REMUNERATION APPROACH

IAG’s remuneration approach is designed to align the interests of shareholders and Executives as well as to encourage sustainable, superior performance.

The alignment between the short term performance of the Group and the reward of Executives has been strengthened.

In August 2016, the People and Remuneration Committee (PARC) and the Board reviewed IAG’s short term performance goals for the Managing Director and Chief Executive Officer (Group CEO) and the Executive Team, and the way performance against these goals translates into Short Term Incentive (STI) outcomes. Previously, the STI of the Executive Team was determined with reference to individual balanced scorecards that were tied to the performance of the division each Executive managed. For the year ended 30 June 2017, the STI of the Group CEO and each member of the Executive Team has been measured against the Group Balanced Scorecard, which drives collective accountability for the performance of the Group under the concept of “One IAG”. STI awards for the year ended 30 June 2017 have been calculated with reference to the Group Balanced Scorecard outcome, with the Board able to exercise discretion up or down from this outcome to reflect the Executive’s contribution to the Group’s performance. Other significant changes to the Group Balanced Scorecard include:

• highlighting the importance of the Group’s financial performance in determining STI outcomes by increasing the weighting of financial measures in the Group Balanced Scorecard to comprise 60% of all goals;
• introducing a net promoter score as the customer measure for the Group Balanced Scorecard. This reflects IAG’s strategic focus on delivering world class customer experiences; and
• simplifying the Group Balanced Scorecard by reducing the number of measures.

PARC considers that IAG’s executive reward framework supports the creation of sustainable financial performance.

To focus Executives on achieving sustainable, long term performance, Executives are provided with Long Term Incentive (LTI) awards in the form of performance rights. The LTI requires Executives to meet challenging long term financial performance targets based on cash Return on Equity and relative Total Shareholder Return. Vesting of the LTI only occurs if the Group exceeds its long term performance targets and delivers superior financial performance over a three-year period for the cash Return on Equity hurdle, and four years in the case of the relative Total Shareholder Return hurdle.

As foreshadowed in the 2016 remuneration report, a review of the cash Return on Equity hurdle was completed during the 2017 financial year. The outcome of this review was that cash Return on Equity was confirmed for this year as an important strategic measure.

The remuneration outcomes presented in the 2017 remuneration report demonstrate a strong link between value created for IAG’s shareholders and reward for its Executives.

To attract and retain Executive talent, IAG provides competitive fixed pay. IAG has taken a conservative approach to fixed pay increases, with increases awarded where Executives are below the market for equivalent roles, or where there has been an increase in responsibilities. For the year ended 30 June 2017, fixed pay was held constant for the majority of IAG’s Executives, with only four out of the 13 Executives receiving increases due to changes in role or to reflect market pay levels. For the remuneration review conducted in August 2017, two out of 12 Executives will receive a fixed pay increase.

In the 2017 financial year, IAG’s business performance was sound. After allowing for divestments and new market entry, the business maintained a stable market position and generated a sound underlying performance despite industry wide claim cost pressures. A strong capital position was maintained, while shareholder returns were improved through active capital management. Reflecting this performance, the Group Balanced Scorecard outcome was 67% of the maximum achievable. The Board determined to cap STI payments to Executives at the Group Balanced Scorecard outcome and in some cases exercised downward discretion. The average STI payment for the Group CEO and the Executive Team was 64% of the maximum achievable.

Based on multiple years of strong returns, the cash Return on Equity hurdle for the three-year period up to 30 June 2016 vested in full. The Board actively considers the performance tests of the LTI to ensure that the outcome appropriately rewards management for the value created for shareholders and has due regard for risk and compliance. The Board determined that software impairments announced to the market on 19 August 2016 would be included in the calculation when determining the cash Return on Equity vesting outcome.

On 30 September 2016, the relative Total Shareholder Return hurdle of the LTI grant awarded in the year ended 30 June 2013 was tested for the second time. Following this retest, IAG’s Total Shareholder Return was ranked at the 53rd percentile of its peer group, resulting in an overall vesting outcome of 56%. This result translated to an additional 2% vesting above the 54% that had already vested following the original test on 30 September 2015. This was the last LTI grant issued with a retesting provision, with the final retest for this grant to be performed on 30 September 2017.

PARC maintains a strong governance focus to ensure remuneration outcomes support the long term financial soundness of the Group.

The Board conducted a review of IAG’s remuneration policy to ensure it reflects sound governance practices that reinforce the financial soundness of IAG and encourages behaviour that supports its risk management framework.

In addition, a more comprehensive review of IAG’s remuneration structure is underway.

IAG considers it is important to align the interests of Non-Executive Directors and Executives with those of shareholders. To support this alignment, Non-Executive Directors and Executives are required to hold a significant number of IAG shares with a period allowed to acquire those shares. Non-Executive Directors who had served at least three years and Executives who had served at least four years as at 30 June 2017 were tested at this date and all met this requirement.

As part of the Board’s role in providing sound governance for IAG’s remuneration programs, the Board conducted an assessment to determine if any reduction of unvested or unexercised equity grants was required. The Board is satisfied that no adjustment was necessary.

For employees whose primary role is risk and financial control, including the Chief Risk Officer and the Chief Financial Officer, the Board maintains oversight of their remuneration to ensure the independence of their functions and its alignment with IAG’s risk management framework.

This information is an extract from 2017 remuneration report, which appears on pages 16-37 of the 2017 annual report.