Snowy Hydro’s Executive remuneration is designed to attract, motivate and retain high calibre Executives who have the requisite experience and skills to lead a large complex organisation. Core to Snowy Hydro’s Executive remuneration strategy is providing a clear and direct link between pay and organisation and individual performance. This is achieved through:
- A remuneration framework which has a fixed and a short and long term “at risk” remuneration component which are only paid if agreed performance gates and Board approved KPIs are met;
- An annual review of the Executive remuneration framework, including the performance measures under the STI and LTI programs;
- Consideration and benchmarking of market remuneration practices to determine any proposed changes to Executive remuneration;
- A balance of corporate and individual KPIs to determine performance outcomes after the minimum performance gates are met; and
- Linking each Executive’s STI and LTI award to the achievement of Board approved stretched and measurable performance goals.
5.1 Remuneration Framework components
CEO & MD and Executive annual remuneration arrangements comprised three components:
1. Fixed Annual Remuneration (FAR);
2. Short Term Incentives (STI); and
3. Long Term Incentives (LTI).
5.2 Remuneration Benchmarking
Snowy Hydro aims to position target total remuneration competitively against comparable organisations. Independent remuneration advisors directly benchmark Executive roles to comparable roles in the Australian market. External market benchmarks are determined by researching disclosed data from relevant Australian listed companies, private companies and Government Business Enterprises, supplemented by survey data where necessary. Target total remuneration for each Executive role is informed by the benchmark data and internal relativities.
In alignment with the Committee Charter, remuneration levels for each Executive is reviewed and approved annually by the Board on the recommendation from the People and Culture Committee.
5.3 Remuneration Mix
A significant portion of CEO & MD and Executive remuneration is set ‘at risk’ to ensure alignment with Snowy Hydro’s strategic objectives. CEO & MD and Executives are only rewarded for delivering performance outcomes consistent with Snowy Hydro’s Budget and Corporate Plan.
The CEO & MD and Executive target remuneration mix as of 30 June 2019 is illustrated below.
As ‘at risk’ remuneration is tied to the achievement of Snowy Hydro and individual performance objectives, actual remuneration received may vary from the target remuneration from year to year.
5.4 Fixed Annual Remuneration
FAR aims to reward the CEO & MD and Executives for delivering on the core requirements of their role. Base salary, superannuation contributions and non-cash benefits comprise an Executive’s Fixed Annual Remuneration (FAR). Factors taken into account when setting the appropriate FAR for all Executives include:
- Market data for comparable roles;
- Complexity of the role;
- Internal relativities;
- An individual’s skills and experience; and
- Individual performance assessments.
Once hired, Executives have no guarantee of FAR increases as per the terms in their Executive contracts. The FAR of all Executives is reviewed annually by the Board, to ensure alignment with market practice.
5.5 Short-Term Incentive Program
Snowy Hydro’s Short-Term Incentive (STI) is intended to reward individuals for their contribution to company performance in line with the Corporate Plan. The STI Plan is an “at risk” annual incentive opportunity where an STI payment could be awarded subject to meeting threshold performance gates and achievement of relevant Group and individual KPIs.
The STI program only becomes available when the following two gates have been met:
- The safety gate requires that there be no fatalities to either an employee or embedded contractor across Snowy Hydro in the given year; and
- The financial gate requires the achievement of 90% of Group consolidated EBITDA which is set in the Budget and approved by the Board each year.
Snowy Hydro uses a balanced scorecard approach when setting key result areas for the CEO & MD and Executives. The key result areas and the KPIs are aligned to the Corporate Plan’s long term goals whilst also providing focus on the key strategic deliverables for the performance year.
The following key result areas are included in the CEO & MD and Executive Scorecard:
- 70% based on the Group Scorecard KPIs – to ensure strong link and ultimate accountability for overall group outcomes; and
- 30% based on the Individual Scorecard - set criteria although they are qualitative in nature.
The CEO & MD and Executive corporate and individual scorecard is illustrated in the table below:
The individual focus component also allows for adjustment of quantitative performance outcomes up or down depending on the circumstances in the external environment, changes in priorities not foreseen at the beginning of the performance period and demonstration of company values and behaviours.
CEO & MD and Executives’ STI opportunities are communicated as STI ‘Target’ (the potential award available if target performance is achieved) and is set at 100% of the target incentive opportunity. The STI Target Opportunity varies by individual and is expressed as a percentage of FAR of between 30% and 60%. The STI Maximum (the maximum potential award available) is set at 200% and only paid at levels in excess of target if the Company delivers superior performance above agreed targets.
At the end of the financial year the People & Culture Committee reviews the performance of the CEO & MD and each Executive. The Committee then recommends to the Board individual STI awards. All STI awards are paid in cash within three months of the end of the financial year.
Individual STI plan awards for CEO & MD and Executives are calculated using the following formula:
FAR x ‘Target’ Opportunity x Financial & Safety Gates x CEO & MD and Executive STI Scorecard Outcome consisting of Group Scorecard Outcome (70%) + Individual Scorecard Outcome (30%)
Notwithstanding the achievement of the agreed Key Results Areas (KRAs), the Board has absolute discretion to make the final determination of the CEO & MD and Executive incentive payouts.
5.6 Long-Term Incentive Program
The Profit Share Plan (PSP) was introduced in FY2017 and is Snowy Hydro’s long-term (three year) performance-based reward and retention scheme for the CEO & MD, Executives and a small number of senior managers. The PSP is designed to focus this small group of Executives and Senior Leaders on long term value creation.
Participation in the plan in any given year is by invitation from the Board. An invitation in one year does not guarantee an invitation in subsequent years.
Under the PSP, participants are eligible to receive a share of the Company profit generated over and above target performance over a three year period. Like the STI, it is payable in the form of cash to participants who are still employed by the entity at the time of vesting.
For KMP, the PSP ‘Target’ Opportunity varies by individual and is expressed as a percentage of FAR of between 23% and 50% on a face value basis.
The quantum of the profit share paid out at the vesting date for each tranche is determined based on the past three years’ average actual EBITDAperformance as a baseline. The following principles apply:
- No pool will be generated unless the three year average actual EBITDA exceeds the threshold performance level set by the Board as per the Corporate Plan;
- The profit sharing percentage is tiered (Tier One and Tier Two) with a higher sharing percentage for the higher tier (Tier Two) representing financial out-performance;
- The Board on the recommendation from the People & Culture Committee determines the EBITDA required for Tier One and Tier Two payments three years in advance at the same time as the Corporate Plan is approved. Currently it is set as follows:
- Profit share starts being earned at 90% (financial gate consistent with the STI financial gate) of the three year rolling average Corporate Plan target. In the plan this is referred to as Tier One gate;
- Profit share above 100% of the three year rolling average Corporate Plan target is distributed at a higher profit share funding rate. In the plan this is referred to as Tier Two;
- As per the STI Plan rules the Board has absolute discretion to adjust or vary the EBITDA outcome as it sees fit.
Prior to FY2017 Snowy Hydro operated an Economic Value Added (EVA) LTI Program. From FY2017 the program was closed to new participants. Last payment for KMP on this scheme will be for the allocation vesting on 30 June 2019.