Douglas McCallum
"We are encouraged that shareholder support for the Company's remuneration arrangements has substantially increased in recent years."

Douglas McCallum

Remuneration Committee Chairman

Dear Shareholder,

On behalf of the Board, I am pleased to present the Directors' Remuneration Report for 2017.

We believe that the remuneration of the Executive Directors appropriately reflects the performance of the Group. Overall total Director remuneration is down against prior periods and incentive based pay is in line with 2016, reflecting the Group’s lower rates of growth compared to previous years. While the Group achieved strong sales and customer growth, lower average basket size for ocado.com compared to 2016 impacted business Revenue. An increase in head office headcount and fixed costs meant EBITDAA remained in line with the prior year. Hence achievement against the revenue and profitability targets under the incentive plans was modest. In 2017, the Group’s Revenue grew 15.2% to £1,463.8 million, average orders per week grew 14.8% to 264,000 and EBITDAA for the Group was flat at £84.3 million for the 53 weeks ended 3 December 2017. Further, although steady progress was made in developing the Group’s new Ocado Solutions platform, the delay to improvements in the capital and operating efficiency of Andover meant achievement against these challenging incentive targets was moderate for the period.

Relationship Between Pay and Performance

We have recommended a bonus payment to the Executive Directors based on 41.5% to 42% achievement against objectives under the bonus plan for the period. 

During the period, we reviewed the performance against the 2015 LTIP award targets, which had a performance period ending on 3 December 2017. The 2015 LTIP awards were subject to the achievement of targets for both the Group’s retail business and platform business. Based on the 2017 results, the Directors achieved 25% against the performance targets. The 2015 LTIP awards are expected to vest in March 2018.

Base salaries, which underpin retention of the Executive Directors, were reviewed during the period. An increase of 2.75% was approved, which is in line with the Group’s employee salary percentage increase and business plans.

The Annual Report on Remuneration contains details of the remuneration paid to Executive Directors during the period.

Key Changes to Executive Director Remuneration

We believe that our remuneration framework helps support and drive our strategy, which is focused on growing the retail business through improvement in the customer proposition and on maximising operational and capital efficiency of the retail business.

Our objective is also to invest in the Group's IP and technology to drive growth, both in our retail business and solutions business. The Remuneration Committee reviews the remuneration framework annually, to make sure that the AIP, the LTIP and the GIP contain specific performance measures that support this strategy.

During the financial year, we undertook a review of the Executive Director AIP structure and concluded that the financial measures of Group EBITDAA and Gross Sales (Retail)A remained aligned with the Company’s strategy and should be retained for 2018 in order to encourage continued strong retail business growth. However, with the progress in the development of the Solutions business it was agreed that a new Ocado Solutions business target should be introduced to align with the evolving Group strategy. Further explanation of the changes can be found in the Annual Report on Remuneration - Implementation of Policy for 2018.

The financial performance measures for the 2018 LTIP awards reflect the same equal split in the 2017 awards, namely between the retail business and the Solutions business but with some changes to the retail profitability measure reflecting the Group's new segmental reporting. The targets are intended to reward the delivery of an efficient platform solution and sales of that platform solution to new customers as well as rewarding growth of the retail business.

Changes to Non-Executive Director Remuneration

The Non-Executive Directors' annual fees were subject to annual review but the basic fees for Non-Executive Directors were left unchanged (2016: £50,000). Fee levels have only increased once since April 2014.

Executive remuneration and the broader context

The Remuneration Committee is mindful of the proposed corporate governance reforms and changes in legislation concerning remuneration and its disclosure. The Committee expects to conduct a full review of its remuneration arrangements in 2018 to coincide with the new requirements coming into force and will report more fully next year.

The Remuneration Committee sets the remuneration policy and remuneration plans in the context of the growth of the Company but while taking into account workforce pay across the Group. Our overall remuneration framework is designed to motivate key employees to achieve the Group's strategic objectives, deliver value for shareholders and to be competitive.

Change of adviser

Following the appointment of Deloitte as the Company's external auditor, the Remuneration Committee conducted a tender for the role of external remuneration adviser. The result was the appointment of PricewaterhouseCoopers as the Remuneration Committee's external remuneration adviser. The Remuneration Committee would like to thank Nicki Demby at Deloitte for her advice and support to the Company.

Further details of the tender can be found in Audit Committee Report.

Shareholder Feedback and Remuneration Disclosure

Each year, we review how shareholders voted on the remuneration report, together with any feedback received. We are aware of some shareholders' ongoing concerns regarding transparency of performance-related remuneration. We have enhanced our reporting of performance in recent years, which we believe provides shareholders with clear and understandable information about the operation of our performance-related incentive schemes. We are encouraged that shareholder support for the Company's remuneration arrangements has substantially increased in recent years, with 93.16% support for the 2016 Directors' Remuneration Report and 93.75% support for the Directors' Remuneration Policy at the 2017 annual general meeting.

I will be available at the AGM to answer any questions about the work of the Remuneration Committee.

Douglas McCallum

Remuneration Committee Chairman

6 February 2018

Remuneration At A Glance

  • Increase in base pay of 2.75%
  • Increase in variable pay of 0.8%
  • Overall pay for all directors decreased
  • Share scheme targets changed for 2018 awards to align with evolving Group strategic objectives
  • Shareholder support for policy and report of 93.75% and 93.16%
  • Directors hold about 16.3% of the total share capital

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See Alternative Performance Measures