HOLT
HOLT: Linking Corporate Performance and Valuation to
Management Incentives
March 2014
Michel Lerner
Head of HOLT EMEA
44 207 883 3649
michel.lerner@credit-suisse.com
credit-suisse.com/holtmethodology
HOLT Analysis
SUMMARY

Principles of the HOLT Management Incentives Scorecard

State of the European and US landscape

Thematic focuses:
- EPS-focused plans
- Return-on-Capital measures and its risks
- The Good, the questionable and the bad of focusing on sales growth
- Plans that incorporate non-operational items
- What constitutes a “long-term” focus?
- Companies with changes being introduced
CLARITY IS CONFIDENCE
1
HOLT
Management should be incentivized by metrics and goals that drive incremental shareholder
value creation
Reward
CFROI
=≈ Margins X
Turns
=
Op. Profit
X
Sales
Sales
IAGI
Measure & Evaluate
CLARITY IS CONFIDENCE
2
HOLT
HOLT Management Incentive Scorecard Construction
CLARITY IS CONFIDENCE
3
HOLT
Positive flags
Di
a
Pe
ps
i
He
i
x
x
x
2
2
3
3
3
4
x
x
x
x
x
x
x
x
x
x
G
2
le
2
xx
TSR relative to a sector peer group is used (1)
xx
x
Long‐term plan which includes financial criteria to determine payout (1)
x
x
Long‐term plan vesting period. Score 1 if above 4 years (1)
Top 2 quintiles of the HOLT Scorecard on Operations (1)
Clawbacks” in comp structure
Financial Criteria have improved?
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
xx
x
x
x
x
x
x
x
x
x
x
x
4
ne
ke
n
Co
lg
at
e
x
1
ge
o
Co
ca
‐C
ol
a
Un
ile
ve
r
He
nk
el
6
BA
T
5
SA
B
5
Re
ck
itt
4
P&
er
sd
or
f
3
Pe
rn
od
Financial criteria include operational drivers (eg Sales, Margins, cash flows, ROE) but not return‐
based measures (1)
ROIC, ROCE, EVA, CFROI are mentioned as a criteria (2)
Financial Criteria have worsened?
No Disclosure (7)
No numerical financial targets at all are disclosed (1)
Negative flags
‐1
Ne
st
Overall HOLT Score
Be
i
Ca
r ls
be
rg
L'O
re
al
The HOLT Remuneration Scorecard allows for quick sector benchmarking to see whether
management is incentivised to manage its business for value
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
EPS is the only financial criteria in EITHER the short or long term plans AND EPS is a poor proxy for Gross Cash Flows (<50% 3 year median) (1)
In addition to traditional accounting multiples, the company also uses non operational financial criteria (e.g. net debt, dividends) (1)
x
Option expense as a % of sales FY0> europe median (1) (Europe median is 0.22%)
No long term plan or long term plan based only on TSR with no financial criteria (1)
TSR peer group is too broad – i.e. not sector peers
CLARITY IS CONFIDENCE
x
x
x
x
4
HOLT
Management incentive plans – state of the landscape
CLARITY IS CONFIDENCE
5
HOLT
Only 1/3 of firms have a balance sheet focus, only 8% have performance measurement periods
longer than 3 years in Europe, 1% in the US
Europe
US
Measure
Frequency
%
Financial criteria include operating drivers (sales, margins, earnings, cash flows, Roe)
246
82%
Return on Capital Measures
105
35%
TSR relative to a sector peer group
99
33%
189
63%
24
8%
87
29%
Long‐term plan with Financial criteria
Long‐term plan performance>3 years
Clawbacks
CLARITY IS CONFIDENCE
6
HOLT
Disclosure is generally lower in Europe than in the US
Measure
No disclosure
No numerical financial targets
EPS as the only criteria in the short or long‐term plan
Non‐operating criteria used to determine pay
No long‐term plan
TSR peer group is broad
Frequency
4
164
%
1%
55%
11%
32
Europe
7%
22
56
41
19%
14%
Measure
Frequency of Use
in S&P 500
%
No Disclosure
2
0%
Numerical financial targets not disclosed
EPS is the only financial criteria in EITHER
the short of long term plans AND EPS is a
poor proxy for Gross Cash Flow (<50% 3
year median)
In addition to traditional accounting
multiples, the company also uses non
operational financial criteria (e.g. net debt,
dividends)
Option expense as % of sales FY0>US
median (US median is 0.38%)
No Long Term Plan or LT Plan
Performance Period is less than 3 years
32
6%
24
5%
US
0
0%
54
11%
190
38%
Source: HOLT
CLARITY IS CONFIDENCE
7
HOLT
HOLT Management Incentive Scores
120
Number of Companies
100
US
80
Europe
60
40
20
0
-8
-7
CLARITY IS CONFIDENCE
-6
-5
-4
-3
-2
-1
0
HOLT Score
8
1
2
3
4
5
6
7
HOLT
UK, Netherlands, Switzerland have higher standards, Spain fares worst
CLARITY IS CONFIDENCE
9
HOLT
Retailers fare best at a sector level (but beware of off-balance-sheet growth—see page 19)
CLARITY IS CONFIDENCE
10
HOLT
Stocks with top scoring remuneration plans and top operational quality
Com pany Nam e
Ticker
Ops
Rem uneration
Accounting Risk
Quintile
Quintile
Quintile
SHIRE PLC
SHP
5
4
Good
EASYJET PLC
EZJ
5
4
Good
ROTORK P.L.C.
ROR
5
4
Good
SYMRISE AG
SY1G
5
5
Above Average
HALMA P.L.C.
HLMA
5
4
Above Average
JOHNSON MATTHEY PUBLIC LIMITED COMPANY
JMAT
4
4
Above Average
GEBERIT AG
GEBN
4
4
Good
NOVOZYMES A/S
NZYMb
4
4
Good
TECHNIP
TECF
5
4
Above Average
SULZER AG
SUN
4
5
Good
CLARITY IS CONFIDENCE
11
HOLT
Firms heavily incentivized by EPS
CLARITY IS CONFIDENCE
12
HOLT
EPS is widely used across pay plans, yet it is the easiest accounting ratio to distort through
accounting choices
40
Top 10 Performance Measurement Criteria In
Europe
35
70%
30
P/E Ratio (FY1)
60%
50%
40%
30%
20%
10%
25
20
15
10
0%
5
0
-100%
-50%
0%
50%
100%
Earnings Growth (FY0 to FY1)
CLARITY IS CONFIDENCE
13
R2 = 0.00
HOLT
Pressure to deliver short-term results is institutionalized
CLARITY IS CONFIDENCE
14
HOLT
EPS is the only financial criteria in EITHER the short or long term plans AND EPS is a poor proxy
for Gross Cash Flows (<50% 3 year median)
Company
Remuneration Accounting Quality Net Income % of Gross Cash Flow Score
REGUS PLC
‐1
Below Average
12.0
TALKTALK TELECOM GROUP PLC
‐1
Poor
24.9
FRESENIUS MEDICAL CARE AG & CO. KGAA 0
Below Average
30.1
WOLSELEY PLC
0
Poor
32.6
BAE SYSTEMS PLC
1
Poor
46.6
G4S PLC
1
Below Average
7.1
SHANKS GROUP PLC
1
Poor
‐34.5
GKN PLC
2
Below Average
49.4
INTERNATIONAL CONSOLIDATED AIRLINES G2
Below Average
‐51.4
LINDE AKTIENGESELLSCHAFT
2
Below Average
33.6
WOLTERS KLUWER NV
2
Below Average
37.5
BUNZL PUBLIC LIMITED COMPANY
3
Below Average
51.3
RIO TINTO PLC
4
Poor
14.4
COBHAM PLC
5
Below Average
43.1
CLARITY IS CONFIDENCE
15
HOLT
Pernod Ricard: EPS growth trending upwards since 2003
5.00
4.50
Basic Earnings Per Share (excl. extra)
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2010: “the level of profit from recurring operations compared with budget projections and the net
debt ratio were sufficient to offset […] the absence of a variable portion linked to change in net
earnings per share.”
CLARITY IS CONFIDENCE
16
HOLT
Pernod Ricard: CFROI including goodwill shows a different story
CFROI (Transaction), %
10.00
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
2003
CLARITY IS CONFIDENCE
2004
2005
2006
2007
2008
17
2009
2010
2011
2012
2013
HOLT
Pernod Ricard: Multiple items flattering the EPS
CLARITY IS CONFIDENCE
18
HOLT
Pernod Ricard: Deep dive into the Accounting Risk
CLARITY IS CONFIDENCE
19
HOLT
Return on Capital Measures
CLARITY IS CONFIDENCE
20
HOLT
The HOLT framework and CFROI metric are well suited to measuring shareholder value creation
Asset Life and Mix
Inflation Adjustments
CROIGI
Cash and Gross
Invested Capital
Accounting
Operating
Return and Net
Invested Capital
CROGI
CFROI®
whereas these
metrics are more
consistent with
building shareholder
wealth
ROIC
ROE
EPS
CLARITY IS CONFIDENCE
difficult to measure
shareholder wealth
creation and easy to
manipulate
21
HOLT
A focus on return-based measures should theoretically signal a superior focus on wealth-creation
principles. In practice, only 1 in 3 show an improving CFROI trend vs. the longer-term
Name
Country
Market
Cap (bil)
REED ELSEVIER NV
NLD
NOVO NORDISK AS
DNK
RTL GROUP
BEL
LEGRAND S.A.
FRA
IMI PLC
GBR
HENKEL KGAA
DEU
SPIRAX-SARCO ENGINEERING PLC
GBR
KERRY GROUP PLC
IRL
ASHTEAD GROUP PLC
GBR
CONTINENTAL AG
DEU
BERENDSEN PLC
GBR
SANDVIK AB
SWE
ROCHE HOLDING
CHE
EASYJET PLC
GBR
GEA GROUP AG
DEU
CENTRICA PLC
GBR
JOHNSON MATTHEY PUBLIC LIMITED CGBR
KONINKLIJKE PHILIPS NV
NLD
NOVOZYMES A/S
DNK
AKZO NOBEL N.V.
NLD
AHOLD NV
NLD
BAYER AG
DEU
WHITBREAD PLC
GBR
MONDI PLC
GBR
TATE & LYLE PLC
GBR
LINDE AKTIENGESELLSCHAFT
DEU
BODYCOTE PLC
GBR
PIRELLI & C SPA
ITA
ELECTROLUX AB
SWE
ARKEMA GROUP
FRA
SAINSBURY (J) PLC
GBR
FRAPORT AG FRANKFURT AIRPORT S DEU
STMICROELECTRONICS NV
FRA
CLARITY IS CONFIDENCE
31.0
95.1
18.6
14.6
7.7
48.0
3.5
11.2
5.4
40.1
2.6
17.5
238.2
8.0
8.7
28.8
10.1
34.2
12.1
18.0
18.5
105.5
9.9
8.0
6.2
36.5
2.0
7.3
6.7
7.0
12.6
6.7
6.8
22
CFROI
2012
30.8
19.8
17.8
16.4
17.9
16.4
15.2
14.6
11.6
11.8
10.5
12.6
12.1
8.8
13.2
11.0
11.6
7.4
9.1
7.9
9.7
9.2
7.3
6.5
8.0
8.3
7.7
7.1
6.8
5.8
4.0
3.8
-5.4
CFROI
2013e
28.4
22.1
18.5
17.1
16.7
16.3
14.7
14.4
13.7
13.3
13.2
13.2
13.1
12.7
12.6
12.4
12.3
10.3
9.3
9.1
8.8
8.2
8.2
8.1
8.1
8.1
7.4
7.3
6.2
5.4
4.4
4.1
-4.2
CFROI
2013 less
3 yr
CFROI
Median
2.9
5.6
2.5
0.9
1.1
0.0
0.9
0.4
3.8
2.3
3.1
1.4
0.7
5.0
1.9
0.3
0.6
3.3
0.4
1.9
0.9
1.0
1.4
1.8
0.6
0.9
1.0
1.6
0.2
0.3
0.6
0.6
0.3
Ratio of
CFROI 3
Year to 7
Year
Median
1.08
1.13
1.07
1.00
1.18
1.10
1.22
1.05
1.10
1.23
1.29
1.00
1.00
1.04
1.00
1.00
1.08
1.24
1.05
1.16
1.00
1.00
1.18
1.58
1.17
1.00
1.00
1.27
1.00
4.57
1.00
1.00
1.00
HOLT
Novo Nordisk’s long term incentive plan is one of the few to explicitly look at R&D efficiency
Novo Nordisk A/S: Relative Wealth Chart
CLARITY IS CONFIDENCE
23
HOLT
Significant amounts of capital are off-balance sheet – how good are the return metrics that are
even used?
ROCE may be less
meaningful for Pharma
stocks
ROCE may be less
meaningful for
Retailers
Beware of asset
sweating
Accounting assets
typically used for ROC
metrics
CLARITY IS CONFIDENCE
24
HOLT
Return-based metrics are part of comp plans – potential questions
Name
Market
Capitaliz
Country
ation
(bil)
[Local]
ADECCO SA
CHE
AGGREKO PLC
GBR
ARCELORMITTAL
NLD
ASML HOLDING NV
NLD
BABCOCK INTERNATIONAL GROUP PL GBR
BASF SE
DEU
BG GROUP PLC
GBR
COCA COLA HBC AG
GBR
CRH PLC
IRL
DEUTSCHE LUFTHANSA AG
DEU
EXPERIAN PLC
GBR
FUGRO NV
NLD
KALI & SALTZ AG
DEU
KINGFISHER PLC
GBR
MAN SE
DEU
MARKS AND SPENCER GROUP PLC GBR
MILLICOM INTERNATIONAL CELLULAR SWE
MORRISON (W M) SUPERMARKETS
GBR
NOVARTIS AG
CHE
PEARSON PLC
GBR
REXAM PLC
GBR
ROCHE HOLDING AKTIENGESELLSCHACHE
SAINT GOBAIN
FRA
SANOFI S.A.
FRA
SKF AB
SWE
STMICROELECTRONICS NV
FRA
TESCO PLC
GBR
TOTAL SA
FRA
TRAVIS PERKINS PLC
GBR
VIVENDI SA
FRA
WEIR GROUP PLC (THE)
GBR
12.72
4.18
19.27
27.81
4.65
71.36
42.79
6.38
13.71
7.39
11.61
3.73
3.68
9.26
13.17
8.05
59.38
6.26
176.10
10.82
3.90
215.17
20.55
103.95
80.82
5.23
28.53
101.09
4.32
24.80
4.55
CFROI
2012
CFROI
Accounting
Accounting
Median Quality Quality Three Year Asset Quality Depreciation
13.80
16.84
1.19
17.28
43.34
8.16
5.12
6.09
4.46
2.56
31.25
8.21
9.22
7.34
6.12
6.98
13.04
5.08
11.49
13.34
8.15
12.13
5.16
8.67
9.93
-5.40
7.79
4.39
12.16
10.90
22.36
15.0
19.9
3.3
18.4
46.9
8.6
6.8
6.5
4.6
3.2
36.2
8.4
11.2
7.8
7.0
7.7
18.3
6.3
12.3
14.0
8.8
12.3
5.3
9.8
11.2
-0.3
7.8
4.9
12.4
14.0
24.6
Above Average
Above Average
Below Average
Below Average
Poor
Average
Below Average
Above Average
Average
Good
Average
Poor
Average
Above Average
Below Average
Above Average
Average
Good
Poor
Poor
Below Average
Poor
Average
Poor
Average
Below Average
Good
Below Average
Good
Poor
Average
Above Average
Good
Below Average
Good
Above Average
Average
Below Average
Below Average
Below Average
Average
Good
Below Average
Average
Average
Good
Below Average
Average
Average
Good
Good
Average
Good
Below Average
Good
Good
Poor
Above Average
Below Average
Above Average
Above Average
Above Average
Accounting
Quality Special
Items
HOLT
Leased
Capitalized Property
R&D / HOLT / HOLT
Assets (%) Assets
2012
(%) 2012
Average
Below Average
Below Average
Below Average
Poor
Below Average
Below Average
Poor
Below Average
Poor
Poor
Below Average
Poor
Below Average
Poor
Below Average
Below Average
Below Average
Below Average
Below Average
Poor
Poor
Poor
Poor
Poor
Poor
Poor
Below Average
Below Average
Below Average
Below Average
42
16
1
25
1
11
1
17
44
1
52
3
43
8
24
2
6
4
4
40
4
7
14
18
4
14
41
6
44
8
25
9
6
3
28
5
3
19
2
9
3
29
4
56
10
19
Asset quality: this is determined based on region relative rank ings for yoy changes in asset utilization, aging assets, large exposure to goodwill
Depreciation: the rating is determined based on yoy changes and materiality of depreciation expense and asset life
Special items: the rating is determined based on frequency and materiality of one-off items
CLARITY IS CONFIDENCE
25
HOLT
Tesco: ROCE vs. CFROI trends don’t match because of off-balance sheet growth
100
80
60
40
20
Off‐balance sheet
stores % HOLT Assets
PP&E % HOLT Assets
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Variable pay: trading profit (i.e. internet sales,
UK lfl sales, working capital), working capital
(prev. UK ROCE)
Long-term: EPS growth ex property profits,
ROCE
CLARITY IS CONFIDENCE
26
HOLT
Saint-Gobain: ROCE flattered by asset sweating and impairments?
ROCE represents 60% of variable pay defined as Operating Income/Total Assets. Total assets include net
PP&E, working capital, net goodwill and other intangibles but excludes deferred tax assets from nonamortizable brands and land
CLARITY IS CONFIDENCE
27
HOLT
The good, the questionable and the bad of focusing on top line growth
CLARITY IS CONFIDENCE
28
HOLT
The good: Unilever added a top line growth component to its comp plan in 2010
CLARITY IS CONFIDENCE
29
HOLT
High growth/value creating firms with sales growth in their compensation plan
Market
Capitaliz CFROI
Transaction
Sales
HOLT
CFROI
Name
Symbol Country
ation Transacti
CFROI /
Growth Remuneration
2012
(bil)
on LFY
CFROI
(5-year)
Score
[EUR]
RANDGOLD RESOURCES LIMITED
RRS
GBR
5.4
20.9
20.9
0%
36
3
ARM HOLDINGS PLC
ARM
GBR
16.7
13.8
18.4
-25%
17
2
HERMES INTERNATIONAL SCA
HRMS
FRA
24.0
25.7
27.2
-5%
16
1
RIGHTMOVE PLC
RMV
GBR
3.3
333.8
346.5
-4%
16
1
SHIRE PLC
SHP
GBR
23.5
13.5
16.1
-16%
15
0
CHE
39.4
13.5
14.2
-5%
14
1
RICHEMONT (COMPAGNIE FINANCIERECFR
VOLKSWAGEN AG
VOWG_p DEU
85.4
6.6
6.7
-2%
13
1
FRA
15.4
10.2
14.6
-30%
12
1
ESSILOR INTERNATIONAL COMPAGNIEESSI
SERCO GROUP PLC
SRP
GBR
2.9
10.4
16.3
-36%
12
2
FRA
65.8
9.1
13.3
-32%
11
0
LVMH MOET HENNESSY LOUIS VUITTOLVMH
DASSAULT SYSTEMES SA
DAST
FRA
10.4
12.2
16.0
-24%
10
0
ATOS SE
ATOS
FRA
6.0
8.7
12.3
-29%
9
1
KABEL DEUTSCHLAND HOLDING AG KD8Gn
DEU
8.9
13.5
14.8
-9%
9
1
KONE OYJ
KNEBV FIN
15.1
20.9
30.5
-32%
9
1
ADIDAS AG
ADSGn
DEU
16.8
9.3
11.9
-22%
8
1
SONOVA HOLDING AG
SOON
CHE
6.8
12.8
18.9
-32%
8
0
ABB LIMITED
ABBN
CHE
42.2
9.8
12.9
-24%
7
0
DRAX GROUP PLC
DRX
GBR
3.9
6.5
7.9
-18%
7
0
GEMALTO N.V.
GTO
NLD
6.9
9.3
12.0
-23%
7
1
NOVARTIS AG
NOVN
CHE
145.2
8.4
10.2
-18%
7
4
SEB SA
SEBF
FRA
2.8
7.0
8.6
-19%
7
2
SWATCH GROUP AG
UHR
CHE
25.4
11.3
11.7
-4%
7
0
CLARITY IS CONFIDENCE
30
HOLT
The questionable: Sainsbury’s “like-for-like” sales growth focus = possible incentive that will
negatively impact margins and/or asset efficiency
Key issues:
- impact of refurbished stores/extended stores on sales vs. margins
- impact of inc. VAT in sales growth given change of mix from food to non-food
31
CLARITY
IS CONFIDENCE
- inflation
- discount and vouchers
HOLT
Value-destroying companies that include sales growth as a pay criteria
Name
OCADO GROUP PLC
STMICROELECTRONICS NV
VESTAS WIND SYSTEMS AS
NOKIA CORPORATION
UNITED UTILITIES GROUP PLC
NESTE OIL OYJ
SAINSBURY (J) PLC
BT GROUP PLC
MORRISON (W M) SUPERMARKETS
DSM N.V.
DEUTSCHE TELEKOM AG
VALLOUREC
CLARITY IS CONFIDENCE
Symbol
OCDO
STM
VWS
NOK1V
UU
NES1V
SBRY
BT
MRW
DSMN
DTEGn
VLLP
Country
GBR
FRA
DNK
FIN
GBR
FIN
GBR
GBR
GBR
NLD
DEU
FRA
32
Market
Cap
3.9
6.0
5.5
21.0
6.5
4.0
7.7
38.1
6.7
8.3
51.3
4.7
CFROI
2012
-6.0
-5.4
-4.9
-3.2
2.7
3.0
4.0
4.1
4.5
5.4
5.5
5.7
Returnbased
Comp
No
Yes
No
No
No
No
Yes
No
Yes
Yes
Yes
Yes
HOLT
The bad (WPP): acquired growth becomes “organic” within 12 months
CFROI inc. goodwill is
significantly lower
CLARITY IS CONFIDENCE
33
HOLT
Companies that include top line as a pay criteria and where acquisitions have generated material
goodwill
Market
Ratio
Capitaliz CFROI
CFROI(L Transaction
Name
Symbol Country
ation Transacti
FY)
CFROI /
(bil)
on LFY
CFROI
[EUR]
IMPERIAL TOBACCO GROUP PLC
IMT
GBR
28.9
11.4
45.98
-75%
RECKITT BENCKISER GROUP PLC
RB
GBR
41.8
16.1
51.87
-69%
WPP
WPP
GBR
19.4
9.9
27.34
-64%
PUBLICIS GROUPE SA
PUBP
FRA
13.1
11.9
28.75
-59%
CAPGEMINI S.A.
CAPP
FRA
9.0
5.2
12.00
-57%
REED ELSEVIER PLC
REL
GBR
25.0
13.2
30.30
-56%
SODEXO
EXHO
FRA
11.8
11.1
23.92
-54%
SAGE GROUP PLC (THE)
SGE
GBR
5.5
11.0
23.37
-53%
CARLSBERG AS
CARLb
DNK
11.1
6.2
13.04
-52%
BRITISH AMERICAN TOBACCO P.L.C. BATS
GBR
76.6
18.7
38.65
-52%
REXEL S.A.
RXL
FRA
5.0
7.2
14.87
-52%
PANDORA A/S
PNDORA DNK
6.3
17.6
36.23
-51%
DANONE SA
DANO
FRA
30.0
8.7
17.88
-51%
PEARSON PLC
PSON
GBR
10.3
6.6
13.27
-50%
HALMA P.L.C.
HLMA
GBR
2.7
13.8
25.03
-45%
SAP AG
SAPG
DEU
67.2
15.8
28.37
-44%
WOLTERS KLUWER NV
WLSNc
NLD
6.1
9.9
17.69
-44%
DIAGEO PLC
DGE
GBR
55.7
14.1
24.89
-43%
SOFTWARE AG
SOWG
DEU
2.5
13.2
23.14
-43%
LEGRAND S.A.
LEGD
FRA
11.7
9.5
16.63
-43%
UNILEVER PLC
ULVR
GBR
82.6
13.5
23.31
-42%
SCHNEIDER ELECTRIC SA
SCHN
FRA
35.7
8.3
13.98
-41%
CLARITY IS CONFIDENCE
34
HOLT
Incentive Plans based on non-operating items
CLARITY IS CONFIDENCE
35
HOLT
Companies that include non-operating items in their pay structure
5
HOLT Remuneration Score
4
3
2
1
0
‐1
‐2
‐3
CLARITY IS CONFIDENCE
36
THYSSENKRUPP
BAE SYSTEMS
PERNOD RICARD
BMW
GALP
H&M
PIRELLI
VOLKSWAGEN
ASTRAZENECA
SUEDZUCKER
‐4
HOLT
Astrazeneca fares OK on dividends
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
-5.00
-10.00
CLARITY IS CONFIDENCE
Dividend Growth (5-Year)
37
HOLT
The CFROI trend shows a significant need to replenish the product pipeline
CLARITY IS CONFIDENCE
38
HOLT
Are the dividend payouts coming at the expense of reinvestment?
R&D % sales
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
30.00
25.00
R&D % Sales (2012)
20.00
15.00
10.00
5.00
0.00
CLARITY IS CONFIDENCE
39
HOLT
Long-Term Incentive Plans (LTIP)
CLARITY IS CONFIDENCE
40
HOLT
Long-term Incentive Period (LTIP)

81% of European firms have a LTIP that include financial criteria, but only 10% of these have a measurement period
> 3 years.

Vesting period vs. long term measurement period. The former incentivizes management to stick around until pay
day, the latter ensures that pay is based on long-term wealth creation.

Why does this matter? Governance should be focused on creating long-term shareholder value. Short-termism
emerges and quarterly or annual accounting metrics become the focus.

Companies that have a long-term plan that exceeds 3 years and has more than TSR as a measure (HOLT
Remuneration Score)
7
6
5
4
3
2
0
‐1
‐2
‐3
CLARITY IS CONFIDENCE
DASSAULT SYSTEMES…
NOVOZYMES A/S
H & M HENNES &…
ANHEUSER‐BUSCH…
BHP BILLITON PLC
L'OREAL
LUNDIN PETROLEUM…
BOUYGUES SA
RWE AG
DEUTSCHE TELEKOM
PUBLICIS GROUPE SA
SODEXO
BASF SE
FRESENIUS SE
INFINEON…
JOHN WOOD GROUP…
SANOFI S.A.
MAN SE
RIO TINTO PLC
Lufthansa
HEINEKEN NV
E.ON SE
1
41
HOLT
Ladbrokes has a long-term incentive plans based on the share price performance in the 30 days
following publication of FY results
240
230
220
End of 30 day
period following
2012 preliminary
results
Profit warning issued
210
200
190
180
170
160
150
LAD LN Equity
140
“the committee will retain responsibility to amend the targets if necessary to take into account
exceptional factors […] which would otherwise render the targets inappropriate”
CLARITY IS CONFIDENCE
42
HOLT
61 European firms have no long-term incentive schemes or a plan based only on TSR and 14 of
these rank in the bottom 2 quintiles in Europe on Operational Quality
Overall
Com pany Nam e
Ticker
Ops
Mom
Val
Quintile
Quintile
Quintile
Overall
Quintile
VOEST-ALPINE AG
VOES
2
4
5
5
INFINEON TECHNOLOGIES AG
IFXGn
2
5
3
4
SUEDZUCKER AG
SZUG
2
3
5
4
GLENCORE XSTRATA PLC
GLEN
2
4
3
3
1
5
2
3
SVENSKA CELLULOSA AKTIEBOLAGET
SCAb
RANDSTAD HOLDING NV
RAND
1
4
4
3
ADECCO SA
ADEN
1
5
2
3
TULLOW OIL PLC
TLW
2
1
5
2
KONINKLIJKE PHILIPS NV
PHG
2
2
5
2
RHOEN-KLINIKUM AG
RHKG
1
5
2
2
METRO AG
MEOG
2
3
2
2
LINDT & SPRUENGLI AG
LISP
2
5
1
2
RENTOKIL INITIAL PLC
RTO
1
4
2
1
BG GROUP PLC
BG
2
1
1
1
CLARITY IS CONFIDENCE
43
HOLT
Firms with negative changes to their incentive plans
CLARITY IS CONFIDENCE
44
HOLT
41 firms introduced positive changes to their pay plan in 2013
CLARITY IS CONFIDENCE
45
HOLT
8 others introduced changes that represent a step back in terms of alignment with shareholder
interests
Name
ENRC
NEXANS SA
2.3
2.4
‐12.8
‐1.6
MICHELIN SCA
6.3
0.4
‐12.2
‐9.4
‐1.3
E.ON SE
1.1
1.0
31.4
7.1
‐0.3
‐1.4
RED ELECTRICA CORPORACI A.
SCHINDLER HOLDING AG
APR ENERGY PLC
NOVOZYMES A/S
•
•
•
•
•
•
•
CFROI Managing
CFROI
LFY in Change for Value
Lowest
is
is
Quintile? Negative Negative
15.9
8.5
9.1
3.9
0.3
8.6
12.4
39.5
22.3
ENRC: TSR benchmark is now 100% based on the FTSE 350. Mining benchmark removed.
Michelin: long-term remuneration plan removed
Schindler: criteria used in the long-term plan no longer disclosed
Novozyme: unclear whether or not ROIC as a criteria has been removed
Nexans: ROCE replaced with FCF as a criteria
E.ON: removal of value add as a critera
APR Energy: Adjusted EBITDA criteria dropped. EPS kept as the sole criteria
CLARITY IS CONFIDENCE
46
HOLT
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CLARITY IS CONFIDENCE
47
HOLT