Remuneration report.
This Remuneration Report contains commentary on principle eight of the ASX Corporate Governance Council principles — remunerating fairly and responsibly.
Remunerating fairly and responsibly
The company seeks to ensure that its remuneration policies attract and maintain talented and motivated directors and employees as a way of enhancing the performance of the company.
Non-executive directors' remuneration
The fees paid to non-executive directors for services in their capacity as directors during the year ended 30 June 2011 are detailed in the table.
The remuneration policy for non-executive directors does not include participation in either a share or share option plan. Non-executive directors or their associates are nevertheless required to hold at least 20,000 shares in the company.
The company's policy is to align directors' remuneration with that for comparably sized New Zealand and Australian companies. Directors' fees are normally reviewed annually by the nominations committee with effect from the beginning of the calendar year.
As part of its 2010 review of remuneration, the company commissioned an independent report on directors' remuneration in Australia, which indicated that some increase in fees was justified having regard to market changes. It was decided to defer any increases and reconsider the position later in the year. As a result, from 1 January 2011, the base director's fee was increased from $121,000 per annum to $135,000 per annum, with committee fees remaining the same at $23,000, $17,500 and $8,500 per annum for participation on the audit, remuneration and nominations committees respectively. The maximum aggregate fees payable in any year was set at $1,500,000 at the 2006 annual shareholders meeting.
Committee chairs receive a 50 percent premium to the committee fee. In 2010, the board chairman's fee was reduced from three times to two and a half times the base fee paid to directors, and inclusive of the time committed by the chairman for participation on board committees. In acknowledgement of the additional time commitment required of any Australian-based director, a travelling allowance of $12,000 per annum is also payable. Where an ad hoc committee is convened, such as for due diligence, additional remuneration may be payable at $1,200 per half day. Mr Fletcher and Mrs Vautier received remuneration for their participation on the due diligence committee in respect of the Crane Group takeover.
The company believes that this provides an appropriate remuneration structure which recognises the increased global focus of the company's activities and the increased corporate governance obligations imposed on directors.
Executive director's remuneration
J P Ling's remuneration as chief executive officer comprises base remuneration, a short-term incentive if specified annual performance targets are satisfied of up to 100 percent of base remuneration and participation in the company's long-term incentive scheme of up to 80 percent of base remuneration. In addition, his total remuneration includes a portion of the assessed value of options granted to him in September 2009.
The actual remuneration received by Mr Ling in the financial year was $2,821,317 comprising base remuneration of $1,449,000, a short-term incentive payment of $1,015,686 and $356,631 paid in October 2010 in respect of the shares vesting pursuant to the 2007 Executive Performance Share Scheme.
As required by the NZSX and ASX Listing Rules, shareholder approval of the two components of
Mr Ling's long-term incentives was received at the annual shareholders' meetings on 14 November 2006 and on 12 November 2008. His long-term incentives, consist of the grant of 1,000,000 options, and entitlement to shares in the company previously granted pursuant to the Executive Performance Share Scheme and in the Executive Long-Term Share Scheme. The value of the 97,408 shares in the company acquired under the Executive Long-Term Share Scheme of 22 October 2010 was $810,435.
The initial grant of 500,000 options was made with effect from 1 September 2006, being the date of
Mr Ling's appointment with a further grant of 500,000 options being made with effect from 8 September 2009. Each option was granted for no cash consideration, at an exercise price for the initial grant of $9.24, being the volume weighted price of Fletcher Building shares sold on the NZX in the ten business days immediately preceding the announcement of his appointment on 10 May 2006. The exercise price for the second grant is $7.78, being the volume weighted price of Fletcher Building shares sold on the NZX in the ten business days immediately preceding the date of grant. The exercise prices are increased annually, with effect from the date of grant, by the company's cost of capital, less any dividends actually paid. There is a restrictive period of three years from the date of grant during which the options may not be exercised. Subject to the company's rules on the trading of securities, options may be exercised at any time between the third and sixth anniversary of the date of grant.
Directors are satisfied that they have received independent advice that Mr Ling's terms of employment provide an appropriate remuneration package for the role of chief executive officer.
As an executive director, Mr Ling did not receive any further remuneration in his capacity as a director of Fletcher Building Industries Limited or other subsidiaries.
Directors' and officers' indemnification and insurance
The company has arranged a programme of directors' and officers' liability insurance covering directors, executives and employees in managerial positions acting on behalf of the company. Cover is for damages, judgements, fines, penalties, legal costs awarded and defence costs arising from wrongful acts committed whilst acting for the company.
Actions not covered include dishonest, fraudulent or malicious acts or omissions; wilful breach of a statute, regulation or a duty to the company; improper use of information to the detriment of the company; and breach of professional duty. The insurance cover is supplemented by indemnification by the company, but this does not cover liability for criminal acts.
Senior management remuneration
The company's remuneration strategy aims to attract, retain and motivate high calibre employees at all levels of the organisation, and so drive performance and sustained growth in shareholder value. Underpinning this strategy is a philosophy that total remuneration should be provided that is competitive in the markets in which the company operates – particularly for delivering superior performance that contributes to improved business results.
Total remuneration for executives comprises fixed pay, including the value of any benefits, and a short-term variable incentive in the form of an annual performance related bonus that forms a significant portion of the total package.
All executive performance bonuses require achievement of a mixture of company financial and personal targets.
The company's remuneration committee is kept fully appraised of relevant market information and best practice, obtaining advice from external advisors when necessary. Remuneration levels are reviewed annually for market competitiveness.
Fixed remuneration
It is the company's policy to pay fixed remuneration comparable to the median and total compensation comparable to the upper quartile for equivalent roles in the country or region in which the incumbent is located. For the purposes of determining total remuneration within the senior executive group, it is assumed that senior executives will on average achieve 75 percent of their potential short-term incentives over time, such percentages to be reassessed periodically in the light of the actual earnings achieved over the business cycle. It is considered appropriate that 50 percent of long-term variable incentives be achieved over a normal business cycle.
Short-term incentive remuneration
Short-term incentive remuneration is available to recognise the contribution of senior executives to company and individual performance objectives. Short-term incentive remuneration targets are expressed as a percentage of fixed remuneration which is up to 100 percent of the fixed remuneration for the chief executive and the direct reports to the chief executive, and up to 50 percent for all other senior executives.
Participation in the plan is by annual invitation, at which time the target incentive is established. This involves each participant being notified of a financial target and several challenging, measurable personal objectives for the financial year. Personal and financial objectives are independently assessed such that a participant can achieve their personal objectives even if the minimum financial target is not achieved.
The financial measures include the operating earnings target for the applicable division or business unit and the corporate Economic Value Added (EVA) target. Corporate executives are measured on a mix of EVA and personal objectives.
The target for commencement and determination of variable incentive payments is an assessed measure for each business unit or operating division, and is based on the approved budget. In most years the starting point for any variable compensation payments is at 90 percent of target, with 50 percent of the financial component earned at 100 percent of target, and 100 percent of the financial component earned at 105 percent of target.
Individual variable compensation payments are offered entirely at the discretion of the board.
Long-term incentives
The company has implemented long-term cash-based performance incentive schemes, targeted at those executives most able to influence financial results. Where performance targets are met, a cash bonus is payable with the after tax amount invested in the company's shares. Participation in any year is by invitation, renewable annually and at the complete discretion of the company.
Where permitted by securities legislation in the relevant jurisdiction, participants purchase shares in the company at the offer price with an interest-free loan. The offer price is established at market value at the time of offer, which will normally be each 30 September. The shares are held by a trustee on behalf of participants until the end of a three year restrictive period which may be extended for one further year for up to 50 percent of the entitlement. Provided certain performance criteria are met and participants remain employed with the company throughout the restrictive period, legal title in the shares will be transferred to them at the end of the restrictive period.
The schemes are either share-ownership based for New Zealand and Australian executives or are designed to deliver the same economic value as the share scheme and is for a small number of executives in other jurisdictions where offering a share scheme is not optimum.
The cash-based share-ownership scheme, the Executive Long-Term Share Scheme (ELSS), will be offered to all eligible executives this year and is described in detail below. This scheme replaced the Executive Performance Share Scheme in 2009 and is designed to deliver the same economic value as that scheme.
Executive Long-Term Share Scheme
The ELSS is a cash-based long-term scheme as, to the extent any performance targets are met, the company will pay a cash bonus to facilitate the acquisition of a number of shares in the company.
Under the ELSS, vesting of up to 50 percent of the shares allocated to a participant will be dependent on achieving the total shareholder return (TSR) target and vesting of up to the other 50 percent of the shares will be dependent on achieving the earnings per share (EPS) target.
The primary reasons for dual performance measures are:
- As the TSR performance requirement is determined by relative performance against a peer group of Australasian companies it focuses on management rather than general market changes;
- EPS is seen as strongly linked to shareholder wealth, as a consistent growth in earnings should lead to dividend growth;
- cumulative compound EPS recognises the importance of underlying earnings even in cyclical industries to generate value for investors;
- EPS provides a relevant internal performance measure, operating independently of capital markets;
- TSR and EPS were the most widely used combination of performance measures based on external benchmarking data.
The main terms of the ELSS are as follows:
(a) It enables participants to purchase shares in the company at market value with the assistance of an interest free loan. Vesting of the shares in the participants is subject to their continued employment and the achievement of the performance objectives.
- Vesting of 50 percent of the shares in the participants requires achievement of certain levels of TSR relative to a comparator group of New Zealand and Australian companies over a minimum three year restrictive period, or as may be extended by the one year retesting period.
- Vesting of the remaining 50 percent of the shares in the participants requires achievement of certain EPS targets over a three year restrictive period. Each year the board will, in its discretion, set an EPS target for the group. EPS is measured by the Fletcher Building group's net earnings attributable to shareholders for financial reporting purposes, divided by the weighted average number of shares on issue. The one year retesting period will not apply to the EPS tranche of shares.
(b) If at the end of the minimum three year restrictive period the TSR performance target has not been met in full, the restrictive period will be extended (either automatically or at the election of the participant, depending on the target level achieved) for a further one year period.
If a retesting period applies, it will apply in relation to all the participant's shares in the TSR tranche. During this one year retesting period, the company will assess (mid-way through the period and at the end of the retesting period) whether the TSR performance objective has been achieved. If the TSR performance declines during the retesting period, the participant's entitlements (if any) will be determined on this lower TSR performance result.
(c) The value of a participant's entitlement and the number of shares to be acquired is determined annually on 1 October.
(d) At the expiry of the minimum three year restrictive period, and, if applicable, on the testing dates during the retesting period, transfer of legal title to some or all shares in the TSR tranche may occur. The extent to which shares are transferred is determined by a sliding scale, with 50 percent of shares vesting if the 51st percentile of the TSR performance of the comparator group is met and 100 percent of shares vesting if the 75th percentile of the TSR Performance is met.
(e) At the expiry of the three year restrictive period, transfer of legal title to some or all shares in the EPS tranche (i.e. 50 percent of shares allocated to a participant) may occur. Each year the Board will, in its discretion, set the vesting scale for the EPS tranche offered that year (including the minimum and maximum vesting thresholds) having regard to current circumstances.
(f) To the extent that either the EPS or TSR performance objectives are met and any conditions on the transfer of shares are satisfied (including continued employment), legal title to the relevant number of Fletcher Building shares will be transferred to the participant and a bonus paid to the participant such that the after-tax amount of that bonus will equal, or exceed, the outstanding balance of the loan in respect of the shares transferred, taking into account any dividends which have been paid by the company during the restrictive period including any retesting period.
(g) The restrictive period may terminate early in certain defined circumstances. These include a participant ceasing employment with the group for a qualifying reason (for example, due to redundancy or sickness), a takeover offer being made for the company or if the company is a party to a Court approved reorganisation, merger or reconstruction. If such an event occurs, a determination will be made of the extent to which the TSR and EPS performance objectives have been met at the relevant date and the extent to which legal title to the shares will pass to the participant. The bonus entitlements noted in (f) still apply to the shares transferring.
(h) To the extent that the EPS or TSR performance objectives are not met at the end of the applicable restrictive period, or if a participant ceases to be employed by the Fletcher Building group other than for a qualifying reason, some or all of the shares will be forfeited to the trustee without compensation unless the trustee in its discretion determines otherwise.
(i) During the restrictive period (including any retesting period) the shares are held by a trustee and may not be sold or used as security for another loan. Participants can direct the trustee how to vote on the shares. Participants are also entitled to the benefits of any dividends, capital returns or other distributions declared by Fletcher Building and to the benefit of any rights issues, bonus issues or other entitlements offered to shareholders. After any adjustment for additional taxation on any such distributions and entitlements, the after-tax value will be withheld by the trustee and applied in part repayment of the loan provided to acquire shares.
In circumstances where shares cannot be acquired under the applicable securities legislation, equivalent economic entitlements are conveyed by way of cash bonus entitlements.
The comparator group of Australasian companies used to determine relative TSR performance for the 2011 offer comprises Adelaide Brighton, Alesco, Amcor, BlueScope, Boral, Brickworks, CSR, F & P Appliances, Gunns, GWA International, James Hardie, Leighton Holdings, Nuplex, OneSteel, Sims Group and Steel & Tube. This is unchanged from that applied for the 2010 ELSS offer, except that Crane Group has been removed. The minimum and maximum EPS targets for the 2011 offer are for EPS for the year ended 30 June 2011 to increase by 8 percent per annum and 14 percent per annum respectively.
On 30 September 2011 the three year restrictive period in respect of the fourth issue under the EPSS and in respect of the first issue under the ELSS, which was made in 2008 to a small number of senior executives, ends. The EPS minimum vesting threshold for the 2008 ELSS will not be met and accordingly no shares will vest in respect of the EPS tranche of shares in that offer. However, present indications are that the TSR of the company for the period will be greater than the 75th percentile of the comparator group of companies and accordingly participating executives in both the EPSS and the ELSS (in respect of the TSR tranche) will be entitled to take up ownership of around 576,000 Fletcher Building shares.
Superannuation
Participation in defined benefit and defined contribution retirement savings plans is made available to executives as required by remuneration practices in relevant jurisdictions. For those participating, an amount to recognise the value of the employer contributions required is included in the remuneration information in the remuneration information later in this report.
Holding the company's securities
A standard term in the senior executive employment contract is a requirement that, over time, senior executives must acquire and maintain a holding in the company's ordinary shares until such time as the sum so invested, or the market value of their shareholding, exceeds 50 percent of their fixed remuneration. In meeting this obligation executives are required, from the date of receipt of the first payment under the senior executive short-term variable incentive plan, to apply at least half of the after tax proceeds so earned in acquiring shares.
The company believes this shareholding strengthens the alignment of senior executives with the interests of shareholders and puts their own remuneration at risk to long-term company performance. Apart from the long-term cash-based performance incentive schemes outlined above where an agreed percentage of any cash received is to be invested in purchasing shares, executives are left to their own discretion to organise acquiring the shares within the normal insider trading rules, and no allowance is made for the restriction on trading those shares. Directors may, in any year at their discretion, ease the share investment percentage required in terms of this policy in respect of any incentive payment arising in that year.
Shares issued to executives under the long-term incentive scheme, but still subject to the restrictive period, do not count towards the required minimum shareholding obligation.
The company does, however, allow New Zealand-based executives to meet their requirement to hold the company's shares by having an economic exposure to the shares through a defined contribution investment account in the Fletcher Building Retirement Plan, the value of which is calculated by reference to the Fletcher Building share price.
Disclosure policy
The New Zealand Companies Act 1993 requires the disclosure of all remuneration payable over $100,000 per annum in $10,000 bands. As the company must comply with this obligation, it has chosen not to also make detailed disclosure of the remuneration of the five highest paid executives as is considered best practice under the ASX Corporate Governance Guidelines.
Compliance with ASX corporate governance guidelines
The company meets all the best practice requirements of the ASX Corporate Governance Council other than making detailed disclosure of the five highest executives' remuneration. As is noted above, the company makes the remuneration disclosures required of a New Zealand company under the Companies Act 1993.
Back to topEmployee remuneration
Section 211 (1) (g) of the New Zealand Companies Act 1993 requires disclosure of remuneration and other benefits, including redundancy and other payments made on termination of employment, in excess of $100,000 per year, paid by the company or any of its subsidiaries worldwide to any employees who are not directors of the company. To give more appropriate information on total employees' remuneration, where there is a contractual commitment to provide incentive remuneration in respect of the year ended 30 June 2011, the amount accrued as at 30 June 2011 has also been included in the total remuneration disclosed below.
