Aviva 2009 Annual Report Download - page 104

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Aviva plc Directors’ remuneration report continued
Annual Report and Accounts 2009
Future actions and changes
The Company does not anticipate any significant changes to the structure of EDs’ compensation packages in 2010, compared with
those outlined in this report. There are, however, three main areas of activity in 2010 which are worth noting:
i) Increased regulation in executive remuneration and changes in corporate governance
2009 has seen a series of regulatory and governance guidelines issued by a wide ranging group of organisations, from the Financial
Services Authority, the Company’s primary regulator, to the Financial Stability Board of the G20. Whilst many of the issued
guidelines do not yet formally apply to Aviva, the Company has already reviewed its existing remuneration arrangements against
these and Aviva’s current remuneration structures are broadly in line with the requirements laid down by the majority of the codes
of practice and corporate governance expectations. A good example of this is the high level of deferral on the annual bonus (two-
thirds) which would be considered best practice in the new environment. In addition, the Company has introduced clawback
provisions into the Company’s share incentive plans. The Group Risk and Regulatory Committee is also mindful of the
recommendations and that its involvement will be required including its input into the setting of financial objectives.
ii) Changes to UK taxation
The changes in the personal tax regime effective in April 2010 will create a significantly different tax position for a number of
senior employees. The Company has therefore made available the choice to receive deferred annual bonus awards as restricted
stock, thus allowing the payment of income tax on grant prior to the changes coming into effect in April 2010. Any potential cost
to the Company is judged to be minimal. In addition, the 2010 LTIP grant will be underpinned by an approved share option grant.
This will have no additional cost to the Company. These changes were discussed with Her Majesty’s Revenue and Customs (HMRC)
before being implemented.
iii) Strategic Reward Review
The Company is required every five years to seek shareholder approval for the operation of its share-based incentive plans. The
Committee has, in the past, carried out a comprehensive review of senior executive remuneration to coincide with this. This has
allowed the Company to put to shareholders’ proposals that reflect a thorough review of the Company’s remuneration package
taking into account changing market and regulatory practice and the requirement to ensure that the package remains competitive.
It was agreed in 2008 that the review would be delayed by 12 months from 2009 to 2010. This will enable Aviva to reflect on the
new regulatory and governance requirements that emerge from the global financial crisis. Following an in-depth review during
2010, new proposals will be put to shareholders in 2011.
Remuneration policy
Alignment with Group Strategy
The Committee considers alignment between Group strategy and the remuneration of its senior executives, including EDs, to be
critical. It believes that senior executives should be highly rewarded (on a market competitive basis) for the delivery of stretching
goals but should receive reduced rewards when the business performs poorly. The pay and employment conditions of employees
of the Company and Group were also taken into account when determining directors’ remuneration for the financial year. To
achieve this alignment Aviva’s remuneration package is leveraged, with a high percentage of pay “at risk” against the achievement
of stretching goals which is aligned with the Company’s risk profile and employee behaviour. Furthermore two-thirds of any bonus
and any LTIP grant are delivered in the form of Aviva shares. The element of deferred bonus that is matched under the OATTV Plan
only vests if very demanding Earnings Per Share (EPS) targets are met. The requirements to defer bonus, participation in the LTIP
and the OATTV Plan closely tie the long-term value of executive remuneration to the Company’s share price performance.
Senior executives thus have high exposure to the same benefits and drawbacks of share price movement as all shareholders. The
belief that senior executives should be shareholders is reinforced through formal guidelines requiring EDs to build up and maintain
a significant holding of shares in the Company.
The Group’s strategic priorities and targets are set out elsewhere in this report. Those priorities are reflected closely in the
remuneration package:
— Basic Salary: Internal and external equity in basic salary positioning is an important contributor to a motivational remuneration
package. A range of market data is used to inform decision making taking into account the Company’s policy with regard to
the FTSE 30 and FTSE 50.
— ABP: Bonus structures are effective only if they drive, through the targets, the maintenance of the Company on a sound
financial footing and sustained profitable growth. In addition, the targets must not provide an incentive to promote behaviours
which could be detrimental to the Company’s long-term interests. Management must justify the targets it recommends. The
Committee assures itself that the targets provide appropriate incentives, are sufficiently challenging, are aligned to shareholders’
interests and are within the Group’s risk appetite.
The Committee also considers how, given changing economic circumstances, the Group’s priorities, and consequently the targets
underpinning its bonus structures, need to change. Given the challenging current environment the Committee has agreed that
financial targets for 2010 should focus more on profitable growth and long-term value creation. Financial targets sit alongside
targets on customer advocacy and employee engagement introduced in 2005 that the Committee believes are critical to long-term
organisational health. The personal objectives of Executive Committee members are reviewed by the Committee to ensure they
adequately reflect the strategic aims of the Group, good governance and best practice.