receive dividend equivalents and the method of calculation.
  • The testing of a performance condition over a shortened performance period.
  • How to deal with a change of control or restructuring of the Group.
  • Whether a participant is a good/bad leaver for incentive plan purposes; what proportion of an award vests at the original vesting date or whether and what proportion of an award may vest at the time of leaving.
  • How and whether an award may be adjusted in certain circumstances (e.g. for a rights issue, a corporate restructuring or for special dividends).
  • What the weighting, measures and targets should be for the annual bonus plan and PSP from year to year.


The Committee also retains the discretion within the Policy to adjust existing targets and/or set different measures for the annual bonus. For the PSP, if events happen that cause it to determine that the targets are no longer appropriate, an
amendment could be made so they can achieve their original intended purpose and ensure the new targets are not materially less difficult to satisfy.

Any use of the above discretions would, where relevant, be explained in the Annual Report on Remuneration and may, as appropriate, be the subject of consultation with the Company’s major shareholders.

OSB operates in a heavily regulated sector, the rules of which are subject to frequent evolution. The Committee therefore also retains the discretion to make adjustments to payments under this Policy as required by financial services regulations.

Conflicts of interest

The Committee ensures that no Director is present when their remuneration is being discussed and considers any potential conflicts prior to meeting materials being distributed and at the beginning at each meeting.

Awards granted prior to the effective date

Any commitments entered into with Directors prior to the effective date of this Policy will be honoured. Details of any such payments will be set out in the Annual Report on Remuneration as they arise.

Remuneration Policy for other employees

The Committee has regard to pay structures across the wider Group when setting the Remuneration Policy for Executive Directors and ensures that policies at and below the executive level are coherent. There are no significant differences in the overall remuneration philosophy, although pay is generally more variable and linked more to the long term for those at more senior levels. The Committee’s primary reference point for the salary reviews for the Executive Directors is the average salary increase for the broader workforce.

A highly collegiate approach is followed in the assessment of the annual bonus, with our corporate scorecard being used to assess bonus outcomes throughout the Group, with measures weighted according to role, where relevant.

Overall, the Remuneration Policy for the Executive Directors is more heavily weighted towards performance-related pay than
for other employees. In particular, performance-related long-term incentives are not provided outside of the most senior executive population as they are reserved for those considered to have the greatest potential to influence overall levels of performance.

Although PSPs are awarded only to the most senior managers in the Group, the Company is committed to widespread equity ownership and a Sharesave Plan is available to all employees. Executive Directors are eligible to participate in this plan on the same basis as other employees.

Illustrations of application of Remuneration Policy

The chart below illustrates how the composition of the Executive Directors’ remuneration packages (as it is intended the Policy will be implemented in 2020) would vary under various performance scenarios.

  1. Minimum performance assumes no award is earned under the annual bonus plan and no vesting is achieved under the PSP – only fixed pay (salary, benefits and pension are payable).
  2. At on-target, half of the annual bonus is earned (i.e. 55% of salary) and 25% of maximum is achieved under the PSP (i.e. 27.5% of salary).
  3. At maximum, full vesting is achieved under both plans (i.e. 110% of salary under the bonus and PSP).
  4. As at maximum, but illustrating the effect of a 50% increase in the share price on PSP awards.

Other than as noted above, share price growth and all-employee share plan participation are not considered in these scenarios.

The terms and provisions that relate to remuneration in the Executive Directors’ service agreements are set out below. Service contracts are available for inspection at the Company’s registered office.

Provision Policy
Notice period 12 months on either side.
Termination payments A payment in lieu of notice may be made on termination to the value of the Executive Director’s basic salary at the time of termination. Such payments may be made in instalments and in such circumstances can be reduced to the extent that the Executive Directors mitigate their loss. Rights to DSBP and PSP awards on termination are shown below. The employment of each Executive Director is terminable with immediate effect without notice in certain circumstances, including gross misconduct, fraud or financial dishonesty, bankruptcy or material breach of obligations under their service agreements.
Remuneration Salary, pension and core benefits are specified in the agreements. There is no contractual right to participate in the annual bonus plan or to receive long-term incentive awards.
Post-termination These include six months post termination restrictive covenants against competing with the Company; nine months restrictive covenants against dealing with clients or suppliers of the Company; and nine months restrictive covenants against soliciting clients, suppliers and key employees.
Contract date Andy Golding 12 February 2020, April Talintyre 12 February 2020.
Unexpired term Rolling contracts.


Payments for loss of office

On termination, other than for gross misconduct, the Executive Directors will be contractually entitled to salary, pension and contractual benefits (car allowance, private medical cover,

life assurance and income protection) over their notice period. The Company may make a payment in lieu of notice equivalent to the salary for the remaining notice period. Payments in lieu of notice would normally be phased and subject to mitigation, by offsetting the payments against earnings elsewhere.

The Company may also pay reasonable legal costs in respect of any compromise settlement.

Annual bonus on termination

There is no automatic/contractual right to bonus payments and the default position is that the individual will not receive a payment. The Committee may determine that an individual is a ‘good leaver’ and may elect to pay a pro-rated bonus for the period of employment at its discretion and based on full year performance.

Deferred bonus awards on termination

In respect of outstanding awards made under the previous policy, deferred bonus awards normally lapse on termination of employment. However, in certain good leaver situations, awards may instead vest on the normal vesting date (or on cessation of
employment in exceptional circumstances). Good leaver scenarios include; (i) death; (ii) injury, ill-health or disability; (iii) retirement with the agreement of the Company; (iv) redundancy; (v) the employing company ceasing to be a member of the Group; or (vi) any other circumstance the Committee determines good leaver treatment is appropriate. Shares which are subject to a holding period will ordinarily be released at the normal time. Where a portion of the annual bonus is required to be deferred in line with FCA regulations, the treatment on cessation will be in line with deferred awards made under the previous policy (as above).

Performance Share Plan awards on termination

Awards normally lapse on termination of employment. However, in certain good leaver situations, awards may vest on the normal vesting date and to the extent that the performance conditions are met. The Committee is, however, permitted under the PSP rules and FCA regulations to allow early vesting
of the award to the extent it considers appropriate, taking into account performance to date. Unless the Committee determines otherwise, awards vesting in good leaver situations will be pro- rated for time employed during the performance period. Shares which are subject to a post vesting holding period will ordinarily be released at the normal time.

Approach to recruitment and promotions

The ongoing remuneration package for a new Executive Director would be set in accordance with the terms of the Company’s approved Remuneration Policy.

On recruitment, the salary may (but need not necessarily) be set at a lower rate, with phased increases (which may be above
the average for the wider employee population) as the Executive Director gains experience. The salary would in all cases be set
to reflect the individual’s experience and skills and the scope of the role. Annual bonus and PSP award levels would be in line with the Policy.

The Company may take into account and compensate for remuneration foregone upon leaving a previous employer using cash awards, the Company’s share plans or awards under Listing Rule 9.4.2 as may be required. This would include taking into account the quantum foregone; the extent to which performance conditions apply; the form of award; and the time left to
vesting. These would be structured in line with any regulatory requirements (such as the PRA Rulebook).

For all appointments, the Committee may agree that the Company will meet certain appropriate relocation costs.

For an internal appointment, including the situation where an Executive Director is appointed following corporate activity, any variable pay element awarded in respect of their prior role would be allowed to pay out broadly according to its terms.

Should an individual be appointed to a role (Executive or
Non-Executive) on an interim basis, the Company may provide additional remuneration, in line with the Policy for the specific role, for the duration the individual holds the interim role.

For the appointment of a new Chairman or NED, the fee arrangement would be in accordance with the approved Remuneration Policy in force at that time.

External appointments

Executive Directors may accept one directorship of another company with the consent of the Board, which will consider the time commitment required. The Executive Director would normally be able to retain any fees from such an appointment.

The Remuneration Policy for the Chairman and Non-Executive Directors

Element Purpose and link to strategy Operation Maximum opportunity
Fees To attract and retain a high-calibre Chairman and NEDs by offering a market competitive fee. The Chairman and NEDs are entitled to an annual fee, with supplementary fees payable for additional responsibilities including the Chair of the Group Audit, Group Nomination and Governance, Group Remuneration and Group Risk Committees and for acting as
the SID.

Fees are reviewed periodically.

The Chairman and NEDs are entitled to reimbursement of travel and other reasonable expenses incurred in the performance of their duties.
There is no prescribed maximum annual increase. The Committee is guided by the general increase in the non-executive market but on occasion may need to recognise, for example, change in responsibility and/or time commitments.

Letters of appointment

The NEDs are appointed by letters of

Provision
appointment that set out their duties and responsibilities. The key terms are:

Policy
Period of appointment Initial three year term, subject to annual re-election by shareholders. On expiry of the initial term and subject to the needs of the Board, NEDs may be invited to serve a further three years. NEDs appointed beyond nine years will be at the discretion of the Group Nomination and Governance Committee.
Notice periods Three months on either side.

The appointments are also terminable with immediate effect and without compensation or payment in lieu of notice if the Chairman or NEDs are not elected or re-elected to their position as a Director of the Company by shareholders.
Payment in lieu of notice The Company is entitled to make a payment in lieu of notice on termination.

Letters of appointment are available for inspection at the Company’s registered office. The effective dates of the current NEDs’ appointments are shown in the table below.

Non-Executive Director Date of appointment
Graham Allatt 6 May 2014
Noël Harwerth 4 October 2019 (appointed to the CCFS Board in June 2017)
Sarah Hedger 1 February 2019
Rajan Kapoor 4 October 2019 (appointed to the CCFS Board in September 2016)
Mary McNamara 6 May 2014
David Weymouth 1 September 2017


2019 Annual Report on Remuneration

Introduction

This section sets out details of the remuneration received by Executive Directors and NEDs in respect of the financial year ended 31 December 2019. This Annual Report on Remuneration will, in conjunction with the Annual Statement of the Committee Chair on pages 122 to 126, be proposed for an advisory vote by shareholders at the forthcoming AGM to be held on 7 May 2020. Where required, data has been audited by Deloitte and this is indicated where applicable.

Membership

The Committee met seven times during the year. Mary McNamara (Chair), Rod Duke and David Weymouth were members of the Committee throughout the year. Sir Malcolm Williamson, Noël Harwerth and Rajan Kapoor joined the Committee on 4 October 2019 following completion of the Combination. Sarah Hedger joined the Committee in March 2020. Rod Duke and Sir Malcolm Williamson ceased to be Directors from 4 February 2020. The attendance of individual Committee members is set out in the Corporate Governance Report.

The Board considers each of the members of the Committee to be independent in accordance with the UK Corporate Governance Code.

Responsibilities

The Committee’s responsibilities are set out in its terms of reference, which are available on the Company’s website. In summary, the responsibilities of the Committee include:

- Pay for employees under the Committee’s scope:

  • Setting the Remuneration Policy.
  • Determining total individual remuneration (including salary increases, bonus opportunities and outcomes and LTIP awards).
  • Ensuring 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.
  • Approving the design of, and determining targets for, any performance-related pay schemes operated by the Company and approving total payments made under such schemes.

Employees under the Committee’s scope include Executive Directors, the Chairman of the Board, the Company Secretary and all employees that are identified as Material Risk Takers for the purposes of the PRA and FCA’s Dual Regulated Remuneration Code (‘Code Staff’).


Key matters considered by the Committee

Key issues reviewed and discussed by the Committee during the year included:

- Significant review of the Remuneration Policy
- Extensive consultation with major investors
-  Combination-related  remuneration matters
- Leaving arrangements for senior employees

  • All business as usual matters for employees under the Committee’s scope:
    • Review and approve salary increases
    • Review and approve bonus awards
    • Determine the grants under the PSP

- Consider and approve the Directors’ Remuneration Report.

Advisers to the Committee

Korn Ferry provided independent advice to the Committee during 2019, having been appointed following a competitive tender process in 2017. The total fees paid to Korn Ferry in 2019 were

£238,632 and were charged on a time and materials basis. This figure includes a significant amount in respect of support for the Committee and management in relation to the Combination.

Korn Ferry has no other connection with the Group and therefore the Committee is satisfied that it provides objective and independent advice. Korn Ferry is a member of the Remuneration Consultants Group and abides by the voluntary code of conduct of that body, which is designed to ensure objective and independent advice is given to remuneration committees.

The Committee consults with the CEO, as appropriate, and seeks input from the Group Risk Committee to ensure that any
remuneration or pay scheme reflects the Company’s risk appetite and profile and considers current and potential future risks.

The Committee also receives input on senior executive remuneration from the CFO and Group HR Director. The Group General Counsel and Company Secretary acts as Secretary to the Committee and advises on regulatory and technical matters, ensuring that the Committee fulfils its duties under its terms
of reference.

No individual is present in discussions directly relating to their own pay.

Directors’ pay outcomes for 2019

Remuneration and fees payable for 2019 – (audited)

The table below sets out a single figure for the total remuneration received by each Executive Director and NED for the years ending 31 December 2019 and 31 December 2018.

 

 

Executive Directors
 

 

Year
 

Basic salary
£’000
 

Taxable benefits1
£’000
 

Pension
£’000
 

Annual bonus paid2
£’000
Amount bonus
deferred2
£’000
 

LTIP3
£’000
 

Total
£’000
Andy Golding 2019 516 21 67 296 296 413 1,609
  2018 501 21 65 347 347 321 1,602
April Talintyre 2019 347 16 45 199 199 219 1,025
  2018 336 16 44 232 232 227 1,087

1 Taxable benefits received include car allowance (CEO £20,000; CFO £15,000) and private medical cover.

  1. 50% of bonus is payable in cash and 50% in shares deferred for three years.
  2. The LTIP figure for the year ended 2018 has been restated based on the share price on vesting of £3.9652 for the 2016 PSP.
Total fees £’000 2018 2019
Chairman    
Sir Malcolm Williamson 63 1
David Weymouth 250 250 1
Non-Executive Directors    
Graham Allatt 89 91
Eric Anstee 83 88
Rod Duke 78 89
Margaret Hassall 63 71
Sarah Hedger 67 2
Mary McNamara 78 90
Directors appointed from CCFS    
Tim Brooke Noël Harwerth
26 3
31 3
Rajan Kapoor 29 3
Ian Ward 28 3
Former Directors    
Andrew Doman 22 4
Total 663 923 5

NEDs cannot participate in any of the Company’s share schemes and are not eligible to join the Company pension scheme.

  1. David Weymouth served as Chairman until 4 October 2019, his fee remained unchanged due to additional responsibilities; Sir Malcolm Williamson became Chairman from that date.
  2. Appointed to the Board on 1 February 2019.
  3. From completion on 4 October 2019.
  4. Ceased to be a Director on 10 May 2018.
  5. An additional amount of £5,000 was payable to each NED for significant extra time spent on matters relating to the Combination.


Executive bonus scheme:

As noted in the Statement from the Committee Chair, given that the Combination with CCFS completed late in the year, the Committee determined that the Business Balanced Scorecard should be assessed based on OSB’s performance as a standalone entity. The Committee however, retained the discretion to adjust the outcome based on performance of the Group as a whole. The performance is set out below. The Committee agreed that no adjustments were required and that the outcome was reflective of underlying performance.

2019 performance against the Business Balanced Scorecard

      Targets1        
 

Category
 

Key performance indicator
Threshold
(25%)
Budget (50%) Max (100%) Actual result Outcome
CEO
Outcome
CFO
Financial (50%) Underlying PBT £192.9m £196.9m £204.9m £199.1m 33.44% 33.44%
  All-in ROE 21.4% 22.4% 24.4% 23.2%    
  Cost to income ratio 31.0% 30.0% 28.0% 30.4%    
  Net loan book growth 16.2% 17.2% 19.2% 20.1%    
Customer (15%) Customer satisfaction 45 50 60 67 11% 11%
  Broker satisfaction 27.5 30 35 26.6    
  Complaints 0.8% 0.5% 0.1% 0.1%    
Quality (15%) Overdue actions 3 2 0 1 11.45% 11.45%
  Arrears 1.25% 1.0% 0.5% 0.96%    
  High-severity incidents 4 3 1 0    
Staff (10%) Diversity2 27.0% 28.0% 30.0% 30.9% 10% 10%
  Employee engagement3 3 4 6 7    
Personal (10%) Vary by executive – see section below         10% 10%
Total           75.89% 75.89%
  1. Targets – based on a sliding scale between threshold, target and maximum.
  2. Diversity – based on the gender diversity of the senior leadership team.
  3. Employee engagement – the employee engagement score represents the number of categories which showed improvement versus the prior year.

2019 personal performance:

The Executive Directors were allocated up to a maximum of 10% of their bonus based on their personal performance against agreed objectives.

The priorities for 2019 were identified in our 2018 Annual Report and objectives built around these. Performance against the objectives for both Executive Directors was outstanding, as was their overall leadership of the Bank.

The objectives set at the start of the year and the Committee’s assessment of performance against them are set out below:

  Objectives Key achievements
CEO Oversee the progression of all established 2019 strategic objectives in line with the operating plan Outstanding leadership in relation to the successful completion of the Charter Court transaction, whilst still also delivering against BAU objectives
  Maintain strong relationships with all regulators Open and honest relationship with regulators maintained throughout 2019. This was a year of exceptional regulator interactions in the context of the Combination transaction
  Continue to embed the OSB Mission, Vision and Values and the associated activities to positively impact on employee survey results. Outstanding leadership during a significant corporate transaction. Externally measured employee engagement increased
  Establish and maintain strong relationships with key investors, brokers and analysts Outstanding performance in relation to investor roadshows and securing investor support for the transaction, including with new shareholders following the completion of the Combination
  Undertake all prescribed and additional responsibilities allocated under the Senior Managers Regime All responsibilities delivered positively and proactively
  Consistently act as a positive ambassador for OSB at all times, demonstrating role model behaviours. Outstanding leadership in year of significant change
CFO Deliver all Board-approved BAU and strategic projects, with a particular personal focus on Data and MI and People-related initiatives Outstanding leadership in relation to the successful completion of the Charter Court transaction, which became the single most important strategic project of the year
  Complete feasibility assessment and project plan for Bankline Direct Feasibility and project plan completed
  Continued automation of regulatory process and successful go-live with new PRA templates Significant progress on automation of regulatory process including use of new template during a year when resources were otherwise diverted to the Combination transaction
  Delivery of a new procurement system to facilitate enhanced Opex reporting and efficiencies Delivered on time and on budget with new system operational by year end
  Continue to strengthen relationships
with shareholders and other stakeholders, including regulator
Outstanding performance in relation to investor roadshows and securing investor support for the transaction. Open and honest relationship with regulators maintained throughout 2019
  Effective oversight of the management of the Bank’s capital and funding covering accurate forecasting, maintenance of the capital and funding plans Step change in the Bank’s capital and funding forecasting and planning capabilities during 2019
  Successful 2018 year end and 2019 first half close and delivery to the market. Includes early finalisation of subsidiary statutory accounts Smooth delivery of OSB and pro forma combined Group accounts
  Consistently act as a positive ambassador for OSB at all times, demonstrating role model behaviours. Outstanding leadership in year of significant change

Based on this performance, the Committee determined that 10% of a possible 10% for the individual element of the bonus should be paid to the each of the CEO and CFO. The CEO and CFO therefore each earned 75.89% of maximum (114% of salary). Half of the bonus will be deferred into shares for three years.


Long-term incentive plan (audited)

The 2017 LTIP award was granted on 16 March 2017 and measured performance over the three financial years to 31 December 2019. Awards will vest after publication of this report, based on the EPS and TSR performance, at 75.1% of maximum, as set out below.
Given that the Combination with CCFS only completed approximately 33 months into a 36 month performance period, the Committee determined that the EPS should be assessed against OSB’s performance as if the transaction had not occurred (the adjustments to EPS were agreed by the Committee and the Chair of the Group Audit Committee).

 

 

 

Performance level
 

Percentage of that part of the award
vesting
 

 

EPS element (50% of total award)
 

 

EPS
performance
 

 

Vesting of EPS part
 

 

TSR (50% of
total award)
TSR
performance
versus FTSE 250
constituents
 

Vesting of TSR part (50% of total
award)
Below ‘threshold’ 0% Less than 6% CAGR 13.6% CAGR 100% Below median 74 out of 50.2%
‘Threshold’ 25% 6% CAGR     Median 176  
‘Stretch’ 100% 12% CAGR     Upper quartile    

The 2017 PSP awards will therefore vest as follows:

 

 

Executive Directors
Number of
shares granted
Number of
shares   due to vest
Number of
shares lapsed
Value from share price
increase 1
Total value
vesting
£’000 2
Andy Golding 143,544 107,801 35,743 £77,832 £413,093
April Talintyre 76,066 57,125 18,941 £41,244 £218,903
  1. Value of share price increase based on a £3.11 share price at the time of grant of the award, to the three-month average share price of £3.8320 to 31 December 2019.
  2. Value of shares based on a three-month average share price of £3.8320 to 31 December 2019. This value will be restated next year based on the actual share price on the date of vesting. Dividend equivalents are not paid under the Performance Share Plan.

The Committee is comfortable that the level of vesting is in line with underlying performance and shareholder experience over the performance period.

Executive pay outcomes in context

Percentage change in the remuneration of the CEO (audited)

The table below sets out the percentage change in base salary, value of taxable benefits and bonus for the CEO compared with the average percentage change for employees. For these purposes, UK employees who have been employed for over a year (and therefore eligible for a salary increase) have been used as a comparator group as they are the analogous population (based on service and location).

Average percentage change 2018–2019
   

Salary
Taxable benefits Annual bonus
CEO 3.02% 0% (14.7)%
UK employees 6.26% 0% 9.9%


Comparison of Company performance and CEO remuneration (audited)

The following table summarises the CEO single figure for total remuneration, annual bonus and LTIP pay-out as a percentage of maximum opportunity for the period between 2013 and 2019:

  2013 2014 2015 2016 2017 2018 2019
Andy Golding              
Annual bonus (as a percentage of maximum opportunity) 92.5% 92.63% 93.00% 88.75% 85% 91.75% 75.89%
LTIP vesting (as a percentage of maximum opportunity) 100% 50% 75.1%
CEO single figure of remuneration (£’000) 518 777 848 910 1,614 1,602 1,609


Total shareholder return

The chart below shows the TSR performance of the Company over the period from listing to 31 December 2019 compared to the performance of the FTSE All Share Index. This index is considered to be the most appropriate index against which to measure performance as the Company is a member of this index.

This graph shows the value, at 31 December 2019, of £100 invested in OneSavings Bank plc on admission (5 June 2014) compared with the value of £100 invested in the FTSE All Share Index on the same date. The other points plotted are the values at intervening financial year ends.

Source: Datastream (Thomson Reuters)

CEO pay ratios

The ratio of the CEO’s single figure of total pay to median employee pay is set out in the table below. The ratio has been calculated in accordance with methodology B as it is the same pay data for employees as is used for the Gender Pay Gap analysis. Full time equivalent pay for individuals that do not work full time has been calculated by increasing their pay pro rata to that of a full time individual. The median ratio has decreased between 2018 and 2019 as a result of a combination of factors, which result in the total
pay for the median individual within the workforce increasing, including positive changes to the Group’s pay policy and changes in the employee population between 2018 and 2019. There has been no change to the Company’s employment models between the two years. The decrease in the ratio between 2017 and 2018 was as a result of the above factors. Additionally, the total pay for the CEO decreased between 2017 and 2018. The median ratio is consistent with the pay, reward and progression policies within the Company.

CEO pay ratio 2017 2018 2019
Method B B B
CEO single figure 1,614 1,574 1,609
Upper quartile 62.1 58.4 63.5
Median 46.1 39.4 37.2
Lower quartile 24.8 21.9 26.2


 

2019
Basic salary
(£’000)
Total pay (£’000)
CEO 516.2 1,609
Lower quartile – Employee A 22.6 24.6
Median – Employee B 34.7 41.8
Upper quartile – Employee C 50.3 61.5


Relative importance of the spend on employee pay (audited)

The table below shows the Company’s total employee remuneration (including the Directors) compared to distributions to shareholders and operating profit before tax for the year under review and the prior year. In order to provide context for these figures, underlying operating profit as a key financial metric used for remuneration purposes has been shown.

  2018 2019
Total employee costs £43.6m £60.5m
Distributions to shareholders £35.7m £61.8m
Underlying profit before tax (PBT) £193.6m £199.1m
Total employee costs vs PBT 22.5% 30.4%
Average headcount 989 1,278
Average PBT per employee £195,753 £155,790

Other disclosures relating to 2019 executive remuneration


Scheme interests awarded during the financial year (audited)

The table below shows the conditional share awards made to Executive Directors in 2019 under the PSP and the performance conditions attached to these awards:

 

 

Executive
Face value of award (percentage of salary)  

Face value of
award
 

Number of shares1
Percentage of awards released for achieving threshold targets  

End of performance
period
 

Performance conditions (weighting)
Andy Golding

 

April Talintyre
150%

 

150%
£780,000

 

£525,450
199,959

 

134,703
 

25%
 

31 December 2021
EPS (40%)
TSR (40%)
ROE (20%)
  1. The number of shares awarded was calculated using a share price of £3.9008 (the average mid-market quotation for the preceding five days before grant on 14 March 2019).
  2. Performance conditions are; (i) 40% TSR versus the FTSE 250 (25% vesting for median performance increasing to maximum vesting for upper quartile performance); (ii) 40% EPS (25% vesting for growth in EPS of 5% per annum increasing to maximum vesting for 10% per annum); and (iii) 20% ROE (25% vesting for average ROE of 20% increasing to maximum vesting for an average of 25%). Financial performance conditions have been adjusted as a result of the Combination to ensure that they are no harder or easier to achieve than was originally intended when the targets were set. This is also the case for the 2018 awards. Full details will be provided in the relevant report at the end of the performance period.

All-employee share plans (audited)

 

 

 

Executive
 

 

 

Date of grant
 

 

 

Exercise price
 

Market price 31 December
2019
 

 

 

Exercisable from
 

 

 

Exercisable to
 

Number of options granted
Number of options as at 31 December
2019
Andy Golding 1 November 2019 £2.65496 £4.3340 1 December 2022 1 June 2023 6,779 6,779
April Talintyre 1 November 2019 £2.65496 £4.3340 1 December 2022 1 June 2023 6,779 6,779

Statement of Directors’ shareholdings and share interests (audited)

Total shares owned by Directors:
Interest in shares
 

Interest in share awards
 

Shareholding requirements
   

Beneficially owned at 1 January
2019
 

Beneficially owned at
31 December
2019
  Without performance conditions at 31 December
2019
Subject to performance conditions as at 31 December
2019
   

Shareholding requirement (percentage of basic salary)
 

Current shareholding (percentage of
basic salary) 1
Executive                
Andy Golding 680,429 512,941   194,916 523,942   250% 428% (Met)
April Talintyre 263,001 220,346   132,554 331,774   200% 273% (Met)
Non-Executive                
Eric Anstee 4,960 4,960            
Rod Duke 80,000 80,000            
Rajan Kapoor 8,970            
Mary McNamara 22,350 22,350            
Ian Ward 35,882            
David Weymouth 13,178 13,178            
Sir Malcolm Williamson 71,764            

1. Shareholding based on the closing share price on 31 December 2019 (£4.3340) and year end salaries.


External appointments

Andy Golding is a Director/Trustee of the Building Societies Trust Limited. He receives no remuneration for this position. Andy Golding was a member of the Financial Conduct Authority’s Small Business Practitioners Panel until his resignation on 17 October 2019.

Payments to departing Directors (audited)

During the year, the Company did not make any payments to past Directors; neither has it made any payments to Directors for loss of office.

How we will implement the Remuneration Policy for Directors in 2020

As set out in the Statement from the Group Remuneration Committee Chair, there will be significant changes in the Directors’ remuneration, largely driven by increased regulatory requirements as a Level 2 Firm under the PRA/FCA remuneration rules.

In particular, there has been a rebalancing of the package to comply with the regulations capping variable pay (i.e. bonus + PSP award) at two times fixed pay (salary + pension + benefits). As such, the CEO’s salary has been increased from £520,000 to £735,000, as the first stage of a planned increase and the CFO’s salary has been increased from £350,300 to £500,000. The pension contribution has been reduced from 13% to 8% of base salary, in line with the rate for the wider employee population. The opportunity under the annual bonus and the PSP has been reduced from 150% of salary to 110% of salary to ensure that variable pay is in line with the cap.

Annual bonus

The 2020 annual bonus will be subject to a maximum limit of 110% of salary. The performance measures have been set in line with the Business Balanced Scorecard. Accordingly, the balance of the metrics are as follows:

Financial Customer Quality Staff Personal objectives
50% of bonus opportunity 15% of bonus opportunity 15% of bonus opportunity 10% of bonus opportunity 10% of bonus opportunity
Underlying PBT All-in ROE
Cost to income ratio Net loan book growth
Customer satisfaction Broker satisfaction Complaints Overdue management actions

Arrears
High-severity incidents Regulatory compliance
Diversity

Employee engagement
Vary by executive

Details of objectives (and performance against these) will be disclosed retrospectively in next year’s report


Performance targets are considered to be commercially sensitive so will not be published in advance. However, there will be full disclosure of the targets set and the extent of their achievement in the 2020 Annual Report on Remuneration. The Committee may apply discretion to adjust the resultant bonus from the Business Balanced Scorecard if the result fails to reflect broader performance and the wider shareholder experience.

Half of any bonus earned will be paid in shares which cannot be sold for three years.


Performance Share Plan

PSP awards of 110% of salary will be made to the Executive Directors with performance being measured over the period to
31 December 2022. The performance conditions will be EPS (35% weighting), relative TSR (35% weighting), return on equity (15% weighting) and a new non-financial/risk-based metric (15% weighting).

At the time of vesting, the Committee will assess whether the formulaic vesting outcome is aligned with the underlying performance, risk appetite and individual conduct over the period.

The target range for EPS has been increased from the range used for the full year 2019 PSP award with the growth referenced off the combined pro forma full year 2019 EPS figure for the two businesses. The minimum threshold for the ROE target range has, however, been reduced slightly from a 20% average to a 19% average. This was to ensure delivery of the threshold, plan and maximum performance levels would result in appropriate payouts for the performance of the combined business, recognising that this target range and required performance would still remain market-leading against the banking sector. The Committee is comfortable that these provide the appropriate stretch, taking into account the business plan, external operating environment and market expectations.

 

 

Performance level
 

 

EPS element (35% of total award)
 

 

TSR element (35% of total award)
 

 

Return on equity (15% of total award)
 

 

Non-financial/risk scorecard (15% of total award)
Percentage of that part of the award
vesting
Below ‘threshold’ Less than 5% CAGR Below median Below 19% Commercially sensitive 0%
‘Threshold’ 5% CAGR Median 19%   25%
‘Stretch’ 12% CAGR Upper quartile 25%   100%
  Pro rata vesting in between the above points      

For the newly-introduced risk-based measure, the Committee will assess the risk management performance with regard to all relevant risks including, but not limited to, conduct, credit, funding, liquidity, market, operational and regulatory risk. There will be full disclosure of the Committee’s assessment on a retrospective basis.

Awards will vest 20% each year between three and seven years after grant, with each vested tranche subject to a one year holding period.

Share ownership guidelines

The CEO and the CFO are required to accumulate and maintain a holding in ordinary shares in the Company equivalent to no less than 250% of salary and 200% of salary respectively. This is calculated on the basis of the value of beneficially owned shares plus the net of tax value of deferred bonus shares or any other unvested share awards which are not subject to performance. Half of any vested share awards must be retained until the guideline is achieved. Based on the current share price, the CEO and CFO hold shares in excess of these levels. Under the new policy, the guidelines will apply for two years following cessation of employment

Chairman and Non-Executive Director fees

Following the completion of the Combination, the fees for the Chairman and NEDs were reviewed in light of the changed responsibilities. The NED fees for 2020 are as follows:

Base fees £’000
Chairman 300
Non-Executive Director 70
Senior Independent Director 20


Additional Board Committee fees Chair Member
Group Nomination and Governance Committee 20 5
Board Integration Committee n/a 5
Group Audit Committee 30 5
Group Remuneration Committee 30 5
Group Risk Committee 30 5
Group Models and Ratings Committee 10 5

Statement of voting at the Annual General Meeting

Shareholders were asked to approve the 2018 Annual Report on Remuneration at the 2019 AGM. The Directors’ Remuneration Policy was approved at the 2018 AGM. The votes received are set out below:

 

Resolution
 

Votes for
% of votes cast Votes against % of votes cast Total votes cast Votes withheld
To approve the 2018 Remuneration Report (2019 AGM) 184,483,824 91.42 17,322,608 8.58 201,806,432 1,003,684
To approve the Remuneration Policy (2018 AGM) 164,447,865 83.71 32,004,658 16.29 196,452,523 8,008,753

The Committee has undertaken extensive engagement throughout 2019 as the new policy has been formulated. The Committee has considered feedback and made changes in response to views expressed. The Committee has continued to engage with shareholders and has written to shareholders who voted against the Remuneration Policy in 2018 to understand their rationale, which related to the increase in incentive opportunity. In response, the Committee will continue to ensure that incentives are subject to stretching performance conditions commensurate with the overall level of remuneration payable.

Approval

This report was approved by the Board of Directors, on the recommendation of the Group Remuneration Committee, on 19 March 2020 and signed on its behalf by:

Mary McNamara

Chair of the Group Remuneration Committee

19 March 2020

Directors’ Report: Other Information

Share capital and rights attaching to shares

The Company had 445,443,454 ordinary shares of £0.01 each in issue as at 31 December 2019. 1,312,862 ordinary shares were issued during 2019; 65,124 at a price of £1.34; 5,516 at a price of £2.2658; 82,750 at a price of £2.40; 1,573 at a price of £3.1454 and 1,157,899 at £0.01. 199,643,055 ordinary shares were issued at a price of £0.01 per share for the Combination.

Further details relating to share capital can be found in note 42.

Without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares, any share in the Company may be issued with such rights (including preferred, deferred or other special rights) or such restrictions, whether
in regard to dividend, voting, return of capital or otherwise as the Company may from time to time by ordinary resolution determine (or, in the absence of any such determination, as the Directors may determine).

Authorities to allot and pre-emption rights

At the 2019 AGM, shareholders renewed the general authority for the Directors to allot up to £817,184 of the nominal value of ordinary shares of £0.01 each. In addition, shareholders gave authority for the Directors to grant rights to subscribe for, or to convert any security into regulatory capital convertible instruments up to £294,186 of the nominal value of ordinary shares equivalent to 12% of issued share capital.

Repurchase of shares

The Company has an unexpired authority to repurchase ordinary shares up to a maximum of 24,515,503 ordinary shares. The Company did not repurchase any of its ordinary shares during 2019 (2018: none).

Employee share schemes

The details of the Company’s employee share schemes are set out on pages 129 and 130 in the Directors’ Remuneration Report.

Results and dividends

The results for the year are set out in the Statement of Comprehensive Income on page 162. Our dividend policy for 2020 remains a payout ratio of at least 25% of underlying profit after taxation to ordinary shareholders. The Directors recommend the payment of a final dividend of 11.2 pence per share on 13 May 2020, subject to approval at the AGM on 7 May 2020, with an

ex-dividend date of 26 March 2020 and a record date of 27 March 2020. This is in addition to the 2019 interim dividend of 4.9 pence per share paid during the year (2018: 14.6 pence total dividend).

Directors and Directors’ interests

The names of the Directors who served during the year can be found in the attendance chart on page 102.

Directors’ interests in the shares of the Company are set out on page 142 in the Directors’ Remuneration Report. None of the Directors had interests in shares of the Company greater than 0.28% of the ordinary shares in issue. There have been no
changes to Directors’ interests in shares since 31 December 2019.

Equal opportunities

The Group is committed to applying its Diversity and Inclusion Policy at all stages of recruitment and selection. Short-listing, interviewing and selection will always be carried out without regard to gender, gender reassignment, sexual orientation, marital or civil partnership status, colour, race, nationality, ethnic or national origins, religion or belief, age, pregnancy or maternity leave or trade union membership. Any candidate with a disability will not be excluded unless it is clear that the candidate is unable to perform a duty that is intrinsic to the role, having taken into account reasonable adjustments. Reasonable adjustments to the recruitment process will be made to ensure that no applicant is disadvantaged because of his/her disability. Line Managers conducting recruitment interviews will ensure that the questions that they ask job applicants are not in any way discriminatory or unnecessarily intrusive. This commitment also applies to existing employees, with the necessary adjustments made, where there is a change in circumstances.

Employee engagement

Employees are kept informed of developments within the business and in respect of their employment through a variety

of means, such as employee meetings, briefings and the intranet. Employee involvement is encouraged and views and suggestions are taken into account when planning new products and projects. The Sharesave ‘save as you earn’ Scheme is an all-employee share option scheme which is open to all UK-based employees.
The Sharesave Scheme allows employees to purchase options by saving a fixed amount of between £5 and £500 per month over a period of either three or five years, at the end of which the options, subject to leaver provisions, are usually exercisable. The Sharesave Scheme has been in operation since June 2014 and is granted annually, with the exercise price set at a 20% discount of the share price on the date of grant.

During the year, a new Workforce Advisory Forum (known as OneVoice or the Forum) was established to gather the views of the workforce to enable the Board and Group Executive Committee to consider a broadly representative range of stakeholder perspectives to guide strategic decisions for the
future of the Company and its subsidiaries. The Forum consists of volunteer representatives from each of the various business areas, as well as permanent members consisting of a designated NED, Mary McNamara, a member of the Group Executive Committee, Jason Elphick and a representative from HR Management. Other NEDs and members of the Group Executive Committee are invited to attend meetings on a rotational basis.

The first OneVoice meeting was held in November 2019 and provided an introduction for the nominated employee representatives. In advance of this meeting, the employee

representatives held drop-in sessions within their business areas in order to engage with employees and identify topics impacting the workforce, of which it was felt the Board and Group Executive Committee should have an awareness. These topics were then raised at the November 2019 meeting and noted as future agenda items. It is anticipated that a similar process will be followed in advance of each subsequent meeting.

Greenhouse gas emissions

Information relating to greenhouse gas emissions can be found on page 84 in the Strategic Report.

Political donations

Shareholder authority to make aggregate political donations not exceeding £50,000 was obtained at the 2019 AGM. Neither the Company nor any of its subsidiaries made any political donations this year.

Notifiable interests in share capital

At 31 December 2019, the Company had received the following notifications of major holdings of voting rights pursuant to


  No. of ordinary shares  

% of issued share capital
Barclays Plc 29,199,962 6.56
Elliot Capital Advisors L.P. 52,937,640 11.90
Eleva Capital SAS 18,319,400 4.12
JPMorgan Asset Management (UK) Limited1 13,035,838 5.36
Merian Global Investors (UK) Ltd 73,911,283 16.64


  the requirements of Rule 5 of the Disclosure Guidance and Transparency Rules:

1. This notification was received in April 2017, no other notifications have been received since.


  No. of ordinary shares  

% of issued share capital
BlackRock, Inc.1 21,031,243 4.72
Elliot Capital Advisors L.P. 43,953,201 9.87
Merian Global Investors (UK) Ltd 65,938,917 14.80


  Since 31 December 2019, the Company received the following notifications:

1. BlackRock, Inc. also gave notice of financial instruments and financial instruments with a similar economic effect to qualifying financial instruments representing 1,192,067 (0.29 per cent) of voting rights.

Barclays Plc gave notice on 6 February 2020 that its shareholding fell below the notifiable threshold.


Annual General Meeting

Accompanying this report is the Notice of the AGM which sets out the resolutions to be proposed to the meeting, together with an explanation of each. This year’s AGM will be held at the offices of Slaughter and May, One Bunhill Row, London EC1Y 8YY on

7 May 2020. The meeting will start at 11am with registration from 10.30am.

Other information

Likely future developments in the Group are contained in the Strategic Report on pages 8 to 93.

Information on financial instruments including financial risk management objectives and policies including, the policy for hedging the exposure of the Group to price risk, credit risk, liquidity risk and cash flow risk can be found in the Risk review on pages 52 to 72.

Details on how the Company has complied with section 172 can be found throughout the Strategic and Directors’ Reports and on page 89.

Going concern statement

The Directors have undertaken a going concern assessment in accordance with ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting’, published by the Financial Reporting Council in September 2014.

As a result of this assessment, the Directors are satisfied that the Group and the Company have adequate resources to continue to operate as a going concern for a period in excess of 12 months from the date of this report and have prepared the financial statements on that basis. In assessing whether the going concern basis is appropriate, the Directors have considered the information contained in the financial statements, the latest business plan, profit forecasts and the latest working capital forecasts.

These forecasts have been subject to sensitivity tests, including stress scenarios relating to Coronavirus and Brexit. Having reviewed the ICAAP and ILAAP, the Directors are satisfied that the Group and the Company have adequate resources to continue in operational existence for a period in excess of 12 months.

Key information in respect of the Group’s SRMF, objectives and processes for mitigating risks, including liquidity risk, are set out in detail on pages 54 to 72.

Jason Elphick

Group General Counsel and Company Secretary

OneSavings Bank plc Registered number: 07312896
19 March 2020


Statement of Directors’ Responsibilities

in respect of the Annual Report and the financial statements


The Directors are responsible for preparing the Annual Report and the Group and parent Company financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Group and parent Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (‘IFRSs’ as adopted by the
EU) and applicable law and have elected to prepare the parent Company financial statements on the same basis.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent Company and of their profit or loss for that period. In preparing each of the Group and parent Company financial statements, the Directors are required to:

  • select suitable accounting policies and then apply them consistently;
  • make judgements and estimates that are reasonable, relevant and reliable;
  • state whether they have been prepared in accordance with IFRSs as adopted by the EU;
  • assess the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
  • use the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent Company’s transactions and disclose with reasonable accuracy at any time, the financial position of the parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the
preparation and dissemination of financial statements may differ from legislation in other jurisdictions.


Responsibility statement of the Directors in respect of the annual financial report

} the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

} the Strategic Report/Directors’ Report includes a fair review
of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description
of the principal risks and uncertainties that they face.

Each of the persons who is a Director at the date of approval of this report confirms that:

  • so far as the Director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and
  • they have taken all the steps they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.

Approved by the Board and signed on its behalf by:

Jason Elphick

Group General Counsel and Company Secretary

19 March 2020

Companies

OSB Group (OSB)
UK 100

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