EY Human Capital Conference 2012: Remuneration as a lever for cultural change

2012 Human Capital Conference23–26 October

Remuneration as a lever for cultural changecultural change

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► The views expressed by panelists in this session are not necessarily those of Ernst & Young LLP.

Remuneration as a lever for cultural change

Presenters

► Dharma ChandranLeighton Holdings [email protected]

► Mike Hogan Ernst & Young Australia

@[email protected]


Session overview

1. Influencing behaviors to support fundamental changeg pp g2. Case study: Leighton Holdings Limited


Influencing behaviors to support fundamental changefundamental change

Remuneration: importance vs. attention

► Poorly designed remuneration plans can lead to negative y g p goutcomes in any situation.

► Typically, remuneration is No. 3 to No. 5 on yp y“attraction/retention” considerations.

► Remuneration can be an immediate change lever to redirect emphasis.

Public focus on performance/reward linkPublic focus on performance/reward link


The balance in measurement emphasis: an illustrationan illustration

Objective Shareholder returnSafety Profit

Risk Risk-adjusted Return on capital

Subjective Behavior

FinancialNon-financial


What are companies doing or thinking about?about?

“Skin in“Skin inthe game” ► Short-term incentive deferral into

equity

Clawback► Material misstatements, behaviors,

undue risk

► Reward policies approval processes

undue risk

Governance processes

► Reward policies, approval processes

► Exercise judgmentI d ti itt /processes ► Increased remuneration committee/ board involvement — policies


Case study: Leighton Holdings Limited

Strategic management company governing semi-autonomous operating companiessemi autonomous operating companies

Leighton HoldingsLeighton HoldingsLeighton HoldingsLeighton HoldingsLeighton HoldingsLeighton HoldingsLeighton HoldingsLeighton Holdings ► 55,000 employeesg g

L i ht J hLeighton

Middl E tLeighton

A i I di & L i ht

g g

L i ht J hLeighton

Middl E tLeighton

A i I di & L i ht

g g

L i ht J hLeighton

Middl E tLeighton

A i I di & L i ht

g g

L i ht J hLeighton

Middl E tLeighton

A i I di & L i ht

g g

L i ht J hLeighton

Middl E tLeighton

A i I di & L i ht

g g

L i ht J hLeighton

Middl E tLeighton

A i I di & L i ht

g g

L i ht J hLeighton

Middl E tLeighton

A i I di & L i ht

► US$22 billion revenue

L i ht J h L i htLeighton

Asia, India HLGThiess Leighton

ContractorsJohn

HollandMiddle East

& Africa (LMEA)

Asia, India & Offshore (LAIO)

Leighton PropertiesThiess Leighton

ContractorsJohn

HollandMiddle East

& Africa (LMEA)



ContractorsJohn

HollandMiddle East

& Africa (LMEA)



ContractorsJohn

HollandMiddle East

& Africa (LMEA)



ContractorsJohn

HollandMiddle East

& Africa (LMEA)



ContractorsJohn

HollandMiddle East

& Africa (LMEA)



ContractorsJohn

HollandMiddle East

& Africa (LMEA)



ContractorsJohn

HollandLeighton

PropertiesAsia, India

and Offshore (LAIO)

HLG (45%

holding)


Internal and external drivers for change

► Project challenges:j g► Two major public-private partnership projects (each experiencing cost

blowouts)

Fi i l h ll► Financial challenges:► AU$408.8 million loss in 2011► Share price fell by 50% in one year► Share price fell by 50% in one year► Further 2012 earnings downgrade of AU$254m

► HR challenges:g► Excessive executive remuneration (especially for CEO of 23 years)► CEO and senior executive succession ► Board turnover

Resulted in negative external perception


g p p

A new team

► New Chairman appointedpp► Third CEO in 12 months appointed August 2011► Executive team refresh, including new Chief Risk Officer,► Executive team refresh, including new Chief Risk Officer,

Group General Counsel and Chief Human Resources Officer

► HR team in Holdings for the first time directly reporting to CEO, with mandate to review remuneration and

i l isuccession planning


From old to new: refreshed remuneration approachapproach

Individually negotiated Reference to market data, Fixed y g

Discretionary, cash-based, fit b d l

,default positioning policyremuneration

Short-term

Discretionary, cash-based,

profit-based pool

Di i d

% of TFR*, KPIs**, deferral

M di t

incentive

Discretionary, cash based, based on profit growth

I l t f ti

Discontinued

% of TFR* annual grants

Medium-term incentive

Irregular grants of options (every 2 to 3 years)

% of TFR*, annual grants of share rightsLong-term

incentive

Individual contractual payments

Discontinued and replaced with equity where possible

Service/ retention

*T t l fi d ti


*Total fixed remuneration** Key performance indicators

Response to change

► Positive feedback from all institutional shareholders/proxy p yadvisory groups consulted to date

► More positive public viewp p

“Executive pay changes introduced ... recognized the need p y g gto align executives’ interests with those of shareholders”

— Australian Financial Review, February 2012

“Finally aligned ... with modern governance standards”— The Australian, February 2012


Implementation approach

► Medium-term incentive discontinued

Abolition and no further service and retention grants (except with explicit committee

l)► New contracts

approval)

Substitution ► Shift in mix toward longer-term and equity-based remuneration

B t

q y

► Service and retention payments replaced by equity grants whereBuyout replaced by equity grants where possible


Rollout of leadership development program

The quality and capability of our leaders is critical to successfully Why?meet business challenges and execute our new strategy

The group’s top 75 leadersWho?

► Move to a performance culture

The group s top 75 leaders

► Define leadership capability needs; gain insight into each leader’s strengths and development opportunities

Objectives?

► Inform succession plans with robust and comparative data; input into risk management processes

► Comply with corporate governance requirementsOngoing. A phased approach has been adopted to rollout the program; conducted in four phases over a six-month period.

When?


p g p p

The journey continues

1. Develop and rollout new group HR and remuneration p g ppolicies

2. Institutionalize and harmonize changes across group globally

3. Embed new, enhanced governance practices

4. Continue leadership development — three-year journey


Key takeaways

► Understanding the issuesg► The key: clearly identify the issues then focus on developing and

implementing solutions to deliver change

► Focus on key levers of change► In any given year, can only focus on a limited number of levers of

changechange

► Senior support► Objectives only achieved with “champions of change” at the top► Objectives only achieved with champions of change at the top

level, including Board and CEO


Questions


EY Human Capital Conference 2012: Remuneration as a lever for cultural change

Business

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