Remuneration approach

IAG’s remuneration approach focuses Executives on generating strong financial outcomes for shareholders, while creating a world leading experience for IAG’s customers.

The value IAG has created is reflected in the remuneration provided to Executives.

IAG rewards Executives for the value they help create through a combination of fixed pay, short term incentives (STI) and long term incentives (LTI). IAG delivered improved business performance on an underlying basis in the 2018 financial year. During the year, further steps were taken to reduce earnings volatility and regulatory capital requirements via greater use of reinsurance quota share capital. The announced sale of IAG assets in Thailand, Vietnam and Indonesia will result in a profit in the next financial year and, in tandem with quota share effects, is facilitating a considerable return of capital to shareholders.

The Board considers overall Group performance, together with an assessment of each Executive’s personal performance, to determine individual STI outcomes. Reflecting IAG’s strong performance during the year ended 30 June 2018, the Group Balanced Scorecard outcome was 74% of the maximum achievable. Consistent with this outcome, the average STI payment for Executives was 71% of the maximum achievable, with payments to individual Executives ranging from 50% to 84%.

Based on strong returns over the three year period up to 30 June 2017, the cash Return on Equity (ROE) hurdle of the 2014/2015 LTI award vested in full. The Board reviewed the ROE vesting outcome to ensure it appropriately reflects the value created for shareholders. Consistent with the approach used when calculating cash ROE in previous tests, the cash earnings result was reduced by the value of the software impairments announced to the market on 19 August 2016.

On 30 September 2017, the relative Total Shareholder Return (TSR) hurdle of the 2013/2014 LTI award was tested. IAG’s TSR was ranked at the 42nd percentile of the peer group and consequently this award did not vest. During the year, the TSR hurdle of the 2012/2013 LTI award was tested for the final time. IAG’s TSR was ranked at the 69th percentile of its peer group, resulting in a final vesting outcome of 88%. Given that 56% of this award had vested previously, Executives received an additional 32% vesting during the year. This was the last LTI grant issued with a retesting provision and there will be no further retests of any LTI grant.

In determining variable pay outcomes for Executives, the Board considers IAG’s risk culture and evaluates how well risks have been identified, assessed and mitigated. This process ensures remuneration practices encourage behaviour that supports sound risk management practices and IAG’s long term financial soundness. In order to inform the Board’s assessment, the Group CEO provided the Board with his evaluation of IAG’s risk management performance. In addition, the Board also separately received input from the acting Chief Risk Officer and the Chair of the Risk Committee. The Board’s assessment of IAG’s risk management performance was considered both in determining STI outcomes for the year, and also in determining whether there were any material risk events that warranted an adjustment to unvested awards of LTI or deferred STI. Based on the assessment undertaken by the Board, no adjustment for material risk failings was applied to the STI awards for the 2018 financial year, nor to the deferred STI or LTI awards granted to Executives in prior years that will vest by 1 September 2018. The Board will continue to consider risk based adjustments when determining STI awards and when elements of deferred pay come due.

In the 2018 financial year, Craig Olsen, Chief Executive, New Zealand, was the only Executive to receive a fixed pay increase as part of the August 2017 review to meet market pay levels.

For the 2019 financial year, the Board has approved fixed pay increases for four Executives. Peter Harmer was appointed Group CEO in 2015. At this time, the Board determined that his fixed pay should be rebased downwards relative to the previous Group CEO. Reflecting this decision, his fixed pay was set at $1.7 million and was unchanged for the two subsequent financial years. For the August 2018 pay review, the Board has determined to increase his fixed pay from $1.7 million to $1.9 million to better reflect market pay levels and his performance in the role. During the August 2018 fixed pay review, the Board also determined to increase the fixed pay of Mark Milliner, Chief Executive Officer, Australia, to reflect a change in role and market relativities; and Craig Olsen, Chief Executive, New Zealand and Julie Batch, Chief Customer Officer, to reflect market pay levels and performance in the role. These increases will be reflected in the Remuneration Report for the year ending 30 June 2019.

IAG continues to evolve its remuneration framework to focus the Executives on generating value for all of IAG’s stakeholders.

Issues highlighted through the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, APRA’s review of remuneration practices across regulated organisations, the ‘Retail Banking Remuneration Review’ (Sedgwick Report) and the Banking Executive Accountability Regime, have significant implications for the design and governance of remuneration frameworks. The Board is reviewing IAG’s approach to executive remuneration to ensure it remains aligned to IAG’s purpose and strategy, while also reflecting broader community expectations. As part of this review, the following enhancements to IAG’s remuneration approach were introduced for the year ended 30 June 2018:

• Applying a more rigorous process for considering risk when assessing performance;
• Formalising the role of the Chair of the Risk Committee and Chief Risk Officer in informing the Board’s assessment of risk management performance;
• Reducing the variable component of the Chief Risk Officer’s remuneration mix to further support the independence of this role; and
• Reviewing IAG’s sales incentive plans with the aim of improving the customer outcomes and supporting IAG’s Purpose.

In addition to the changes described above, the Board has determined that the following changes to IAG’s remuneration approach will apply for the year ending 30 June 2019:

• The proportion of an Executive’s STI award that is deferred will increase from one third to one half. This change will apply to any Executive STI awards made from September 2019; and
• The performance period for the cash ROE hurdle will be extended from three to four years.

The Board will continue to review the remuneration framework to ensure it is fit for purpose and further changes may be made in future years.

The information shown on pages 20 and 21 is an extract from the 2018 remuneration report, which appears on pages 18-38 of the 2018 annual report.