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POST OFFICE LIMITED
GROUP EXECUTIVE REPORT
nazis Postmaster Operational Meeting
Title: Excellence Incentives Date: 17 January 2024
. Martin Edwards, Network . I Martin Roberts, Group Chief Retail
AuMions Strategy & Delivery Director Sponsor: Officer
Input Sought: GE discussion on scheme design, value & timing
Operational Excellence Incentives (OEIs) are a proposed new component of the remuneration
system designed to reward branch compliance with back office activities which help reduce
discrepancies and other costs for POL. We trailed our intention to launch OEIs at the November
Postmaster conference, committing to share further details as part of the annual remuneration
announcements in March.
Questions addressed
1. What is the proposed design of OEIs?
2. What are the key dependencies for successful launch of the scheme?
3. What are the expected payments and financial implications?
4. When do we propose to announce and launch the new scheme?
5. What other remuneration changes do we expect to announce in March?
Report
What is the proposed design of OEIs?
1. The rationale for the OEIs scheme is threefold:
a. it should create a win-win cycle of improved profitability for both sides,
exemplifying a partnership approach where remuneration improvements are
partly funded by reductions in Post Office costs arising from branch conformance;
b. it demonstrates we are listening to postmaster and NFSP feedback,
addressing the perception that branches are being asked to undertake a growing
workload of back office activities without direct remuneration; and
c. the OEIs are well targeted from a network strategy perspective, with more
money going to the more commercial branches we need to retain.
2. From a long list of over a dozen potential metrics, we have selected four lead measures
for the scheme which: a) are consistent with existing operational requirements for
branches; b) have a strong correlation with cost reductions for Post Office; and c) can be
robustly measured and reported:
e Trading Period Balance
* Cash Declarations
¢ Cash Pouch Errors
¢ Excess Cash
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3. These activities will be measured on a monthly basis with the opportunity for branches to
earn up to a 5% boost to their monthly variable remuneration, based on the scoring
scheme set out in the following diagram:
Step I: » Step 2: » Step 3:
Trading Period Balance Points mean fs Above 80 point hurdle
No balance, No Payment 100 (5%)
v To secure any payment, I 96 (4%) Sere
J : 7, above 80 points
branches must complete Start with 100 Points 92 (3%) receive 0.25% of
the monthly Trading 2 pts off for each day of > variable rem per
Period (TP) Balance. incomplete Cash 88 OX) [alist peo
v This is a stock check of Declarations HUE) maximum ofS
cash, stamps, etc. v2 pts off for a Cash 80 (0%) <
v Only branches that have Pouch Error H wu .
done a TP in their given V I pt off for each £lk of 72 \ Sa ee eae
week are eligible for Average Excess cash i 68 receive no payment
payment. 64
60 /
4. These measures have been through multiple iterations following extensive engagement
with both internal and external stakeholders, including the NFSP, five regional Postmaster
Forums, two of our strategic partners (Morrisons and Hendersons), the Postmaster NEDs
and the Postmaster Experience Director. Overall the feedback has been very positive,
subject to us fulfilling the key dependencies set out in the next section.
What are the key dependencies for successful launch of the scheme?
5. This engagement has reinforced the importance of two critical enablers to support the
successful launch of the scheme:
a. Access to robust and timely data for each branch on the performance metrics
which drive the monthly incentives (as detailed above), ensuring there is complete
transparency on the basis for their payments. This will be made available through a
new dashboard on Branch Hub, the development of which is due to be completed by
April.
b. A comprehensive programme of training and support to ensure every branch
is clear on the correct processes they need to follow to receive a full OEI payment.
This will be achieved through four main channels:
i. the relaunch of the Operations Manual in March, which aims to provide a
comprehensive and easy-to-digest reference guide on how to run a branch;
ii. the launch of a new online training module on back office processes, available
by April;
iii. the continuation of the Area Manager Operational Excellence visits to provide
face-to-face guidance on these processes, building on the 7,343 branch visits
completed to date; and
iv. support through the Branch Support Centre (BSC) to deal with any queries
that branches have on their payments. BSC staff will be given full training to
manage these enquiries, alongside nominated contact points for subject
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matter experts on any more complex questions. We will also publish a
Frequently Asked Questions document on Branch Hub to seek to pre-empt the
majority of simpler queries.
6. Alongside these two hard dependencies, the postmasters we have consulted have
consistently raised the importance of note counters to enable them to accurately and
efficiently process growing cash volumes. While in principle we could launch the OEI
scheme without addressing this request, this will inevitably provoke criticism that we are
not giving them the essential tools they need to do their job. Our recommendation
therefore is that, subject to positive results from the 40 pilot branches, we commit to
providing our c.3,500 largest banking branches with note counters alongside the launch
of the OEI scheme. This would create a strong package of measures to both improve
branch profitability and reduce discrepancies. An option for funding the costs of these note
counters is set out below.
What are the expected payments and financial implications?
7. Based on the scoring set out above, the charts below show the scores achieved across the
network based on a recent month of data (November trading) and how this then translates
to a variable remuneration increase. In summary, based on this snapshot of current
performance, :_ would
receive a smaller uplift averaging
...%variable remtobe paid.
3,000 I 3,500!
_, 3.000
= IRRELEVANT I= IRRELEVANT
1,500}
Ps
sb
E 1,001
Up to %rem to be paid
Scores
8. If this current performance were maintained for a full year, it would generate a total
annual payment of c “I If all branches achieved perfect scores every month, then the
total annualised payment would be . Clearly we hope that this scheme, along with
other proactive measures being. taken, will improve performance. Our best estimate is a
full-year figure of around ¢ t which is consistent with the allocation for 2024/25
remuneration increases in the current Three Yea The proposed September launch
date set out below reduces the first year costs to
9. Improvements in these activities will help us to reduce our costs, in particular in the
following areas (these are the total costs for each area rather than the estimated savings):
‘or staff costs for dealing with transaction corrections, discrepancies and other
related issues from postmasters;
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‘or branch discrepancies; and
1, The c.1,400 branches in the left-hand graph showing zero points are those that did not complete their trading period balance
in the correct week. Around 1,200 of these did complete their balance within the month but in the wrong week.
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‘or interest costs from excess cash assuming current base rates of
(these costs are currently running at fir pa based on the existing hedge at
10. The scale of the cost reduction will depend on the behavioural response to the incentives
alongside the impact of other measures, and will be tracked closely pre and post launch.
When do we propose to announce and launch the new scheme?
11. We have committed to an annual cycle of remuneration announcements in March of each
year detailing the rate increases for the new financial year. We therefore propose to
announce details of the new OEIs scheme as the centrepiece of the forthcoming March
2024 announcements. However, rather than commencing the new payments from April,
we would recommend delaying the actual launch of the scheme until September
remuneration (August trading), for two reasons:
a. to save judgeted remuneration increase, which we propose
should be ringfenced to fund the deployment of note counters to
subject to evaluation of the results from the first 40 pilot branches. This will reduce
opex and increase capex in next year’s budget;
b. to allow four months of ‘dry running’ with branches during which period we would
share monthly data on their performance against the OEI metrics via Branch Hub,
allowing ample time for them to understand how the scheme works and to
thoroughly test and refine the support mechanisms detailed in paragraph 5.
12. In our March announcement we will indicate that the specific metrics and scoring
mechanisms are subject to ongoing review, taking into account feedback from branches
both during the ‘dry run’ period and through the subsequent months of live running.
13. Given the links to the wider budgeting process, we suggest seeking Board approval for
this scheme (and any other remuneration changes for 2024/25 as outlined below) at the
February Board meeting.
What other 2024/25 remuneration changes do we expect to announce in March?
14. The other major remuneration changes we expect to include in the March announcements
are as follows:
« the standard CPI increase to Royal Mail and Parcelforce volume-based rates,
expected to be worth}! based on current inflation rates of 3.9%;
e the impact of the Royal. Mail tariff changes expected to be confirmed within the next
two months (the value of which are unknown at this stage);
e the continuation of the Major Branch Support payment t
year, at a cost of: (but accrued in the current financial year). This is designed to
reduce churn in those critical town and city centre branches which are not yet
benefiting from banking growth and mails automation; and
e cost-based increases to fixed outreach payments
15. Further details of these increases and any other product remuneration proposals will be
set out in February, in the context of the wider 2024/25 budget projections for
remuneration and trading profit.
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