Network Rail executive incentive scheme approved

Network Rail’s new executive incentive scheme was approved today following an extensive and through examination by Members (Network Rail’s equivalent to shareholders) at a general meeting in London. Under the new scheme the potential annual bonus for executive directors has been reduced by 40%. In addition, a new long-term scheme tied into the outperformance of the company’s targets for the current regulatory control period (2009 to 2014, CP4) was also approved.

Steve Russell, chairman of Network Rail’s remuneration committee said: “Network Rail plays a pivotal role in running Europe’s most intensively used rail network with the responsibility of moving almost four million people safely every day. It is a hugely complex business, investing billions each year on improvements, and helping the UK economy to continue its recovery. Having an executive incentive scheme is essential for the company to attract and retain top talent.”

The Annual Incentive Plan:
The new annual incentive plan (AIP) has a maximum potential award of 60%.

Steve Russell said: “The company has this year cancelled directors’ annual bonuses and suspended its executive incentive scheme while it underwent a thorough review. This new scheme cuts the potential annual award by 40%, has tough targets, will be independently assessed by our regulator, and will only reward clear, unequivocal success and outstanding performance.”

In order for an award to be made under the new annual scheme, two objectives relating to the punctuality of trains (both passenger and freight) and the condition of the infrastructure must be met. The Office of Rail Regulation’s annual assessment of our performance will inform Network Rail’s remuneration committee’s judgement. Failure to meet targets in these areas will normally mean no bonus being awarded.

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Assuming these hurdles are passed, there are six business goals to be measured against, each making up 10% of the potential award. In addition the remuneration committee will exercise structured discretion taking into account safety as well as passenger, customer and supplier views.

The long-term scheme:
The existing long-term incentive plan (LTIP) has been scrapped and replaced with a long-term gain-share scheme that incentivises the executive directors to outperform regulatory targets for control period 4 (2009-14) and thereby deliver even more savings for the taxpayer.

Steve Russell continued: “The new long-term scheme will only reward sustained performance that exceeds targets and expectations. Meeting our regulatory objectives and targets over our five-year control period is not enough. Only extraordinary performance can result in the directors sharing in a portion of this success.”

One of the key measures of the successful delivery of CP4 is the regulatory target of making cost efficiency savings of £5.2bn - or 22%. If the company succeeds in delivering above and beyond this ORR target, the top ten executives may be eligible to share in these and other additional savings. This share would be in a range of 0% to 2.6% of whatever extra savings (capped at a maximum of £600m) are made, with the extent of the extra savings being identified and verified by the ORR. Eligibility will be subject to other key regulatory targets also being met.