NEXT has again achieved record pre-tax profits and earnings per share (EPS). Underlying pre-tax profits of £622m were 9% higher than last year and underlying EPS of 298p were 16.6% higher. The key financial objective remains long term sustainable growth in EPS. Therefore EPS is used to determine the executive directors' annual bonus and the level of any entitlement under the Share Matching Plan (SMP). The Committee also assesses EPS performance and other factors in evaluating whether the general economic underpin test for the Company's Long Term Incentive Plan (LTIP) has been satisfied. The Committee considers that this strong EPS performance fully justifies the bonuses and long term incentives earned by the executive directors and other senior executives during the 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 annual bonus for executive directors of 99% of the maximum potential award. It should also be noted that, like last year, we excluded exceptional gains of £45m from this EPS calculation (2012: exceptional gains of £47m excluded).
Base salaries for executive directors were increased by 2.0% in February 2013 (having increased by 1.2% in 2011 and 2.5% in 2012) in line with wider company cost of living awards. We consider that increases in base salaries should continue to be restrained given the potentially significant multiplier effect of such increases on future costs.
Under the LTIP a variable percentage of a maximum number of shares granted at the start of each performance period can vest, depending on NEXT's relative TSR performance against a comparator group of some 20 other UK retailers. The maximum number of shares that may be granted is a percentage of each director's base salary, divided by NEXT's average share price over the three months prior to the start of the performance period. Details of grants and of the comparator group are set out in Part 3 of this report.
Since 2008 NEXT has made grants twice a year, rather than annually, and two awards matured in the year. Over the performance periods of these grants, i.e. between August 2009 to January 2013, NEXT's share price rose from 1705p to 4059p and market capitalisation grew from £3.4 billion to £6.5 billion, a further £855m was returned through share buybacks and £449m paid in dividends.
The LTIP that matured in July 2012 vested 96% when NEXT's TSR ranked fifth against the comparator group and 98% of the January 2013 LTIP is expected to vest as its TSR also ranked fifth against the comparator group. This vesting is subject to the Committee's review of the economic underpin performance condition in April.
The value of these two LTIPS's is high; this is largely due to the rise in the Company's share price over the performance periods as there was no increase in the maximum number of shares originally granted. Last year, we decided that the maximum value of LTIP's vesting for any participant in any one year should be capped at £2.5m and the Chief Executive's LTIP payments last year were reduced by £704k. This year the £2.5m cap will again be applied and, assuming the Committee confirms the grant maturing in January 2013 has vested, payments to Lord Wolfson and Christos Angelides will be reduced by an estimated £327k and £11k respectively.
After applying this cap, the total value to the executive directors of the two LTIPs is estimated at £7.5m, of which approximately 51% or £3.8m is attributable to the growth in share price over the performance periods.
Shareholders approved the SMP in 2010. The purpose of the plan is to encourage ownership of NEXT shares amongst executive directors and other senior executives, and thereby further align their interests with shareholders. For the 2010 grant, which is due to vest in June 2013, some 25 senior executives were able to reinvest part, or all, of their annual bonus in NEXT shares. Subject to growth in fully diluted EPS over three years, participants are eligible to receive matching shares for every share bought.
Fully diluted EPS for 2012/13 was 280.8p (excluding exceptional gains). This compares with 176.0p for 2009/10, and represents growth of 60% over the three year period. As a result of this strong performance, the 2010 SMP will vest in full in June 2013, subject to the continued employment of participants. Lord Wolfson has waived his potential entitlement under this SMP on the understanding that all NEXT employees who have been employed since January 2010 will share an equivalent amount by way of a special bonus in July 2013, pro rata to their annual salary. The estimated value of the amount waived by Lord Wolfson (based on the methodology proposed by BIS) is £2.4m. The estimated total pre-tax value for other executive directors is £4.6m, of which £2.1m (46%) derives from the growth in NEXT's share price since buying their SMP shares.
Total performance-related remuneration
The aggregate performance-related remuneration of the executive directors has increased from £8.7m last year to approximately £9.9m (see Directors' Remuneration and Long Term Incentive Plan). This remuneration is directly linked to strong profits and EPS growth, which have been reflected in NEXT's increased share price and therefore the value of shares in the LTIP.
The Remuneration Committee has carefully reviewed the level of performance-related remuneration earned by the executive directors. The Committee considers that it is a strong reflection of NEXT's operating and financial performance over the past three years and that it is aligned with the financial interests of shareholders generally.
Additional remuneration disclosures
The tables below give a single figure for total remuneration, split between fixed and performance-related elements, for the current and previous years and are based on methodologies proposed by BIS which differ from current regulations:
|Base pay||Performance-related pay|
|Annual bonus||LTIP3||Share |
|Base pay||Performance-related pay|
Measurement bases for elements of total remuneration
- Pension values are calculated using the HMRC method proposed by BIS, i.e. 20 times the post-inflation benefit for defined benefit pensions. It does not necessarily represent the economic value of the pension accrual and is not immediately available to the relevant director. The increase in pension values for Lord Wolfson and Christos Angelides over the two financial years is entirely due to the effect of inflation and not to any change in the underlying accrued annual pre-inflation benefit. Where the accrued value is negative, a value of zero is used.
- Supplements of 15% of base salary are paid in lieu of pension provision after the directors became deferred members of the defined benefit section of the NEXT Pension Plan. Andrew Varley and David Keens received this supplement from April and June 2011 respectively and Lord Wolfson and Christos Angelides from November 2012.
- LTIP values for 2012/13 comprise the actual value of awards that have vested and been paid for the performance period ending in July, together with the estimated value of awards that will vest for the performance period ending in January, based on the average NEXT share price over the last financial quarter. For 2011/12 these are the actual value of the LTIP awards.
- SMP values for 2012/13 assume a maximum vesting in June 2013 and are based on the average NEXT share price over the last financial quarter. As detailed above, Lord Wolfson has waived his potential entitlement to the June 2010 SMP which will mature in June 2013.
We continue to focus on the alignment of executive remuneration and long term growth in shareholder value. The graph below charts total annual remuneration of Lord Wolfson against TSR over the last 10 years and shows that TSR grew by 430% more than the Chief Executive's remuneration, or by 290% excluding the SMP waiver.
10 year CEO Pay and NEXT TSR
Other Remuneration Committee highlights
In addition, during the year we determined the following:
- EPS growth targets for executive directors' annual bonus for 2013/14 and review of consistency with bonus targets for other NEXT staff.
- Additional eligibility criteria for participation in future SMP investments whereby participants who sell their investment shares prior to or after a new SMP is made will have restrictions placed on the level of investment they can make or the number of matching shares that can vest.
- Introduction of a minimum NEXT shareholding for all executive directors; the Chief Executive is required to hold shares with a value at least 1.5 times pre-tax salary, with other executive directors holding shares equal to their annual salary. All executive directors currently exceed these requirements. New executive directors would have up to 5 years to achieve the required holding.
- In line with changes to the defined benefits section of the NEXT Group Pension Plan, the pension entitlements of Lord Wolfson and Christos Angelides under the unfunded unapproved pension arrangement have been amended to freeze the accrual of future benefits under the unfunded arrangement based on their base salaries at 31 October 2012. From that date, Lord Wolfson and Mr Angelides have received an annual salary supplement of 15% of their base salary, which does not attract bonus.
The Committee believes 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.