Part 2: remuneration strategy and policy Information not subject to audit

The Committee's objective is to ensure that the remuneration paid to senior executives is appropriate in both amount and structure, is directly linked to the Company's annual and longer term performance and in alignment with the interests of shareholders. We believe that stable and transparent remuneration structures are key elements in a fair system for rewarding personal and collective contribution across the business. There are bonus structures throughout the Company, including Head Office, stores, call centres and warehouses. The focus is on ensuring that a competitive and appropriate base salary is paid to directors and senior managers, together with incentive arrangements that are:

  • aligned with shareholders' interests and with long term business strategies;
  • measured against challenging benchmarks, including both absolute financial targets (which are set in advance) and relative share price performance;
  • a mix of annual and three year performance periods;
  • paid in a combination of cash and shares; and
  • transparent and without 'soft' non-financial targets which could otherwise allow undue discretion to award bonuses that do not reflect actual financial performance.

Pay and employment conditions elsewhere in the Group are considered to ensure that any differences for directors are justified. Remuneration policy does not conflict with the Company's approach to environmental, social and corporate governance matters and we believe the current arrangements do not encourage directors to take undue business risks.

We aim to maintain a stable remuneration structure whereby directors and senior management know at the start of each year the potential rewards available to them, and the performance thresholds, without awarding significant increases in base salaries. Over the past three years, general salary levels for all grades across NEXT, including directors, have risen by an annual average rate of 1.9%. Individual merit awards are only given after a careful assessment of personal performance. No executive director has received a merit or promotion award during the last three years. For the current year, base salaries across NEXT and for directors will rise by 2.0%, which is again below the level of inflation.

We give careful consideration 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. We recognise that corporate performance and share price performance may not be correlated in any single accounting period. Notwithstanding this, 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, as opposed to increases in salaries or annual bonus.

EPS and performance measurement

The Committee reviews each year the basis of annual bonus and performance thresholds for the SMP. We have again concluded that EPS remains the most appropriate measurement for the following reasons:

  • We have used EPS as the determining measurement for many years; it is therefore consistent and transparent to participants and shareholders. The Committee will exercise discretion if required to adjust EPS to reflect what it considers to be a fairer outcome for shareholders and executives. Thus, last year the Committee decided to exclude from the calculation of EPS the exceptional profit achieved on the sale of Ventura and the proceeds of a refund of VAT. This year we have excluded the exceptional profit on the sale of a development property and the accounting gain resulting from changes to the defined benefit pension scheme.
  • 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 in determining annual bonuses and the SMP is complemented by the application of TSR for the LTIP.

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 satisfied that the ability to invest in the business and to continue to grow the dividend would not be prejudiced. Consistent with the clear focus on long term growth in EPS, the Board takes great care to manage the dilutive impact on shareholders of the various share-based schemes available to directors and other employees. The Company regularly purchases shares in the market and holds them in NEXT's Employee Share Option Trust (ESOT) for reissue to satisfy option exercises and other share-based payments.

Remuneration policy table

The following table summarises the objectives and policies with regard to each of the elements of executive remuneration and the approach to payments on external recruitment and termination.

Element
of pay
Purpose and link to strategyOperationMaximum potential valuePerformance targetsChanges for 2012 and 2013
SalaryTo provide a satisfactory base salary within a total package comprising salary and performance-related pay. Performance-related components and certain benefits are calculated by reference to base salary. The level of salary broadly reflects the value of the individual, their role, skills and experience.Reviewed annually, effective February. The Committee focuses particularly on ensuring that an appropriate base salary is paid to directors and senior managers. The Committee considers salaries in the context of overall packages with reference to market data, individual experience and performance, and the level and structure of remuneration for other employees and the external environment. External benchmarking analysis is occasionally undertaken.There is no guaranteed or maximum annual increase. The Committee considers it important that base salary increases are kept under tight control given the potential multiplier effect of such increases on future costs. In the last 3 years, salaries have been increased in line with the wider company cost of living awards.Not applicableIn line with the current policy, base salaries of the executive directors increased by 2.0% in February 2013, in line with the wider company cost of living awards.
The base salaries for the executive directors with effect from February 2013 will be:
£'000
Lord Wolfson729
Christos Angelides529
David Keens487
Andrew Varley362
Annual bonusTo incentivise annual delivery of stretching financial goals. Provides focus on the Company's key financial objective of sustainable growth in EPS.
To provide a retention element in the case of the Chief Executive as any annual bonus in excess of 100% of base salary is payable in shares, deferred for a period of two years and subject to forfeiture if he voluntarily resigns prior to the end of that period.
Based on stretching pre-tax EPS targets set annually, taking account of a range of factors including the company's own internal budgets and the wider background of the UK economy. Pre-tax EPS has been chosen as the basic metric to avoid executives benefitting from external factors such as reductions in the rate of corporation tax. The philosophy has been to structure targets such that there has to have been growth in EPS before any annual bonus is payable to executive directors. By contrast we have set the threshold for staff bonuses at a lower level than for directors. We have the right to apply discretion in the interests of fairness to both shareholders and executives by adjusting the basis for calculating EPS, e.g. to take account of any exceptional items.A maximum bonus of 150% of salary for the Chief Executive and 100% of salary for other executive directors.For the year to January 2013, performance targets were set requiring pre-tax EPS of 357.4p before any bonus became payable, growth of 5% on the prior year. At this point bonus would be 30% of salary in the case of the Chief Executive and 20% of salary for other executive directors. A maximum bonus of 150% and 100% of salary for the Chief Executive and the other executive directors respectively was payable if pre-tax EPS exceeded 391.4p, growth of 15%. A straight sliding scale of payments operated for performance between the minimum and maximum levels.For 2012/13 actual pre-tax EPS achieved, excluding £44.9m of exceptional gains, was 391.1p, growth of 14.9%. Accordingly, a bonus of 149% of salary for the Chief Executive and 99% of salary for the other executive directors was earned.
Bonus performance targets for the year ahead have been set but are not disclosed in advance for reasons of commercial sensitivity. The targets and performance will be disclosed in next year's Remuneration Report.
Long Term Incentive Plan (LTIP)To incentivise three year total shareholder return relative to a selected group of retail companies.
Provides focus on delivering superior returns to shareholders.
Retention of key employees over three-year performance periods.
A variable percentage of a pre-determined maximum number of shares can vest, depending on relative total shareholder return (TSR) performance against a comparator group of retail companies (shown in Part 3 of this report).
The maximum number of shares that may be awarded to each director is a percentage of each director's base salary at the date of each award, divided by NEXT's average share price over the three months prior to the start of the performance period.
LTIP awards are made twice a year to reduce the volatility inherent in the TSR performance measure and to enhance the portfolio effect for participants of more frequent, but smaller LTIP grants.
The Chief Executive, other executive directors and senior management receive grants equal to 100%, 75% and 60% of annual salary respectively every six months.
For Christos Angelides, in recognition of the strategic importance of his product skills, each of the four semi-annual LTIP awards with performance periods ending July 2012 through to January 2014 were increased from 75% of salary to 125%.
The maximum aggregate annual award allowed under the current plan rules is 200% of base salary (300% in exceptional circumstances). With effect from 2011/12 the maximum value of any LTIP awards that vest for a participant in a year has been capped at £2.5m.
Performance is measured over periods of three years, which commence in February and August, by comparing TSR against some 20 other UK listed retail companies.
Relative
performance
Percentage
vesting
Below median0%
Median20%
Upper quintile100%

If no entitlement has been earned at the end of a three year performance period then that award will lapse; there is no retesting.
Before any of the awards vest, the Remuneration Committee must have regard to the performance of the Company in light of underlying economic and other circumstances, including EPS performance of the Company and of other UK retailers over the period. Whilst not disclosed in advance, the factors taken into account in determining the awards are disclosed in the relevant year's Remuneration Report.
The grant that matured in July 2012 vested 96% as the TSR ranked fifth out of 22 in the comparator group. The Remuneration Committee also assessed the performance of NEXT during the performance period and determined that the economic underpin performance condition had been satisfied.
The grant that matured in January 2013 is expected to vest at 98% as the TSR ranked fifth. This vesting is subject to review of the economic underpin performance condition in April.
Share Matching Plan (SMP)To encourage greater ownership of NEXT shares amongst the executive directors and other senior executives and thereby further align their interests with shareholders.Participants who invest a proportion of any annual cash bonus in NEXT shares can receive up to a maximum of two times their original share investment, calculated on a pre-tax basis. Any matching is conditional upon achieving fully diluted EPS growth targets for the following three years. The executive directors and around 20 other senior executives participate in the scheme.Having initiated the SMP in 2010 with a maximum matching ratio of two times, the Committee decided in 2012 to cap the level of investment for each participant and reduce the scale of potential matching from a maximum of two times to a maximum of one times the initial investment. The maximum matching award allowed under the plan rules is three times. This may be granted if considered appropriate but the Committee would consult with major shareholders before doing so.Vesting of the awards granted in 2012 is dependent on achieving the fully diluted post-tax EPS targets detailed in the Share Matching Plan in Part 3 of this report.The amount of annual bonus that may be invested under the SMP in 2013 is the lower of an individual's post-tax bonus and a maximum amount of between £100,000 (2012: £50,000) and £200,000 (2012: £125,000). The matching award remains at a maximum of one times the initial investment.
The minimum match of 0.25 of a share requires fully diluted EPS growth of 12% and the maximum match of one times requires growth of 30% over the three year performance period.
As noted in the SMP Section of this report, Lord Wolfson has waived his potential entitlement to the SMP granted in 2010 and due to mature in June 2013.
PensionTo provide post-retirement benefits or cash alternative.All executive directors are deferred members of the defined benefit section of the NEXT Group Pension Plan.
Since becoming deferred members of the defined benefit section of the Plan, Lord Wolfson and Christos Angelides have contributed to the unfunded, unapproved pension arrangement. They ceased to contribute to this arrangement during 2012. Andrew Varley and David Keens ceased to contribute to the Plan in October 2008 and May 2011 respectively. Their pensions are no longer linked to salary and will increase in line with statutory deferred revaluation.
Executive directors now receive salary supplements of 15% in lieu of pension provision. These supplements are less than the contributions the Company would otherwise make to the defined benefit section of the Plan.
Directors and some senior managers receive enhancements from the Plan, increasing the accrual of their retirement benefit up to two thirds of their final pensionable earnings on completion of 20 years pensionable service at age 65. The lump sum payable on death is four times base salary.Not applicableIn line with changes to the defined benefits section of the NEXT Group Pension Plan, the future pension entitlements of Lord Wolfson and Christos Angelides under the unfunded unapproved pension arrangement will be calculated by reference to their base salaries at 31 October 2012, rather than final earnings. From that date, Lord Wolfson and Mr Angelides have received an annual salary supplement of 15% of their base salary.
Other BenefitsTo provide market competitive non-cash benefits.Executive directors receive benefits which may include the provision of a company car or cash alternative, private medical insurance, subscriptions to professional bodies and staff discount on Group merchandise.
Non-executive directors receive staff discount on Group merchandise but do not participate in any of the Group's bonus, pension, share option or other incentive schemes.
Not applicableNot applicableNot applicable
Share ownership guidelinesTo align the interests of executive directors and shareholders.For the Chief Executive the minimum shareholding is 1.5 times his pre-tax salary and for other executive directors not less than equal to their salary.Not applicableNot applicableThis requirement was introduced in 2012, although all executives have had significant shareholdings in excess of these minimums for many years. Any newly appointed executive director has up to five years to acquire the minimum shareholding.
Recruitment awardsTo enable the recruitment of key executives.Any awards determined at the time of recruitment by the Committee to reflect the individual circumstances.Any recruitment awards may have reference to the value of any outstanding awards forgone by the potential recruit.Performance conditions would normally be based on NEXT performance, although any awards made to replace those forfeited as a result of joining NEXT may, in exceptional circumstances, be made without performance conditions if necessary.No recruitment awards were made during the year.
Termination paymentsIn line with market practice, to ensure NEXT can recruit and retain key executives, whilst protecting the Company from making payments for failure.In practice, the Committee would consider the need for and quantum of any termination payments having regard to all of the relevant facts and circumstances at that time.
Any future service contracts will take into account relevant published guidance.
Each of the executive directors has a rolling service contract which commenced on 14 March 2013 and which is terminable by the company on giving one year's notice. The Company has reserved the right to make a payment in lieu of notice on termination of an executive director's contract equal to their base salary and contractual benefits (excluding performance-related pay). If notice of termination is given immediately following a change of control of the Company, the executive director may request immediate termination of his contract and payment of liquidated damages equal to the value of his base salary and contractual benefits.
In normal circumstances executives have no entitlement in respect of loss of performance bonuses and all share awards would lapse following resignation. However, under certain circumstances (e.g. 'good leaver' or change in control), and solely at the Committee's discretion, annual bonus payments may be made and would ordinarily be calculated up to the date of termination only. In addition, awards made under the LTIP and SMP would generally be time pro-rated and remain subject to the application of the performance conditions at the normal measurement date.
In the event of any termination payment being made to a director (including any performance-related pay elements), the Committee will take full account of that director's duty to mitigate any loss and, where appropriate, the Committee may seek independent professional advice and consider the views of shareholders as expressed in published guidance prior to authorising such payment.
Not applicableNo compensation payments on termination of employment were made during the year.
Chairman and non-executive director feesTo ensure fees paid to the Chairman and non-executive directors are competitive and comparable with other companies of equivalent size and complexity.
Additional fees are paid to non-executive directors who chair the Remuneration and Audit Committees, and the Senior Independent Director.
Remuneration of the non-executive directors is determined by the Chairman and the executive directors.
The Chairman is paid monthly and non-executive directors are paid quarterly.
Fee levels for non-executive directors are reviewed bi-annually.
The Chairman was paid a fee of £250,000 per annum and the basic non-executive director fee was £50,000, with a further £10,000 paid to the Chairmen of the Audit and Remuneration Committees, and to the Senior Independent Director.Non-executive directors do not participate in bonus or share-based incentive arrangements.The fees payable to the Chairman and non-executive directors increased in February 2013 as follows. The previous increase was in 2011.
£'000Increase
Chairman255.02%
Base fee for non-executives52.55%
Further fee payable to Chairmen of Audit and Remuneration Committees and to the SID10.55%
Claw-backsClaw-back provisions are to be included in the service contracts for all executive directors and will be enforced where appropriate to recover performance-related remuneration which has been overpaid due to: a material misstatement of the Company's accounts; errors made in the calculation of an award; or a director's misconduct.