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Directors' remuneration report

Annual statement from the Chairman of the Remuneration Committee

Anthony Nightingale

Dear Shareholder

I am pleased to present the Remuneration Committee’s report for the year to 31 December 2016.

The Committee’s report is presented in the following sections:

By way of preface, I would like to share the context for the key decisions the Committee took during 2016, in particular, the decisions relating to remuneration arrangements in 2017 and how we rewarded the performance achieved in 2016.

Reviewing the Directors’ remuneration policy

Ahead of the renewal of the Directors’ remuneration policy at the AGM in 2017, the Committee very carefully considered and debated a range of potential remuneration models. The Committee concluded that the current model continues to connect remuneration with the achievement of the Group’s ambitious goals to deliver further profitable growth in the coming years. On this basis, the Committee decided to retain the current remuneration model while making a number of improvements to ensure that it continues to be aligned with the Group’s remuneration principles, business priorities and evolving stakeholder expectations.

The proposed new Directors’ remuneration policy has been designed to:

Simplify incentive arrangements

The Committee is committed to simplifying the remuneration arrangements for the Executive Directors wherever possible. To this end, the number of Annual Incentive Plan financial metrics is being reduced from the seven measures used in 2016 to four measures (cash flow, operating free surplus, IFRS operating profit and NBP EEV profit) for the 2017 financial year. These targets are aligned with the Group’s focus on growth and cash generation. Minimum capital levels must be achieved for future bonuses to be paid, underscoring the importance of disciplined and proactive risk and capital management.

In a similar spirit of simplification, the Chief Executive, M&G will receive long-term incentive awards under a single incentive plan (the Prudential Long Term Incentive Plan, PLTIP) from 2017. In the past, the role holder has participated in two long-term incentive arrangements. The face value of the awards will remain unchanged.

Reward the delivery of the Group’s longer-term strategy

It is proposed that a sustainability scorecard be used to determine vesting of 25 per cent of PLTIP awards made in 2017 and subsequent years. The scorecard rewards the longer-term generation of capital, the development of a more diverse senior leadership team and the achievement of the Group’s conduct expectations. These measures are aligned to the Group’s strategic priorities and corporate values, and achieving them will support the Group’s ability to deliver to its stakeholders during and beyond the three-year performance period.

The Committee continues to be mindful of its scope to use discretion to adjust bonus payments and/or PLTIP vesting levels if it is not satisfied that the underlying financial performance of the Company during the relevant performance periods justifies the payments arithmetically suggested by the achievement of the performance conditions.

Strengthen the connection between executives and other shareholders

The Committee has decided to introduce a two-year holding period for PLTIP awards made in 2017 and subsequent years. This holding period will apply after the end of the three-year performance period, giving a five-year time horizon for these awards.

To further strengthen the alignment between executives and shareholders, the value of shares which Executive Directors are asked to own will be increased as follows:

  • The Group Chief Executive will be asked to own shares worth at least 400 per cent of base salary (350 per cent at present); and
  • Other Executive Directors will be asked to own shares worth at least 250 per cent of base salary (200 per cent at present).

Many of the Executive Directors have shareholdings well in excess of the guidelines that they are asked to meet. For instance, on 31 December 2016, Mike Wells had a beneficial interest in shares with a value of over 700 per cent of his salary.

As the Committee considered the new Directors’ remuneration policy, I corresponded with and met shareholders who together own around 43 per cent of the Group’s share capital as well as organisations that represent and advise shareholders. The Committee and I are grateful for the feedback and support that we received.

Rewarding 2016 performance

Prudential’s executive remuneration arrangements reward the achievement of Group, business and personal targets, provided that this performance is delivered within the Company’s risk framework and appetites, and that the conduct expectations of Prudential, our regulators and other stakeholders are met.

In rewarding performance, the Committee scrutinises the proposed bonus and LTIP performance targets, which are based on the business plans agreed by the Board, to ensure they are sufficiently challenging, and the Committee sets stretching performance ranges for each of the financial performance measures. The Committee believes that there is a high degree of stretch in both the business plans and the target ranges when factors such as the external economic, political and regulatory environment, across the Group’s businesses and geographies, are taken into account.

As set out in the Business review section earlier in this annual report, the Group delivered strong financial performance in 2016, notwithstanding the significant changes which took place in the markets in which it operates.

Performance against these key metrics exceeded the stretching targets established by the Board and the results achieved in recent years. The Group achieved these results while maintaining appropriate levels of capital and operating within the Group’s risk framework and appetites. The Committee believes that the bonuses it awarded to Executive Directors for 2016 appropriately reflect this performance.

Performance in 2016 built on the strong results achieved in recent years, despite the external challenges faced by the Group during this time. Based on total shareholder return (TSR) and strong cumulative IFRS operating profit performance over the performance period, the Committee determined that between 41.7 and 70.8 per cent of the PLTIP awards made to Executive Directors in 2014 would vest (depending on the business unit). These awards will be released to participants in April 2017.

The total 2016 ‘single figure’ for the Group Chief Executive is lower than the total 2015 ‘single figure’, despite continuing strong business performance. This is chiefly a result of a lower level of vesting of the 2014 PLTIP award. Mike Wells’s 2016 ‘single figure’ is 30 per cent less than his 2015 ‘single figure’, notwithstanding his exceptional leadership and personal performance.

As you will be aware, there have been three changes to Prudential’s team of Executive Directors during 2016. The remuneration decisions arising from these changes were disclosed in stock exchange and website announcements when they took place. Further information can be found in the Recruitment arrangements and Payments to past Directors sections of this report.

I trust that you will find this report a clear account of the way in which the Committee has implemented the Directors’ remuneration policy during 2016 and of the Committee’s proposed new Directors’ remuneration policy.

Anthony Nightingale, CMG SBS JP
Chairman of the Remuneration Committee
13 March 2017

Strategic priority Group performance £m 2016 bonus achievement

Notes

  1. As previously reported and includes the contribution from the Korea Life business for all years prior to 2016.
  2. As previously reported and includes the contribution from the Korea Life business and UK bulk annuity new business profits for all years prior to 2016.

IFRS operating profit1

Prudential's primary measure of profitability and a key driver of shareholder value

CAGR (excluding Korea): +14%

2015-2016 growth 7%IFRS operating profit

Above stretch level

IFRS operating profit accounted for 35 per cent of Group financial bonus targets

EEV new business profit2

A measure of the future profitability of the new business sold during the year and indicates the profitable growth of the Group

CAGR (excluding Korea and UK bulk annuity new business profits): +14%

2015-2016 growth 24%EEV new business profit

Above stretch level

EEV new business profit accounted for 5 per cent of Group financial bonus targets

Business unit remittances

Cash flows across the Group balance these net remittances (which support dividend payments) with the retention of cash for profitable reinvestment

CAGR: +9%

2015-2016 growth 6%Business unit remittances

Above stretch level

A cash flow measure was used to determine 10 per cent of the Group financial bonus targets

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