Marks & Spencer : Remuneration 2020

REMUNERATION

REMUNERATION OVERVIEW

"The Committee ensures that the pay framework isappropriately flexible,to act in shareholders'best interests in unpredictablecircumstances."

Andrew Fisher, Chair of the Remuneration Committee

IN THIS SECTION

REMUNERATION

Remuneration overviewp66-p71Remuneration in contextp72-p73Remuneration policyp74-p80

ANNUAL REPORT ON REMUNERATION

Remuneration structurep81

Total single figure remunerationp81Salary and benefitsp82

Annual Bonus Schemep83-p84Performance Share Planp84-p85Directors' share interestsp86-p87Changes to Board membershipp89

Non-executive directors'remunerationp90

Remuneration Committee remitp91

INTRODUCTION

On behalf of the Board, I am pleasedto present our 2019/20 Remuneration Report. We also present our proposedRemuneration Policy (Policy). In line with regulations, we are seeking shareholdersupport and approval for our Remuneration Policy at the 2020 AGM. A summary of the proposed changes to the approved Remuneration Policyis set out below and on pages 74-80of this report.

The Remuneration Report provides a comprehensive picture of the structureand scale of our remuneration framework, its alignment with the business strategy and the rest of the workforce, as well as the decisions made by the Committee as a result of business performance forthis year and the intended arrangements for 2020/21.

BOARD CHANGES

Following the departure of HumphreySinger in December, we were delightedto appoint Eoin Tonge as CFO. Detailsof Humphrey's leaving arrangements, along with recruitment details for Eoin, can be found on page 89 of this report.

The Committee was pleased that we secured the appointment of Eoin Tongein line with our simplified pay framework. He will, however, receive mobilityallowances for a set period of time.

In addition, we are pleased to appoint Katie Bickerstaffe as our new ChiefStrategy and Transformation Officerand see her become an executive memberof the Company. Katie was previously anon-executive director of the Company and a member of the Remuneration Committee, for which I would like to thank Katie for all her help and support. In linewith our standard practice Katie did not participate in Committee discussions thatcould be construed as her influencing herown future remuneration arrangements.

REMUNERATION FRAMEWORK CONSIDERATIONS

Shareholder engagement and feedback

The Board is committed to ensuring thatour remuneration framework supports ourstrategy, and provides a balance betweenmotivating and challenging our seniorleaders to deliver our business priorities and also driving the long-term sustainablesuccess of M&S.

The Committee spent a considerableamount of time this year reviewing thecurrent remuneration framework, structures, measures and targets. This was all undertaken in the context of the ever-changing political and retailtrading landscape and more recently inlight of the ongoing Covid-19 pandemic.

The Committee consulted with our major shareholders (representing almost 50%of our total shares in issue) to discuss ourproposal and response in respect ofexecutive pay arrangements. Additionally, we also approached a number of shareholder representative bodies givenmany of our stakeholders engage their services. The Committee reviewed and discussed all the responses andfeedback provided and have developed a remuneration framework that we believe, based on what we currently know, will support the business over the next three years and is aligned with investor expectations.

The Committee believes that ourRemuneration Policy continues to provideappropriate flexibility, ensuring that anypayments made in the implementationof the Policy are in the best interests of both the Company and our shareholders.

The overall framework is considered toremain appropriate but based on investor feedback some minor amendments are proposed and described below.

USE OF DISCRETION

Recent world events have highlightedthe importance of having a flexible policy together with appropriate permissiblediscretions to ensure that we can continue to run M&S successfully. For completetransparency, we are more explicitlyoutlining the discretions already in placeto ensure the Committee is able to act in the best interests of the business andour shareholders in unknown andunpredictable circumstances.

The Committee has the ability to apply malus, clawback and responsibleapplication of discretion to override formulaic outcomes of the incentive schemes to ensure that pay outcomesare appropriate in the wider business and economic climate beyond the relevant performance measures. During the year, the Committee discussed the breadth ofprovisions in place and agreed that these provide the Committee with sufficient capacity to act appropriately inunforeseen circumstances. The clawback provisions which have been in place since

2017 allow the Committee a numberof circumstances during the life ofthe binding policy beyond financial misstatement; these are explicitly disclosed on page 76.

During the year the Committee did notapply any discretion to the variable pay outcomes of the bonus and PerformanceShare Plan (PSP). The Committee agreed that the final vesting of the PSP was reflective of the last three years of M&S's performance and that the Policy operated as intended.

KEY AMENDMENTS TO REMUNERATION POLICY

The PSP will continue to be the primary long-term incentive plan for executives.

We will maintain the overall construct ofthe plan, with the typical award being 250% of salary against a maximum of 300% of salary. However, to ensure more relevant alignment between seniorremuneration, the strategic direction of the Company, and the interests of our shareholders, we propose to introduce strategic measures into the PSP. In direct response to shareholder feedback, the plan will retain a portion based upon TotalShareholder Return (TSR) performance.

We propose to increase the shareholdingrequirement for all executive directorsto 200% of salary. The CEO's requirement will remain at 250% of salary. To furtheralign executives with shareholders and the longer-term success of the business, we will be introducing a post-cessation shareholding guideline. Executives will be expected to continue to hold theirshareholding requirement for two yearspost exiting the business.

Having already reduced our pension cashalternative for new executive directors at our last policy review, and in line with the pay arrangements offered to executive directors joining since that time, we areformally removing this cash payment forall new executive director appointments. In order to remove any policy differential between incumbent and new executive directors, Steve Rowe has agreed to forgohis contractual arrangements for this pension cash alternative. Steve's pensionsupplement will be reduced to zero over the next three years. Steve will remain eligible to participate in thepension scheme on the same terms asall other colleagues as has long beenM&S's practice.

Shareholders approved the currentRemuneration Policy at the AGM in 2017. As such, the Company is required to seekapproval for the new policy at the AGMto be held on 3 July 2020. Pages 74-80provide the full details of the proposedpolicy. For transparency, the table belowsets out an overview of the key areas of the Policy.

Base salary

Benefits

Main features of current policy

-Increasesawarded are normally in line with those elsewhere inthe business.

Adjustments inexcess of this may

be made where theCommittee deems it appropriate.

-

Salaries will becompared againstappropriately sizedlisted companies.

-Benefitsprovided at a rate commensurate with the market and currently include a car orcash allowance, a driver, and lifeassurance plusother benefitsprovided to allcolleagues,including colleague discount.

Policy change-No change.

-No change.

Pension benefits

-Directors may participate inM&S's defined contributionarrangement on the same terms asother colleagues,or receive a cash supplement in lieu of pensioncontributions.

Cash alternativemaximum iscurrently 20% of salary forother executivedirectors (25% for CEO).

• -Removal of pension cash supplements for any future directors.

• -Reduction of the CEO's cash pension supplement tozero over nextthree years.

Annual Bonus Scheme

• -Maximumopportunity of 200% of salary.

• -50% of total bonusdeferred into shares for three years.

• -Measured against Adjusted Group ProfitBefore Tax (PBT) (currently 70%of award) and individualobjectives.

• -Clawbackand malus provisions apply.

-No change.

Performance Share PlanShareholding requirement

• -Maximum awardof 300% of salary.

• -Performance measured againstfinancial targets over a three-yearperiod.

• -Performance conditions may includequantifiable non-financial/strategicmeasures, with financial measurescomprising at least 50% of awards.

• -A two-yearholding period post vesting.

• -Clawbackand malus provisions apply.

-The CEO is required to hold 250% of salary in shares. For allother executive directors,the current requirement is 150% of salary.

Non-executive directors (including Chairman)

• -Fees reviewed annually.

• -Comprise basicfee plus additionalfee for extra responsibility of Board orCommittee Chairman or SeniorIndependentDirector.

• -Fees will becompared against appropriatelysized companies.

• -In addition, the Chairman may beentitled to the use of a car and driver.

• -In line with our other colleagues,the Chairman andnon-executivedirectors are entitled to receive colleague discount.

-No change.

• -The shareholding-No change. requirement is increasing from 150% to 200% forall other executivedirectors.

• -Directors are required to continue to hold their shareholding requirement

  (or their actual shareholding on leaving if lower) for two years after leaving M&S.

STRATEGIC ALIGNMENT OF PAY

The focus at M&S continues to be on transformation, so the measures and targets used in M&S's incentive schemes,specifically those of the PerformanceShare Plan and Annual Bonus Scheme, align with the KPIs and strategic priorities being used across the business. The illustration below demonstrates this strong linkage between the KPIs and strategic priorities with executiveremuneration. This strength of alignmentwill enable the Committee to ensurepay arrangements help to accelerate transformation and fulfill M&S's potentialfor long-term sustainable profitable growth, despite the prolonged impact of Covid-19 in the current trading environment and likely subsequentfinancial performance.

The Committee will continue to thoroughly review the pay structures and incentive arrangements for the senior leadership team to ensure strongalignment between the delivery of business performance and the associatedremuneration arrangements as thebusiness continues along this acceleratedtransformation journey to emerge stronger and more competitive.

STRATEGIC ALIGNMENT OF REMUNERATION FRAMEWORK WITH KPIS

Annual BonusKPI/Strategic Priority

As measured byPerformance Share Plan (PSP)

Scheme (ABS)

(when operating)

KPI

Adjusted Earnings Per Share (EPS)

Financial Results

SeeKPIson p26

Return On Capital Employed (ROCE)

Group PBT Before Adjusting Items (PBT)

Strategic Priority

See

What we are learning from the crisisWhat will never be the same againAccelerating the transformation programme

Strategic Prioritieson p7

2019/20 PERFORMANCE

ADJUSTED EARNINGS PER SHARE

RETURN ON CAPITAL EMPLOYED

GROUP PBT BEFORE ADJUSTING ITEMS

16.7p

12.7%

£403.1m

Adjusted EPS in 2019/20 was 16.7p. This was below the 26.8p threshold required for any vesting under this element of the 2017 PSP award.

Average three-year ROCE performance was 12.7%. As a result, 11.2% out of a maximum of 33% of the

Group PBT was below the threshold for bonus payments to be made under the

2017 PSP will vest under this element.

2019/20 Annual Bonus Scheme.

CONTEXT OF BUSINESS PERFORMANCE

During the year, M&S made goodprogress in further implementing its transformation. With improvementsmade to range, value and customer communication, the Food businessoutperformed the market and improved its financial performance in several aspects such as sales and operating profit.

In addition, significant strides were taken to deliver the strategy to bring M&S foodonline via the investment in Ocado Retail Limited. While several Clothing & Home departments improved theirperformance, ultimately total revenue for this area of the business was down.

As referenced earlier in this AnnualReport, the impact of Covid-19 has been significant. In the short-term, M&S hasresponded rapidly to the changing trading landscape making financial decisions tosecure the future of the business. In the long-term the business must, as described earlier in this Annual Report, harness thelearnings from this crisis to return M&S toprofitable, sustainable performance.

As demonstrated on page 68 andreferenced throughout this RemunerationReport, there is a strong alignment between M&S's key financial performanceindicators and the measures within the directors' incentive schemes. The inclusion of strategic measures within thelong-term incentive award, allows theCommittee to drive the delivery of M&S's transformation while supporting thelearnings taken from this global crisis.

As shown earlier in this Annual Report, while there were some financial improvements within the business,this did not translate to improvements in the core key performance indicatorson page 68. As such, payments under both the Annual Bonus Scheme and

PSP were impacted by M&S's overallperformance during the year.

WIDER WORKFORCE PAY ARRANGEMENTS

The Committee received regular and varied updates during the year relatingto M&S's pay arrangements. In addition tothose already outlined in the Committee'sremit available on the M&S website,detailed discussions ranged from hourly pay for store colleagues to colleague participation in last year's rights issue.

Further, we welcome the collaboration with the Business Involvement Groupat the Committee meeting in receivingdirect feedback on colleagues' views. This dialogue ensures a close link between thepay philosophies at the most senior levelswith those for the broader population.

To demonstrate the Committee's keen interest in wider workforce payarrangements within M&S, we have this year expanded our disclosure on these specific areas; see pages 72 and 73.

As is referenced earlier in this AnnualReport, the business has taken great careto support all colleagues during theCovid-19 pandemic which the Committee and the Board were supportive of. From a pay perspective, these include, but arenot limited to, supporting every colleague needing to either self-isolate or shield themselves to do so on full pay, andrewarding M&S's hardworking frontlinestore and e-commerce distribution colleagues with an additional short-term15% pay award.

SINGLE FIGURE AND INCENTIVE SCHEME OUTCOMES

The graph below summarises the total payments made to executive directors in 2019/20, illustrating the figures detailed inthe single figure chart set out later in thisreport on page 81.

The total pay for the CEO was c.20% lowerthis year, reflecting lower PSP outcomesand the reduction in share price during the year.

The 2017 PSP will vest at 11.2% in June 2020 for the three-year performance period up to 28 March 2020. Page 85 of this reportprovides further detail on the specifics of the targets set and the respectiveachievement under each measure, whichare also summarised in the illustration overleaf. The remit of the Committee is to ensure that targets set are stretchingyet achievable, rewarding the delivery of sustainable, ambitious long-termperformance. Vesting under the PSPremains low when reviewed in the context of the wider market. However, theCommittee is satisfied that this vestingis reflective of the challenging businessperformance Steve Rowe and ArchieNorman have both highlighted earlierin this Annual Report.

SINGLE FIGURE REMUNERATION FOR 2019/20

PERFORMANCE SHARE PLAN (PSP) VESTING 2019

VESTING OUTCOMESIMPACT OF SHARE PRICE CHANGE ON PSP VESTING VALUES

Adjusted EPS

MaximumActual

33.33% 0%

Average ROCE

Maximum33.33%

Actual12.7%

Relative TSR

Maximum33.33%

Actual0%

Outturn

Maximum100%

Actual11.2%

As is shown in the illustration above, a significant proportion of a director's reward is linked to the movement in share price, providing significant investment in the Company and strong long-termalignment with shareholders

Value at grant share price

Value at vesting share price

(£3.28)

(£1.65)

See Performance Share Planon p84-p85

The 2019/20 Annual Bonus Scheme was focused on restoring the business to profitable growth. Annual performancefor the year was again focused on GroupPBT before adjusting items (PBT) withindividual measures set against the key areas of delivery deemed most critical to the transformation journey. As withprevious years, individual performancewas measured independently of

PBT performance, but, mirroring arrangements elsewhere in the business, no individual element could be earneduntil the threshold needed to securepayment under the PBT element wassimilarly achieved. For the 2019/20financial year, the PBT achievement of £403.1m was below the threshold to trigger a bonus payment and so no bonus was paid under the Annual Bonus Scheme to anyone within the organisation, including the executive directors.

However, in order to ensure continuedstrong governance and transparentreporting to shareholders, and in line with the normal processes, the Committeediscussed each director's achievement against the relevant individual performance targets. Final achievementagainst these individual objectives is detailed on page 83 of this report.

The Committee is satisfied that incentivepayments made to executive directorsduring the year are appropriate in thecontext of business performance for2019/20 and payments made elsewherein the business. The Remuneration Policyoperated as intended so no changes to outcomes were necessary.

PAY ARRANGEMENTS FOR 2020/21

When reviewing salary levels, the Committee considers a number of internal and external factors, primarily the salaryreview principles applied to the rest ofthe organisation, but also Company performance during the year and externalmarket data. As a result of performance in the year and the unprecedented impact ofthe Covid-19 pandemic, it was decided notto implement any salary increases in the wider organisation and the Committeedecided that it would be appropriate to freeze Steve Rowe's salary. As detailed within this report, the Committee made the recommendation, and Steve agreed, that over the next three years the CEO pension supplement would be reduced to zero. While the intended structure of the Annual Bonus Scheme, as detailed on page 75 in the Policy table, remains