Network Rail directors could share a bonus pot worth up to £600M by exceeding cost cutting targets for the company, under a new executive incentive scheme has been approved by the company’s members.
Under the new scheme the potential annual bonus for executive directors has been reduced by 40%.
A new long-term scheme tied to the out-performance of the company’s targets for the current regulatory control period to 2014 was approved. Under this long term “gain share” bonus structure, the company’s top ten executives could share a bonus pot of up to £600M by exceeding the cost saving targets for the company by the Office of Rail Regulation.
Network Rail’s remuneration committee chairman Steve Russell 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.”
In order for an award to be made under the new annual scheme, two objectives relating to the punctuality of trains 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.
“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,” Russell added.
The existing long-term incentive plan 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).
One of the key measures of the successful delivery of the current control period to 2014 is the regulatory target of making cost efficiency savings of £5.2bn - or 22% of its costs. 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 are made, capped at a maximum of £600M, with the extent of the extra savings being identified and verified by the regulator. Eligibility will be subject to other key regulatory targets also being met.
“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,” Russell said.