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Remuneration Report

Summary Statement

A statement to shareholders from the Chairman of the Remuneration Committee.

On behalf of the Remuneration Committee, I am pleased to present the Directors' Remuneration Report for the year ended 31 December 2013.

The Remuneration Committee's focus is on ensuring that the way we manage remuneration for Executives rewards them for delivering what we see as being their central responsibility – to increase the value of the business to shareholders consistently and over a long period of time.

The main focus of the Committee's work is to manage the various aspects of the remuneration package of Executive Directors at Aggreko which comprises:

  • salary; 
  • annual bonus; 
  • the Company's Long-term Incentive Plan (LTIP); 
  • pension and life assurance; and 
  • other benefits, including healthcare and expatriate benefits for Directors seconded away from their home country. 

Although our approach to remuneration policy and its implementation is consistent with previous years, as you will see below, after consulting with some of our largest shareholders we have made a number of changes to the details of our remuneration policy.

The Committee met five times during 2013; details of members' attendance are set out in the table in the Corporate Governance section.

PERFORMANCE OUTCOMES FOR 2013

As the Chairman notes in his statement, 2013 proved to be a challenging year for the Company. Aggreko started the year facing weaker market conditions in the Power Projects business, following a strong 2012 which included the London Olympics as well as peak revenues from both Military work in Afghanistan and post- Fukushima Japan reconstruction, and weakening exchange rates. Despite these headwinds, Aggreko delivered what the Committee believes is a creditable performance, with reported revenue at similar levels to 2012, with the decline in reported trading profit contained to 8%. Reported D-EPS also declined by 8% from 100.4p to 92.03p.

Although trading profit and D-EPS declined, the Executive Directors received bonuses ranging from 42% to 99% of salary. So I thought it would be helpful to explain here how variable pay is set and measured, and why the Committee believes that the actual bonus and Long-term Incentive Plan (LTIP) awards for 2013 are consistent with Company performance.

The main performance measure we use for the annual bonus is diluted earnings per share (or D-EPS). We believe it is one of the most effective ways to measure Company performance, and that therefore basing annual bonuses on D-EPS growth is one of the best ways to align Executive Director pay with the interests of shareholders. Each of the Executive Directors therefore has a D-EPS growth target as an element of his bonus.

We set bonus targets in the context of expected market conditions and external forecasts, rather than, say, historic performance. After such a strong 2012, which included the London Olympics as well as peak revenues from military work in Afghanistan and post-Fukushima Japan reconstruction, it would have been unrealistic to expect the business to repeat that performance, and there would have been little point in setting a budget that would have been seen within the business as unattainable. So after a rigorous process, the Board set a budget which included adjusted D-EPS for bonus purposes of 90.63p (compared with the actual adjusted D-EPS for 2012 of 102.14). The actual outcome for 2013 was 96.45p – beating budget by 6.4%. The Committee has discretion to make further adjustments when calculating bonuses if they think that it would better reflect the actual performance of the Company, and in this instance we used our discretion to reduce the outcome adjusted D-EPS to 95.47p (solely for the purpose of Executive Directors bonuses), resulting in adjusted D-EPS beating budget by 5.3%. This reduced bonuses from what they would otherwise have been and in turn, this meant that Executive Directors received 83.4% of the D-EPS element of their bonus as against the 90% they would have been due had the Committee not exercised its discretion.

You will note that we refer to 'adjusted D-EPS'. This is because when we set the annual bonus, we calculate D-EPS on a constant currency basis, using exchange rates fixed at the beginning of the year; in this way the bonus reflects the true performance of the business, and not currency movements.

Diluted earnings per share is just one of a number of metrics we use for the annual bonus – we also use operating cashflow, regional trading profit and regional debtor days – but in each case the outcome is measured against a budget rigorously tested and approved by the Board at the beginning of the year, set by reference to a background of reasonable expectations.

Further, the Executive Directors will receive shares under Aggreko's LTIP in April equivalent to between 22% and 42% of their basic salaries. These awards were granted in 2011, subject to demanding performance conditions based on real (i.e. excluding inflation) D-EPS growth and return on capital employed, measured over a three year period. Full details of those conditions are set out under the Annual Report on Remuneration section, but in summary, during that period real D-EPS grew by a compound 5% per annum, and as a result 28% of the shares subject to the D-EPS growth criterion will vest; none of the shares subject to the ROCE condition will vest; and in aggregate 21% of the basic LTIP will vest. In calculating the value of these shares, we have used the average share price during the last quarter of 2013, as required by the appropriate regulations.

CONSULTATION WITH SHAREHOLDERS AND CHANGES TO REMUNERATION

During 2013 we consulted a number of our largest shareholders on proposed changes to Executive Director remuneration. These included:

  • providing an additional bonus opportunity to the Chief Executive and CFO; introducing a new complementary measure of net cashflow from operating activities; and deferring 25% of any bonus earned into shares which vest after three years; 
  • increasing the Performance Share Plan (PSP) grant for the CFO from 75% to 85% of salary; 
  • straightening the LTIP vesting schedule by removing the discontinuity between 10% and 13% p.a. D-EPS growth; 
  • revising ROCE targets for the PSP and the Co-Investment Plan (CIP); and 
  • increasing shareholding guidelines. 

All those consulted supported our proposals, and we therefore put them into effect. Further details of our revised arrangements are set out in the Policy Report and in the Annual Report on Remuneration.

We will keep remuneration policy under review during the forthcoming year, and, in doing so, will continue to give full consideration to the principles set out in the UK Corporate Governance Code in relation to Directors' remuneration and to the guidance of investor representative bodies.

In particular, the Company's current LTIP schemes expire in 2014, and no new awards can be made under those schemes after April 2014. We will review all aspects of the Company's incentive arrangements at that stage to ensure it continues to be aligned with the Remuneration Policy and Company strategy. The Committee will consult with major shareholders before making any significant changes.

CHIEF EXECUTIVE

We have announced that Rupert Soames has resigned as Chief Executive. Rupert will leave the Group on 24 April 2014 and at that date Angus Cockburn, currently Chief Financial Officer, will be appointed Interim Chief Executive. He will be paid his basic salary and benefits up to that date, but will receive no bonus for 2014. He will receive the cash element only of his bonus for 2013 but will not receive the deferred share element. His 2011 LTIPs will vest on 19 April 2014 but his other outstanding LTIPs will lapse, in each case, in accordance with the rules of the Schemes. He will receive no compensation for loss of office or other payment in connection with his resignation. In setting the remuneration for his successor the Committee will follow the approach set out in the 'Approach to Recruitment Remuneration'. Meanwhile details of Angus Cockburn's remuneration as Interim Chief Executive are set under the Annual Report on Remuneration section.

CHANGES IN REPORTING REQUIREMENTS

In October 2013 new reporting requirements for Directors' remuneration were introduced for companies such as Aggreko. This report is our first to be made under the new regulations (although shareholders may recall that last year we opted to incorporate a number of the proposed changes to enhance transparency). The following report now comprises two distinct sections: a 'Policy Report' and an 'Annual Report on Remuneration'. The Policy Report outlines Aggreko's remuneration policy, setting out the role of each element of pay, how the structure of the package helps reinforce the achievement of Aggreko's strategy, and details of reward opportunities available to the Company's Executive Directors. The Annual Report on Remuneration details how the policy was implemented in 2013, and includes a table for the single figure of total remuneration for all Directors. There will be two votes proposed at our Annual General Meeting. The first, on the Policy Report will be a binding vote, which means that no payments can be made under the policy unless the vote is passed. The Policy Report must be put to shareholders for approval in this way whenever there is a change in policy or otherwise at least once every three years. The second vote, on the Annual Report on Remuneration, as in previous years, is advisory.

We hope you will find this report clear and informative, and would welcome any feedback.


Russell King

Chairman of the Remuneration Committee
6 March 2014

COMPLIANCE STATEMENT

This Report covers the period 1 January 2013 to 31 December 2013 and provides details of the Remuneration Committee's role and the remuneration policy we apply in decisions on executive remuneration.

The Company has complied with the principles and provisions relating to Directors' remuneration in the UK Corporate Governance Code, and this Remuneration Report has been prepared in accordance with the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. In accordance with Section 439 and 439A of the Companies Act 2006, a binding resolution to approve the Policy Report and an advisory resolution to approve the Annual Report on Remuneration will be proposed at the Annual General Meeting on 24 April 2014.

In accordance with the Regulations, the following sections of the Remuneration Report are subject to audit: the Single total figure of remuneration for each Director, total pension entitlements, Scheme interests awarded during the financial year, Vesting of LTIP Awards to Former Directors and the statement of Directors' shareholdings and share interests. The remaining sections of the Remuneration Report are not subject to audit.

REMUNERATION COMMITTEE

The Committee's principal function is to determine Aggreko's policy on executive remuneration and to approve specific remuneration packages for its Executive Directors, Company Secretary and such senior members of the executive management, for example the Executive Committee, as it is asked by the Board to consider, including their service contracts with the Company. The Committee's remit includes, but is not restricted to, basic salary, benefits in kind, performance related awards, share options and share awards, long-term incentive schemes, pension rights, and any compensation or termination payments. The Committee also has responsibility for making a recommendation to the Board in respect of the remuneration of the Chairman.

The full Terms of Reference of the Committee are available on our website at http://ir.aggreko.com/committee-terms-of-reference.