Dechra Pharmaceuticals PLC

Dechra Pharmaceuticals PLC

Annual Report and Accounts for the year ended 30 June 2012

Directors' Remuneration Report

Dr Christopher Richards
Chairman of the Remuneration Committee

Dear Shareholder

On behalf of the Board I am pleased to present Dechra's Remuneration Report for the year ended 30 June 2012.

Following Bryan Morton's resignation at the beginning of July 2012 I have agreed to take on the responsibility as Chairman of the Remuneration Committee. At a time when executive remuneration is under intense public scrutiny, I believe that this role will be a challenging one. I am mindful that when making decisions sensitivity is given to all stakeholders. At the same time, we need to ensure that we provide remuneration packages for Executives which motivate them to continue to grow the Company.

Remuneration increases for the Executive Directors over the last three years has been limited to inflation. Over the same period, the Company has experienced annual double digit growth and completed a number of acquisitions, including DermaPet, HY-50 and Eurovet. The latter acquisition is the largest transaction in the history of Dechra and represents a move into new territories and new markets for Dechra Veterinary Products and significantly increases the complexity of the Group. Given the increase in the scale and complexity of the Group and the increase in the Directors' responsibilities, the Committee has decided to carry out a review of Executive remuneration. The review should be completed by the end of the current financial year and it is intended that any proposals will be discussed with Dechra's main Shareholders before implementing any changes.

The other focus for the year ahead will be the implementation of the Performance and Development Review ("PDR") process. The approach has been piloted during 2011/2012 and initial feedback has been positive. A full 12 month PDR cycle is now underway by way of an extended group during the 2012/2013 PDR year. It is our intention to evaluate remuneration increases against individual performance results determined by the PDR outcome for 2013/2014. Particularly in respect of the Executives, this will provide a distinct alignment between any remuneration changes and the performance of the Group.

Finally, I welcome the view of all Shareholders in respect of this report. I shall be at the Annual General Meeting to discuss any queries you may have. Alternatively, I can be contacted via the Company Secretary.

Dr Christopher Richards
Remuneration Committee Chairman

The Remuneration Report is presented in accordance with the relevant provisions of the UK Corporate Governance Code (the "Code") and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (the "Regulations"). In accordance with the Regulations the report is divided into two sections, unaudited and audited information. View the Audited Information.

The Board is responsible overall for the Group's remuneration policy and the setting of the Non-Executive Directors' fees, although the task of determining and monitoring the remuneration packages of the Executive Directors and agreeing the Chairman's fee level has been delegated to the Remuneration Committee (the "Committee").

This report will be submitted at the 2012 Annual General Meeting for the approval of the Shareholders.


The Committee consists exclusively of independent Non-Executive Directors and during the financial year comprised as follows:

MemberIndependentMeetings eligible
to attend
Meetings attended
Bryan Morton (resigned 9 July 2012)Yes21*
Mike RedmondYes22
Neil Warner†Yes22
Dr Chris Richards‡Yes22

Zoe Goulding

* Bryan Morton was unable to attend one meeting due to additional work commitments at EUSA Pharma. He was subsequently updated on the matters discussed at the meeting.

† Appointed Chairman of the meeting which Bryan Morton was unable to attend.

‡ Appointed Committee Chairman on the resignation of Bryan Morton.

The Chief Executive attended both meetings held during the financial year in order to assist on matters concerning remuneration of other senior executives within the Group; however, the Chief Executive was not present during the part of the meetings where his own remuneration was discussed.


The Committee has its own terms of reference, which are approved by the Board. These are reviewed on an annual basis to ensure that they continue to adhere to best practice. During the 2011/2012 financial year this review took place at the May meeting. Copies can be obtained via the Company website at The Committee Chairman and the Company Secretary are available to Shareholders to discuss the remuneration policy.

The Committee is responsible for determining, on behalf of the Board, the framework of remuneration for the Executive Directors and for ensuring and reviewing the ongoing appropriateness and relevance of the remuneration policy.

In particular, the terms of reference authorise the Committee to:

  • make recommendations to the Board on Executive remuneration;
  • determine on behalf of the Board specific remuneration packages and conditions of employment for Executive Directors;
  • determine targets for any performance related pay schemes operated by the Company; and
  • determine the policy for and scope of any pension arrangements for the Executive Directors.


The Committee met twice during the year in accordance with its terms of reference. Members' attendance at the meetings can be found above. The table below sets out a number of the matters which were discussed (and where necessary approved) at the two meetings:

DateSubject Matter
August 2011
  • Approval of Director bonuses
  • Approval of satisfaction of performance condition in respect of the LTIP
  • Review of Committee effectiveness
  • Discussion of the LTIP awards to be granted to Executives and Senior Management
  • Approval of satisfaction of Approved and Unapproved Share Options
May 2012
  • Confirmation of Executive Directors' and Senior Managers' salaries
  • Confirmation of Chairman and Non-Executive Directors' fees
  • Confirmation of executive bonus arrangements for 2011/2012
  • Rights issue adjustment to share option schemes and future share option grants
  • Review of terms of reference


The Committee's main advisers are set out below:

AdviserAreas of advice
Chief Executive
Group HR Director
Remuneration of Senior Executives and senior management
DLA Piper (UK) LLPShare Scheme matters (in particular in relation to the Rights Issue)
Hewitt New Bridge StreetCalculation of satisfaction (or otherwise) of the LTIP performance conditions
Deloitte LLPGeneral remuneration and incentive arrangements for Executives and general share scheme advice

DLA Piper (UK) LLP are the Company's lawyers and Deloitte LLP have recently been appointed to provide tax and compliance advice to the Group. Hewitt New Bridge Street has no other connection with the Company. The nature and quantum of other services provided by DLA and Deloitte are always considered in order to ensure that no conflict of interest arises in relation to the services they provide to the Remuneration Committee.

Effectiveness Review

During the year, the Committee reviewed its effectiveness as part of the overall board evaluation process. Following the reviews, the Committee considered it had the skills and experience necessary to perform its responsibilities. However, following the resignation of Bryan Morton, it was agreed that the Committee membership required strengthening once all additional Non-Executive Directors have been appointed to the Board. The Board was advised of these findings.

Remuneration Policy and Practice

Non-Executive Directors

The Board aims to recruit and retain Non-Executive Directors of a high calibre with the requisite experience required to achieve success for the Company and its Shareholders. The fees of the Chairman are determined by the Committee and the fees of the Non-Executive Directors are determined by the Board following a recommendation from both the Chief Executive and the Chairman. It should be noted that neither the Chairman nor the Non-Executive Directors takes part in the determination of their own remuneration. Non-Executive Directors are paid a basic fee with additional fees paid for the chairing of Committees. During the financial year under review the Non-Executive Directors' fees increased by 2%. Taking into account the current market sentiment in relation to increases in Non-Executive fees and in the light of pay increases across the Group, it has been agreed to increase the basic fee by 2% for the 2012/2013 financial year. The annual fee level for 2012/2013 is therefore:

Non-Executive Director39
Remuneration Committee Chairmanship additional fee3
Audit Committee Chairmanship additional fee3

Non-Executive Directors are not eligible to participate in any of the Company's share schemes, incentive schemes or pension schemes.

Executive Directors

Dechra's policy on Executive Directors' remuneration is to provide remuneration packages that:

  • attract, retain and incentivise Executives of the calibre required to ensure that the Group is managed successfully to the benefit of Shareholders;
  • provide appropriate alignment between Dechra's strategic goals, Shareholder returns and Executive reward; and
  • have a competitive mix of base salary and short and long term incentives with a significant proportion of the package determined by stretching targets linked to Dechra's performance.

In defining Dechra's remuneration policy, the Committee takes into account best practice guidelines set by institutional investor bodies such as the Association of British Insurers. The Chairman of the Company also ensures the Company, through the Committee and its Chairman, maintains contact with principal Shareholders about remuneration matters.

As reported in the 2011 Annual Report the HR Director continues to establish a Group PDR process. It our intention to evaluate any Executive remuneration increases against individual performance results determined by the PDR outcome for 2013/2014.

The primary elements of the Executives' remuneration package focus on supporting different objectives, as illustrated in the following table, which also shows the remuneration opportunities for 2011/2012 and 2012/2013 along with the remuneration performance measures:

PolicyOpportunity and Performance Measures
Base Salary
When considering base salary the Committee ensures that it provides the basis for a market competitive package to recruit and retain talent amongst the Executive team and that it recognises the value of the individual, their skills and experience and performance

The Committee also takes into consideration:
  1. remuneration packages payable to employees employed in comparable companies; and
  2. pay increases within the Group more generally
Base salaries are reviewed annually on 1 July. In line with the Group's budgeted average increase in base pay for all employees, the Committee agreed that base salaries be increased by 2% with effect from 1 July 2012 to:

Ian Page — £382,565
Simon Evans — £240,470
Ed Torr — £229,539
The Company operates a Group Stakeholder personal pension scheme which has been effective since 1 July 2005The Company contributes 14% of salary on behalf of the Executive Directors

A salary supplement is paid in lieu of amounts above the annual allowance of £50,000 per annum
Benefits in Kind
Provided on a market competitive basisThe Company provides the use of a fully expensed car, medical cover and life assurance scheme
Annual Bonus
The executive bonus scheme rewards Executive Directors for achieving operating efficiencies and profitable growth in the relevant year by reference to challenging but achievable operational targets and individual objectives determined at the beginning of the financial yearDetails of the executive bonus scheme for the 2011/2012 financial year can be referenced.

The executive bonus scheme for the 2012/2013 financial year will be as follows:

A payment of 10% of salary is triggered on achievement of 95% of budget and payment of 90% of salary on achievement of 105% of budget with straight line vesting for achievement between these two parameters

A further 10% of salary can be earned based on the achievement of personal objectives

The personal objectives for the Chief Executive, Ian Page, are set by the Chairman. The personal objectives for Simon Evans and Ed Torr are set by Ian Page
Long Term Incentives Plan ("LTIP")
The LTIP provides a clear link between the remuneration of the Executive Directors and the creation of value for Shareholders by rewarding the Executive Directors for the achievement of longer term objectives aligned closely to Shareholders' interestsCurrent scheme rules permit grants up to 150% of salary (200% of salary in exceptional circumstances)

Actual awards made to the Executive Directors in 2011/2012 were 100% of salary

For the grant during the financial year ended 30 June 2012 vesting is based on:

  • an 'underpin' condition based on the Company's underlying diluted earnings per share performance; and
  • the Company's TSR performance compared to the constituents of the FTSE SmallCap Index at the start of the performance period

The performance measure for the 2012/2013 awards is currently being reviewed by the Committee. Any proposed change to the performance measure for the LTIP will be discussed with the Company's major Shareholders before being implemented

Balance of Remuneration

Just under two-thirds of each Executive Director's total remuneration is variable and is linked to corporate performance. The following chart illustrates the proportions of the Executive Directors' remuneration packages comprising fixed (i.e. base salary and employer pension contributions) and variable elements of pay, assuming maximum annual bonus and long term incentives are achieved.

Fixed vs Variable Pay at Maximum Performance

Base Salary

During the last four years (2008/2009 to 2011/2012) salary increases for the Executive Directors have been in line with average salary increases for the wider employee population (approximately 2% to 3%).

At the last review of Executive remuneration that took place during spring/summer 2010, the Committee concluded that the value of the Executive Directors' remuneration packages continued to be positioned at the lower end of the market. At the Committee meeting in May 2012, it was agreed that the Executive Directors would be awarded a 2% pay increase for 2012/2013 but that a review of their enhanced roles and responsibilities would be completed following the recent acquisition of Eurovet. Any proposed above inflationary increase will be discussed with the Company's major Shareholders before being implemented.

Annual Bonus

The Company operates an annual cash incentive scheme for the Executive Directors. Annual bonuses were awarded by the Committee in respect of 2011/2012 having regard to the performance of the Group and personal performance objectives for the year. Details of the 2012/2013 annual bonus scheme can be found in the table above.

The amount achieved for the year ended 30 June 2012 against targets for 2011/2012 is as follows:

2011/2012 TargetsAmount Achieved for the Year Ended 30 June 2012
Underlying profit before tax performance — 10% of salary payable upon the achievement of 95% of Group profit target rising to 90% of salary payable upon the achievement of 110% of Group profit targetThe profit before tax target was £35.0 million on a constant currency basis; actual profit before tax was £34.8 million (at constant currency based on budgeted exchange rates) reflecting 99.6% of the profit target resulting in a payment worth 50% of salary
Personal objectives — up to an additional 10% of salary was payable to Executive Directors upon the achievement of personal objectivesActual performance resulted in payment worth 10% of salary. The objectives are based on key aspects of delivering the Group's strategy
Total Annual Bonus Earned for the Year Ended 30 June 201260% of Salary

Long Term Incentive Arrangements and Share Schemes

Long Term Incentive Plan

Awards, equal to 100% of salary, were granted to the Executive Directors on 7 September 2011.

Vesting of the awards will normally occur provided:

  1. that the participant is still employed by the Group at the end of the three year vesting period; and
  2. to the extent that the pre-set performance targets have been satisfied over the three year performance period which will run from the start of the financial year within which the award is granted. Performance targets for the grant during the financial year ended 30 June 2012 are:
      1. an 'underpin' condition based on the Company's underlying diluted earnings per share performance — no awards will vest if the Company's underlying diluted earnings per share has not grown by at least RPI +3% per annum over the performance period;
      2. the Company's TSR performance — assuming that the underpin is achieved, vesting of the awards will be determined by the Company's TSR performance compared to the constituents of the FTSE Small Cap Index at the start of the performance period. The TSR will be calculated by comparing average performance over three months prior to the start and end of the performance period. Vesting will be on the following basis:
TSR PerformanceVesting Percentage
Below median0%
Between median and upper quartilePro-rata vesting based on the Company's ranking in the comparator group
Upper quartile100%

To the extent that the performance targets are not met over the three year performance period, awards will lapse, i.e. there is no retesting of the performance conditions.

As set out in the Audited Information of this report, for the three year period to 30 June 2012 the Company's TSR performance fell below the median of the FTSE Small Cap Total Return Index. Therefore, although the 'underpin' condition has been met no awards will vest on their maturity date.

Company Share Option Scheme and Savings Related Share Option Scheme

The Company also operates an Approved Share Option Scheme, an Unapproved Share Option Scheme and a Savings Related Share Options Scheme ("SAYE"). Executive Directors are entitled to participate in the SAYE but are not entitled currently to participate in the Approved Share Option Scheme or the Unapproved Share Option Scheme by reason of their participation in the LTIP. The Committee has the discretion to amend this going forward but would ensure that any such amendment would not result in an increase in the total pre-tax value delivered to participants.

Rights Issue

Following the Rights Issue completed in May 2012, the Committee approved adjustments to the LTIP, Approved Share Option Scheme, Unapproved Share Option Scheme and the SAYE in accordance with the rules of each of the relevant schemes. The adjustments, where necessary, were approved by HM Revenue & Customs and the effect of these adjustments on the outstanding LTIP and SAYE awards are shown in the respective tables below. The total value of outstanding awards under the Company's share plans was not increased as a result of these adjustments.

Share Ownership Guidelines

In line with best practice, there are formal share ownership guidelines for Executive Directors requiring them to retain at least half of any share awards vesting as shares (after paying any tax due on the shares) until they have a holding of Dechra shares worth at least 100% of their base salary. Currently, all of the Executive Directors' shareholdings equate to over 100% of their base salary:

% of
Ian Page859,7514,1781,114%
Simon Evans1,032,1045,0162,127%
Ed Torr472,7672,2981,021%

* Calculated using the share price as at 30 June 2012.

In September 2010, the Board adopted formal share ownership guidelines for Non-Executive Directors, whereby Non-Executive Directors are required to acquire the equivalent of 50% of their base fee by the third anniversary of their appointment to the Board. With the exception of Bryan Morton, the Non-Executive Directors' shareholdings equate to over 50% of their annual fee.

% of
Mike Redmond73,417357424.8%
Bryan Morton (resigned 9 July 2012)3,6451843.2%
Dr Chris Richards7,4003694.6%
Neil Warner5,4482664.6%

* Calculated using the share price as at 30 June 2012.

Policy on External Appointments

The Company recognises that Executive Directors may be invited to become Non-Executive Directors of other companies and that this can help broaden the skills and experience of a Director. Executive Directors are only permitted to accept external appointments with the approval of the Board.

The only Executive Director to hold an external appointment is Ian Page. He is Non-Executive Chairman of Sanford DeLand Asset Management Limited, a position which he has held since 7 October 2010. During the year Ian Page received no remuneration for this appointment.

Total Shareholder Return Graph

The graph below shows the TSR performance of the Company over the past five financial years compared with the TSR over the same period for the FTSE Small Cap Total Return Index. In June 2012 the Company moved from being a constituent member of the FTSE Small Cap Index to the FTSE 250; as the move to the FTSE 250 took place during the final month of the financial year being reported it was not considered necessary to reflect Dechra's performance against the constituent members of the FTSE 250.

Total Shareholder Return — 2007 to 2012

Directors' Shareholdings

The beneficial interests of the Directors and their families in the share capital of Dechra Pharmaceuticals PLC as at 30 June 2012 were as follows:

Mike Redmond73,41756,475
Ian Page859,751726,282
Simon Evans1,032,104882,689
Ed Torr472,767411,381
Bryan Morton (resigned 9 July 2012)­3,645­—
Dr Chris Richards7,4004,000
Neil Warner5,4484,191

There have been no changes in the holdings of the Directors between 30 June and 4 September 2012.

Contracts of Services

Details of the Executive Directors' service contracts/Non-Executive Directors' letters of appointment are set out below.

Notice Period
Mike Redmond25 April 200112 months12 months
Ian Page1 September 20086 months12 months
Simon Evans6 February 20096 months12 months
Ed Torr6 February 20096 months12 months
Bryan Morton (resigned 9 July 2012)8 January 201012 months12 months
Dr Chris Richards1 December 201012 months12 months
Neil Warner2 May 200312 months12 months

There are no expiry dates applicable to either Executive or Non-Executive Directors' service contracts. The Company may, in its absolute discretion at any time after written notice has been given by either party, lawfully terminate the service contract by paying to the Director an amount equal to his basic salary entitlement for the unexpired period of notice (subject to a deduction at source of income tax and National Insurance contributions). In the event that the service contract is terminated before the end of any financial year, the Director shall not be entitled to any bonus in respect of that financial year. Non-Executive Directors have a service contract for an initial 12 month period which is thereafter terminated by either party giving 12 months' notice. Non-Executive Directors' compensation is confined to 12 months' fee.

Individual Directors' eligibility for the various elements of compensation is set out below:

Mike Redmond12 monthsn/an/a
Ian Page12 monthsNil12 months
Simon Evans12 monthsNil12 months
Ed Torr12 monthsNil12 months
Bryan Morton (resigned 9 July 2012)12 monthsn/an/a
Dr Chris Richards12 monthsn/an/a
Neil Warner12 monthsn/an/a

Where applicable, payment of this compensation would be in full and final settlement of all claims other than in respect of share options or awards and pension arrangements. In an appropriate case the Directors would have regard to the departing Director's duty to mitigate loss, except in the event of dismissal following a change of control of the Company. Other than as described above, there are no express provisions within the Directors' service contracts for the payment of compensation or liquidated damages on termination of employment. No compensation payments were made to Executive or Non-Executive Directors during the year.

Audited Information

The Auditor is required to report on the information contained in the remainder of this report.

Summary of Remuneration

& Fees
Executive Directors
Ian Page377*22530632619
Simon Evans23614126403396
Ed Torr22513515375368
Non-Executive Directors
Mike Redmond848482
Malcolm Diamond (resigned 5 November 2010)15
Bryan Morton (resigned 9 July 2012)414140
Dr Chris Richards383822
Neil Warner414140

* This includes a salary supplement of £2,509 paid in lieu of employers' pension contribution in excess of the £50,000. Therefore the base salary is £375,064.

The performance conditions attaching to the annual bonus for 2011/2012 are explained above.

Long Term Incentive Plan

Awards made under the LTIP are as follows:

Number of shares at
30 June
Granted during
the year
Rights Issue
Lapsed during
the year
Exercised during
the year
Number of shares at 30 June 2012Performance periodShare Price at date of award Pence
Ian Page19 Nov 200892,593(26,751)(65,842)2008-2011391.75
24 Sept 200986,8617,71494,5752009-2012404.10
22 Dec 201072,2416,41578,6562010-2013514.00
7 Sept 201185,2417,57092,8112011-2014455.50
Simon Evans19 Nov 200858,201(16,815)(41,386)2008-2011391.75
24 Sept 200954,5994,84859,4472009-2012404.10
22 Dec 201045,4094,03249,4412010-2013514.00
7 Sept 201153,5804,75858,3382011-2014455.50
Ed Torr19 Nov 200855,556(16,051)(39,505)2008-2011391.75
24 Sept 200952,1174,62856,7452009-2012404.10
22 Dec 201043,3443,84947,1932010-2013514.00
7 Sept 201151,1454,54255,6872011-2014455.50

* Outstanding awards were subject to an adjustment following the Rights Issue to reflect the bonus element of the transaction

The performance conditions attached to the LTIP are explained above.

Independent verification has also recently been sought from Hewitt New Bridge Street in respect of the satisfaction of the performance targets for awards vesting in September 2012. The 'underpin' condition (the Company's underlying earnings per share has grown by at least RPI plus 3% per annum over the performance period) has been met, however, it has been confirmed that the Company's TSR performance for the three year period to 30 June 2012 fell below the median of the FTSE Small Cap Total Return Index. Therefore no awards will vest on their maturity date.

The aggregate gain made by the Executive Directors on share options exercised during 2012 was £729,997 (2011: £408,459).

SAYE Scheme

Directors' entitlements under the SAYE Scheme are as follows:

Award dateMarket price at date of grant PenceExercise Price PenceExercise datesAt 30 June 2011 NumberExercised NumberGranted NumberRights
Lapsed NumberAt 30 June 2012 Number
Ian Page13 Oct 2008387315.02*Dec 20134,8834335,316
Simon Evans13 Oct 2008387315.02*Dec 20134,8834335,316
Ed Torr13 Oct 2008387315.02 Dec 20111,119(1,119)
12 Oct 2009445304.92*Dec 20121,6401451,785
17 Oct 2011478365.59*Dec 201490480984

* Outstanding awards were subject to an adjustment following the Rights Issue to reflect the bonus element of the transaction

Share Price

The middle market price for the Company's shares on 30 June 2012 was 486p and the range of prices, which have been adjusted to take into account the bonus element of the Rights Issue, during the year was 392.5p to 524.82p.

Pension Entitlement

All Executive Directors were members of the Dechra Pharmaceuticals PLC Group Stakeholder personal pension scheme throughout the year. Contributions made by Dechra Pharmaceuticals PLC on behalf of the Executive Directors during the year are based on a percentage of pensionable salary and were paid as follows:

Ian Page515051
Simon Evans483332
Ed Torr523031

From 6 April 2011, the annual allowance for tax relief on pension savings for individuals reduced to £50,000. Since this became effective Ian Page has elected to receive a salary supplement in lieu of the employer contribution over and above the £50,000 limit.

By order of the Board

Dr Christopher Richards
Chairman — Remuneration Committee
4 September 2012

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