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Sarah Munby
Permanent Secretary & Principal Accounting Officer
Department for Business, Energy & Industrial Strategy
1 Victoria Street
London
SW1H
5% August 2021
Dear Sarah,
For Approval: Post Office Incentive Schemes for the Chief Executive Officer
and Chief Finance Officer
Iam writing to request approval to include the Chief Executive Officer (CEO) and Chief
Finance Officer (CFO) of Post Office Limited in the Short-term Incentive Scheme
(STIP) for 2021/22 and the Long-term Incentive Scheme (LTIP) for FY 2021/24.
I am also writing to request approval for an adjustment to the EBITDAS target within
the LTIP for 2019/22. As set out in the Articles of Association of POL (Articles 50 to
52), the remuneration of all Board members including the CEO and CFO requires
approval by the Shareholder.
The STIP and LTIP were approved by the Remuneration Committee in July 2021 in
respect of the Group Executive (GE) and Senior Leadership group (SLP). At the same
time, the Remuneration Committee approved the adjustment of the EBITDAS target
within the LTIP for 2019/22.
The proposals requiring your approval in relation to the CEO and CFO are:
1. To include the CEO and CFO in the STIP for 2021/22
2. To include the CEO and CFO in the LTIP for 2021/24
3. To adjust the EBITDAS target within the LTIP for 2019/22
1. 2021/22 STIP
The CEO and CFO are eligible to participate in a STIP as follows:
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Position Threshold On-target Stretch
CEO 24% 30% 45%
CFO 32% 40% 66%
Payments under the plan are determined in line with the achievement of performance
criteria, as follows:
Gateway measure
Measure Detail Target
Network Maintain branch 11,500 branches are maintained
coverage network (subject to any waiver)
There are Company measures in the plan which account for 80% of the plan payment
and comprise both financial and Postmaster-centric measures. The remaining 20% is
on personal performance in line with the rating received through the Performance
Management process.
The financial and Postmaster-centric measures are weighted 40/60 and the targets
are as follows:
Weighting I Measure Detail Threshold Target Maximum
£41.6m £52m* £62.4m
As per agreed (80% of (100% of (120% of
40% EBITDAS definition Board Board Board
agreed agreed agreed
target) target) target)
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Postmaster centric measures
Weighting I Measure Detail Threshold I Target Maximum
Measured by
1) Postmaster "
‘ - question B1 and B7 9) 9 9
aoe (baseline 17% and 30% 33% 36%
° 25% respectively)
2)Transaction aged transition
corrections 9 1,400 1,200 1,000
9 (baseline average
(15%) 1,647)
3) Growth in £331m (3019/20 £405m
total revenue new
on 2 core Mails (90% of commercial (110% of
60% product areas target) s from MDA target)
(financials not 2
)
volume)
£190m
4 £214m £236m
Mails 7.5% ‘ 90% of
rking 7 5%) Banking vege) (100% of (110% of
. budget) budget)
4) Improveme
nt in a key
area of Inland 60% I Inland 70% I Inland 80%
compliance Dangerous goods
9 9 Internation I Internation I Internation
(Inland 7.5% al 75% al 85% al 95%
International
7.5%)
Summary of consolidated weighting
Measure
Individual 20%
Company - financial 32%
Company - Postmaster centric 48%
Total 100%
Detailed information on the measures can be found in Appendix 1
2. 2021-2024 LTIP
The CEO and CFO are eligible to participate in a LTIP as follows:
Position Threshold On-target Stretch
CEO 24% 30% 43%
CFO 40% 50% 70%
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As with the STIP, the measures for the LTIP have been mapped against the strategic
intent, 7 pillars and 6 priorities. Substantial work has been done, in consultation with
the Remuneration Committee, over the course of 2021 to identify what measures
would be truly transformational and also clearly sign-post the cultural journey
required.
As a result, the following measures and metrics were approved in July by the
Remuneration Committee in respect of the GE and SLP population:
Gateway measures (to be achieved before any payment is awarded)
Measure Detail
Target
EBITDAS less
change spend Affordability gateway
Achievement of positive EBITDAS less
change spend for FY 2023/24. (Note that
if change spend is delayed, deferred or
aborted a rationale for the deferral or
cancellation of the project must be
provided in summary to the Committee
(with detail available if required) when
out-turn for the LTIP is measured and the
out-turn and/or target will be adjusted if
appropriate).
Maintain branch
Network coverage network
11,500 branches are maintained (subject
to any waiver)
Financial measure
Weighting Measure I Detail Threshold Target See
Trading profit plus
network subsidy
payment less
interest, less tax,
aging Ie 100% of I 120% of
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40% Cash flow I change spent 80% of Board I Board Board
(excl, HMBU agreed target I agreed agreed
settlement costs) target target
plus movement in
net funding
position
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Non-financial measures — strategic and transformational
Weighting Measure Detail Threshold Target ot
Question B1
and B7 from
the
Quadrangle
survey
Discretion can
Postmaster I apply if all the
Promise year one, two 45% 50% 60%
(15%) and three
actions
identified in the
five-year
Postmaster
engagement
plan have been
completed.
Outstanding
Number of reprocont less
branches 50% of 100% of
Systems offering full than 25% of branches I branches
implementatI " estate and
60% ion: delivery RMG services have an complete I completed
(15%) without Horizon implementatio d by end I by end of
by 31 March of 2024 2024
2024 n date in the
next 3-6
months
Percentage of
Postmasters
Systems fully
implementat adopting/utilisin
Postmaster g the processes 70% 80% 90%
adoption and services
(15%) available
through the
new system
The customer and colleague promise measured through
progress against:
Customer e customer NPS - (appropriate customer NPS measure
and to be developed and agreed by 31/12/2021)
colleague ¢ colleague engagement/NPS to support customer and
promises postmaster promises: (to be developed and agreed by
(15%) 31/12/2021)
Threshold, Target and Maximum to be confirmed
Please note that there is no individual measure for the LTIP.
Detailed information about the LTIP measures can be found in Appendix 2.
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Consideration of progress against recommendations of the Inquiry
In determining the outcome of the LTIP, the Remuneration Committee will take into
account the recommendations of the Inquiry when available and review the progress
of the Executive against those recommendations. This will also apply to
recommendations for the CEO and CFO.
If not available during the LTIP measurement period this measure will be deferred and
included in the 2022-25 LTIP and not this 2021-24 LTIP.
3. LTIP 2019-2022: Change in Performance Metric - EBITDAS target
In December 2019, the Remuneration Committee agreed a resolution to “approve the
FY2019/22 target and range, based on the 21/22 EBITDAS being £110m with 85%
being the threshold figure and 115% being stretch. If business plans change by more
than 10% either way, we will replace with the 5 year Plan (SYP) number in March
2020”
In the event the 5YP numbers were not agreed due to Covid-19. The EBITDAS 21/22
target figure was discussed during the additional Remuneration Committee meeting
on 9 April 2021, and it was noted that the next step was for the Board to agree the
2021/22 budget and seek approval from the Remuneration Committee to apply this
target to the 2019-22 LTIP.
The matter was discussed at the July Remuneration Committee meeting, and it was
agreed to align the LTIP EBITDAS performance target for FY21/22 with the Annual
Plan figure of £52m. On this basis, LTIP threshold would be £44.2m (85% of target)
and stretch would be £59.8m (115% of target).
In reaching this agreement, the Remuneration Committee took into account the
significant challenges faced by senior leaders including the impact and on-going
effects of the Covid-19 pandemic, the on-going impact of the Inquiry, the negativity
associated with the Post Office brand and a significant fall in trading profit during
2020-21.
As the business targets for FY21/22 are expected to change by more than 10% of the
original forecast, and in line with the resolution passed by the Committee in December
2019, the Remuneration Committee approved the proposal to make an adjustment to
the EBITDAS performance target for FY21/22 in relation to the LTIP. This will align it
with the Annual Plan figure of £52m and, whilst it contains a significant amount of
stretch, provides a more realistic incentive target.
Correspondingly, we are seeking approval to apply this change to the LTIP 2019 - 22
for the CEO and CFO. This will bring arrangements for the CEO and CFO in line with
the other GE members, and also align it with the agreed business targets.
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As commented in the STIP section, there is still volatility in the market, and should
the EBITDAS target be revised as part of the mid-year Board sessions or earlier, the
Remuneration Committee will be asked to consider the new EBITDAS quantum which
would follow the 85 - 115% performance range. We will seek approval to apply any
revised targets agreed as a result of this review to the CEO and CFO.
In conclusion
I look forward to receiving your approval for the CEO and CFO participation in the
2021/22 STIP and the 2021 - 24 LTIP, together with approval for a change to the
EBITDAS target in the 2019 - 22 LTIP.
Yor
‘s sincerely
Ken McCall
Chair, Remuneration Committee
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Appendix 1
Detail of STIP measures
Financial measure - EBITDAS
A single financial measure has been proposed in line with the principle that the STIP is
simple and easy to understand by all and equally reflects Post Office’s mission: a
commercial business with a social purpose.
In setting the targets, the principle that has been applied is that the On-target amount is
equal to the Board agreed target for 2021/2, with a performance range of 80% to 120%
for Threshold and Maximum.
As presented at the Board, it is acknowledged that there is still volatility in the market.
The Board have agreed that two stretch assumptions in relation to FRES (£6m) and
Labels (£8m) would be tracked through the first half of the year, and baseline targets
adjusted downwards accordingly, should these revenues not transpire. This would
happen as part of the mid-year Board sessions or earlier. Should the EBITDAS target
be revised, the Remuneration Committee will be asked to note the new EBITDAS
quantum which would follow the 80-120% spread. In this instance, we would also ask
BEIS to note the new EBITDAS quantum and 80-120% range in relation to the metrics
for the CEO and CFO.
Postmaster centric measures
Postmaster satisfaction
It is proposed to use the same two questions from the Quadrangle survey that are
included in the Transformation Incentive Scheme:
e B1 “how would you describe your relationship with Post Office”; and
« B7 “how supported, or not, do you feel from Post Office”.
These two questions have been selected to provide cohesion through the two schemes
(and they are also proposed for inclusion in the 2021/4 LTIP) and provide alignment with
the strategic intent and the priorities. The outcome of the Transformation Incentive
Scheme will be calculated in January 2022, with the outcome of the 2021/2 STIP around
3 months later. The proposed target of 33% satisfaction for this measure is considered
to be very stretching. The baseline (from the January 2021 Postmaster survey) was
17% for question B1 and 25% for question B7. For the Transformation Incentive
scheme, the target is set at 30% for both, which means that the target in the STIP
represents a 10% improvement in the 3-months from January to April 2022.
Assessment of this measure will be the average result across the two questions.
As with the Transformation Incentive Scheme, it is proposed that the Committee may
consider and exercise discretion if all of the actions identified for in-year delivery in the
five-year Postmaster engagement plan have been completed.
Transaction Corrections
Assessment of this measure will be on a straight-line basis.
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Growth in Mails and Banking
Mails: There has been substantial volatility in the run rate of parcel volumes vs 2019
over the last 14 weeks but this now seems to have settled in a range of +3% to -10%.
All indicators are showing ecommerce is now in negative growth.
Analysis suggests that parcel volumes this year will stabilise at -3% vs 2019. At this
level, with the new commercial arrangement with Royal Mail, this would bring us to
£368m which is £22m greater than the 2019 outturn with parcel revenue up 28% vs
2019 and Special delivery up 20%. Therefore, the target is proposed at £368m.
Threshold is the 2019/20 revenue as agreed with the Remuneration Committee while
stretch is set at the £390m (pre UKGI stretch £38m budget).
- In response to feedback from the Remuneration Committee for, we have adjusted
the figures around the £368m target to represent 90% of Target at Threshold and
110% of Target at Stretch, recognising that this takes the Threshold figures
below the 2019/20 actual.
- For clarity, if the £52m EBITDAS target is adjusted downwards because of mails
performance, there would be no change to the £368m number for the purposes of
the revenue growth metric.
Banking: The Remuneration Committee agreed the principle of using 2019/20 as the
pre Covid-19 baseline for threshold targets. However, for Banking, BF2, which started in
January 2020, has inflated revenue to such an extent that at £130m this threshold
number is too low. Therefore, we are proposing a range +/- 10% for the threshold and
stretch around the on-target which aligns with Budget. NB. UKGI budget stretch has
only been added to Mails and FRES profit share, the Banking budget is the same under
both £38m & £52m versions.
Assessment of this measure will be split 50/50 between Mails and Banking, and on a
straight-line basis.
Improvement in a key area of compliance
Assessment against this measure will be split 50/50 between Inland and International,
and on a straight-line basis.
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Appendix 2
Detail of LTIP measures
Financial measure - cash flow
A single financial measure has been proposed with consideration to the principle that the
LTIP is simple and easy to understand by all and equally reflects the Post Office mission.
In setting the targets, the principle that has been applied is that the on-target amount is
equal to the target for 2023/4 which is anticipated to be agreed after the autumn 2021
spending review. A range of 80% to 120% of this target on a straight-line basis is
proposed. This aligns with the principle set for the financial measure in the STIP. This is
a change from the 2019/22 LTIP where the range was set at 85% to 115%.
This measure is weighted at 40% of the total LTIP to allow for increased focus to be
given to the transformational elements of the LTIP.
Non-financial measures
These are weighted at 60% (15% per individual measure). Each measure could be
achieved independently of each other, and a bonus considered for that element in
isolation.
Postmaster Promise
The same two questions (B1 and B7) from the Quadrangle survey are for the LTIP as for
both the Transformation Incentive Scheme and STIP. Aligning the same measures over
the three incentives clearly signals the importance of these two measures and the action
plans to support delivery against them whilst also signposting the improvement expected
over the period to 2024. Further stretch improvements would be set for future LTIP
awards.
Assessment of this measure would be the average result across the two questions.
Systems implementation: two measures - delivery and Postmaster adoption
It is proposed that there are two measures relating to the systems implementation: the
first relating to delivery to be measured by the number of branches offering full Royal
Mail Group services without Horizon and the second assessed through measuring the
percentage of Postmasters fully adopting/utilising the processes and services available
through the new system.
Assessment of these two measures will be on a straight-line basis.
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Customer and Colleague Promises
Work is currently underway to develop our customer and colleague promises. Customer
progress will be measured against a relevant and appropriate customer NPS measure
that will be developed and agreed by 31/12/2021.
Colleague engagement is measured through the engagement survey (to be developed
from the Engagement drivers). The inclusion of colleague engagement/NPS is vital to
ensure the aligned focus of the organisation on supporting both the customer and
postmaster promises. We will analyse the engagement drivers to enable us to use the
elements of engagement which most strongly drive the Customer experience. These
will be developed and agreed by 31/12/2001.
Assessment of this measure will be 50/50 across Customer and Colleague and will be
detailed further once the work is finalised.
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