Remuneration committee letter

J shearman letter

June 2017

Trifast plc
Trifast House,
Bellbrook Park, Uckfield,
East Sussex, TN22 1QW
Tel: +44 (0)1825 747366
Fax: +44 (0)1825 747368

email: corporate.enquiries@trifast.com

Website: www.trifast.com

Dear Shareholder

Introduction

As Chairman of the Trifast plc Remuneration Committee (the 'Committee'), I am pleased to introduce our remuneration report for 2017 which has been prepared by the Committee in accordance with the relevant legal and accounting regulations, then approved by the Board.

The role of the Committee is to ensure that the remuneration provided to our Executive Directors motivates them, aligns them with delivery of our strategy and creates shareholder value in a sustainable manner. In addition, it is our task to ensure that the remuneration received by the Executive Directors is proportionate to the performance achieved and the returns received by you as shareholders.

To fulfil our role, the Committee undertook a review of the Company's remuneration Policy ('Policy') during the year and consulted with shareholders on proposed changes to the current Policy. Details of the proposed Policy are set out in this report and I look forward to your support for the changes at the 2017 AGM.

Key 2017 remuneration outcomes

This year has been another successful one for Trifast. At Actual Exchange Rates (AER), our revenue grew by 15.6%, we delivered growth of 28.3% in underlying diluted Earnings per Share and ROCE remained extremely healthy at 19.9%. In addition, over the past year, our shareholders have benefitted from an increase in Total Shareholder Return ('TSR') of c.70%, a substantial outperformance against the FTSE Small Cap and industry benchmarks.

Our Annual Report sets out the key areas where we have made substantial progress against our strategic priorities with some key highlights including the successful integration of Kuhlmann into our business, opening a new distribution and technical centre in Barcelona and the continuing enhancement of our manufacturing capacity.

It is now nearly two years since Mark Belton moved into the role of Chief Executive Officer with Clare Foster joining as Chief Financial Officer. Any management change involves significant risks, but the Committee is delighted with the successful transition that has taken place and already seen Mark and Clare playing key roles in Trifast's success. They, together with the continued support of Malcolm Diamond, Geoff Budd and Glenda Roberts, are overseeing a significant transformation of the business which will further benefit shareholders in the years to come.

In arriving at the annual bonus and deferred equity outcomes for the 2017 financial year, the Committee assessed the achievement of the Group's financial performance targets and the Executive team's personal performance targets that were set at the start of the year:

  • Underlying diluted earnings per share growth of 28.3% exceeded the stretch target of 22%
    • It is worth noting that for the deferred equity element of the bonus scheme, the maximum performance target (threshold) was achieved ignoring the positive impact of currency movements in the year
  • ROCE of 19.9% ensured that the underpin of ROCE exceeding group WACC + 2% (12%) was met
  • Each Executive Director's personal objectives were met such that there was no requirement to apply a reduction to the formulaic bonus outcome based on the achievement of the EPS target and the ROCE underpin
  • As a result, each Executive Director will receive the maximum annual bonus entitlement of 100% of salary and the maximum deferred equity award of 100% of salary

The Committee is comfortable that the 2017 annual bonus and deferred equity outcomes reflect the underlying performance of the Company.

Proposed remuneration Policy and structural changes

The remuneration structure that shareholders approved in 2014 and 2015 was designed for a specific purpose, pre-dominantly to bridge a period of management transition during a time when long-term target setting was difficult. Whilst the current Policy has been effective, given the Company's development since 2015, the Committee now feels comfortable setting long-term targets that would allow a more traditional remuneration model to be operated.

The Committee also acknowledges that a number of shareholders voted against the current Policy and its implementation given its focus on the short-term. We take shareholder feedback seriously and the changes to our remuneration Policy have been designed to reflect these views. The Committee also consulted, more recently, with its major shareholders regarding the introduction of the new Policy. Those shareholders will note that we have responded to many of the issues raised and made changes, highlighted in this statement, in an effort to ensure that we adopt a Policy that has the support of a large majority of our shareholders. We are grateful for the time shareholders have taken to review and comment on the Policy we are proposing and will continue to engage with our shareholders on remuneration matters and take account of those views.

Overall, the Policy has been constructed to provide management with a remuneration opportunity that is competitive against companies of a similar size and complexity, but with a greater emphasis on the variable elements of the package than those peers. Broadly, the Committee targeted lower quartile salaries combined with an above median incentive opportunity to provide a total remuneration opportunity at or approaching the median. As such, management will be well rewarded if material long-term sustainable value is delivered for shareholders but total remuneration is limited to the fixed elements of the package if performance falls below expectations.

The significant changes from the current Policy are in relation to the simplification of the annual bonus and the introduction of a traditional long-term incentive arrangement with a three year performance period.

The new Policy has been specifically designed to meet the following objectives:

  • Alignment with the long-term business strategy during the Group's next stage of development
  • Focus on the key performance metrics that drive shareholder value creation
  • Motivate, retain and attract top talent from a competitive talent pool
  • Align the interests of executives and shareholders
  • Be in line with UK corporate governance best practice

Further details of the new Policy can be found Directors' Policy Report but outlined below are the key highlights.

Base salary and Non-Executive Director fees

The Committee determined that Executive Director base salaries will not usually be increased by a higher percentage than the average annual increase in salaries for UK employees. Larger increases may be awarded if, subject to performance, there is i) a material change in the role and responsibilities of the Executive Director, or ii) an Executive Director has been appointed at below the market level to reflect experience, or iii) an Executive Director has been promoted internally and their salary is below the market level.

As you will be aware, with effect from 1 April 2017, Malcolm Diamond transitioned from Executive Chairman to Non-Executive Chairman. In light of changes to the composition of the Executive team and the shift of responsibilities of Executive Directors, the Committee decided it was an appropriate time to review and adjust base salary levels. In line with the current and proposed Policy, set out in this report, with effect from 1 April 2017 the Committee will make the following salary increases:

  • CEO: Increase base salary from £250,000 to £300,000
  • CFO: Increase base salary from £200,000 to £230,000
  • Other Executive Directors: Increase base salary from £200,000 to £210,000

In addition, given Malcolm Diamond's transition from Executive to Non-Executive Chairman, the Committee has determined that his fee will reduce from £200,000 to £150,000 from 1 April 2017 with a further reduction to £125,000 from 1 April 2018. This reduction reflects the Chairman's phased reduced time commitment to the role.

The Committee considered whether base salary increases should be staged over a number of years given their impact on the overall remuneration package. However, the Committee felt that given strong individual and corporate performance a one-time immediate increase was appropriate.

There will be no change to our Policy in relation to Non-Executive Director fees. The Board reviewed Non-Executive Director fees which have been unchanged for three years and compared current fee levels to levels in organisations of comparable size and complexity. In order to ensure Non-Executive Director fees reflect the increasing level of responsibility and time commitment as the Company grows, fees paid from 1 April 2017 will be based on a maximum of the following:

  • NED base fee: £42,000
  • SID fee: £6,000
  • Audit / Remuneration Committee Chair: £8,000
  • Audit / Remuneration Committee member: £5,000

Annual Bonus

The annual bonus is being simplified. The primary performance condition will remain as Earnings per Share ("EPS") growth (75% of opportunity) alongside the introduction of a range of Strategic and Operational measures (25%) such as financial and operational excellence, growth strategy, customer satisfaction, people and risk mitigation. At least 40% of the Strategic and Operational measures will be linked to quantitative metrics and for FY2018 the Committee has determined to assess 10% of the total bonus opportunity against a ROCE target to ensure earnings growth is of a quality nature. These measures have been introduced to provide a holistic assessment of corporate performance. EPS will be measured on an organic growth basis only i.e. the impact of acquisitions and share buybacks will be stripped out from the reported EPS figure.

The maximum opportunity will be decreased to 125% of base salary (from 200%) due to the introduction of a standalone Long Term Incentive Plan. Up to 100% of base salary will be paid in cash with any bonus in excess of this being deferred into shares for three years. The deferral period was increased from two to three years based on feedback from the shareholder consultation, as was the exclusion of share buybacks in the EPS calculation.

Long-Term Incentive Plan (LTIP)

A more traditional long-term incentive plan is being introduced to help shift some focus towards longer-term performance. Awards under the new LTIP will vest over a three year performance period with a proportion of awards being subject to a holding period of up to two years.

Awards will be subject to the satisfaction of EPS growth (70% of opportunity) and relative TSR (30%) performance conditions and the maximum annual opportunity will be 150% of base salary. A new shareholding requirement of 200% of salary will also be implemented alongside the LTIP. The LTIP has been designed to be in line with market practice in terms of structure and features stretching performance conditions which support the business strategy and therefore aligns the interests of management and shareholders.

Performance conditions

EPS has been chosen as the primary performance condition for the annual bonus and LTIP as the Committee feels it is the most appropriate measure of growth for Trifast over the coming Policy cycle and provides a clear line of sight for the Executive team. The weighting of EPS in the annual bonus and LTIP has been reduced in response to shareholder feedback. The Committee is comfortable that the balance of EPS, Strategic and Operational and relative TSR provides a set of measures that will drive underlying performance in the short- and long-term which will translate to absolute and relative shareholder returns.

Looking Ahead

The company has had a number of years of successfully implementing its strategy, evidenced by our record EPS performance as well as value created for shareholders. We remain committed to the delivery of further growth from both organic and acquisitive sources.

Furthermore, the Committee believes that a key reason for the successes of the business has been having the right management team in place. We want this four strong Executive team to continue into the next stage of growth for the Company whilst operating a Policy that is fit for purpose. In order to do so we look forward to your support in approving our proposals at July's AGM.

Jonathan Shearman
Chairman of the Remuneration Committee
12 June 2017