Remuneration

Non-Executive Director remuneration

Directors' fees

The total remuneration available to non-executive directors is fixed by shareholders at the annual meeting. The current annual fee pool limit is $1,500,000 and has not been increased since it was approved by shareholders at the Annual Meeting in October 2003.

The Human Resources and Compensation Committee annually reviews director remuneration taking into account the responsibilities, skills, performance and experience of the directors and then makes appropriate recommendations to the board. The committee takes advice from independent consultants to ensure that remuneration is in line with other comparable companies in New Zealand.

BOARD/COMMITTEE CHAIRMAN1 MEMBER1
Base Fee - Board of Directors $330,000 $130,000
Audit and Risk Management Committee $35,000 $17,000
Human Resources and Compensation Committee $30,000 $15,000
Nominations and Corporate Governance Committee NIL NIL

1Committee chair and member fees are not payable to the chairman of the board, and committee member fees are not payable to committee chairs. Where a director is the member or chairman of more than one board committee, the director receives the single highest applicable fee.

No director (excluding the CEO) receives compensation in the form of stock options or restricted shares or participates in bonus or profit-sharing plan.

Information on the total remuneration paid to Directors and values of other benefits received by the Directors of Telecom, during the previous financial year can be viewed in the Remuneration at Telecom section of the latest Annual Report.

Retirement allowances

No retirement allowances are provided to directors.

No director (excluding the CEO) has a service contract with Telecom that provides for benefits or remuneration in the event that the service of any such director with Telecom is terminated. For details of benefits or remuneration to be paid to the CEO in such circumstances, see CEO remuneration below.

Superannuation

No superannuation was paid to any Telecom director during the financial year ended 30 June 2013.

Telecom employee remuneration

Remuneration Governance

The Human Resources and Compensation Committee is responsible for reviewing Telecom's remuneration and human resources strategy, structure, policy and practices. External expert advice, best practice remuneration structures and market trends are reviewed to ensure that the remuneration strategy for Telecom contributes to effective performance and value creation.

The Human Resources and Compensation Committee recognises the role people play in the achievement of Telecom's short-term and long-term objectives as a key source of competitive advantage. To successfully compete, Telecom must be able to attract, retain and motivate capable employees.

The Committee is also ultimately responsible for the governance of Telecom's remuneration policies and practices and for ensuring Telecom meets its legislative and regulatory requirements as they relate to remuneration matters. The Committee continually reviews its policies and practices to ensure it meets best practice requirements in this area. For further detail on the role and responsibilities of the Human Resources and Compensation Committee see Board Committees.

Remuneration principles

There are four key principles determined by the Human Resources and Compensation Committee that underpin Telecom's remuneration policies. Supporting each key principle are appropriate policies and practices with clear and established accountabilities and processes. The principles are:

1. Rewards are market-competitive to attract and retain talented people

The overall remuneration structure is designed to deliver rewards that are competitive in the labour markets in which Telecom competes for people.

The Human Resources and Compensation Committee decides Telecom's position within a comparative market and this determines remuneration ranges. Individual remuneration is set within these ranges taking account of a number of factors, including individual performance and capability, specific business needs, the criticality to Telecom of a specific position or individual, market shortages of specific skills, regional differences and economic climate. Remuneration ranges are reviewed annually to reflect movement in market remuneration.

2. Remuneration is linked to performance so that higher levels of performance attract higher rewards.

Overall business strategy shapes Telecom's corporate plan. It cascades down to business groups and is reflected in business plans and finally in individual performance objectives. Individual performance is a key input into the annual remuneration review decision, such that above-target performance results in higher levels of fixed remuneration. Where applicable the variable remuneration component is at-risk and includes specifically designed sales incentives, annual incentives and long-term incentives. Each of Telecom's incentive schemes links desired performance outcomes with appropriate reward.

  • Sales incentives, specific to sales positions, are designed to drive achievement of sales, customer value and service targets.
  • Telecom's annual incentive scheme provides a short-term reward for performance consistent with Telecom's corporate plan.
  • Consistent with market practice, long-term incentives apply only to senior management positions. These incentives link the rewards of those individuals who most directly influence Telecom's long-term business performance to the delivery of outcomes that increase shareholder value.

3. The overall cost of remuneration is managed and linked to the ability of the Company to pay.

Telecom has a significant financial investment in its people. Effective growth is dependent on the quality, commitment, innovation and drive of these employees. Telecom aims, in a competitive market, to achieve the appropriate balance between managing overall remuneration costs and investing in people.

Telecom pays total remuneration at market level. The overall remuneration cost is linked to Telecom's performance and therefore ability to pay.

4. Rewards to senior management are aligned to the long-term performance of the Company

The Human Resources and Compensation Committee makes recommendations to the board on senior management incentive remuneration plans, including long-term incentives. Senior management remuneration packages comprise a fixed portion and an at-risk portion that is generally only paid when performance objectives are met. A member of the Leadership Team's remuneration package is comprised of approximately 50% as a fixed component with the remaining 50% at risk, balancing short and longer-term performance.

TELECOM INCENTIVE SCHEMES

Incentive changes for FY13

Telecom maintains a variety of both short-term and long-term incentive plans, allowing greater flexibility in providing a "custom fit" solution to drive desired performance outcomes. Different parts of the Company are at different stages of their development - some parts of the organisation are in early stage investment, some parts of the Company are more mature and, as with all true portfolios of business, some parts of the organisation may potentially be divested in the future. Hence it is appropriate to align incentive plans with the part of the Company to which they apply. In addition to sales incentives, Telecom has three types of incentives: a short-term annual incentive, an equity incentive and long term incentives. These schemes are designed to ensure there is an appropriate balance between short-, medium- and longer-term performance objectives. These are described in detail below.

Annual incentive scheme

Telecom's annual cash-based short-term incentive scheme is an integral part of Telecom's overall approach to competitive performance-based remuneration. It aims to reward eligible individuals for meeting or exceeding individual and company targets that are aligned to Telecom's strategic direction.

In previous years, employees at all levels in the organisation were eligible to participate in the scheme, however, from 1 July 2013, only senior employees who play a significant role in driving Telecom's performance will be eligible to participate in the scheme. Employees who will no longer be eligible to participate in the scheme had a portion of their incentive target added to their base salary as a one-off recognition of the narrowing of the scheme.

The board determines Telecom's strategy and measures of success and agrees a corporate plan, with reference to external performance benchmarks. Based on this agreed plan, business performance targets are set at the beginning of the year, with the board assessing performance against these targets following the completion of the financial year. The high-level corporate strategies and targets are used to set individual objectives that are stretching, measurable, achievable, realistic and time bound. The incentive design is intended to balance business performance and individual performance so that above target performance in both may result in above target payments, while below target performance in either results in lower or, in some cases, no incentive payments.

For the year ended 30 June 2013, the business performance targets related to EBITDA, fee cash flow, customer connection numbers and revenue. Given the focus has been on the simplification and resetting of the business, the board has determined that payments made under the annul incentive scheme for the period ending 30 June 2013 will be based solely on the Company's performance , with the outcomes delivered at the same level across the business. This is a departure from the approach taken in previous years where individual performance combined with company performance was taken into account to determine payments.

Equity Incentive Scheme

The Equity Incentive Scheme was introduced in September 2012 for members of the then Leadership Team. The board has the discretion to deliver this incentive in redeemable ordinary shares or cash (such that the value delivered in cash would put the participant in a similar position to what they would have been in had shares been issued). In the event the relevant members of the leadership team are awarded redeemable shares, they would be prohibited from disposing of the redeemable ordinary shares for a specified period, generally two years. At the end of the specified period the redeemable ordinary shares automatically reclassify into ordinary shares.

Awards made to the relevant members of the leadership team are subject to a pre-allocation performance hurdle, with the quantum of their award determined by their annual performance outcome achieved for the previous year ended 30 June.

For the year ended 30 June 2013 the board has determined the equity incentive is to be delivered in cash deferred for a period of two years vesting in September 2015. Payment will be made with reference to the share price at the time of vesting which will put the recipients in the same financial position they would have been in had redeemable ordinary shares been issued.

Long-term incentive schemes

Telecom currently operates equity and cash-based long-term incentive schemes for the CEO, members of the Leadership Team and senior managers.

Telecom's at-risk long-term incentive schemes have been modified as appropriate over different financial years to maintain appropriate incentivisation in a context of significant transformation in the telecommunications sector. Having a wide range of long-term incentive schemes in operation gives Telecom the flexibility it requires to grant under a particular scheme depending on what is appropriate in the circumstances.

In FY13 (granted in September 2012) long-term incentives were delivered under the Share Rights Scheme (see Share Rights Scheme below) and the Restricted Share Scheme (see Restricted Share Scheme below).

Awards made to the CEO and the Leadership Team in FY13 are subject to post-allocation performance hurdles, with outcomes approved by the Human Resources and Compensation Committee. Awards made to senior managers in FY13 were subject to a pre-allocation performance hurdle, with the quantum of their award determined by their annual performance outcome achieved for the previous year ended 30 June.

An overview of the long-term incentive schemes currently operating at Telecom during FY13 for the Leadership Team and senior managers are summarised in the table below. See CEO Remuneration for details of the CEO's long-term incentive schemes.

SCHEME TYPE GRANTED IN EXECUTIVE SENIOR MANAGERS
Telecom Share Rights Scheme Share-based incentive FY13 Eligible
Three year vesting
Post-allocation performance hurdle
Only Australian employees eligible
Three year vesting
Pre-allocation performance hurdle
Telecom Restricted Share Scheme Share-based incentive FY13 Ineligible Only New Zealand employees eligible
Three year vesting
Pre-allocation performance hurdle
Telecom Equity Link Scheme A cash-based incentive which is directly linked to the share price performance of Telecom FY12 Eligible
Three year vesting
Post-allocation performance hurdle
Eligible
Three year vesting
Post-allocation performance hurdle
Telecom Cash-based LTI Scheme A cash-based performance incentive FY11 Eligible
Post-allocation performance hurdle
Vested in September 2012
Eligible
Three year vesting
Post-allocation performance hurdle

Restricted Share Scheme

Under the Restricted Share Scheme, ordinary shares in Telecom are issued to Telecom Trustee Limited, a Telecom subsidiary. Participants purchase shares from Telecom Trustee Limited with funds lent to them by Telecom and which are held on their behalf by Telecom Trustee Limited. Telecom Trustee Limited cannot exercise any voting rights attached to the shares. However, once vested, the shares have the same voting rights as ordinary shares.

Generally, the shares vest after a three-year period, although a reduced period may be used in some cases. If the individual is still employed by Telecom at the end of the vesting period, the employee is provided a cash bonus which must be used to repay the loan and the shares are then transferred to the individual. Under special circumstances, individuals who cease employment prior to the end of the vesting period can receive a partial award under the Restricted Share Scheme. Restricted shares may be eligible for dividends.

Share Rights Scheme

Under the Share Rights Scheme, participants are granted rights to purchase Telecom shares at a nil cost strike price. Share rights have no voting rights until exercised and generally cannot be exercised for a three-year period. The share rights will be exercisable at the end of the vesting period only if the individual is still employed by Telecom and, in the case of Leadership Team Members, a total shareholder return performance hurdle has been met. In special circumstances early vesting may occur.

The total number of restricted shares and share rights on issue under these schemes comprised less than 1% of the total shares on issue at 30 June 2013. See note 25 to the financial statements in the Performance section of the annual report for more details.

Equity Link Scheme

In FY12 the Leadership Team and senior managers received their long-term incentive awards under the Equity Link Scheme. The Equity Link Scheme provides a cash payment of an amount that is adjusted upwards or downwards based on Telecom share price movement over the specified period, ensuring that the value of the incentive payment is linked to share price performance. Vesting will occur in September 2014, provided the individual is still employed by Telecom and in the case of the Leadership Team, provided a total shareholder return performance hurdle has been met.

Cash-based LTI Scheme

In FY11 the Leadership Team and senior managers received their long-term incentive awards under a cash-based performance scheme.

For the current Leadership Team, vesting and payment occurred in September 2012, subject to performance hurdle testing and provided the relevant Leadership Team Member was still employed by Telecom. For senior managers, payment will occur in September 2013, provided the senior manager is still employed by Telecom. In special circumstances early vesting may occur.

CEO remuneration

Employment agreement and termination benefits

Mr Moutter has an employment agreement that commenced on 13 August 2012. The agreement is not a fixed-term contract. The employment agreement may be terminated by the board on three months' notice. If the board gives notice of termination, Telecom must pay the CEO a termination payment equal to nine months' base remuneration. In addition, the board retains sole discretion to determine any entitlements under the CEO's annual performance incentive, performance equity incentive and long-term performance incentive schemes (all outlined below) subject to the rules of these schemes.

The employment agreement may also be terminated by the board without notice, in the event that the board considers the CEO to be guilty of serious misconduct which justifies summary dismissal or if the CEO commits an act of bankruptcy. In such an event, the CEO is only entitled to his base remuneration and accrued statutory holiday pay and all other entitlements will be forfeited.

The agreement may be terminated by the CEO on three months' notice within three months of a fundamental change occurring. A 'fundamental change' is where the CEO is no longer the CEO of a company listed on either the New Zealand or Australian stock exchanges and, as a result, the terms of his employment are materially different from those set out in his employment agreement. If such a fundamental change occurs, the CEO is entitled to a payment as if the board had terminated his employment agreement on notice. The CEO may also, at any time, terminate the agreement on six months' notice. During such notice period, the CEO will continue to receive all remuneration and other entitlements under the agreement.

The board may elect to pay the CEO an amount based on his base remuneration in lieu of all or part of any termination notice period. If the CEO is prevented from carrying out his duties by personal accident, death or ill health, the board may in certain circumstances terminate the agreement immediately and make a payment equal to nine months' base remuneration to the CEO.

Remuneration

The CEO's remuneration package reflects the scope and complexity of the CEOs role.

The package for FY13 included a fixed cash component, an at risk short-term incentive (to be paid under the CEO Annual Performance Incentive Scheme), an at risk equity incentive (to be awarded under the CEO Performance Equity Scheme) and an at risk long-term incentive (to be awarded under the CEO Performance Rights Scheme). Sixty four percent of the CEO's remuneration package is at risk.

The CEO's employment agreement also provided for a one-off grant of NZ$750,000 share rights to acquire ordinary shares in Telecom (Additional Grant) to be made in FY13. This grant was made under the CEO Performance Rights Scheme; however it differed from other grants under that scheme in that there were no performance criteria attached to it. In addition, 50% of the share rights will be exercisable on year after the grant and the remaining 50% will be exercisable two years after the grant.

CEO Incentive Schemes

CEO Annual Performance Incentive Scheme

The CEO is eligible for an annual cash-based short-term incentive, which is subject to his achievement of specific performance objectives set by the board based on the agreed strategy and business plan for the respective financial year. The specific performance objectives will be based on Telecom's business and strategic plans and other criteria relating to corporate governance, reputation, effective leadership and management. These objectives will be set at the beginning of each financial year and assessed at the end of the financial year by the board when it makes its determination of the incentive award. The board will assess the CEO's performance and determine the actual payment value of his short-term incentive in the range of 0 to 175% of his target value.

CEO Performance Equity Scheme

The CEO Performance Equity Scheme is intended to reward the CEO for achieving pre-specified target levels of performance during a financial year and to align the CEO's remuneration with the long-term performance of Telecom. The performance objectives that apply under this scheme are the same as those that apply under the CEO Annual Performance Incentive Scheme. The board will assess the CEO's performance and determine the actual award in the range of 0 to 175% of his target value. The incentive award will be delivered in redeemable ordinary shares, or at the board's discretion, this award can be delivered in cash. The CEO is prohibited from disposing of the redeemable ordinary shares for a specified period, generally two years and Telecom may redeem the shares in certain termination situations. At the end of the specified period they will automatically reclassify into ordinary shares. The issue of the shares on these conditions links a substantial part of the CEO's remuneration with the share price performance of Telecom.

CEO Performance Rights Scheme

The CEO Performance Rights Scheme is intended to link part of the CEO's remuneration with the long-term performance of Telecom and align the CEO's interests with those of shareholders, through the granting of equity with post-allocation performance testing. Each share right is granted for no cash consideration and provides the right to purchase one Telecom ordinary share for no cash consideration (that is, each share right has a nil exercise price). The board will set the period after which share rights are eligible for vesting (that is, become exercisable) at the time a grant is made. For the grant for FY13, the board determined that one-half of the share rights will be eligible for vesting two years after the grant, and one-half of the share rights will be exercisable three years after the grant. For subsequent grants of share rights it is anticipated that the board will specify that share rights be eligible for vesting three years after the grant.

The ability of any of the share rights to vest and the number of share rights that will vest following the end of the vesting period, is dependent on the applicable performance hurdle being met. There will be a re-test 12 months after the initial testing of the performance hurdle.

Each share right converts to one ordinary share on exercise or, at the board's discretion, a cash amount equal to the value of the shares can be paid instead.

Performance Hurdle

Share rights granted under the CEO Performance Rights Scheme (other than the Additional Grant) can only be exercised if the applicable performance hurdle has been met. Testing to determine whether the performance hurdle has been met will occur at the end of the vesting period of the grant. In order for share rights to be exercised, the minimum threshold of this hurdle must be met. If the maximum performance hurdle is not met, there will be a re-test twelve months later using the same methodology. The board may amend the performance hurdle or specify a different performance hurdle or specify a different re-test date for future grants of share rights under the CEO Performance Rights Scheme if it determines, in its discretion, that the proposed performance hurdle ceases to be appropriate. The performance hurdle for a particular grant of share rights cannot be changed after those share rights have been granted. Achievement of the performance hurdle will be determined by the board following receipt of data that verifies that the performance hurdle has been met for each tranche of share rights. Once the performance hurdle is met, the share rights may be exercised up to and including the lapse date.

The board also has discretion to grant shares rights with no performance hurdles. It is anticipated that the board will specify that subsequent grants of share rights are subject to performance hurdles.

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