This year's Remuneration Report for NEXT is the first prepared in accordance with the new regulations. Whilst its format has changed to reflect the greater complexity of the regulations, the approach of the Remuneration Committee has remained consistent with previous years.
We seek to avoid significant increases in base salaries and associated costs and prefer to offer annual and longer term incentives which reward strong business and financial performance, measured against challenging benchmarks and reflecting the experience of shareholders. During the year NEXT has achieved record pre-tax profits of £695m and EPS of 366.1p, representing annual growth of 11.8% and 23% respectively; over the past 3 years EPS have grown by a compound annual average of 18.2%. We consider that this consistently strong EPS performance fully justifies the bonuses and long term incentives earned by the executive directors and other senior executives during the year. This performance has also been aligned with shareholders as dividends have grown by a compound annual average of 18% and the share price has risen 215% from £19.94 to £62.80 over the past 3 financial years.
The Committee has addressed the following areas over the past year:
Annual bonus and base salaries
At the start of the year, the Committee set targets for EPS growth, details of which are shown in the Remuneration Policy table. This year's strong growth in EPS resulted in a maximum pay-out under the annual bonus for executive directors. Base salaries for executive directors were increased by 2% in February 2014 (having increased by 2.5% in 2012 and 2.0% in 2013), in line with wider company cost of living awards and our general approach of restraint.
Long Term Incentive Plan ("LTIP")
Since 2008 NEXT has granted smaller awards twice a year, rather than annually, and accordingly this year the Committee approved two further grants. In addition, two awards matured. Over the performance periods for these awards, i.e. between August 2010 to January 2014, NEXT's share price rose from £21.50 to £62.80 and its market capitalisation grew from £4.0 billion to £9.7 billion. £492m was paid in dividends and a further £894m was returned to shareholders through share buybacks. The LTIP for the three year performance period to July 2013 vested 100% when NEXT's TSR ranked fourth out of 21 companies in the comparator group and 100% of the LTIP for the three year performance period to January 2014 has also vested as NEXT's TSR ranked third in the comparator group.
The estimated total value of these two LTIPs is substantial (see the Single Total Figure of Remuneration table). However, as there was no change in the basis of grant, this is largely due to the 192% rise in share price over the performance periods. In 2011 we decided that the maximum value of LTIPs vesting for any participant in any one year, irrespective of the underlying strength of performance or share price growth, would be capped at £2.5m. The cap will be applied again this year and as a result Lord Wolfson's and Christos Angelides' LTIP payments are expected to be reduced by an estimated £1,097k and £762k respectively (based on the calculation method prescribed by the new regulations).
In recognition of wider investor concern over the complexity of some annual and long term incentive plans, the Committee decided that executive directors should only participate in the LTIP and will not be granted any further awards under the NEXT Share Matching Plan. Instead, the maximum value of LTIP awards granted to executive directors each year will now be 200% of base salary (previously 200% for Lord Wolfson and 150% for other executive directors), thereby consolidating the maximum value of awards that may otherwise be received if executive directors continued to participate in both plans. The combined level of awards for each executive director falls in consequence.
To further align the interests of executive directors with shareholders, the Committee determined that any LTIP awards granted to executive directors after January 2014 will be subject to the condition that any vesting on maturity will only be settled in shares and that, after payment of tax and NIC, the net shares received should ordinarily be retained for a period of two further years. Executive directors will retain dividend and voting rights during this holding period.
In light of the changes noted above, the Committee reviewed the cap on the maximum value of LTIPs vesting for any participant in any one year and decided it is appropriate to remove the cap for LTIP awards granted to executive directors after January 2014. The £2.5m cap will remain in force for LTIPs with performance periods ending in the financial years to January 2015 and 2016.
Share Matching Plan ("SMP")
Although the Committee decided that executive directors should no longer participate in the SMP, the Committee considers that the SMP still continues to meet its objectives for other members of the senior management team and intends to invite senior executives below Board level to participate in 2014. We closely monitor the level of pay-outs under the SMP and over the past 2 years we have made a number of changes to the original SMP which have reduced the amounts that can be invested as well as the maximum level of matching award.
The 2011 SMP will vest in full in April 2014, subject to the continued employment of participants. Lord Wolfson has waived his potential entitlement under the 2011 SMP (as he also did last year with his 2010 SMP) on the understanding that all NEXT employees who have been employed since April 2011 will share an equivalent amount by way of a special bonus in May 2014, pro rata to their annual salary. The estimated value of the amount waived by Lord Wolfson (based on the average NEXT share price over the last 2013/14 financial quarter of £56.47) is £3.8m.
EPS and performance measurement
The Committee reviews each year the basis and performance measures used for the annual bonus, LTIP and SMP. The performance measures for both the annual bonus and the SMP have hitherto been based solely on growth in EPS – pre-tax EPS for the annual bonus and fully diluted post-tax EPS for the SMP.
The principal reasons for using the EPS measure have been set out in previous Remuneration Reports. They are:
- it is consistent and transparent to participants and shareholders;
- NEXT is predominantly a single business selling products through a number of channels under the NEXT brand. No significant earnings are derived from uncorrelated businesses and therefore a group metric such as EPS is logical and consistent with strategy;
- EPS continues to be the core financial measure by which the Board assesses overall performance; and
- the use of EPS is complemented by the application of TSR and consideration of the general economic underpin condition for the LTIP.
As explained in previous years, we consider it right that the impact of share buybacks on EPS should be included in performance measurement as, for more than a decade, share buybacks have been one of NEXT's primary strategies in generating value for shareholders. Share buybacks are regularly considered by the Board and are subject to prior approval as to timing, price and volume. Shares are only bought after the Board is fully satisfied that the ability to invest in the business and to continue to grow the regular dividend would not be impaired. Following the Board's decision to set a minimum required return from any share buybacks (as described in detail in the Chief Executive's Review) and to make special dividend payments where the return cannot be met, the Committee felt that some changes were needed to the performance measure for the annual bonus. The Committee concluded that the basis of calculation for this purpose should incorporate an appropriate adjustment to reflect the benefit to shareholders from any special dividends paid in the period. This is in order to ensure that there is no unintentional reward or penalty for management arising from one means or another of returning value to shareholders. The Board will maintain the same robust discipline over the level of special dividends as it does with regard to share buybacks.
The policy vote
As referred to earlier, this report is split between a remuneration policy section and an annual report which sets out actual remuneration. Each section will be subject to a separate vote at the AGM. If approved, the policy section will become binding on the Board which means that payments outside the policy would be unauthorised. We believe that our policy, as set out in this report, strikes a balance between having the legal authority to make payments which we consider to be in shareholders' interests, whilst limiting the Committee's discretion appropriately. Our policy therefore focuses on our actual approach to pay but includes the required formal caps at higher levels than we envisage needing, so as to preserve some flexibility. The Committee believes that it has demonstrated an appropriately conservative approach to pay decisions over many years and I wish to reassure shareholders that we will continue to do so.
Each year the Committee carefully reviews the level of performance-related remuneration earned by the executive directors. The Committee considers that the remuneration earned is a reflection of NEXT's strong operating and financial performance over the past three years. Moreover, we believe that NEXT's remuneration strategy, and the structures implementing that strategy, have contributed positively to maintaining the stable and highly motivated management team at NEXT who have continued to deliver consistently strong performances for shareholders.
We pay close attention to ensuring that there is an appropriate balance in the remuneration structure between annual and long term rewards, as well as between cash and share-based payments, to ensure that the way NEXT remunerates its senior executives drives the right behaviours and rewards the right outcomes. We believe that the present weighting towards rewarding sustainable long term performance is well aligned with shareholders' interests. This is evident from the high proportion of directors' performance-related pay in the year that derived from growth in EPS and share price.
I hope very much that shareholders will support the Committee's continuing overall approach to remuneration and, on behalf of the Committee, I commend both the policy and our report to you.
Chairman of the Remuneration Committee