DIRECTORS’ REPORT - iiNet · directors’ report . your directors present their report on . the...

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DIRECTORS’ REPORT

YOUR DIRECTORS PRESENT THEIR REPORT ON THE CONSOLIDATED ENTITY (“THE GROUP”) CONSISTING OF iiNET LIMITED (“iiNET”) AND THE ENTITIES IT CONTROLLED AT THE END OF, OR DURING THE YEAR ENDED 30 JUNE 2013.

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DIRECTORSThe following persons were directors of iiNet Limited during the whole of the financial year and up to the date of this report, unless otherwise stated:

■ M. Smith (Chairman)■ M. Malone (Managing Director)■ P. Broad■ D. Grant

Interest in the shares and options of the Company and related bodies Corporate As at the date of this report, the interest of the directors in the shares of iiNet Limited were as follows:

Director Number of ordinary shares

M. Smith 270,429

M. Malone 9,012,162

P. Broad 48,596

D. Grant 86,000

S. Hackett 6,036,332

P. James 35,000

L. McCann 21,500

Total 15,510,019

Company secretary

D. Buckingham – see page 33 for the biography of the company secretary.

Dividends Cents per share $’000

Total dividends declared for the 2013 financial year 19 30,635

Dividends paid in the year

Final dividend paid for the 2012 financial year 8 12,878

Interim dividend paid for the 2013 financial year 8 12,899

Total 16 25,777

Principal activities

During the year the principal activities of the Group consisted of the provision of internet and telephony services in Australia. There have been no significant changes in the nature of these activities during the year.

■ S. Hackett – Appointed 16 August 2012■ P. James■ L. McCann

Details of each director’s qualifications, roles, responsibilities and other listed company directorships are detailed on pages 28 – 31.

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OPERATING AND FINANCIAL REVIEWGROUP OVERVIEW

iiNet was founded in 1993 and listed on the Australian Securities Exchange in 1999. Michael Malone was one of the two original founders of the business and is the current Managing Director of the iiNet Group.

A detailed overview and a review of the Groups operations are included in the Chairman’s review and Managing Director’s Report.

Business Strategy

iiNet’s business strategy is to lead the market with products that harness the potential of the internet and then differentiate with award-winning customer service.

STRENGTHEN FRONT LINE

CAPABILITIES

Cross sell after excellent service. Address customer

service pain points. Expand and leverage techii™.

DEVELOP NEW OFFERINGS

Grow broadband subscribers with compelling bundles,

leading in NBN and customer led innovations. Launch and

grow Jiva.

KNOW THE CUSTOMER

Use customer segmentation and insights to offer current

and potential customers improved products and

services.

The Board and senior management use a combination of financial and operational key performance indicators (KPIs) to measure and monitor performance, which are inherently linked to the objectives of the Group. Directors receive the KPIs for review prior to each Board meeting, allowing all directors to monitor the Group’s performance.

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Key Performance Indicatorr Rationale link to objectives

Revenue Growth

Net Promoter Score (NPS)Everything we do at iiNet is about ensuring our customers receive excellent service. Leading the industry on customer service and low churn is key to the achievement of long term sustainable value. NPS is iiNet’s KPI for quality of service.

Reduced ChurnA reduction in churn is key to cost-effectively retaining our customer base and can be achieved through excellent customer service and increasing products per customer.

Group Broadband Subscribers and the NBN opportunity

Broadband is our core product to customers and broadband customer growth is key to the achievement of long term sustainable value. NBN represents the biggest future opportunity for growth of core broadband services.

Products Per Customer GrowthStrengthening customer loyalty to the Group’s brands through a deeper relationship with our awesome products, leading to incremental revenue growth, higher customer satisfaction and lower churn.

Business Sector GrowthExpanding our business products to provide complete telecommunications solutions and capitalising on the growth opportunities presented in the business sector.

Mergers & Acquisitions GrowthContinuing to lead the telecommunications industry consolidation will enable iiNet to build further scale, identify cost efficiencies through synergies and provide earnings growth opportunities.

Cost Reduction

Business Simplification and IntegrationAchieving synergies on business simplification will lead to scale/operating efficiencies for the business.

Network and Operating Expenditure Efficiency A key contributor to financial growth and ultimately increased return for shareholders.

Financial Returns

Group EBITDA Growth Strong financial growth will allow iiNet to reinvest in further growth and increase scale in the sector.

Compound Annual Growth Rate of Earnings Per Share Growth in earnings per share will deliver strong and sustainable shareholder value.

Total Shareholder Return (TSR) Reflecting our focus on providing strong, absolute returns to shareholders.

Directors’ Report – continued

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Risks

While the roll-out of the NBN presents an excellent opportunity to gain traction in a new market, it also increases the competitiveness of the industry by opening the market to potential new competitors and provides the same opportunities for Telstra and other competitors to increase their own market share. Telstra’s dominance in the telecommunications market, with their substantially larger customer base and marketing resources, presents challenges to iiNet’s ability to gain market share. However by being first to market with services across all NBN technologies, leading on product and differentiating on service we believe that the NBN presents a significant opportunity for the Group.

RISKS

Increased competition

Telstra market dominance

Changes to the NBN planned

roll-out

Directors’ Report – continued OPERATING RESULTS FOR THE YEAR

Revenue was up 13% to $940,990k (2012: $831,225k). The increase in revenue was attributable to the following:

■ Continued expansion of the services provided to existing residential and business broadband customers; and

■ A full year’s contribution from the acquisition of the TransACT Group and Internode Pty Ltd against only seven months and five months respectively for the comparative financial period.

Profit for the year increased 64% to $60,938k (2012: $37,054k). The increase was attributable to a number of factors including:

■ The revenue increase and contributions from the acquisitions identified above;

■ Associated acquisition synergies to the Group plus other ongoing operating cost savings;

■ A rebate of $5,663k (net of tax) for the year ended 30 June 2013 relating to excess Internal Interconnection Charges (IIC) in prior periods recognised in December 2012; and

■ In June 2012, retrospective amended legislation in relation to Rights to Future Income Tax was substantially enacted preventing iiNet from claiming income tax deductions for all of the cost base allocated to its previously acquired subscriber bases. This amended legislation increased the Company’s income tax expense by $7,804k in FY2012.

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Risk management

Please refer to the Corporate Governance Statement for further detail.

Sustainability reporting

Please refer to the Corporate Sustainability section for further detail.

Environmental regulation and performance

The operations of the Group are not subject to any significant environmental regulations.

Significant changes in the state of affairs

Total equity increased by $37,693k to $324,342k (2012: $286,649k). The movement was largely the result of increased profits. There were no other significant changes in the state of affairs during the year ended 30 June 2013.

Matters subsequent to the end of the financial year

On 20 August 2013, the Group declared a fully franked final dividend of 11.0 cents per share with respect to the financial year ended 30 June 2013. The dividend had a record date of 2 September 2013 and a payment date of 27 September 2013.

On 5 August 2013, iiNet Limited entered into a binding agreement to acquire Adam Internet and associated companies for $60 million cash consideration. Completion of the acquisition occurred on 30 August 2013.

Likely developments and expected results

A detailed review of the Group’s activities and prospects is contained in the Chairman’s Review and the Managing Director’s Report.

Share options

(i) Unissued shares

As at the date of this report and the reporting date, there were no unissued ordinary shares under options. Refer to note 27 of the financial statements for further details of the options outstanding. Option holders do not have any rights by virtue of the options they hold, to vote or participate in any share issue of the Company or any related body corporate.

(ii) Shares issued as a result of the exercise of options

During the financial year, employees and executives have exercised options to acquire 270,000 fully paid ordinary shares in the Company at a weighted average exercise price of $2.00 per share.

EBITDA is not a financial measure recognised by International Financial Reporting Standards (IFRS). The measure has been included in our review because it is the closest approximation to net cash flows from operating activities from the Consolidated Statement of Comprehensive Income. EBITDA has been calculated using inputs measured in accordance with IFRS as follows:

Profit before tax to EBITDA reconciliation

30 June 2013

30 June 2012

$’000 $’000

Profit before income tax 83,241 63,009

Add: Depreciation and amortisation expense 82,045 65,458

Add: Finance costs net of interest revenue 21,723 16,378

Reported earnings before interest, taxation, depreciation and amortisation

187,009 144,845

Review of financial condition

During the year the Group produced net cash inflows from operating activities of $138,270k (2012: $100,912k). A significant amount of this has been reinvested in the network, with $31,651k spent on plant and equipment (2012: $40,927k). There was also an $83,247k net cash outflow (2012: $80,856k – inflow) from financing activities, primarily driven by net debt facility repayments of $40,000k (2012: $121,047k net drawdowns) and dividend payments of $25,777k (2012: $20,312k).

The gearing ratio for the Group for the year ended 30 June 2013 was 54% (2012: 77%), as measured by net debt divided by total equity. The Group’s bank facility consists of a $330 million revolving cash advance facility. Interest on the facility is recognised at the aggregate of the base rate plus a variable margin indexed to the Group gearing ratio. During the current and prior year, there were no defaults or breaches relating to the utilised bank facility.

Hedging is undertaken whenever necessary to manage financial risk exposures and comply with banking arrangements, through the use of interest rate swap contracts and foreign exchange contracts.

Directors’ Report – continued

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Indemnification and insurance of directors and officers

During the year the Company paid a premium in respect of a contract insuring the directors, officers and Company Secretary of the Company and all related bodies corporate, against liabilities incurred in acting in such capacities, to the extent permitted under the Corporations Act 2001. The contract prohibits the disclosure of the nature of the liabilities or the amount of the premium.

Meetings of directors

The number of meetings of the Company’s Board of directors and of each Board committee held during the year ended 30 June 2013, and the number of meetings attended by each director, were as follows:

Meeting of Committees

Full meetings of directors

Audit and Risk Committee

Remuneration and Nomination

Committee

Director A B A B A B

M. Smith 10 10 5 5 5 5

M. Malone 9 10 * * * *

P. James 10 10 * * 5 5

S. Hackett 10 10 * * * *

P. Broad 10 10 * * 5 5

D. Grant 9 10 5 5 * *

L. McCann 10 10 5 5 2 2

A = Number of meetings attended.B = Number of meetings held during the time the director held office.* = Not a member of the relevant committee.

Directors’ Report – continued Rounding

The Company is of the kind referred to in Class Order 98/100, issued by the Australian Securities and Investment Commission, relating to the “rounding” of amounts in the Directors’ Report. Amounts in the Directors’ Report and in the financial report have been rounded in accordance with that class order to the nearest thousand dollars or in certain cases the nearest dollar.

Auditor independence declaration

A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 61.

Non-audit services

The following non-audit services were provided by the Group’s auditor, Ernst & Young. The directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for audits imposed by the Corporation Act 2001. The nature and scope of each type of non-audit service provided was such that auditor independence was not compromised.

Ernst & Young received or are due to receive the following amounts for the provision of non-audit services:

2013 $

Assurance related and due diligence services 192,527

Total 192,527

DEAR SHAREHOLDER

The 2013 financial year has seen an exceptional year of performance for

iiNet. Through organic and inorganic revenue growth and leveraging

synergies from recent acquisitions, iiNet has produced record results. iiNet

has experienced strong financial performance with revenue up by 13%, net

profit after tax up 64%, operating cash flows up 37% and 36% growth in

total dividends.

The delivery of this strong performance is a direct result of the hard work

and dedication of our people. The Managing Director and executive team

have been pivotal to this success. Our remuneration framework is designed

to retain these key executives, recognise the individual contributions of our

people and motivate them to achieve strong performance aligned to our

business strategy and shareholder interests.

The Board is committed to ensuring the remuneration framework is tied to

delivering the business strategy and creating enduring shareholder value

over the long term. During the year, the Board made a number of decisions

in support of this objective, including:

1. A MESSAGE FROM THE REMUNERATION AND NOMINATION COMMITTEE.

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REMUNERATION REPORT AUDITED

■ Continuing to set challenging performance measures for Short Term Incentive (STI) and Long Term Incentive (LTI) components of remuneration to ensure achievement of the business strategy over both the short and long term;

■ Reviewed the overall remuneration framework as the iiNet business rapidly grows and evolves, and the current market position of iiNet’s executive remuneration; and

■ Actively engaged with shareholders and shareholder representatives to consult and seek their feedback on iiNet’s remuneration practices and reporting to understand how we can best represent that in our remuneration report. Consequently, we have made changes to the format and content with the aim of being clear, transparent and concise with a greater focus on demonstrating the link between

remuneration and performance at iiNet to shareholders.

Challenging performance measures for ‘at risk’ STI components of remuneration

The STI component of remuneration is focused on a balanced scorecard

approach, with financial and non-financial measures focused on delivery

of the critical business objectives of iiNet. The executive must meet a

minimum threshold hurdle level across all measures of the scorecard

before they can receive an STI payment.

The performance hurdles are based on achievement of customer net

promoter score, growth in customers and products per customer, financial

profit growth, launching new products and delivering the integration

targets for recently acquired businesses. These hurdles are focused

on internal performance measures which, if achieved, lead to business

objectives being met. Comprehensive Benchmarking Review

In the 2013 financial year, the Board recognised that iiNet is growing

rapidly and that the remuneration framework needs to evolve to ensure

it remains effective. The Board therefore commissioned a comprehensive

benchmarking review of the executives’ remuneration across fixed pay, STI

and LTI. The findings of the report are consistent with iiNet’s remuneration

philosophy of ensuring the fixed and STI components of remuneration are

positioned at or below the median of the comparator group. However,

where challenging performance hurdles are achieved, the LTI component

positions the total remuneration of the executives at the 75th percentile

of the comparator group. This is in line with the iiNet remuneration

philosophy of placing greater emphasis on the “at risk” components of

remuneration for executives and management to ensure alignment with

business objectives and shareholder wealth creation.

2013 LTI award

The Board conducted an extensive review of iiNet’s LTI plan during the year.

The aim of the review was to ensure it remains effective and continues to

meet the purpose of the plan, being to retain high quality key executives and

drive the achievement of sustainable long term growth for shareholders.

Subsequently, the Board approved a 2013 LTI grant under the LTI Plan. The key

hurdle for the grant is a challenging absolute TSR performance target of at

least 20% per annum measured over the three year performance period 1 July

2012 to 30 June 2015. This performance hurdle directly rewards executives for

an increase in shareholder wealth, focusing the executives on long term share

price growth.

I hope you find the report useful and I encourage you to provide feedback on

the development of our remuneration practices and reporting, and thank you

for your continued support.

Yours sincerely,

Louise McCann

Chairman, Remuneration & Nomination Committee

Directors’ Report - Remuneration Report – audited - continued

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This remuneration report explains our approach to executive remuneration, performance and remuneration outcomes, for iiNet and its Key Management Personnel (KMP) for the year ended 30 June 2013.

1.1 Key management personnel

KMP encompasses all directors, as well as those executives who have specific responsibility for planning, directing and controlling material activities of the Group. In this report, “Executives” refers to the KMP excluding the Non-Executive Directors.

The information provided in this remuneration report has been audited as required by Section 308 (3C) of the Corporations Act 2001.

List of KMP

Directors

Michael Smith Chairman and Non - Executive Director

Michael Malone Managing Director

Paul Broad Non - Executive Director

David Grant Non - Executive Director

Simon Hackett Non - Executive Director (from 16 August 2012)

Peter James Non - Executive Director

Louise McCann Non - Executive Director

Executives

Greg Bader Chief Business Officer

David Buckingham Chief Financial Officer and Company Secretary

Maryna Fewster Chief Customer Officer

John Lindsay Chief Technology Officer

1.2 iiNet Performance

iiNet’s remuneration framework operates to tie the remuneration received by executives to increased shareholder wealth over the longer term.

A summary of key iiNet performance metrics and 5 year share price history is as follows:

Directors’ Report - Remuneration Report – audited - continued EARNINGS PER SHARE (CENTS)

FY

133

7.8

FY

122

3.9

FY

112

2.0

FY

102

2.8

FY

09

16.9

SHARE PRICE

JUNE 2009 - JUNE 2013

2013

2009

2010 2011

2012

7

6

5

4

3

2

1

+319%*

($)

* Calculation from 1 July 2008 to 30 June 2013

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THE BOARD IS COMMITTED TO ENSURING THE REMUNERATION FRAMEWORK IS TIED TO DELIVERING THE BUSINESS STRATEGY AND CREATING ENDURING SHAREHOLDER VALUE OVER THE LONG TERM.

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2. REMUNERATION GOVERNANCEDirectors’ Report - Remuneration Report – audited - continued

2.1 Role of the Remuneration and Nomination Committee

The Remuneration and Nomination Committee is responsible for ensuring iiNet has remuneration strategies and frameworks that fairly and responsibly reward executives and non-executive directors with regard for performance, the law and corporate governance.

Further detail on the Remuneration and Nomination Committee’s responsibilities is set out in its Charter available at: http://investor.iinet.net.au/irm/content/pdf/remuneration.pdf

The Remuneration and Nomination Committee continuously strives to ensure iiNet’s remuneration strategy and outcomes are directly connected to its business strategy and performance supporting increased shareholder wealth over the long term.

The Committee comprises four independent non-executive Directors: Louise McCann (Chairman appointed 17 March 2013), Peter James (former Chairman), Paul Broad and Michael Smith.

2.2 Use of independent remuneration consultants

The Remuneration and Nomination Committee seeks advice and market data from independent remuneration consultants as required. The Committee has protocols in place to ensure that any advice is provided in an appropriate manner and is free from undue influence of management. The Committee received advice from the following consultants during the year:

Consultant Type of advice Fee

KPMG Remuneration reporting $24,300

PwC LTI structuring and benchmarking on remuneration $126,068

Neither KPMG nor PwC provided “remuneration recommendations” for the purposes of the Corporations Act. PwC provided LTI structure advice and benchmarking of executive and non-executive remuneration and KPMG provided advice on executive remuneration reporting including current market practices.

2.3 iiNet’s share trading policy

The iiNet Share Trading Policy imposes trading restrictions on all iiNet employees who are considered to be in possession of “inside information” and additional restrictions in the form of trading windows for executives. Executives and members of the executive management team are prohibited from trading in Company shares, except in a 30-day period following seven days after the release of the final and half-yearly results. These trading restrictions are subject to discretion exercised by the Chairman.

iiNet prohibits KMP from entering into contracts to hedge their exposure to the iiNet shares or options awarded as part of their remuneration package.

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3. EXECUTIVE REMUNERATION3.1 Executive Remuneration Strategy

The Board has established a remuneration strategy that supports and drives the achievement of iiNet’s business strategy. The Board is confident the remuneration framework aligns the Executives with shareholder interests. iiNet is a business that is heavily focused on key performance indicators and rewards its people at all levels on achievement of those KPIs. The Board is currently focused on investing in growth and achieving synergies.

The below diagram shows how the remuneration strategy and framework align with the achievement of iiNet’s business strategy and ultimately achieves sustainable long term wealth creation for shareholders.

iiNet Business Strategy To lead the market with products that harness the potential of the internet and then differentiate with award-winning customer service.

Remuneration Strategy Retain key executive talentAlign executive reward with achievement of business strategic objectives

iiNet has enjoyed significant growth year on year, delivering on its focused strategy through a consistent, committed and highly talented Executive team.

Challenging Key Performance Indicators (KPIs) focused on financial and non-financial measures.

Short term and long term components of remuneration ‘at risk’ are based on performance and outcomes.

Remuneration Framework Fixed remuneration Short term incentive (STI) Long Term Incentive (LTI)

Set at no more than market median for similar sized organisations by reference to market capitalisation, using external benchmark data.

Consideration is given to the employee’s experience and skills.

Aligned to the achievement of iiNet’s business objectives measured over the short term (12 months).

Balanced scorecard approach focusing on financial and non-financial KPIs based on specific individual performance goals consisting of:

■ Customer service measured by Net Promoter Score■ Financial objectives measured by EBITDA■ Customer and product growth measured by subscribers and products per customer■ Business integration measured by synergy targets

Aligned to the achievement of increased shareholder wealth over the long term.

Focused on external performance measures such as:

■ Compound annual growth rate of earnings per share

■ Customer service measured by Net Promoter Score and reduced churn

■ Product per customer growth

■ Business sector growth

■ Network & operating expenditure efficiency

■ Mergers & acquisitions growth

■ Total shareholder return

The Board benchmarks and positions executive remuneration levels at or below 50th percentile of market for fixed and STI outcomes but targets total remuneration at the 75th percentile if the maximum LTI vests resulting in increased shareholder wealth. Benchmarking is provided by external expert advisors.


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3.2 Managing Director Remuneration

Fixed remuneration

$516,470 per annum.

Fixed remuneration is reviewed annually by the Board by reference to market data.

Benchmarking undertaken during the financial year indicated the Managing Director’s fixed remuneration is positioned below the 50th percentile of similar size companies. The Board determined no increase to fixed remuneration during the year, reflecting iiNet’s remuneration strategy of focusing on the long term - rewarding long term business success and increase in shareholder value.

Short term incentive

STI opportunity of $285,000 (maximum opportunity $445,312) subject to KPIs determined by the Board at the commencement of the year. KPIs directly relate to iiNet’s business strategy (see 3.1 Executive Remuneration Strategy).

STI opportunity is reviewed annually by the Board by reference to market data.

Benchmarking undertaken during the financial year indicated the Managing Director’s STI opportunity is positioned below the 50th percentile of similar size companies. The Board determined no increase to STI opportunity during the year, reflecting iiNet’s remuneration strategy of focusing on the long term - rewarding long term business success and increase in shareholder value.

The 2013 STI is $374,062, (131% of the target opportunity). More detail of the performance against specific KPIs is set out at 3.4.

Long term incentive

The Managing Director is a significant shareholder in iiNet and is well aligned to shareholders.

The quantum of the award is determined by reference to market data and the Board’s philosophy of paying at or below median for the fixed base and STI and providing a significant LTI “at risk” to reward the achievement of longer term shareholder wealth.

2013 outcomes

No LTI vested during the 2013 year.

Amounts for long term performance bonus and rights shown in the statutory remuneration table at 3.6 reflect the amortised accounting expense for the 2012 and 2013 LTI awards which do not vest until 2014 and 2015.

2013 award

358,739 phantom rights (award fair value approximately $1.10m) will be paid in shares or in cash equal to the value of shares calculated using the 30 day VWAP immediately prior to vesting date (at the Board’s discretion) if a Total Shareholder Return of 20% per annum is achieved over the three year performance period 1 July 2012 to 30 June 2015.

Additional detail on the structure of the LTI is set out at 3.5.

2012 award

The 2012 LTI grant is for the performance period 1 July 2011 to 1 July 2014. The award of $1.71 million ($570,000 per year) will only be paid if a minimum gateway of 15% Compound Annual Growth Rate (CAGR) of EPS is achieved, plus the achievement of other specific KPI targets including reduced churn, increased products per customer, subscriber growth, business division revenue growth, key new product growth, network and operating expenditure efficiency and M&A growth.

If stretch targets for each KPI are achieved, in addition to an EPS accretion CAGR target of 20%, then the maximum payout can rise to $5.13 million for the 3 year performance period.

Additional detail on the structure of the LTI is set out at 3.5.

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3.3 About iiNet’s KMP Short term incentive

Objective

The iiNet STI plan is designed to reward Executives for the achievement of objectives tightly linked to iiNet’s business strategy focusing on growth and consolidation.

Participation

All executives and employees.

STI opportunity

The maximum STI available to each Executive is set at a level based on role, responsibilities and market data for the achievement of stretching targets against specific KPIs. The maximum STI opportunity for each executive is listed at 3.4 as an absolute dollar amount and as a percentage of the executive’s fixed base.

Performance period

The STI performance period is from 1 July 2012 to 30 June 2013. STI payments are made in August 2013 after assessment of performance by the Board.

Link between performance and reward

Each year KPIs are selected using a balanced scorecard approach of both financial and non-financial measures of performance. KPIs are selected based on what needs to be achieved over the 12 month period to achieve the business strategy over the longer term. These KPIs are the drivers of shareholder value creation.

All KPIs are based on the long term business strategy but are adjusted to reflect individual Executive roles.

Further details of the KPIs used to assess 2013 performance and the outcomes are set out at 3.4.

Assessment of performance

Managing Director

The Remuneration and Nomination Committee assesses the Managing Director’s performance against the KPIs set at the beginning of the year and recommends the STI payment outcome to the Board for approval.

Other Executives

The Remuneration and Nomination Committee reviews and approves the performance assessment and STI payments for the other Executives on the recommendation of the Managing Director.

Payment method

STI payments are delivered as a cash bonus.

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3.4 2013 STI performance and outcomes

2013 has been a year of strong performance and the remuneration outcomes reflect this. Outstanding customer service and satisfaction as measured by Net Promoter Score is a primary objective of the Group as the business strategy is built around the growth and retention of the customer base. This focus underpins each of the KPIs.

The specific KPIs and the outcomes achieved for FY13, for the Managing Director are set out in the following table:

Objective Rationale link to strategy Measurement Weighting 2013 outcome

Net Promoter Score (NPS)

Everything we do at iiNet is about ensuring our customers receive excellent service. Leading the industry on customer service and low churn is key to the achievement of long term sustainable value.

Measured by net promoter score “NPS”

15% $42,750 100%

Group Broadband Subscribers

Broadband customer growth is key to the achievement of long term sustainable value.

Broadband subscribers 20% $92,625 163%

Closing Mobile Voice and Mobile Broadband

Continued innovation on production and diversification will lead to increased products per customer and increased revenue and margins per customer.

Mobile subscribers 15% $53,437 125%

Group FY13 EBITDA Strong financial growth will lead to sustainable returns to shareholders.

EBITDA 25% $114,000 160%

Business Simplification and Integration

Achieving synergies on business simplification will lead to cost/operating efficiencies for the business.

Synergy $ targets 25% $71,250 100%

Total 100% $374,062 131%

2013 STI bonus pool outcomes

The maximum combined cash bonus pool available to be paid to the executive team for the 2013 financial year was $925,312 (2012: $738,985) and the minimum is nil. For the 2013 financial year, 85% (2012: 92%) of this bonus amount was achieved by the executives. The KPIs for other executives are a subset of the Managing Director’s KPIs above.

Executive Target STI opportunity As a % of fixed Actual STI outcome % Achieved % Forfeited

M. Malone 285,000 71% 374,062 131% nil

G. Bader 100,000 25% 86,250 86% 14%

D. Buckingham 100,000 32% 116,250 116% nil

M. Fewster 100,000 32% 116,250 116% nil

J. Lindsay 100,000 26% 90,000 90% 10%

Total 685,000 782,812


3.5 KMP Long Term Incentive Plan

Objective

The iiNet long term incentive plan is designed to directly link executive rewards to the growth in long term shareholder wealth by focusing on a mix of key financial and operating performance criteria:

■ The Board’s focus is to ensure the performance measures of the iiNet long term incentive plan are appropriate and reflect the developing business strategy. This involves ensuring that the grants made under the long term incentive plan continue to reflect that developing business strategy.

■ For the performance period 1 July 2010 to 30 June 2013, the performance measure is a gateway of EPS accretion of 15% plus additional KPIs based on strategic operational goals. In 2013, the Board decided to focus executives on an additional overlay of share price growth and accordingly for the performance period 1 July 2012 to 30 June 2015, absolute TSR of 20% was introduced as the performance target.

2012 GRANTEPS & STRATEGIC

OPERATIONAL GROWTH

2013 GRANT ABSOLUTE TSR

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Photograph by Akil Madan, Senior Programmer.

1 July 2010

30 June 2011

30 June 2012

30 June 2013

30 June 2014

30 June 2015

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The Board, therefore, set challenging levels of performance to be achieved with a minimum annual TSR of 15% required before any performance rights vest and a stretching 20% as the base target. iiNet determined this level of performance was required after analysis of the following:

■ Required cost of equity for iiNet shareholders

■ Estimate of future share price, dividends and implied returns

■ Analysis of historical TSR performance of iiNet and other high-performing companies.

A stretch level of 25% TSR per annum is also available giving Executives the opportunity to increase the number of performance rights by 50%.

Definition of TSR

TSR means total shareholder return including dividends of iiNet over the Performance Period.

TSR measures the return received by shareholders from holding shares in iiNet over a particular period and is calculated by taking into account the growth in share price over the period as well as the dividends and other distributions received during that period. The formula for calculating TSR is shown below:

(Share Price at TSR End Date) – (Share Price at TSR State Date) + ($ Dividends Reinvested)

Share Price at TSR State Date

The Share Price at TSR Start Date is the volume weighted average share price (VWAP) for the 30 days up to and including 1 July 2012; and

The Share Price at TSR End Date will be the VWAP for the 30 days up to and including the last day of the performance period.

2013 iiNet Long Term Incentive award

Objective

The 2013 iiNet long term incentive grant is designed to directly link

executive rewards to the growth in long term shareholder wealth.

Instrument

Performance rights to acquire ordinary iiNet shares.

Quantum

358,739 performance rights granted to each participating Executive (refer

section 3.6).


The Board has selected absolute TSR as the performance hurdle for the 2013 LTI grant. This hurdle directly rewards executives for focusing on increasing shareholder wealth through business strategies that will result in share price growth.

It was determined that a simple absolute TSR, rather than relative TSR, was the most appropriate measure for the 2013 LTI grant as part of the existing LTI plan. Absolute TSR was chosen because of the lack of sufficient peer group comparators to iiNet in the Australian market. Other peer companies within the Australian telecommunications sector are of a different scale or different stage in the company life cycle to iiNet.


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Performance period

All performance rights are subject to an overall 3 year performance period

under which executives must remain employed until 30 June 2015.

The performance rights are divided into three tranches for performance

testing:

■ Tranche 1 119,580 of performance rights are assessed against performance over

the period 1 July 2012 – 30 June 2013





This structure drives a continual focus on the achievement of a consistent

TSR over the 3 year performance period.

Grant date fair value 1

Per performance right – Tranche 1: $3.71, Tranche 2: $2.87, Tranche 3: $2.39

(Approximately $1,073,000 per participant).

1 Fair value calculated at grant date: 23 October 2012.


Vesting schedule

Performance rights will only vest if the following TSR performance is

achieved for each performance period:

TSR performance Vesting outcome

Up to 15% per annum Nil

15% per annum 75%

15% to 20% per annum Pro-rata vesting from 75% - 100%

20% per annum 100%

20% to 25% per annum Pro-rata vesting from 100% - 150%

25% per annum and above 150%

Performance for Tranches 1 and 2 will be assessed at the end of the relevant performance period. The performance rights meeting the performance condition will only become exercisable at 30 June 2015 if the Executive remains employed.

Termination of employment

All unvested performance rights lapse immediately on termination

with Board discretion to allow vesting in situations such as redundancy,

retirement, permanent incapacity and death.

All vested performance rights are required to be exercised within 30 days

of termination unless employment is terminated for cause where all vested

performance rights are cancelled immediately.

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2012 iiNet Long Term Incentive award

Objective

The 2012 iiNet long term incentive grant is designed to directly link

executive rewards to the drivers of growth in long term shareholder

wealth.

Instrument

Performance rights to acquire ordinary iiNet shares (Managing Director only

has right to cash award).

Quantum

Managing Director

Cash pool value $1.71 million (maximum $5.13 million based on stretch

targets being achieved and a minimum of nil).

Other participating Executives

Pool value per individual $600,000 (maximum $1.8 million based on stretch

targets being achieved).

Final pool value determines number of performance rights granted.

Grant date fair value

$2.8167 per performance right on grant date of 1 July 2011.

Performance period

1 July 2011 to 30 June 2014 (vesting occurs on 30 September 2014 (50%) and 31 December 2014 (50%)).



Gateway of EPS accretion CAGR of 15% must be met before any payment is made. Additional KPIs must be met based on objectives directly linked to the achievement of business strategy.

Level of reward can be increased if stretching KPIs and EPS accretion CAGR up to 20% are achieved.

The Managing Director’s plan targets are detailed on the following page, other executives targets are based on a subset of these targets relevant to their areas of responsibility.

Termination of employment

All unvested performance rights lapse immediately on termination with Board discretion to allow vesting in situations such as redundancy, retirement, permanent incapacity and death.

All vested performance rights are required to be exercised within 30 days of termination unless employment is terminated for cause where all vested performance rights are cancelled immediately.

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2012 Long Term Incentive Award Managing Director’s Targets

Target/Measure Weighting Dollar Value of Performance Rights

Targets Base Target Payout 100% Stretch Target Payout 150%

CAGR EPS 16.7% $285,000 $427,500

Achieve Group net promoter score (NPS) 16.7% $285,000 $427,500

Grow products per customer ratio 16.7% $285,000 $427,500

Grow broadband subscribers 10% $171,000 $277,875

Grow business sector revenue 10% $171,000 $277,875

Grow mobile customer base 10% $171,000 $277,875

Deliver integration synergies 10% $171,000 $171,000

Deliver inorganic financial growth 10% $171,000 $277,875

Total $1,710,000 $2,565,000

Accelerators*

EPS Accretion CAGR 17.5% (150% of total) $2,565,000 $3,847,500

EPS Accretion CAGR 20.0% (200% of total) $3,420,000 $5,130,000

* The CAGR accelerators have to be met for any increased award to be made, i.e. no pro-rata increase is available between target levels.

Legacy option plan: Executive & Director 2008

The options issued to an executive and director in the 2008 financial year were issued on the basis that 50 percent of the total number issued will vest on the 18 month and 36 month anniversary dates following their issue. The options have a 5 year life and can be exercised any time after they have vested. The exercise price is set at the prevailing market price of the Company’s ordinary shares at the time of the issue of the options. There are no other performance conditions attached. Shares issued on exercise of share options during the 2012 financial year were as follows:

Executive Value of options exercised during the year (i) $ Shares issued (no.) Paid per share ($)

M. Smith $740,000 200,000 $2.00

D. Buckingham $256,200 70,000 $2.01

(i) Intrinsic value has been applied on exercise date as the basis of measurement.

No share options were granted to or forfeited by Executives in the 2013 financial year.

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3.6 Statutory remuneration tables ($)

The following table of executives’ remuneration has been prepared in accordance with accounting standards and the Corporations Act 2001 requirements. The amounts shown are equal to the amount expensed in the company’s financial statements.

Year Short term Long term Post-employment

Termination Share-based payments

Total

KMP Salary & fees Cash bonus Non-monetary Long service leave

Performance bonus (i)

Superannuation Termination payments

Performance rights (ii)

Total Performance related %

M. Malone 2013 423,069 374,062 76,931 10,681 527,719 16,470 - 365,117 1,794,049 71%

2012 394,004 274,312 57,149 44,935 508,505 15,775 - - 1,294,680 60%

G. Bader 2013 293,061 86,250 22,939 14,647 - 16,470 - 550,281 983,648 65%

2012 277,589 79,500 33,950 5,569 - 15,775 - 178,279 590,662 44%

D. Buckingham 2013 308,583 116,250 10,167 30,685 - 16,470 - 550,281 1,032,436 65%

2012 282,447 86,450 22,437 4,913 - 15,775 - 175,469 587,491 45%

M. Fewster 2013 318,546 116,250 16,454 10,079 - 16,470 - 550,281 1,028,080 65%

2012 295,140 84,787 12,245 10,728 - 15,775 - 175,665 594,340 44%

S. Hackett (iii) 2013 31,154 - - - - 6,194 - - 37,348 -

2012 114,090 50,000 4,179 181,684 - 10,644 - - 360,597 14%

J. Lindsay (iv) 2013 299,057 90,000 943 31,004 - 16,470 - - 437,474 21%

2012 108,571 103,985 - 70,568 - 9,771 - - 292,895 36%

Total 2013 1,673,470 782,812 127,434 97,096 527,719 88,544 - 2,015,960 5,313,035 63%

Total 2012 1,471,841 679,034 129,960 318,397 508,505 83,515 - 529,413 3,720,665 46%

(i) Includes value of performance bonus estimated to be paid out in cash under the 2012 LTI grant.

(ii) Performance rights awarded to executives under the 2009, 2012 and 2013 LTI grants, except the Managing Director who received equity settled performance rights under 2013 LTI grant only.

(iii) Became a KMP on 1 February 2012, which ceased on 16 August 2012 upon appointment to the Board.

(iv) Became a KMP on 22 May 2012.

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Remuneration components as a proportion of total remuneration paid or expensed

The following table reflects the fixed base, STI and LTI calculated in accordance with the accounting standards as a proportion of the total.

KMP Fixed (i) STI (ii) LTI (iii) Total

M. Malone 29.4% 20.8% 49.8% 100%

G. Bader 35.3% 8.8% 55.9% 100%

D. Buckingham 35.4% 11.3% 53.3% 100%

M. Fewster 35.2% 11.3% 53.5% 100%

S. Hackett 100.0% - - 100%

J. Lindsay 79.4% 20.6% - 100%

(i) Fixed equals the percentage of remuneration consisting of salary and fees, non-monetary benefits, termination payments, long service leave and superannuation.

(ii) STI equals the percentage of remuneration consisting of cash bonus that was paid in respect of the year.

(iii) LTI equals the percentage of remuneration consisting of the value of performance rights and bonuses that was expensed to the statement of comprehensive income.

3.7 Executive contracts and termination arrangements

Employment contracts

The key conditions of the Managing Director and executives’ service agreements are outlined below:

Name Agreement commence

Agreement expire Notice of termination by company(i) Employee notice

M. Malone 28 July 2006 No expiry, continuous agreement 6 months (or payment in lieu of notice) 12 weeks

G. Bader 6 August 2007 No expiry, continuous agreement 6 months (or payment in lieu of notice) 12 weeks

D. Buckingham 7 December 2007 No expiry, continuous agreement 6 months (or payment in lieu of notice) 12 weeks

M. Fewster 24 July 2007 No expiry, continuous agreement 6 months (or payment in lieu of notice) 12 weeks

S. Hackett 5 November 2010 Ended 16 August 2012 upon appointment to the Board 6 months (or payment in lieu of notice) 12 weeks

J. Lindsay 18 May 2012 No expiry, continuous agreement 6 months (or payment in lieu of notice) 12 weeks

(i) Company notice increased by 1 week if executive is over age of 45 and has completed 2 years service.

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4.3 Non-executive Directors’ remuneration details ($)

Non-Executive Directors

Year Board and Committee

Fees

Superannuation Total

M. Smith 2013 179,769 15,089 194,858

2012 155,769 14,019 169,788

P. Broad 2013 89,923 8,093 98,016

2012 83,077 7,477 90,554

D. Grant 2013 104,923 9,443 114,366

2012 98,654 8,879 107,533

S. Hackett 2013 75,643 6,944 82,587

2012 - - -

P. James 2013 94,731 8,526 103,257

2012 88,269 7,944 96,213

L. McCann 2013 90,115 8,110 98,225

2012 80,904 7,281 88,185

Total 2013 635,104 56,205 691,309

Total 2012 506,673 45,600 552,273

End of Remuneration Report (audited).

Signed in accordance with a resolution of the directors.

Michael SmithChairman

24 September 2013

4. NON-ExECuTivE DiRECTORS’ REMuNERaTiONThe Board sets Non-executive Director remuneration at a level which enables the attraction and retention of directors of the highest calibre, while incurring a cost which is acceptable to shareholders. The remuneration of the Non-executive Directors is determined by the Board on recommendation from the Remuneration and Nomination Committee within a maximum fee pool.

Non-executive Directors receive a base fee and statutory superannuation contributions. Non-executive Directors do not receive any performance based pay.

4.1 Fee Pool

The maximum amount of fees that can be paid to Non-executive Directors is capped by a pool approved by shareholders. At the 2012 Annual General Meeting, shareholders approved the current fee pool of $900,000 per annum.

4.2 Directors’ 2013 Fee Structure

Prior to 2012, board and committee fees had not been increased since November 2008. In determining the appropriate level of fees, the Board obtained independent market data from PwC. The iiNet fees were compared to a comparator group based on similar sized companies to iiNet, excluding resources and real estate companies. The benchmarking review indicated the iiNet directors’ fee levels to be positioned between the 25th and 50th percentile of the comparator group. As a result of this review, the Board approved an increase to the iiNet board and committee fees to reflect the increased responsibilities and workload of the directors since 2008.

The following table outlines the main Board and Committee fees as at 30 June 2013.

Chair fee Member fee

Board $85,000 $85,000

Audit and Risk Committee $20,000 $10,000

Remuneration and Nomination Committee $10,000 $5,000


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auDiTOR’S iNDEPENDENCE DECLaRaTiONDirectors’ Report - Remuneration Report – audited - continued

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