irectors remuneration report
Annual statement y the hairman of the emuneration ommittee
t has een another year of ro ust performance for iageo
ith the organisation continuing to sho resilience and creativity in an ongoing volatile environment
n this year s report
|
Remuneration at a glance |
109 |
|
Pay for performance at a glance |
110 |
|
Remuneration Committee governance |
111 |
|
Directors' remuneration policy |
113 |
|
Annual report on remuneration |
119 |
oo ing ac on
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Single figure of remuneration table |
119 |
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Annual incentive payouts for 2022 |
120 |
|
Long-term incentives vesting in 2022 |
121 |
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Pension and benefits in 2022 |
122 |
|
Long-term incentives awarded in 2022 |
123 |
|
Outstanding share plan interests |
124 |
|
Shareholding requirement |
125 |
|
CEO total remuneration and TSR performance |
126 |
|
CEO pay ratio |
126 |
|
Annual change in pay for Directors and employees |
128 |
|
Non-Executive Director pay |
129 |
|
oo ing ahead to |
3 |
|
|
Salary increases for the year ahead |
130 |
|
|
Annual incentive design for the year ahead |
130 |
|
|
Long-term incentives for the year ahead |
130 |
|
ear Shareholder
am pleased to present the irectors remuneration report for the year
|
ended 3 une |
hich contains: |
The current Directors' remuneration policy, which was approved at the AGM on 28 September 2020; and
The annual remuneration report, describing how the policy has been put into practice during 2022, and how the policy will be implemented in 2023.
usiness performance
As mentioned elsewhere in the Annual Report, Diageo has delivered a strong set of financial results for 2022. Organic net sales grew at double-digit rates and, in an environment of high-cost inflation, the company implemented strategic price increases across all regions while continuing to grow volume and market share. Operating margin expanded and cash generation continues to be robust, with £2.8 billion of free cash flow delivered in the year and an increase in return on invested capital to 16.8%.
The organisation has continued to show resilience, skill, creativity, focus and determination during what has remained an uncertain time. Employee engagement has remained very high, the company has continued to invest for long-term growth in its brands and portfolio and has maintained focus on delivering the key sustainability milestones underpinning Society 2030: Spirit of Progress'. Again this year, Diageo has not participated in any furloughing schemes or initiated any widespread lay-offs as a result of ongoing impacts of the Covid-19 pandemic. The company has continued to provide support to its employees, customers and the communities in which it operates.
oo ing ac at decisions made during the year
ncentive outcomes
In determining annual and long-term incentive outcomes, the Remuneration Committee reviews not only the financial outcomes against targets set, but also considers Diageo's holistic performance. It assesses market share gains, financial performance relative to our Alcoholic Beverages and TSR peer groups, progress made towards our Society 2030: Spirit of Progress' goals and employee engagement, among other factors. It also considers the experience of shareholders over the applicable performance period, including the company's TSR performance relative to our peer group.
Following this review, the Remuneration Committee concluded that the financial measure outcomes for both the annual and long-term incentives were fair reflections of overall business performance in testing market conditions during the relevant performance periods. Consequently, the Committee did not exercise discretion to alter the incentive outcomes.
In setting the 2022 annual incentive, the Committee returned to annual targets, having set two half-yearly targets for the previous year, which reflected the significant uncertainty and volatility facing the business at that time. The company's performance in 2022 resulted in maximum achievement for all three financial measures despite the very stretching nature of performance required to achieve the maximum payouts - which reflected higher growth percentages than pre-Covid-19 pandemic levels for net sales and operating profit. The Individual Business Objective (IBO) outcomes for the CEO and CFO reflect an assessment of the achievement of critical business and ESG related milestones. Further detail is set out on page 120.
106 Diageo Annual Report 2022
Overall annual incentive payouts were 93.75% of maximum for Ivan Menezes and 90.0% of maximum for Lavanya Chandrashekar, with one-third being deferred into Diageo shares for three years.
The 2019 long-term incentive plan targets were set in the summer of 2019 before the Covid-19 pandemic and therefore reflect the company's growth plan at that time. Following an assessment of performance against the targets, the vesting outcome for the 2019 performance share awards, which will vest in September 2022, is 59.3% of maximum for the CEO and 59.8% of maximum for the CFO. Share options for the CEO will vest at 61.5% of maximum.
The Committee believes that the incentive plans continue to drive the desired behaviours to support the company's values and strategy and that the Directors' remuneration policy has operated as intended in 2022.
oo ing for ard to the year ahead
The Committee approved base salary increases of 3% for Ivan Menezes and Lavanya Chandrashekar, effective 1 October 2022. These increases reflect strong performance and are below the 2022 salary increase budgets for the UK and US for the wider employee population and are consistent with external market salary increases for executive directors in the current environment.
As previously communicated, Ivan Menezes' pension contribution will reduce from 20% to 14% of salary effective 1 January 2023, ensuring full alignment of executive director pension contributions with the UK workforce. The CFO's pension contribution has been 14% since joining the Board on 1 July 2021.
The structure and performance measures for the annual and long-term incentives remain unchanged for 2023 as these continue to align with the company's strategy.
Alignment of incentives ith strategy glo al mar et competitiveness
Our ambition is to be one of the best performing, most trusted and respected consumer companies in the world. Our strategic priorities to drive the company forward are unchanged: sustain quality growth, embed everyday efficiency, invest smartly, promote positive drinking, champion inclusion and diversity and pioneer grain-to-glass sustainability.
The performance measures in the incentive plans align with the strategy and the key performance indicators on pages 32-34. The financial measures for the annual incentive focus on net sales growth, operating profit (both of which represent critical measures of growth for Diageo) and operating cash conversion (which recognises the criticality of strong cash performance and cash containment, particularly in the current challenging market conditions). The IBO component adds focus on key individual strategic and financial objectives.
emuneration principles
The approach to setting executive remuneration continues to be guided by the remuneration principles set out below. The Committee considers these principles carefully when making decisions on executive remuneration in order to strike the right balance between risk and reward, cost and sustainability, and competitiveness and fairness.
The company has a strategy to grow and leverage its leaders globally given the international nature of the business. We also need to have the right tools in place to source talent globally and the increasingly restrictive corporate governance environment in the United Kingdom presents some challenges when considered against the significantly higher pay norms in the United States and other parts of the world, particularly given the increasing international mobility of the senior talent pool.
Long-term value creation for shareholders and pay for performance remains at the heart of our remuneration policy and practices. Attracting and nurturing a vibrant mix of talent with a range of backgrounds, skills and capabilities enables Diageo to grow and thrive, and ultimately to deliver our Performance Ambition. Remuneration remains a key part of attracting and retaining the best people to lead our business, balanced against the need to ensure our packages are appropriate and fair in the business and wider employee context, delivering market- competitive pay in return for high performance against the company's strategic objectives.
elivery of usiness strategy
Short and long-term incentive plans reward the delivery of our business strategy and Performance Ambition. Performance measures are reviewed regularly and stretching targets are set relative to the company's growth plans and peer group performance. The Committee seeks to embed simplicity and transparency in the design and delivery of executive reward.
reating sustaina le long term performance
A significant proportion of remuneration is delivered in variable pay linked to business and individual performance, focused on consistent and responsible drivers of long-term growth. Performance against targets is assessed in the context of underlying business performance and the quality of earnings'.
inning est talent
aving market-competitive total remuneration with an appropriate balance of reward and upside opportunity allows us to attract and retain the best talent from all over the world, which is critical to our continued business success.
onsideration of sta eholder interests
Executives are focused on creating sustainable share price growth. The requirement to build significant personal shareholdings in Diageo, and to hold long- term incentive awards for two years post-vesting encourages executives to think and act like owners. Decisions on executive remuneration are made with consideration of the interests of the wider workforce and other stakeholders, as well as taking account of the external climate.
GOVERNANCE
|
Diageo Annual Report 2022 |
107 |
Directors' remuneration report continued
The measures under the long-term incentive plans continue to reflect the company's strategic priorities and key drivers of long-term growth by incorporating organic net sales, organic profit before exceptional items and tax, free cash flow, TSR and key Environmental, Social and Governance (ESG) measures (greenhouse gas reduction, water efficiency, positive drinking and gender and ethnic diversity).
Global pay competitiveness is another key remuneration principle for the company. Attracting and retaining key talent is critical for our business and remuneration is an important aspect of being able to meet our talent objectives. As we operate in a global talent market, the Committee takes into account global pay practices, including the US market, when reviewing executive pay. Global pay competitiveness has been considered by the Committee in the context of a number of changes in the Executive Committee during the year.
n summary
Diageo's strong performance in ongoing challenging market conditions is reflected in the incentive outcomes and the decisions the Committee has made, which it considers are in line with the company's philosophy of delivering market competitive pay in return for high performance against the company's strategic objectives.
The Committee is interested in the views of shareholders and their representative bodies and values their ongoing engagement on remuneration matters. As our Directors' remuneration policy is due for renewal at the 2023 AGM, I look forward to engaging with shareholders and institutional advisors in the coming year.
I hope that you will join the Board in approving the advisory resolution on the Directors' remuneration report at the AGM on 6 October 2022.
Susan Kils y
Non-Executive Director and Chair of the Remuneration Committee
108 Diageo Annual Report 2022
emuneration at a glance
|
Salary |
Allo ances and enefits |
Annual incentive |
ong term incentives |
Shareholding requirement |
|
|
Purpose and |
- Supports the attraction and |
- Provision of market-competitive |
- Incentivises delivery of |
- Rewards consistent long-term |
- Ensures alignment between the |
|
link to strategy |
retention of the best global |
and cost-effective benefits |
Diageo's financial and |
performance in line with |
interests of Executive Directors |
|
talent with the capability to |
supports attraction and |
strategic targets |
Diageo's business strategy |
and shareholders |
|
|
deliver Diageo's strategy |
retention of talent |
- Provides focus on key financial |
- Provides focus on delivering |
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|
metrics and the individual's |
superior long-term returns to |
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contribution to the company's |
shareholders |
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|
performance |
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Key features |
- Normally reviewed annually on |
- Provision of competitive |
- Target opportunity is 100% of |
- Annual grant of performance |
- Minimum shareholding |
|
1 October |
benefits linked to local market |
salary and maximum is 200% |
shares and share options |
requirement within five years of |
|
|
- Salaries take account of |
practice |
of salary |
- CEO award up to 500% of |
appointment: |
|
|
external market and internal |
- Maximum company pension |
- Performance measures, |
salary |
- CEO 500% of salary |
|
|
employee context |
contribution is 14% of salary |
weightings and stretching |
- CFO award up to 480% of |
- CFO 400% of salary |
|
|
for new Executive Director |
targets are set by the |
salary |
- Post-employment shareholding |
||
|
appointments, which is aligned |
Remuneration Committee |
(% of salary for both CEO and |
requirement for Executive |
||
|
to the offering for the wider |
- Subject to malus and clawback |
CFO described in performance |
Directors of 100% of in- |
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|
workforce in the United |
provisions |
share equivalents) |
employment requirement in |
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|
Kingdom |
- Executive Directors defer one- |
- Performance measures, |
the first year after leaving the |
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third of earned bonus |
weightings and stretching |
company and 50% in the |
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|
payment into Diageo shares |
targets are set annually |
second year after leaving the |
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held for three years, which first |
- Three-year performance period |
company |
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|
took effect on the bonus for |
plus two-year retention period |
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the year ended 30 June 2021 |
- Subject to malus and clawback |
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- Remainder paid out in cash |
provisions |
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after the end of the financial |
- Grant price based on six- |
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year |
month average to 30 June |
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preceding grant date |
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Planned for |
- 3% salary increase for the CEO |
- Allowances and benefits |
- Targets will be set for the full |
- Performance measures on net |
- No change to shareholding |
|
year ending 30 |
and CFO, slightly below the |
unchanged from prior year |
year |
sales growth, relative TSR, |
requirement |
|
June 2023 |
annual salary budgets for the |
- Company pension contribution: |
- For the year ending 30 June |
cumulative free cash flow, |
|
|
wider workforce in the United |
- CEO 20% of salary until |
2023, measures on net sales |
profit before exceptional items |
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Kingdom and the United |
1 January 2023, at which point |
growth, operating profit |
and tax and ESG |
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States |
the CEO's pension contribution |
growth and operating cash |
- Size of long-term incentive |
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|
will reduce to 14% of salary |
conversion, 80% in total |
award opportunity is |
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|
- CFO 14% of salary |
weighted equally, with |
unchanged from prior year |
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|
remaining 20% on individual |
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|
objectives |
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Implementation |
- 3% salary increase for the CEO |
- Allowances and benefits |
- Full year targets resumed |
- esting of 2019 performance |
- As at 30 June 2022, CEO |
|
in year ended |
in line with wider workforce in |
unchanged from prior year |
for year ended 30 June |
shares at 59.3% of maximum |
shareholding of 3,093% of |
|
30 June 2022 |
the United Kingdom and the |
- Company pension contribution: |
2022. |
for Ivan Menezes and 59.8% |
salary |
|
United States in 2021 |
- CEO 20% of salary |
- Payout of 100% of maximum |
of maximum for Lavanya |
- As at 30 June 2022, CFO |
|
|
- CFO appointed 1 July 2021 |
- CFO 14% of salary |
for the financial elements of |
Chandrashekar |
(Lavanya Chandrashekar) |
|
|
No salary increases post |
the plan |
- esting of 2019 share options |
shareholding of 31% of salary |
||
|
appointment in 2021 |
- Total payout of 93.75% of |
at 61.5% of maximum for Ivan |
(has until 1 July 2026 to meet |
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|
maximum for the CEO and |
Menezes. The CFO was not in |
requirement) |
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90.0% of maximum for the |
her current role in 2019 and |
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CFO |
does not hold a share option |
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award for that year |
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|
Implementation |
- No salary increase for |
- Allowances and benefits |
- Targets set over two half-year |
- esting of 2018 performance |
- CEO shareholding 2,735% of |
|
in year ended |
Executive Directors or |
unchanged from prior year |
periods |
shares at 29.3% of maximum |
salary |
|
30 June 2021 |
Executive Committee |
- Company pension contribution: |
- Payout of 100% of maximum |
- esting of 2018 share options |
- CFO (Kathryn Mikells) |
|
members. Exceptional salary |
- CEO 20% of salary |
for the financial element of the |
at 10% of maximum |
shareholding 868% of salary |
|
|
increases only (e.g. on |
- CFO 20% of salary |
plan |
|||
|
promotion) for the wider |
- Total payout of 93.75% of |
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|
workforce |
maximum for the CEO and |
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91.3% of maximum for the |
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|
CFO |
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roportionality and management of ris
The structure of Diageo's executive remuneration package ensures that executives have a vested interest in delivering performance over the short and long-term. There is a three-year deferral of one-third of the annual incentive payout into shares, a two-year retention period on any vested awards under the long-term incentive plan and a post-employment shareholding requirement that applies for two years after leaving the company. The performance, retention and clawback periods for each element of remuneration are outlined below.
|
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
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GOVERNANCE
|
Diageo Annual Report 2022 |
109 |
ay for performance at a glance
The charts below show performance outcomes against targets for the long-term and annual incentive plans. Targets under both incentive plans are set with reference to Diageo's strategic plan and the historical and forecasted performance of Diageo and its peers.
|
ong term incentives (for the period 1 uly |
1 |
to 3 |
une |
) |
|||||||||||||||||||||||||||||
|
Organic growth in net sales |
Cumulative free cash flow |
||||||||||||||||||||||||||||||||
|
CAGR |
Threshold |
Midpoint |
Maximum |
Threshold |
Midpoint |
Maximum |
|||||||||||||||||||||||||||
|
3.75% |
4.875% |
6.0% |
£8,600m |
£9,100m |
£9,600m |
||||||||||||||||||||||||||||
|
Actual 8.9% |
Actual £8,271m |
||||||||||||||||||||||||||||||||
|
Organic growth in profit before exceptional items and tax |
Relative TSR ranking vs peer group |
||||||||||||||||||||||||||||||||
|
CAGR |
Threshold |
Midpoint |
Maximum |
Threshold |
Midpoint |
Maximum |
|||||||||||||||||||||||||||
|
4.5% |
7.5% |
10.5% |
9th (median) |
- |
3rd (upper quintile) |
||||||||||||||||||||||||||||
|
Actual 8.8% |
Actual 8th |
||||||||||||||||||||||||||||||||
|
Annual incentive (for the period 1 uly |
1 to 3 |
une |
) |
||||||||||||||||||||||||||||||
|
Net sales growth |
Operating profit growth |
||||||||||||||||||||||||||||||||
|
Threshold |
Target |
Maximum |
Threshold |
Target |
Maximum |
||||||||||||||||||||||||||||
|
5.2% |
8.2% |
11.2% |
8% |
14% |
20% |
||||||||||||||||||||||||||||
|
Actual 21.4% |
Actual 26.3% |
Diageo's share price growth over the period 30 June 2019 to 30 June 2022
Growth in dividend distribution to shareholders in year ended to 30 June 2022
|
2022 |
£3,351 |
2022 |
76.18p |
||
|
2019 |
£3,384 |
2021 |
72.55p |
||
istoric reward outcomes under the annual and long-term incentive plans over the past five years are shown below. esting outcomes under the long-term incentive plan are shown against annualised total shareholder return for the three-year period ended in the year of vesting (i.e. annualised TSR for the three years ended 30 June 2022 is shown against the vesting outcome for the 2019 long-term incentive awards vesting in 2022). Outcomes against annual incentive financial measures are shown against organic operating profit growth for each respective financial year, as disclosed in prior-year annual reports.
|
5-year vesting outcomes of long-term incentives |
5-year history of annual incentive payouts |
||||||||||||||
|
Executive Director vesting outcome (% of maximum) |
Annualised TSR % |
Payout (% of maximum) |
Operating profit growth % |
||||||||||||
|
100 |
70% |
60% |
89% |
73% |
27.5% |
29.3% |
59.3% |
61.5% |
30 |
100 |
75% |
60% |
100% |
100% |
30 |
|
6 |
|||||||||||||||
|
80 |
24 |
80 |
24 |
||||||||||||
|
60 |
18 |
60 |
18 |
||||||||||||
|
40 |
12 |
40 |
12 |
||||||||||||
|
20 |
10% |
10% |
6 |
20 |
0% |
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|
0 |
0 |
0 |
0 |
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|
2018 |
2019 |
2020 |
2021 |
2022 |
2018 |
2019 |
2021 |
2022 |
-20 |
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Performance shares |
2020 |
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Share options
Annualised total shareholder return over three-yearlong-term incentive performance period
Annual incentive payout (financial measures excluding individual business objectives)
Organic operating profit growth (% on prior year)
110 Diageo Annual Report 2022
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Diageo plc published this content on 04 August 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 04 August 2022 12:06:45 UTC.
