Annual Report & ACCOUNTS for the year ended 30 June 2014

HYR 2014

Introduction — Key Principles

Dechra's policy is to provide remuneration packages that:

  • promote the long term success of Dechra, with stretching performance conditions, which are rigorously applied;
  • 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 along with the Chairman of the Committee ensure that contact is maintained with major shareholders about remuneration matters.

Directors' Remuneration Policy

This part of the Directors' Remuneration Report sets out Dechra's Directors' Remuneration Policy which, subject to shareholder approval at the 2014 Annual General Meeting, shall take binding effect from the close of that meeting.

Policy Table for Executive Directors:

Element: Base Salary

Purpose and link to strategy

Core element of fixed remuneration reflecting the individual's role and experience.

Operation

The Committee ordinarily reviews base salaries annually taking into account a number of factors including (but not limited to) the value of the individual, their skills and experience and performance.

The Committee also takes into consideration:

  • pay increases within the Group more generally; and
  • Group organisation, profitability and prevailing market conditions.

Performance measure

Not applicable.

Maximum opportunity

Whilst there is no maximum salary, increases will normally be in line with the level of salary increase awarded (in percentage of salary terms) to other employees in the Group. However, higher increases may be awarded in certain circumstances, such as:

  • on promotion or in the event of an increase in scope of the role or the individual's responsibilities;
  • where an individual has been appointed to the Board at a lower than typical market salary to allow for growth in the role in which case larger increases may be awarded to move salary positioning to a typical market level as the individual gains experience;
  • change in size and complexity of the Group; and/or
  • significant market movement.

Such increases may be implemented over such time period as the Committee deems appropriate.

Element: Pension

Purpose and link to strategy

Help retain and recruit employees and provide appropriate income in retirement.

Operation

The Company operates a Group Stakeholder personal pension scheme that has been effective since 1 July 2005. All Executive Directors excluding Tony Griffin are members of this scheme.

Tony Griffin participates in a defined benefit pension plan which has been established in the Netherlands. This is a funded career average pay arrangement, where pensionable salary is subject to a €50,000 cap. Salary over this cap is paid into a defined contribution pension plan.

Performance measure

Not applicable.

Maximum opportunity

The Company contributes up to 14% of salary to a pension scheme on behalf of the Executive Directors, and/or as a salary supplement in lieu of pension contributions where appropriate.

Element: Benefits

Purpose and link to strategy

Provided on a market competitive basis.

Operation

The Company provides benefits in line with market practice and includes the use of a fully expensed car, medical cover and life assurance scheme.

Other benefits may be provided based on individual circumstances, which may include relocation costs and expatriate allowances.

Performance measure

Not applicable.

Maximum opportunity

Whilst the Committee has not set an absolute maximum on the level of benefits Executive Directors may receive, the value is set at a level which the Committee considers to be appropriately positioned taking into account relevant market levels based on the nature and location of the role and individual circumstances.

Element: Annual Bonus

Purpose and link to strategy

The executive bonus scheme rewards Executive Directors for achieving financial and strategic targets in the relevant year by reference to operational targets and individual objectives.

Operation

Targets are reviewed annually and any pay-out is determined by the Committee after the year end based on targets set for the financial period.

The Committee has discretion to amend the pay-out should any formulaic output not reflect the Committee's assessment of overall business performance.

Performance measure

Operational targets (which may be based on financial or strategic measures) and individual objectives are determined at the beginning of the financial year.

The personal objectives for the Chief Executive Officer are set by the Chairman. The personal objectives for other Executive Directors are set by the Chief Executive Officer.

At least 75% of the bonus opportunity is based on financial measures (which may include profit before tax).

For financial measures, up to 15% of the maximum for the financial element is earned for threshold performance, rising to up to 50% of the maximum for the financial element for target performance and 100% of the maximum for the financial element for maximum performance.

Vesting of the bonus in respect of strategic measures or individual objectives will be between 0% and 100% based on the Committee's assessment of the extent to which the relevant metric or objective has been met.

For 2015, a bonus of up to 90% of salary may be earned based on underlying profit before tax targets and up to 10% of salary based on personal objectives, as described under the section titled Implementation of the Directors Remuneration Policy in the Year Ending 30 June 2015 .

Maximum opportunity

Maximum bonus opportunity for Executive Directors is 100% of base salary.

Element: Long Term Incentive Plan (LTIP)

Purpose and link to strategy

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 to shareholders' interests.

Operation

The Committee intends to make long term incentive awards under the existing LTIP.

Under the LTIP, the Committee may grant awards as conditional shares, as nil cost options, as forfeitable shares or as cash settled equivalents (or may settle in cash a share award).

An additional payment (in the form of cash or shares) may be made in respect of shares which vest under the LTIP to reflect the value of dividends which would have been paid on those shares during the vesting period (this payment may assume that dividends had been reinvested in Dechra shares on a cumulative basis).

Awards under the LTIP granted in November 2013 are subject to a 'malus' provision enabling the Committee to revoke awards in the event of a material misstatement of the financial statements. For awards granted after 1 July 2014, the malus provision has been extended to provide the ability to revoke, reduce or impose further conditions on unvested awards in the event of serious reputational damage to the Company or if a previous annual bonus opportunity has paid out at a higher level than would have been the case but for the material misstatement or serious reputational damage to the Company.

The Company also has in place a Company Share Option Plan (CSOP). Awards under the CSOP take the form of options to acquire shares, with a per share exercise price equal to the market value of a share at the date of grant.

The Committee may at its discretion structure awards as Approved Performance Share Plan (APSP) awards comprising both a tax qualifying option granted under the CSOP and LTIP award, with the vesting of the LTIP award scaled back to take account of any gain made on exercise of the approved option. Other than to enable the grant of APSP awards, the Company does not intend to grant awards under both the LTIP and CSOP in the same grant period. Where an APSP award is granted, the qualifying option under the CSOP will be subject to a 'malus' provision to the extent permitted in accordance with the applicable legislation.

Performance measure

Performance measures under the LTIP will be based on financial measures (which may include, but are not limited to, earnings per share growth, relative total shareholder return, return on capital employed and free cash flow).

At least 50% of any award will be subject to a performance measure based on earnings per share.

Awards will vest as to 25% for threshold performance, increasing to 100% for maximum performance.

Where an option under the CSOP is granted as part of an APSP award, the CSOP option will be subject to the same performance condition as the LTIP award.

For 2015, LTIP performance targets will be based 50% on total shareholder return (TSR) and 50% on earnings per share (EPS), with each element subject to an underpin based on return on capital employed (ROCE) as described under LTIP Awards made during the Year End 30 June 2014.

Maximum opportunity

The maximum award level under the LTIP in respect of any financial year is 200% of salary.

For the 2015 financial year, the following award levels will apply:

  • Chief Executive Officer — 200%
  • Chief Financial Officer — 150%
  • Other Executive Directors — 100%

If an APSP award is granted, the option under the CSOP may be granted over shares with a value of up to £30,000, or any other applicable HMRC limit going forward. Because of the scale back of the LTIP element of the APSP award, the value of shares subject to the CSOP option will not count towards the limits referred to above.

Other than where a CSOP option is granted as part of an APSP award, options under the CSOP will not be granted to Executive Directors.

Element: All Employee Share Plans

Purpose and link to strategy

Provision of the SAYE to Executive Directors creates staff alignment with the Group and provides a sense of ownership.
Executive Directors may participate in such other all employee share plan as may be introduced from time to time.

Operation

Tax qualifying monthly savings scheme facilitating the purchase of shares at a discount.

Any other all employee share plan would be operated for Executive Directors in accordance with its rules and on the same basis as for other employees.

Performance measure

Not subject to performance conditions in line with the HMRC qualifying operation of such plans.

Maximum opportunity

The limit on participation under the SAYE scheme will be that set in accordance with the applicable tax legislation from time to time. The contribution limit is £500 per month as at 30 June 2014.

The limit on participation under any other all employee share plan would be determined in accordance with the plan rules (and, where relevant, applicable legislation) and would be the same for the Executive Directors as for other relevant employees.

The Committee may amend the terms of awards and options under its share plans in accordance with the plan rules in the event of a variation of Dechra's share capital or a demerger, special dividend or other similar event or otherwise in accordance with the rules of those plans.

Explanation of Performance Metrics

Performance measures for the LTIP and annual bonus are selected to reflect the Company's strategy. Stretching performance targets are set each year by the Committee taking into account a number of different factors. The Committee considers that the underlying profit before tax is closely aligned to the Group's key performance metrics; together with annual personal objectives linked to the achievement of strategic milestones, we consider that this encourages sustainable growth year by year. The application of EPS and TSR targets to the LTIP aligns management's objectives with those of shareholders for the longer term.

The Committee may vary any performance measure if an event occurs which causes it to determine that it would be appropriate to do so, provided that any such variation is fair and reasonable and (in the opinion of the Committee) the change would not make the measure less demanding. If the Committee were to make such a variation, an explanation would be given in the next Remuneration Report.

Policy Table for Non-Executive Directors:

Element

Purpose and link to strategy

Operation

Opportunity

Fees and benefits

To provide fees within a market competitive range 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 Officer and the Chairman.

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

Non-Executive Directors may be eligible to receive benefits such as travel and other reasonable expenses.

Non-Executive Directors are paid a basic fee with additional fees paid for the chairing of Committees.

An additional fee is also paid for the role of Senior Independent Director.

Where benefits are provided to Non-Executive Directors they will be provided at a level considered to be appropriate taking into account the individual circumstances.

Policy for the Remuneration of Employees More Generally:

The Group aims to provide a remuneration package that is competitive in an employee's country of employment and which is appropriate to promote the long term success of the Company. The Company intends to apply this policy fairly and consistently and does not intend to pay more than is necessary to attract and motivate staff. In respect of the Executive Directors, a greater proportion of the Directors' remuneration package is 'at risk' and determined by reference to performance conditions. The Company's SAYE scheme encourages share ownership by qualifying employees and enables them to share in value created for shareholders.

Illustrations of Application of Remuneration Policy:

The following charts provide an illustration, for each of the Executive Directors, of the application for the 2015 financial year of the remuneration policy. The charts show the split of remuneration between fixed pay (i.e. base salary, benefits and employer pension contributions), annual bonus and long term incentive pay on the basis of minimum remuneration, remuneration receivable for performance in line with Dechra's expectations and maximum remuneration (not allowing for any share price appreciation).

Ian Page

Ian Page Barchart

Anne-Francoise Nesmes

Anne Francoise Nesmes Barchart

Tony Griffin

Tony Griffin Barchart

In illustrating the potential reward, the following assumptions have been made.

Annual bonus

LTIP

Fixed pay

Minimum performance.

No bonus.

No LTIP vesting.

Base salary (being the latest known salary as at 1 July 2014, benefits and employer pension contributions as disclosed under Single Total Figure of Remuneration.

Performance in line with expectations.

Bonus equal to 50% of salary is earned.

LTIP vests as to 25% of the maximum award (50% of salary for Ian Page, 37.5% of salary for Anne-Francoise Nesmes and 25% of salary for Tony Griffin).

Maximum performance.

Bonus equal to 100% of salary is earned.

LTIP vests in full (200% of salary for Ian Page, 150% of salary for Anne-Francoise Nesmes and 100% of salary for Tony Griffin).

Recruitment Remuneration Policy

When hiring a new Executive Director, the Committee will typically align the remuneration package with the above Policy.

When determining appropriate remuneration arrangements, the Committee may include other elements of pay which it considers are appropriate. However, this discretion is capped and is subject to the principles set out under Introduction — Key Principles and the limits referred to below.

  • Base salary will be set at a level appropriate to the role and the experience of the Director being appointed. This may include agreement on future increases up to a market rate, in line with increased experience and/or responsibilities, subject to good performance, where it is considered appropriate.
  • Pension and benefits will only be provided in line with the above Policy.
  • The Committee will not offer non-performance related incentive payments (for example a 'guaranteed sign-on bonus').
  • Other elements may be included in the following circumstances:
    • an interim appointment being made to fill an Executive Director role on a short term basis;
    • if exceptional circumstances require that the Chairman or a Non-Executive Director takes on an executive function on a short term basis;
    • if an Executive Director is recruited at a time in the year when it would be inappropriate to provide a bonus or long term incentive award for that year as there would not be sufficient time to assess performance. Subject to the limit on variable remuneration set out below, the quantum in respect of the months employed during the year may be transferred to the subsequent year so that reward is provided on a fair and appropriate basis;
    • if the Director will be required to relocate in order to take up the position, it is the Company's policy to allow reasonable relocation, travel and subsistence payments. Any such payments will be at the discretion of the Committee.
  • The Committee may also alter the performance measures, performance period and vesting period of the annual bonus or LTIP, subject to the rules of the LTIP, if the Committee determines that the circumstances of the recruitment merit such alteration. The rationale will be clearly explained in the next Directors' Remuneration Report.
  • The maximum level of variable remuneration which may be granted (excluding 'buyout' awards as referred to below) is 300% of salary.

The Committee may make payments or awards in respect of hiring an employee to 'buyout' remuneration arrangements forfeited on leaving a previous employer. In doing so, the Committee will take account of relevant factors including any performance conditions attached to the forfeited arrangements and the time over which they would have vested. The Committee will generally seek to structure buyout awards or payments on a comparable basis to the remuneration arrangements forfeited. Any such payments or awards are excluded from the maximum level of variable remuneration referred to above. 'Buyout' awards will ordinarily be granted on the basis that they are subject to forfeiture or 'clawback' in the event of departure within 12 months of joining Dechra, although the Committee will retain discretion not to apply forfeiture or clawback in appropriate circumstances.

Any share awards referred to in this section will be granted as far as possible under Dechra's existing share plans. If necessary and subject to the limits referred to above, recruitment awards may be granted outside of these plans as permitted under the Listing Rules which allow for the grant of awards to facilitate, in unusual circumstances, the recruitment of an Executive Director.

Where a position is filled internally, any ongoing remuneration obligations or outstanding variable pay elements shall be allowed to continue in accordance with their terms.

Fees payable to a newly appointed Chairman or Non-Executive Director will be in line with the policy in place at the time of appointment.

Policy on Service Contracts:

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

Name

Commencement date of current service contract

Notice Period

Director

Company

Mike Redmond25 April 20013 months3 months
Ian Page1 September 20086 months12 months
Anne-Francoise Nesmes22 April 20136 months12 months
Tony Griffin1 November 20126 months12 months
Ishbel Macpherson1 February 20133 months3 months
Dr Chris Richards1 December 20103 months3 months
Julian Heslop1 January 20133 months3 months

There are no expiry dates applicable to either Executive or Non-Executive Directors' service contracts. The Non-Executive Directors are entitled to compensation on termination of their appointment confined to three months' remuneration.

While the Committee's policy is for the service contract of any newly appointed Executive Director to have a notice period of not more than 12 months, the Committee retains discretion to set an initial notice period of up to 24 months, reducing to 12 months over the initial 12 months of employment.

Policy on Payment for Loss of Office:

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

Provision

Treatment upon loss of office

Base Salary/Fees

Base salary/fees and benefits based on the duration of the notice period receivable from the Company.

Payments in Lieu of Notice

The Company has discretion to make a payment in lieu of notice at any time after notice has been given by either the Company or the Director. Such a payment would consist of basic salary for the unexpired period of notice and may also include benefits for that period.

Annual Bonus

This will be reviewed on an individual basis and the decision whether or not to award a bonus in full or in part will be dependent upon a number of factors including the circumstances of their departure and their contribution to the business during the bonus period in question. Any bonus payment would typically be pro-rated for time in service to termination and paid at the usual time (although the Committee retains discretion to pay the bonus earlier in appropriate circumstances).

LTIP

If an Executive Director ceases employment with the Group for any reason within the first 12 months of the performance period relating to an award under the LTIP, that award will lapse.

If an Executive Director ceases employment with the Group before the end of the performance period relating to an award under the LTIP as a result of retirement, ill-health, injury, disability, redundancy, death, transfer of his employing entity out of the Group or any other reason, at the discretion of the Committee, the award will usually vest on the normal vesting date, although the Committee has discretion to permit the award to vest on cessation. In either case, the award will vest to the extent determined by reference to the relevant performance conditions and as reduced to reflect the period of time from the start of the performance period to the date of cessation.

If an Executive Director ceases employment for any reason after the end of the performance period relating to an award under the LTIP, that award will continue to subsist in accordance with the rules of the LTIP.

Pension

This would be taken into account as part of the payment referred to in the base salary section.

Recruitment Awards

Anne-Francoise Nesmes was granted two recruitment awards, as referred to in the Company's Directors' Remuneration Report for the year ended 30 June 2013.

The first of those Awards vested on 30 June 2014 and may be exercised until 30 December 2014. If Anne-Francoise Nesmes ceases employment with the Group before exercise as a result of ill-health, injury, disability, redundancy, death, transfer of her employing entity out of the Group or any other reason, at the discretion of the Committee, the award will continue to subsist subject to its terms.

The second Award is due to vest, subject to satisfaction of performance conditions, on 30 June 2015. That Award is subject to leaver provisions which are the same as those applying to the LTIP.

Other Payments

In appropriate circumstances, payments may also be made in respect of accrued holiday pay, and outplacement and legal fees.

Options under the Company's SAYE scheme will vest if a participant ceases employment with the Group due to death, injury, disability, redundancy, retirement, the transfer of his employing entity out of the Group or by reason of dismissal in circumstances constituting wrongful or unfair dismissal where such dismissal occurs more than three years after the grant of the option.

Change of Control

In the event of a change of control, unvested awards under the LTIP will vest to the extent determined by the Committee taking into account the relevant performance conditions and, unless the Committee determines otherwise, the extent of vesting so determined shall be reduced to reflect the proportion of the relevant performance period that has elapsed.

In the event of a change of control, the Recruitment Awards referred to above will vest in full.

Options under the SAYE scheme will vest on a change of control.

Where appropriate 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.

Where a 'buyout' or other award is made outside Dechra's existing share plan, as permitted under the Listing Rules as referred to above, the leaver provisions would be determined at the time of the award.

The Committee reserves the right to make additional exit payments where such payments are made in good faith in discharge of an existing legal obligation (or by way of damages for breach of such an obligation) or by way of settlement or compromise of any claim arising in connection with the termination of a Director's office or employment.

Consideration of Employment Conditions Elsewhere in the Group

The Committee does not formally consult with employees as part of its process when determining Executive Director pay. However, as noted in the Policy Table, the level of salary increases of employees within the wider Group is considered when setting base salary for Executive Directors. The Committee is also kept informed of general decisions made in relation to employee pay and related issues.

Consideration of Shareholders' Views

The Committee believes that ongoing dialogue with major shareholders is of key importance. During the year, the Committee consulted with major shareholders in relation to proposed changes to the LTIP performance conditions following the disposal of the Services Segment, and took account of comments received during that consultation in finalising its approach to the adjustments.

Legacy Remuneration Arrangements

The Committee reserves the right to make remuneration payments and payments for loss of office notwithstanding that they are not in line with the Policy set out above where the terms of payments were agreed: (i) before the Policy came into effect; or (ii) at a time when the relevant individual was not a Director of the Company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a Director of the Company. For these purposes, 'payments' includes the satisfaction of variable remuneration and, in relation to an award over shares, the terms of the payment are 'agreed' at the time the award is granted.

2014 Annual Report on Remuneration

The following section provides detail in respect of remuneration paid to the Directors during the year in line with the Remuneration Policy detailed in the 2013 Directors' Remuneration Report (which did not require shareholder approval). KPMG LLP have audited the 2014 Annual Report on Remuneration excluding Implementation of the Directors' Remuneration Policy in the Year Ending 30 June 2015 and Consideration by Directors of Matters Relating to Directors' Remuneration unless indicated otherwise.

Single Total Figure of Remuneration

The table below sets out the total remuneration for each person who has served as a Director in the period ended 30 June 2014. The table shows the remuneration for each such person in the year ended 30 June 2014 and the year ended 30 June 2013:

Salaries & Fees
£'0001

Benefits
£'0002

Annual Bonus
£'0003

Long Term Incentives
£'0004

Pension
£'0005

Total
£'000

2014

2013

2014

2013

2014

2013

2014

2013

2014

2013

2014

2013
Ian Page440411373335215864554162581,5361,201
Anne-Francoise Nesmes (appointed 22 April 2013)30094171024021302427901132
Tony Griffin (appointed 1 November 2012)62322233128186832826477360
Ed Torr (ceased employment 31 January 2014)1342301017107832943251932564687
Mike Redmond1068610686
Ishbel Macpherson (appointed 1 February 2013)39163916
Dr Chris Richards42424242
Julian Heslop (appointed 1 January 2013)41194119
Neil Warner (retired 17 October 2013)13421342
Total1,3471,16395888853451,2418661511233,7192,585

Please note the following methodologies have been used in respect of the above table:

  1. Salaries & Fees – this is the cash paid or received in respect of the relevant period.
  2. Benefits – this represents the taxable value of all benefits paid or received in respect of the relevant period. The benefits provided include the use of a fully expensed car (where taken), medical cover and life assurance. SAYE options granted in the year have also been included in the benefits column. These have been valued using the fair value as per note 24 to the Group's financial statements. Tony Griffin's benefits from 2013 have increased by £21,000 due to the addition of a company car benefit.
  3. Annual bonus – this is the amount of cash bonus paid in respect of the relevant period.
  4. Long Term Incentives – this is the value of any long term incentives vesting where the performance period ended in the relevant period.
  5. Pension – this is the cash value of the employer contribution to the Group stakeholder personal pension scheme or, in the case of Tony Griffin, defined contribution pension plan plus the value of any salary supplement paid.
  6. Tony Griffin's remuneration is paid in Euros but reported in Sterling for the purpose of this table. The exchange rate used for this purpose was 1.24 for 2013 and 1.20 for 2014. The difference in the 2013 and 2014 remuneration is purely in relation to exchange rates.

Additional Disclosures in Respect of the Single Figure Table:

Salaries & Fees

As disclosed in the single figure table above, no increase was made to Executive Directors' salaries in the year ended 30 June 2014. However, Ian Page's base salary was increased by 15% to £440,000 part way through the 2013 financial year. This increase was made following a comprehensive review of Ian Page's remuneration package and after consultation with Dechra's major shareholders. This increase reflects:

  • his achievements since his appointment as Chief Executive Officer in 2001;
  • his delivery of significant and sustained increase in shareholder value;
  • his successful integration of a number of significant strategic acquisitions; and
  • the market positioning of his salary against companies of a similar size and complexity.

Further detail in relation to this matter is detailed in last year's Directors' Remuneration Report.

The Committee's approach to Executive Directors' salaries for the year ending 30 June 2015 is summarised under Implementation of the Directors Remuneration Policy.

The Chairman and other Non-Executive Directors are paid a fee for their role and additional fees for chairmanship of the Remuneration Committee and Audit Committee. As disclosed in the Directors' Remuneration Report for the year ended 30 June 2014, the Chairman's fee was increased in the year ended 30 June 2014 to a level more commensurate with his experience, performance and overall contribution to the business. No other Non-Executive Director received an increase in fees for the year ended 30 June 2014. The Non-Executive Directors' fees for the year ended 30 June 2014 were determined on the following basis:

Office

2014
Fee
£'000

Chairman106
Non-Executive Director39
Remuneration Committee Chairmanship additional fee3
Audit Committee Chairmanship additional fee3

The approach to the Chairman and Non-Executive Directors' fees for the year ending 30 June 2015 is summarised under Implementation of the Directors' Remuneration Policy in the Year Ending 30 June 2015.

Annual Bonus

The Company operates an annual cash incentive scheme for the Executive Directors. Annual bonuses were awarded by the Committee in respect of the 2014 financial year having regard to the performance of the Group and personal performance objectives for the year.

The amount achieved for the year ended 30 June 2014 against targets for the 2014 financial year is as follows:

2014 Financial Year Targets

Amount Achieved for the Year Ended 30 June 2014

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 target.

The underlying profit before tax target was £38.5 million. Actual underlying profit before tax was £39.9 million reflecting 105% of the profit target when translated at constant exchange rate resulting in a payment worth 70% of salary.

Personal objectives: up to an additional 10% of salary was payable to Executive Directors upon the achievement of personal objectives.*

Actual 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 201480% of salary

* The Committee considers that the actual objectives are commercially sensitive as they give our competitors insight into our business plans and therefore they are not detailed in this report.

The Committee's approach to Executive Directors' annual bonus opportunities for the year ending 30 June 2015 is summarised under Implementation of Directors Renumeration Policy in the Year Ending 30 June 2015.

Pension:

All Executive Directors (excluding Tony Griffin) were members of the Dechra Pharmaceuticals PLC Group Stakeholder personal pension scheme throughout the year. Tony Griffin is a member of a defined pension plan in the Netherlands. Contributions made by Dechra Pharmaceuticals PLC on behalf of the Executive Directors during the year equated to no more than 14% of pensionable salary.

The annual allowance for tax relief on pension savings for individuals reduced from £50,000 to £40,000 from 6 April 2014. Since this became effective, Anne-Francoise Nesmes has elected to receive a salary supplement in lieu of the employer contribution over and above the £40,000 limit. Ian Page has received a salary supplement for the entire period under review. Both have committed to invest this supplement appropriately.

Tony Griffin is a member of the Basispensioen, a defined benefit scheme established in the Netherlands. His normal retirement age is 67. The table below sets out the arrangements for Tony Griffin for the period under review:

Accrued benefit at 1 July 2013€8,861
Increase in accrued benefit excluding inflation allowance€9,520
Increase in accrued benefit including inflation allowance€9,704
Transfer value of benefit accrued during the period less member contributions€26,000
Transfer value at 1 July 2013€127,000
Transfer value at 30 June 2014€154,000
Increase in transfer value over the period after member contribution€27,000

Chief Executive Officer Remuneration for Five Previous Years:

Year ended

Total single figure remuneration
£'000

Annual bonus payout (% of maximum opportunity)

LTIP vesting (%
of maximum
number of
shares)

30 June 20141,53680100%
30 June 20131,20136100%
30 June 2012682600%
30 June 20119846071.1%
30 June 201076844100%

Percentage Change in Chief Executive Officer Remuneration:

The table below sets out in relation to salary, taxable benefits and annual bonus the percentage change in pay for Ian Page and the average percentage change for all UK based employees comparing pay in respect of the year ended 30 June 2013 and the year ended 30 June 2014. For these purposes, UK employees were chosen as a comparator group reflecting that Ian Page is UK based and the number of UK employees was sufficiently large to provide a robust comparison. Employees outside the UK were not included in the comparator group since country specific differences could distort the comparison.

Chief Executive Officer

Average per all UK based Employees

2014
£000
2013
£000
Increase
%
2014
£000
2013
£000
Increase
%
Salary14404117.129291.5
Taxable benefits34333.01.61.58.7
Annual bonus352158122.22.81.949.8

1. The difference reflects an increase in Ian Page's salary as of 1 January 2013, details of which can be found under Salaries & Fees. Ian Page elected to waive his salary increase for the 2014 and 2015 financial years.

Relative Importance of Spend on Pay

The following table sets out the percentage change in distributions to shareholders by way of dividend and share buyback and total remuneration paid to or receivable by all Group employees comparing the year ended 30 June 2013 and the year ended 30 June 2014.

Year ended
30 June
2013
£'000

Year ended
30 June
2014
£'000

% change
Distributions to shareholders by way of dividend and share buyback12,19913,50010.7
Overall expenditure on pay — continuing operations39,83441,6254.50
Overall expenditure on pay — discontinued operations11,1181,4601(86.9)
  1. The Services Segment was divested during August 2013. The 2014 pay therefore includes 1.5 months of Services compared to 12 months in 2013.

Long Term Incentive Arrangements and Share Schemes:

LTIP Awards Vesting in Respect of the Year Ended 30 June 2014

Ian Page and Ed Torr were granted LTIP Awards on 7 September 2011, the performance targets for which are as follows:

  1. an 'underpin' condition based on Group underlying diluted earnings per share performance: no awards would 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 was determined by the Company's TSR performance compared to the constituents of the FTSE Small Cap Index over the period of three financial years ended on 30 June 2014. Vesting is on the following basis:

TSR Performance

Vesting Percentage

Below median0%
Median25%
Between median and upper quartilePro-rata vesting based on the Company's ranking in the comparator group
Upper quartile100%

Ed Torr ceased to be employed by the Company part way through the performance period and, in line with the LTIP Scheme rules, was treated as a good leaver in respect of this Award. In accordance with the terms of the Award, the TSR performance was measured up to the date of cessation of employment, 31 January 2014. The Company's TSR performance was 67% compared with a 65% TSR for live companies in the top quartile comparator group. The EPS underpin was measured on the basis of whether, in the opinion of the Committee, the EPS underpin was on course to be satisfied at the end of the original Performance Period. The Committee, after taking advice in relation to this element, considered that the EPS underpin was satisfied and that the Award would have vested as to 100%. A time pro-rating reduction was then applied to reflect Ed Torr's reduced length of service in the performance period, resulting in 86.1% of the shares vesting. In the single figure table, the value attributable to this Award is calculated by multiplying the number of shares in respect of which the Award vested (47,946) by £7.015 (being the mid market quotation of a share on 31 January 2014).

Ian Page's Award vested on 7 September 2014. In respect of the performance conditions, the Company's TSR performance was over 68% compared with a 65% TSR for all companies in the top quartile of the comparator group. In addition, the Group's underlying diluted EPS increased by 19.25% over the performance period. As a result Ian Page's Award vested in full. In the single figure table, the value attributable to this Award is calculated by multiplying the number of shares in respect of which the Award vested (92,811) by £6.95 (being the average market value of a share over the last quarter of the Company's financial period ending on 30 June 2014).

The aggregate gain made by the Executive Directors on share options exercised during 2014 was £883,249 (2013: £5,187). In addition Ed Torr exercised his outstanding SAYE options and LTIP option granted on 7 September 2011. The gain made on these share option exercises was £338,755.

Recruitment Award for Anne-Francoise Nesmes Vesting in Respect of the Year Ended 30 June 2014

As disclosed in the Company's Directors' Remuneration Report for the year ended 30 June 2013, on her appointment the Committee agreed to award Anne-Francoise Nesmes two LTIP Awards, each to the value of 100% of her base salary.

The vesting of the first of those Awards was subject to a performance condition based on the Chief Executive Officer's assessment of her performance in the period from her date of joining the Company (22 April 2013) until 30 June 2014. Based on the Chief Executive Officer's assessment of her performance over this period, the Award vested as to 100% on 30 June 2014. In the single figure table the value attributable to this Award is calculated by multiplying the number of shares in respect of which the Award vested (41,739) by £7.235 (being the mid market value of a share on 30 June 2014).

The details of the LTIP Awards granted during the year ended 30 June 2014 are set out below. The Committee's approach to Executive Directors' LTIP Awards for the year ending 30 June 2015 is summarised under Implementation of the Directors' Remuneration Policy in the Year Ending 30 June 2015.

LTIP Awards Made During the Year Ended 30 June 2014

Awards were granted to the Executive Directors on 27 November 2013, on the following basis:

Type of award

Maximum opportunity

Number of shares

Face value at
grant1

% of award vesting at threshold

Performance period

Ian PageNil cost option under the LTIP200% of salary129,221£879,99525%1 July 2013 –
30 June 2016
Anne-Francoise NesmesNil cost option under the LTIP150% of salary66,079£449,99825%1 July 2013 –
30 June 2016
Tony GriffinNil cost option under the LTIP100% of salary34,129£232,41825%1 July 2013 –
30 June 2016
Ed Torr2Nil cost option under the LTIP100% of salary33,706£229,53825%1 July 2013 –
30 June 2016
  1. For these purposes, the face value of the Award is calculated by multiplying the number of shares by £6.81 (being the average share price used to determine the number of shares comprised in the Awards).
  2. Lapsed on Ed Torr's cessation of employment on 31 January 2014.

50% of each Award is subject to a performance condition based on the Company's TSR performance over the performance period relative to the constituent companies of the FTSE 250 index (excluding investment trusts) over the performance period as follows:

TSR PerformanceVesting Percentage
Below median0%
Median25% of the TSR portion will vest
Between median and upper quartilePro-rata vesting between 25% and 100% based on the Company's ranking in the comparator group
Upper quartile100% of the TSR portion will vest

50% of each Award is subject to a performance condition based on the growth in the Company's EPS over the performance period as follows:

EPS compound annual growth rate

Vesting Percentage

<8% CAGR0%
8% CAGR25% of the EPS portion will vest
CAGR between 8% and 13%Pro-rata vesting between 25% and 100%
13% CAGR100% of the EPS portion will vest

Each of the TSR element and the EPS element is subject to an additional ROCE performance measure. Unless the Company's ROCE is 10% or more in the final year of the performance period, the Awards will lapse in full regardless of TSR and EPS performance. The percentage vesting will be reduced by 10% by every 1% that ROCE falls below 15%.

Recruitment Award for Anne-Francoise Nesmes

As disclosed in the Company's Directors' Remuneration Report for the year ended 30 June 2013, on appointment the Committee agreed to award Anne-Francoise Nesmes two LTIP Awards, each to the value of 100% of her base salary. These Awards were granted on 27 September 2013 as follows:

Type of awardMaximum opportunityNumber of sharesFace value
at grant2
% of award vesting at thresholdPerformance period
Recruitment Award 11Nil cost option100% of salary41,739£296,556100%22 April 2013 – 30 June 2014
Recruitment Award 22Nil cost option100% of salary41,739£296,55625%1 July 2012 – 30 June 2015
  1. This Award vested on 30 June 2014 as disclosed under Recruitment Award for Anne-Francoise Nesmes Vesting in Respect of the Year Ended 30 June 2014.
  2. For these purposes, the face value of the award is calculated by multiplying the number of shares by £7.105 (being the mid market quotation of a Dechra share on the date of grant).

Recruitment Award 1 was subject to a performance condition based on the Chief Executive Officer's assessment of Anne-Francoise Nesmes' performance in the period from her date of joining the Company (22 April 2013) until 30 June 2014. Upon vesting, the Award will be subject to claw back should Anne-Francoise Nesmes not remain in employment with the Company until 30 June 2015. This Award vested on 30 June 2014 (details of which have been provided earlier in this report).

Recruitment Award 2 is scheduled to vest on 30 June 2015 and is subject to performance conditions which are the same as those applying to the LTIP Awards granted on 5 March 2013:

50% of the Award is subject to a performance condition based on the Company's TSR performance over the performance period relative to the constituent companies of the FTSE 250 index (excluding investment trusts) over the performance period as follows:

TSR Performance

Vesting Percentage

Below median0%
Median25% of the TSR portion will vest
Between median and upper quartilePro-rata vesting between 25% and 100% based on the Company's ranking in the comparator group
Upper quartile100% of the TSR portion will vest

50% of the Award is subject to a performance condition based on the growth in the Company's EPS over the performance period as follows:

EPS

Vesting Percentage

<33p0%
33p25% of the EPS portion will vest
Between 33p and 40pPro-rata vesting between 25% and 100%
40p100% of the EPS portion will vest

Each of the TSR element and the EPS element is subject to an additional ROCE performance measure. Unless the Company's ROCE is 10% or more in the final year of the performance period, the Awards will lapse in full regardless of TSR and EPS performance. The percentage vesting will be reduced by 10% by every 1% that ROCE falls below 15%.

As reported in the Directors' Remuneration Report for the year ended 30 June 2013 the performance conditions attaching to the LTIP Award made on 5 March 2013 were rebased following the disposal of the Services Segment in August 2013. A consultation with major shareholders was undertaken at the beginning of November 2013 following which the above performance conditions were rebased as detailed above.

SAYE Options Granted in the Year

The following Directors were granted SAYE options on 7 April 2014:

Number
of options

Option
price

Exercise
date

Ian Page1,630£5.52May 2017
Anne-Francoise Nesmes1,630£5.52May 2017

Payments to Past Directors (Unaudited):

There were no payments made to past Directors during the period.

Payments for Loss of Office (Unaudited):

A payment for loss of office was made to Ed Torr during the financial year and equated to:

  • 12 months of his salary at £229,539;
  • pro-rated bonus for the financial year of £107,118;
  • pension of £32,158; and
  • 12 months' private medical cover to Ed Torr and his family and the provision of a fully insured car for 12 months.

In addition, Ed Torr was treated as a 'good leaver' for the purposes of his SAYE options and LTIP option granted on 7 September 2011 which vested on cessation of employment. Further details in relation to the LTIP can be found under Long Term Incentive Arrangements and Share Schemes.

No other compensation payments were made to Executive or Non-Executive Directors during the year.

Shareholding Guidelines and Statement of Directors' Shareholdings and Interests:

Executive Directors

By the third anniversary of their appointment to the Board, Executive Directors are required to have acquired and retained a holding of Dechra shares equivalent to the value of at least 100% of their base salary. The holdings of the Executive Directors and their families as at 30 June 2014 are as follows.

Name

Ordinary shares
No.

Ordinary
shares
£'000*

% of
salary

Ian Page906,6436,5601,491%
Anne-Francoise Nesmes (appointed 22 April 2013)N/AN/A
Tony Griffin (appointed 1 November 2012)20,07714563%

* Calculated using the share price as at 30 June 2014.

The above numbers represent Executive Directors' total interest in shares in the Company as at 30 June 2014, other than Anne-Francoise Nesmes' whose first LTIP Award vested on 30 June 2014. However, she is prohibited from exercising the Award due to the imposition of a close period, scheduled to end on 8 September 2014. On exercise she will hold 41,739 shares. The value of these shares at 30 June 2014 equated to 101% of her salary. However, this does not take into account any potential sale of shares to cover the tax liability arising on exercise.

Non-Executive Directors

Name

Ordinary shares
No.

Ordinary
shares
£'000*

% of
base fee

Mike Redmond73,417531501%
Ishbel Macpherson5,84842110%
Dr Chris Richards7,40053138%
Julian Heslop10,00072186%

* Calculated using the share price as at 30 June 2014.

The above numbers represent the Non-Executive Directors' total interest in shares in the Company as at 30 June 2014. There have been no changes in the holdings of the Directors between 30 June and 8 September 2014.

Executive Directors' Interests under Share Schemes

Long Term Incentive Plan

Awards held under the Long Term Incentive Plan by each person who was a Director at 30 June 2014 are as follows:

Award date

Number of shares at
30 June 2013

Granted during the year

Lapsed during the year

Exercised during the year

Number of shares at
30 June 2014

Status

Performance period

Ian Page22 December 201078,656(78,656)Vested2010-2013
7 September 201192,81192,811Vested2011-2014
5 March 201394,42094,420Unvested2012-2015
27 November 2013129,221129,221Unvested2013-2016
Anne-Francoise Nesmes27 September 2013141,73941,739Vested2013-2014
27 September 2013141,73941,739Unvested2012-2015
27 November 201366,07966,079Unvested2013-2016
Tony Griffin5 March 201334,40134,401Unvested2012-2015
27 November 201334,12934,129Unvested2013-2016
  1. These Awards are the Recruitment Awards granted to Anne-Francoise Nesmes as referred to under Recruitment Award for Anne-Francoise Nesmes Vesting in Respect of the Year Ended 30 June 2014. They were granted outside the rules of the LTIP.

SAYE Scheme

Options held under the SAYE Scheme by each person who was a Director at 30 June 2014 are shown under SAYE Options Granted in the Year.

Total Shareholder Return (TSR) 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 250 Total Return Index. Throughout the financial year ended 30 June 2014 the Company has been a constituent member of the FTSE 250; for this reason it is considered that the TSR performance of the FTSE 250 Index be represented in this report.

Implementation of the Directors' Remuneration Policy in the Year Ending 30 June 2015:

The Directors' Remuneration Policy will be implemented in the year ending 30 June 2015 in line with the way in which it has been implemented in the year ended 30 June 2014.

Salary and Fees

Excluding Ian Page, Executive Directors' base salaries have been increased by 3% with effect from 1 July 2014. This is broadly in line with the average increase awarded to employees in the wider Group. Ian Page has elected to waive a review of his salary for the year ended 30 June 2015.

In respect of the Chairman, following the benchmarking exercise that was undertaken during the 2013 financial year, it was agreed to award him an increase over a two year period. The second increase will take effect from 1 July 2014, taking his fee to £126,000 per annum (an increase of 18%). It is considered that this now brings the Chairman's fee to a level more commensurate with his experience, performance and overall contribution to the business together with that paid for chairmen of companies of a similar size and complexity to Dechra.

In terms of the remaining Non-Executive Directors, it has been agreed to increase their base fee to £40,000 per annum (an increase of 2.56%). A review was also undertaken in respect of the fees paid for the Chairmen of the Remuneration and Audit Committees. The additional fee was increased from £3,000 to £5,000 per annum. It is considered that Dechra remains in the lower quartile in respect of such payments and it has been agreed to increase these additional fees over the medium term to bring them in line with the median of FTSE 250 companies. In addition, it was agreed that a fee should be introduced for the Senior Independent Director role, at the rate of £3,000 per annum.

Annual Bonus

No changes have been made to the bonus structure. Executive Directors, therefore, will have a bonus opportunity of 100% of salary for the year ending 30 June 2015, on the same basis as for the year ended 30 June 2014. Details of the bonus structure can be found under Annual Bonus.

LTIP

The Committee proposes that LTIP awards for the year ended 30 June 2014 will be made at the level of 200% of salary for Ian Page, 150% of salary for Anne-Francoise Nesmes and 100% of salary for other Executive Directors. The performance measures remain as per the grant of LTIP Awards made on 27 November 2013, details of which can be found under LTIP Awards Made During the Year Ended 30 June 2014.

Consideration by Directors of Matters Relating to Directors' Remuneration:

Governance

The Board has overall responsibility for the Group's remuneration policy and the setting of the Non-Executive Directors' fees. 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 Committee.

Membership

Details of each member's attendance at the Committee meetings is detailed in Corporate Governance.

The Chief Executive Officer attended all meetings held during the financial year in order to assist on matters concerning remuneration of other senior executives within the Group. However, he was not present during the part of the meetings where his own remuneration was discussed. The Group HR Director, Katy Clough, has attended all meetings since her appointment.

Responsibilities

The Committee has defined 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 2014 financial year this review took place at the June meeting. Copies can be obtained via the Company website at www.dechra.com. The Committee Chairman and the Company Secretary are available to shareholders to discuss the remuneration policy.

An overview of the Committee's terms of reference is provided in Corporate Governance.

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.

Advisers

The following people have provided advice to the Committee during the year in relation to its consideration of matters relating to Directors' remuneration.

  • Chief Executive Officer, Chief Financial Officer, Group HR Director and Company Secretary
  • Deloitte LLP

Deloitte is retained to provide independent advice to the Committee as required. Deloitte is a member of the Remuneration Consultants Group and, as such, voluntarily operates under the Code of Conduct in relation to executive remuneration consulting in the UK. Deloitte's fees for providing remuneration advice to the Committee were £24,360 for the year ended 30 June 2014. The Committee assesses from time to time whether this appointment remains appropriate or should be put out to tender and takes into account the Remuneration Consultants Group Code of Conduct when considering this. Deloitte was appointed by the Committee and has provided share scheme advice and general remuneration advice to the Company. Details of additional services which Deloitte provide to Dechra are detailed in the Audit Committee Report.

Statement of Voting at Last Annual General Meeting

The Company remains committed to ongoing shareholder dialogue and takes an active interest in voting outcomes. The following table sets out actual voting in respect of the resolution to approve the Directors' Remuneration Report at the Company's Annual General Meeting on 17 October 2013:

Resolution

Votes for

% of vote

Votes against

% of vote

Votes withheld

Approve Remuneration Report64,850,11598.83769,2561.174,092,105

This report was approved by the Board on 8 September 2014 and signed on its behalf by:

Dr Christopher Richards
Remuneration Committee Chairman