THE ACCOUNTS OF THE

CO-OPERATIVE GROUP:
TURNAROUND TO REBUILD
The Remuneration Supplement

A Concise Analysis of the 2015 Remuneration Policy Report

With Explanatory Notes to Aid Its Interpretation

Kat Rose 2016

katrose@live.co.uk

Contents
Introduction ........................................................................................................................................ 2
The Remuneration Policy Votes .......................................................................................................... 2
Overall Reasoning for 2015 onwards .................................................................................................. 2
Fair Pay ............................................................................................................................................ 2
Competitive Pay with Rewards for Successes ................................................................................. 2
Pay Levels for Colleagues ................................................................................................................ 2
Pension Changes from October 2015 ................................................................................................. 3
Rebalancing Executive Salaries ........................................................................................................... 3
The Annual Incentive Plan (AIP) changes........................................................................................ 3
The Long Term Incentive Plan (LTIP) changes ................................................................................. 3
Comparison with Previous Long Term Incentive Plans ................................................................... 4
Reduced Notice Periods A Work in Progress ................................................................................... 4
Garden Leave .................................................................................................................................. 5
Notice Period Pay ............................................................................................................................ 5
The Chief Executives Pay Reduction .................................................................................................. 5
Fixed Pay Cut, from July 2016 ......................................................................................................... 5
Annual Incentive Plan and Long Term Incentive Plan cuts, from January 2017 ............................. 5
What These Changes Will Mean Once All Are In Force .................................................................. 6
Other Payments to Executives ............................................................................................................ 6
Relocation Payments ...................................................................................................................... 6
Forfeiture of Previous Incentive Type Rewards .............................................................................. 7
Payments on Leaving the Group ..................................................................................................... 7
Non-executive Directors Remuneration ............................................................................................ 7

Introduction
This is a summary of the first report from the Co-operative Groups new Remuneration Committee, a
report which informs the reader that it was written with members concerns about the existing
remuneration policy in-mind.
The new remuneration report includes a separate element which focusses on policy itself, rather
than just its results. Whilst the vote upon that policy element of the Committees report is not
binding, if members should happen to oppose it then the Committee will try to address those
concerns before putting it to any future vote.
The current remuneration structure will remain in place until 2017, but with some policy changes
that have already taken place and which are included in this report.

The Remuneration Policy Votes

This years AGM will feature two votes on executives pay packages:
The first will be on the pay packages that executives have already received and will be your
opportunity to say if you agree with the pay packages that have been awarded; details of their total
pay packages will feature in the full report on the Groups Finances, of which this is a supplement.
The second vote is on the Remuneration Policy, the policy which determines how much
remuneration all Executives and Board Members will receive; it is the information for the second
vote that is summarised here.

Overall Reasoning for 2015 onwards

When the Co-operative Group was in crisis they had to make executive pay packages very attractive.
Now that the Group is no longer in crisis, the focus can be better balanced between finding the best
talent and getting value for money.
The focus for the new Remuneration package is fair pay in return for achieving set goals:

Fair Pay
As and when executives hit the targets set for them, the total remuneration for executives will be in
the middle of the range of pay packages offered by similarly sized businesses, for similarly
challenging roles.

Competitive Pay with Rewards for Successes

While offering reasonable pay packages in comparison to other businesses of a similar size, the
Committee also wants to ensure that incentives are linked to specific goals of both a financial and a
co-operative nature.

Pay Levels for Colleagues

The Group has increased the total pay packages of its lowest paid colleagues so that all colleagues,
regardless of their age, are now earning a minimum of 7.20 an hour; most colleagues are earning
slightly more than this. This increase was agreed with Usdaw trade union representatives before the
Governments announcement of its Living Wage. The Co-operative Group is also moving toward all
colleagues being able to participate in an annual incentive scheme; though only senior management
who are in a position to influence long term strategy will receive Long Term Incentive Plan pay
awards.

Pension Changes from October 2015

The way that pension payments are made has changed, the defined benefit pension scheme has
been closed and all colleagues, regardless of pay grade, will now only have the opportunity to take
part in the pre-existing defined contribution scheme.
In order to ensure that there is enough money to pay for colleagues pensions as they retire, all
colleagues pensions are invested in the Groups pension scheme. The Groups pension scheme then
invests the money in financial instruments (contracts that give rise to a financial asset of one entity
and a financial liability or equity instrument of another entity) with the aim of making that pension
pot grow.
The defined benefit pension scheme being replaced by a defined contribution scheme means a
change for some colleagues from receiving a guaranteed pension from the Group upon retirement,
to the Group guaranteeing the amount of money that it will contribute towards their pensions.
This change means that the Groups future pension commitment will be based on how much has
been put into colleagues pensions, rather than pre-defined pay-out levels.
Where employer contributions to some executives pensions formerly amounted to to a total of 16%
of base salary, they will all now receive 10% of base salary. Those colleagues on all pay grades who
were in the of the defined contribution pension scheme, have seen employer contributions to their
pensions increase by 2% of their base salaries. The result will be all colleagues, regardless of pay
grade, receiving the same percentage of their base salary from the Group toward their pensions. Its
a step in the direction of co-operation and hopefully there might be more such steps in future.

Rebalancing Executive Salaries

Now that the Rescue phase has passed, the Remuneration Committee are looking to reduce the
ratio of base salary to incentive payments. This would mean a higher percentage of new executives
total pay package being dependent on their meeting the targets that they have been set.
The composition of the present executives pay package is likely to change from the
beginning of 2018. The change will see the ratio of fixed pay to target-based pay adjusted, as
greater emphasis will be placed upon target-based pay.

The Annual Incentive Plan (AIP) changes

The Annual Incentive Plan is used when the Co-operative Group has a set of short-term goals that
they want to encourage colleagues of whichever pay grade to meet; a short-term goal in this case
means a goal that can be achieved within a year.
AIP bonuses are awarded based on both personal performance and business performance. Business
performance goals for this annual bonus are generally based on budgeted profit for the year.

The Long Term Incentive Plan (LTIP) changes

The Long Term Incentive Plan is used when the Co-operative Group has a set of medium-term goals
that they want to encourage the executive to meet; a medium-term goal in this case means a goal
that can be achieved within three years.
Claw-back provisions exist for both the Long Term and the Annual Incentive Plan, so in the event of
any significant misstatement any amounts that might have been overpaid can be claimed back.

The standardised goals for the 2015-2017 Long Term Incentive Plan are as follows:
40%

Is based on the net debt:EBITDA ratio; the ratio usually used to determine a businesss
ability to pay-off its debts. The formula is: Debt - Cash EBITDA. EBITDA is a business's total
Earnings Before Interest, Taxes, Depreciation and Amortization.

25%

Colleague Engagement

25%

Membership Spend

10%

Brand Health

Fixed pay is not increasing for 2015 or 2016; also, any new Executive that joins the Group will
start with a lower ratio of fixed to goal-based pay than the present Executives currently receive.
At present the pay-out from the Long Term Incentive Plan, where there was none in the
previous year, has resulted in significantly higher total pay packages for the current Executive.

Comparison with Previous Long Term Incentive Plans

The Long Term Incentive Plans do overlap each other, meaning that in 2015 Group executives
needed to attend to priorities from the 2013-15 Incentive Plan, the 2014-16 Incentive Plan and the
2015-2017 Incentive Plan in order to receive payments in 2015, 2016 and 2017.

Each Goal = 20%

The 2013-2015 Long Term Incentive Plan

To re-capitalise the Bank (to stop the Bank from collapsing).

To reduce costs and increase efficiency to meet targets.
To create a new Group leadership structure, get executives in to fill it and create a new
performance management process for all Group colleagues.
To create a new Group strategy and purpose: clearly defined, communicated & embedded in
the financial plan.
To safeguard the reputation of the Group.

Each Goal = 33%

The 2014-2016 Long Term Incentive Plan

To achieve a target 'net debt to EBITDA ratio'.

To achieve a target cumulative cash flow level (cumulative cash flow being the total amount of
money that has been paid into or out of a business during a set period of time, so invoices
don't count).
To safeguard the reputation of the Group.

Reduced Notice Periods A Work in Progress

Notice periods are significant because since 2011 they have rarely been worked, but they have been
paid for by the Group. Between 2011 and 2015 these notice periods have resulted in the Group
paying former executives 2.08million for Notice Periods and 3.49million for Garden Leave.
Notice Period and Gardening Leave payments combined cost the Group 5.57million between
2011 and 2015, for which they received nothing. It would save the Group millions if the
Remuneration Committees negotiations to halve these notice periods were successful.
Any new executives to join the Co-operative Group will automatically be given a maximum notice
period of 6 months; the previous allowance was up to a full year.

Garden Leave
When the Group deems it necessary to keep an executive under a contract of employment, but not
have them work their notice (for example: if they are under an open investigation); that executive
will be placed on garden leave. Whilst an executive is on garden leave they will only receive the
payments that the Group is contractually obliged to pay them.

Notice Period Pay

Once a decision has been made that an executive will leave the Group, the Group may consider it
advisable to pay them the fixed pay that they would have received had they worked their notice,
instead of insisting that they work it. When fixed pay is given to executives in lieu of notice it is paid
in instalments. These instalments are liable to be either reduced or stopped when a former
executive finds a new job, depending upon the difference between the remuneration package for
their role at the Group and that at their new employer. If their new role pays better than their role
at the Group did, then the payments can cease when that new role starts rather than at the end of
their notice period.
The main advantage for the executive is that, as the fixed pay payments start to arrive, they
can concentrate on looking for a new job straight away. The main advantage for the employer
is that key decisions which are vital to the businesss future wont be made by someone who
has already decided to leave the business.
The main disadvantage for the business is that it has to send payments to the departing
executive without seeing any work in return.

The Chief Executives Pay Reduction

Much has been reported in relation to the Chief Executives pay and it being reduced, heres a
breakdown of what that really means.

Fixed Pay Cut, from July 2016

The Chief Executives Fixed Pay is set to reduce from 1,250,000 to 750,000 from the 1st July
2016, a cut of 500,000 if applied to the whole year. A July 1st start date means that the actual
reduction will be 250,000 in 2016. After concerns about the CEOs pay were raised last year, a
change of this nature is a step forward and one which media reports made clear, has disturbed
the status quo.

Annual Incentive Plan and Long Term Incentive Plan cuts, from January 2017
These represent significant pay package reductions for the Chief Executive and they will be more
significant because of the reduction in their base/fixed salary which will take full effect from 2017.
Annual Incentive Plan and Long Term Incentive Plan payments are calculated on the base/fixed
salary of the executive, so a reduction in base pay will automatically mean a reduction in Annual
Incentive Plan pay from 2016. In addition, Annual Incentive Plan payments that the Chief Executive
can earn will be reduced as a percentage of their base salary from 100% to 40% in 2017. The
maximum level of Long Term Incentive Plan payments that the Chief Executive can earn will also be
reduced from 100% of their base salary to 50% of their base salary.

You can see what these changes to the Chief Executives pay will mean in real terms in the chart
below:

CEO's Fixed and Incentive Pay (000's) 2015-2019

Base (Fixed) Pay

2015

AIP (Max Possible

pay-out)

Pay Year

2016

LTIP (Max Possible

Pay-out) 2013-15
Scheme
LTIP (Max Possible
Pay-out) 2014-16
Scheme
LTIP (Max Possible
Pay-out) 2015-17
Scheme
LTIP (Max Possible
Pay-out) 2016-18
Scheme

2017

2018

2019
-

500

1,000

1,500

2,000

2,500

3,000

3,500

Value in (000's)

*LTIP awards are set scheme by scheme, with each scheme lasting 3 years, Maximum LTIP refers to the maximum
possible pay-out level if the CEO exceeds his targets by 100%.

What These Changes Will Mean Once All Are In Force

In total these changes will reduce the maximum base pay and bonuses that the Chief Executive can
earn by 62% in 2019, when compared to 2015. The current Chief Executive has agreed to have his
notice period halved, a move set to save the Group hundreds of thousands of pounds at the least;
details of when this change will come into effect are currently to be confirmed.

Other Payments to Executives

Benefit payments to executives (for example: car allowances or relocation costs) will echo the
industrys normal practices. This means that the Groups offer to executives will be on a par with
what competitors of a similar size are offering their executives.

Relocation Payments
Relocation payments are provided to new executives, at the Remuneration Committees discretion,
in order to help them to move closer to their new place of work. If executives dont have to travel
too far to get to work, or have to live away from their families in order to get to work, then they are
more likely to stay working with the Co-operative Group, rather than looking for another job closer
to home.

Forfeiture of Previous Incentive Type Rewards

When seeking to recruit top executives from another business, that other business will often
endeavour to retain those executives through offering them attractive incentive schemes. When the
Co-operative Group is seeking to persuade those executives to leave their present employer in order
to work for the Group, they can use these payments to match some or all of the incentive package
offered by the executives present employer and therefore give executives one less reason to stay
with their present employer.

Payments on Leaving the Group

In addition to notice period and garden leave payments, explored earlier in this paper, payments
towards legal fees and career support may also be made subject to negotiations with the departing
executive and Remuneration Committee discretion.
The award of any bonus scheme payments to departing executives will also be decided at the
discretion of the Remuneration Committee, subject to the executives performance and contractual
entitlements.

Non-executive Directors Remuneration

Whilst it is apparent the non-executive directors remuneration has increased between 2014 and
2015, few will find this surprising when the levels of business expertise the new directors bring
to the Group are also different from that of their predecessors. Calculating the exact level of
that increase is challenging because of the eclectic nature of directors remuneration payments
in 2014.
The Board Chairs remuneration has more than doubled, but the current Chair has yet to claim
any payment for his role. To date the Group have paid 250,000 directly to the Co-operative
Community Investment Foundation in his name, at his request, rather than to him.

2015 Grounds for Director Remuneration

Basic and total fee for Board Chair = 250,000
Basic fee for a Director = 60,000
Additional fee for the Senior Independent
Director = 15,000
Additional fee for the Chair of the Audit and
Risk Committee = 15,000
Additional fee for the Chair of the
Remuneration Committee = 15,000

Additional fees for sitting on individual

Business Boards are not included in the 2015
Remuneration Report. The reports of the
Groups individual businesses, which may
contain this information, were not available at
the time of writing.

2014 Grounds for Director Remuneration

Basic and total fee for Board Chair = 120,000
Basic fee for a Director = 12,000
Additional fee for Membership of the Risk and
Audit Committee = 3,000-6,000
Additional fee for Membership of the
Remuneration Committee= 1,000-5,000
Regular Additional fee for Membership of the
Food Holdings Board = 12,000-18,000
Additional fee for Membership of the Specialist
Businesses Board = 18,000
Additional fee for Membership of the Cooperative Banking Group Limited (Board) and
its committees = 17,000
Additional fee for Regional Board and Area
Committee Membership = 7,000
Additional fee for Membership of the Cooperatives UK and Co-operative Press Board =
1,000
Additional fee for Trustees of the Pension Fund
= 2,000-6,000

In order to establish how the Group Directors fees compare to our competitors I looked first to the
nearest competitor (of a roughly similar size) that might be considered to be a co-operative. This
comparison wasnt highly illuminating as the John Lewis Partnerships accounts are less transparent
than those of the Group. Then I turned to the 2015 Annual Report of the Nationwide Building Society
(p. 91), given its status as a registered mutual:
Fee policy

Fees for 2015/16

Fees for 2014/15

Chairman

375,000

310,000

Basic fee

62,000

62,000

Senior Independent Director*

30,000

30,000

Chairman of the Audit Committee or Board

Risk Committee

35,000

35,000

Member of the Audit Committee or Board Risk

Committee

15,000

12,500

Remuneration Committee Chairman

30,000

25,000

Remuneration Committee member

15,000

12,500

3,000

3,000

Nomination Committee member

* The Senior Independent Director fee of 30,000 from 2014/15 is inclusive of committee membership fees. Committee
Chairman fees will continue to be paid.

In terms of areas to monitor over the coming years, on the current evidence, executives
remuneration packages would appear to have more areas that could create cause for concern than
the non-executive directors pay.
Overall, despite misgivings highlighted in this report, the proposed remuneration policy represents
significantly better value for money and a few more co-operative elements, than the previous one.
The official information needed to produce this report was also more accessible than that of
previous Remuneration Reports published by the Group, due in no small part to the increase in
explanatory information.

Kat Rose 2016