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det Department for
UK Government Business, Energy
Investments
Date: 15 March 2019
Director General: Mark Russell
Lead Officiat Tom Aldred
Lead Official Telephone:
Recipient To Note / Comment To Approve / Decide
Secretary of State / Kelly Tolhurst x
MP.
Permanent Secretary x
Special Advisers xX
OFFICIAL SENSITIVE
PROPOSED REMUNERATION FOR NEW CEO OF POST OFFICE LTD
Summary
1.
Post Office Ltd (POL) are recruiting a new CEO and have proposed a significant
increase in remuneration compared to the previous CEO.This would see base
salary and performance pay rise by 27%, taking the maximumavailable pay to just
under £1m. POL propose rebalancing performance pay towards the short term
(annual) incentive relative to the long term (three year), in order to attract
candidates who are likely to be taking a pay cut to join the organisation.To comply
with HMT rules, neither cash-in-lieu of pension and cash allowances would be
offered. This submission sets out the proposals in detail and the supporting
evidence. UKGI believe the evidence for increasing base pay is compelling; the
case for a corresponding increase in performance pay is reasonablegiven the
nature of the role and the benchmarking data Even at the increased pay level
proposed by POL, base pay and total potential compensation are lower quartile.
External support for this has been provided by PwC and Russell Reynolds. POL
also has a significant pay compression issueat senior level in the company which
would be addressed by the increase in CEO base pay If, however, you decide that
the total potential compensation is too high, we would recommend increasing base
pay and freezing potential performance pay at the current level
Timing
2. By 25 March. You have asked for reassurance that a permanent appointment be
made by 1 September and the Permanent Secretary has also asked officials to
accelerate the process following his meeting with POLs Chair. An early response
would enable us to see approval from the CST before the Easter recess. Your
support for a competitive package would also help to attract a high-quality
candidate and reduce the risk of failure to attract an external candidate. There are
two internal candidates for the role.
Recommendations
3. We recommend that you approve the proposed remuneration package
comprising base salary of £415k, a maximum STIP bonus of£344,450 (83% of
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base) and a maximum LTIP bonus of £232,400 (56% of base). If you are
uncomfortable with the extent of the rise in maximum pay out, we recommend you
approve the rise in base pay, but ask POL to freezemaximum performance pay at
current levels, while granting them flexibility to rebalance between shot andlong
term incentives. Following your decision we will seek approval from the CST as
soon as possible. Annex A is a proforma that sets out further details andwould be
included alongside adviceto the CST.
Background
4. POL’s current CEO Paula Vennells formally leaves POL in April but she has
already stepped back from day-to-day activities; ‘GRO. “lYou have
indicated that you are content for POL to appoint Al Cameron, the current Chief
Financial and Operating Officer, as interim CEO, pending recruitment of a
permanent replacement. You have approved his remuneration package,
conditional on him effecting a successful handover, and have indicated that you
plan to write to POL to approve the appointment. We are currently seeking CST
clearance for his remuneration package.
5. With Al stepping up to CEO, POL should appoint an interim CFO to avoid
excessive concentration of responsibility in one person.We understand that you
are content to follow the Permanent Secretarys advice that this appointment is
delegated to POL’s Board, and that this includes the delegation ofpay and terms
and conditions, provided that they are within the existing pay envelope app!
for the current CFO. POL have identified and interviewed a candidat
UKGI's representative director Tom Cooper has met with her ad bell
would be a high-quality appointment, who would add value to P' i
potentially beyond. A biography is provided at Annex B.
alternative job offers and we are seeking approval from the
appointmentcan be made assoon as possible.
6. The BEIS SCS Recruitment Panel are expecting to see this case and have
emphasised that they do not want the interim CFO to be given the same package
as the incumbent as this includescash allowances for private medical insurance
and in lieu of a company car While recognising that these allowances run counter
to government policy, they are currently available for all the senior people within
POL and we believe this is better dealt with at the level of the whole organisation,
rather than in the context ofa short term temporary appointment We have already
indicated to POL that they will need to remove such allowances forthe permanent
CEO. Your letter to POL is a good opportunity to communicate that government will
no longer allow the payment of such allowances for new hires By way of context,
the maximum pay being offered to the interim CFO is £471k compared to £648k for
Al Cameron, in his current permanent role as Chief Financial and Operating
Officer.
Are you content to delegate the appointment, and pay, terms and conditions for
the interim CFO to POL’s board?
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Department for
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UK Government & Industrial Strategy
7. You have previously approved the job description and the overallrecruitment
process, including the indicative timetable. You are receiving a separate
submission which restates this and updates the indicative timetable. It also
highlights where the process can get held up and what can be done to minimise
these risks.
. POL is not a regular public sector organisation. It isa large and complex business
that operates in competitive markets including mails, retail and financial services It
has an ambitious three-year strategyaimed at continuing to increase profitability,
and, absent unforeseen events, we believe that it should be in a position to start
paying material dividends to HMG in the next few years. Delivering this agenda,
and developing a comprehensive strategy requires an experienced and high
calibre leader. POL believes that the pay package of the existing CEO isunlikely
to be sufficient to attract a diverse and high calibre field of candidates This is
supported by market intelligence from headhunters, independent benchmarking
analysis and the severe pay compression within POLs executive team.
Current CEO Remuneration
9. The current CEO's remuneration is split intobase pay and performance pay. Base
pay consists of salary, a pension contribution of 25%, and allowances for a car and
private medical insurance. Since Paula has maxed out on her pension pot, she
chooses to take cash-in-lieu of pension.Performance pay consists of a short-term
incentive plan (“STIP”) based on performance in that financial year, and a long-
term incentive plan (‘LTIP”), based on performancein three years time. Profit is the
primary measure of performance as measured by EBITDAS. For 2019/20, the
maximum pay available to the CEOwould be £782,500, made up as follows
Table I - Current CEO pay opportunity, 209/20
Base pay
Base salary £255,000
Benefits — car allowance plus medical £9,900
Cash in lieu of pension £63,750
Total base pay £328,650
Performance pay
STIP (2018-19) £204,000
LTIP (2016-19) £249,900
Total maximum performance pay £453,900
Total pay (maximum opportunity) £782,500
Base pay
10.Benchmarking analysis suggests POLs current CEO is substantially underpaid
relative to comparator organisations, with base pay lying well below the lower
quartile. POL’s Remco commissioned PWC to carry out specific benchmarking
analysis against similar-sized organisations in three areas: social purpose, mail
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do Department for
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and retail, and challenger banks PWC constructed a weighted average of the
lower quartiles of each group, based on a 40/40/20 split. Lower quartilebase salary
was £429,000, which is more than two-thirds greater that received by POL’s
current CEO. Pension contributions would be additional to this. While
benchmarking exercises have their limitations,we believe that the evidence that
base pay is too lowis compelling*
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.UKGI also asked POL to work with their headhunters Russell Reynolds to assess
the potential candidates atthe POL’s current CEO package (base salary of £255k)
and ata higher level (£325k) proposed by POL Russell Reynolds advise thatwhile
the role would be attractive to some people at the lower levelthere is a material
difference compared to the candidates who might consider joining POL at £325k
(Annex C). Details of the candidates, including their existing remuneration, is set
out in confidence inAnnex D.
12.In their letter Russell Reynolds write that their“strong advice is that the current
compensation is insufficient to attract the right leader of the Post Office, and that it
could attract a far more experienced set of candidates if base salary is raised to a
minimum of £325k.” This assumes that pension and bonus schemes (as a % of
salary) and all benefits remain unchanged.
13.A higher base salary for the new CEO would also help to address the severe pay
compression at executive level in POL. The CEOs base pay is currently just 4%
above the CFOO’s. This compares to a pay gap of 57% in comparable
organisations and 54% in the FTSE 250. Pay compression can limit the ability to
attract candidates at lower levels in the organisation, and, frankly, is often a source
of frustration for CEOs. POL’s proposal would create a gap of 32% in the base pay
of CEO and CFO, which we believe is more appropriate.
14.POL’s initially proposed retaining the structure of the current CEO package that
includes £9,900 of allowances plus a 25% pension contribution that can be taken
as cash if the candidate has maxed out their pension pot (and many will have
done). Both the BEIS SCS Review Panel and HMThave indicated that they will not
approve either cash in lieu of pension orother cash allowances. POL will eliminate
these, but in order to offer candidates an equivalent amount the base salary will
need to rise.
15.The equivalent of £325k with pension and allowances is £41& without POL have
therefore proposed offering a base salary of £415k. UKGI believe this is
justified by the evidence above. !n addition, we would give POL the flexibility to
offer this in a combination of cash and pension contribution, should a candidate so
wish.
Performance pay
' The aggregate lower quartile (LQ) figure was calculated as (40% x the Social Purpose LQ¥ (40% x the Mails &
Retail LQ)+ (20% x the Challenger bank LQ). The figure excludes cash in lieu of pension and allowance in lieu of
a company car.
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Department for
UK Government Business, Energy
Investments & Industrial Strategy
16.The performance pay available at POL, while generous, is also well below
comparator organisations. The current CEO is eligible for an STIP bonus of 48%
for hitting target (80% for hitting stretch) and an LTIP of 70% (98% stretch)At the
weighted lower quartile, the STIP bonus for hitting target performance is 131%
while the LTIP bonus is 81%. For FTSE 250 CEOs, the maximum opportunity at
the Lower Quartile is 125% of base for STIP and 150% for LTIP.’ Detailed
benchmarking analysis is provided atAnnex E. We are satisfied that the FTSE
250 is an appropriate reference point for a business of POls size and complexity.
17.POL propose that total performance pay should rise proportionally with the
increase in base salary, excluding the increase that occurssimply because pension
and allowances are move into base salary. This creates a total performance pay
envelope of £578,500 (table 2).
Table 2 - Calculation ofmaximum performance pay envelope
Salary STIP stretch at 80% I LTIP stretch at 98% I Maximum performance pay
of salary of salary
325,000 260,000 318,500 578,500
18. This would create a maximum pay-outof £991,850 (table 3).
Table 3 - Maximum pay out under new package
Base salary £415,000
STIP (2019-20) £344,450
LTIP (2019-22) £232,400
Total (maximum opportunity) £991,850
19.This represents an increase in maximum pay of£209,300 (27%). This is large and
could be challenged by some stakeholders who have criticised current levels of
executive pay in the context of the franchising programme and the decline in
aggregate postmaster pay. On balance, we believe it is justified in order give POL
the best possible chance of attracting a high quality and diverse field of candidates.
If you are uncomfortable with the level of the maximum pay out, we recommend
that you agree to the increase in base pay but ask POL to freeze performance pay
at the current envelope of £53,900. Maximum pay would fall to£868,900.
20.A third option is to require POL to freeze maximum pay at its current level
(£782,500), but allow them to increase base pay and reduce performance pay. We
would not advise this as it would materially weaken executive incentives once in
post. It would also present its own communication challenges.
The balance between short and long term incentives
21.Within the overall envelope of performance pay, POLwould like to place greater
emphasis on STIP. They propose maximum STIP bonus rises slightly to 83% of
? Deloitte, Directors’ remuneration in FSE 250 companies October 2018
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base while the maximum LTIP bonus reduces to 56% (table 4). This represents a
significant shift in the ratio of STIP to LTIP from 45:55 to 60:40.
Table 4 - Overall performance pay envelope, new CEQif performance pay rises in proportion with base pay)
Base STIP stretch at LTIP stretch at Total performance pay
83% 56% available
415,000 344,450 232,400 576,850
22.POL’s rationale is that the candidatesthey want to attract are likely to be taking a
hit on annual compensation (base and short term bonus), and this avoids
PWC’s benchmarking also found a greater
emphasis on STIP than LTIP in relevant comparator organisationsfara 16). There
is a real trade-off here between attracting the highest calibre candidates and
providing appropriate long-term incentives once they are in post. Government
policy towards executive payemphasises long term incentives and while the LTIP
bonus of 40% (56% stretch) remains substantialjt will be outweighed by the larger,
more immediate STIP. You could object to POLs proposal and insist on a relative
strengthening of the LTIP. However, this will make it more difficult to attracta
diverse pool of credible candidates. Onbalance, our advice is to approve POL's
proposals as theywill help to attract a wider range of high quality candidates.
exacerbating the issue further.
Proposed package and maximum pay out
23.POL’s proposed package is summarised in tabled.
Table 5 — Proposed remuneration package compared to current CEO
Current CEO
STIP (% of salary) LTIP (% of salary) Allowances Total
Salary Entry Target Stretch I Entry Target Stretch I Car & I Pension I Target Stretch
38.4% 48% 80% 56% 70% 98% I med I 25%
255,000 I 97,920 122,400 __ 204,000 I 142,800 __178,500__ 249,900 I 9,900 I 63,750 I 629,550__I 782.550
New CEO: POL’s proposal
STIP (% of salary) LTIP (% of salary) Allowances Total
Salary Entry Target Stretch I Entry Target Stretch I Car & I Pension I Target Stretch
40% 50% 83% 32% 40% 56% I med
415,000 I 166,000 __ 207,500 _344,450 I 132,800 166,000 _ 232,400 - -I 788,500 _I 991,850
New CEO: rise in base pay and freeze in performance pay
STIP (% of salary) LTIP (% of salary) Allowances Total
Salary Entry Target Stretch I Entry Target Stretch I Car & I Pension I Target Stretch
31.5% 39.3% 65.3% I 25.2% 31.5% 44.1% I med
415,000 I 130,619 163,273 271,034 I 104.495 130,619 182,866 - -I 708,892 _I 868,900
Note: We propose that the new CEO has the option of taking up to 25% of their base salary as a pension
contribution. We believe this is unlikely in practice since most candidates will already have maxed out their pension
pot. STIP and LTIP bonuses are expressed as a % of base salary. Eligibility for Entry, Target and Stretch are
determined by meetingrelevant thresholds for EBITDAS
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Automatic increase
24. Annual changes to executive pay currently require Shareholder and CST approval,
in accordance with POLs articles of association. POL’s previous CEO received
only one increase in base pay in six years, and the multiple stages of approval
have meant that final decisions have often taken many months and added
significantly to the workload of ministers and officials UKGI recommends that the
CEO's base salary increases automatically in line with the rest ofPOL’s workforce,
whenever there are annual pay increases. This would reduce workloads and
remove uncertainty for candidates (and once in place, for executive. It would
protect against executives receivinga rise in excess of that received by the rest of
the workforce, and any changes in performance pay would require ministerial
approval. However, it would mean effectively devolving your, and the CSTs,
approval powers to the POL Board. You recently approved a similar measure in
relation to Ordnance Survey.
Are you content to approve automatic rises in pay, up to a maximum of the
average across the rest of POL's workforce?
Recommendations and Next Steps
25.UKGI recommend that you approve POL’s proposed package to allow the
recruitment to progress While it represents a substantial increase to the current
arrangements, this is necessary to bring it closer to that offered by the wider
market and soto attract a sufficiently high calibre candidate for thismportant role
26.The shift in performance pay towards STIP is significant and you should consider
whether you want to press POL to redress it.
27.\f you are content to approve the remuneration package, we would like you to write
to the CST as soon as possible so that the package can be finalised before
recess. We have worked closely with HMT officials to remove contentious
elements. However, they have indicated that the CST will require compelling
evidence to support an increase in maximum pay of this magnitude.
Contributors
28.The Post Office Policy team has been consulted on this submission. The proposal
has not been seen by the SCS Recruitment Panel, as the Permanent Secretary
asked for it to be accelerated through the system.However, the Panelhave asked
to see the evidence underpinning this case including benchmarking, performance
measures and metrics. The have also expressed a view thatPOL should not offer
cash-in-lieu of pension or other cash allowances,because this goes against wider
government guidance. Wehave followed this advice.
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det Department for
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29.We have not been able to consult BEIS HRor BEIS Communications in the time
available.
30.This advice is not considered to raise legal issues and Legal has not been
consulted.
Annexes
. Proforma to accompany letter for the CST
. Biography of prospective interim CFO, GRO_
. Letter from Russell Reynolds (POLs head-hunters)
. Information on prospective candidates from Russell Reynold¢Contains
confidential personal information OFFICIAL-SENSITIVE)
. PWC benchmarking analysis
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