Insurance Australia : Remuneration overview (67.3 KB)

REMUNERATION

Letter from the Chairman of the People and Remuneration Committee

Dear Shareholders,

On behalf of the People and Remuneration Committee (PARC) and the Board, I am pleased to present the 2022 Remuneration Report.

Responding to your feedback

The Board and PARC are determined to ensure that executive remuneration continues to be aligned with IAG's business strategy, the market and most importantly, shareholder outcomes.

The first 'strike' against our Remuneration Report last year sent us strong and clear feedback on executive remuneration outcomes, and the principles that guided our decision making. As

a Board, we reflected deeply on this feedback, and we have made changes to ensure executive remuneration outcomes are more closely aligned with shareholder outcomes.

The changes reflect the work of the external review of IAG's remuneration framework that we flagged last year. They were further guided by a PARC

led working group that considered underlying structural issues and proposed changes. These are intended to:

• ensure greater alignment between shareholder outcomes and executive remuneration outcomes;
• introduce a simpler approach to performance measurement and some aspects of remuneration; and
• be more transparent around the process, including how we make remuneration decisions.

While the changes to our remuneration framework will be fully implemented for FY23 onwards, we applied a number of the key new shareholder alignment performance measures for FY22. These include replacing cash earnings with Net Profit After Tax (NPAT) before amortisation of acquired intangibles (NPAT before amortisation) as the measure to determine Short Term Incentive (STI) pool funding.

The elements of the Group Balanced Scorecard (Group BSC) were set at the commencement of the performance year prior to the AGM and as result are unchanged for FY22 but have been replaced by a more strategically-focused BSC for FY23.

At the same time, we are conscious of the need to appropriately reward our employees, particularly given the challenges they have had to address this year as a result of the number and degree

of weather events, and the ongoing challenge of COVID-19.

What is changing?

Greater alignment

As an overarching principle, all one-off unusual items, or financial statement adjustments during the performance period will be included when we determine outcomes for STI or Long-Term Incentive (LTI) Return on Equity (ROE) hurdles.

We have established earnings calculation principles the Board uses when it considers whether adjustments to incentive outcomes are required to help ensure any discretion exercised is also aligned with shareholder outcomes, and considers market, community, and regulator expectations. The principles support transparent disclosure

of the rationale in cases where discretion has been applied.

A simplified approach

We have simplified the Group BSC we will use to determine the STI for FY23. We use the Group BSC to align the organisation to delivering the outcomes outlined in our 5-year strategy and ambition.

To make it more effective, the weighting on financial measures in the Group BSC will increase from 50% to 60%, and we will have two financial measures, being underlying insurance profit to reflect the quality of earnings, and NPAT, because this is a true and unadjusted representation of statutory profit / earnings in the period and more closely aligns to the shareholder experience.

We have also reduced the total number of measures in the Group BSC from eight to six, and each measure has a direct link to one of the four strategy pillars. Non-financial measures will support customer growth above market growth; digital transformation; risk management; and performance underpinned by employee engagement. Details are set out in Section D I. We will continue to review the Group BSC measures to ensure they support the execution of our strategy.

The Board has committed to introduce ESG metrics into executive incentive arrangements for FY24 and is working through the approach.

Transparency

To improve the transparency of our STI financial targets and outcomes, we have begun to disclose these in the 2022 Remuneration Report. We have also disclosed additional detail on the determination of the STI pool, the earnings calculation and Board decision-making processes.

Alignment of remuneration outcomes with business results

The business delivered strong gross written premium growth of 5.7% and improved its underlying business performance despite the challenging external environment which included an unprecedented level of natural perils claims and volatile investment markets.

NPAT was $347 million, compared to a $427 million loss in FY21. The result incorporates strengthening of prior period reserves, a high number of natural peril events, volatile investment markets, and a higher inflationary environment. NPAT also included a $200 million pre-tax release from the business interruption provision, and strong momentum in the underlying business performance.

On a management results basis, our reported insurance profit of $586 million represented a reported insurance margin of 7.4%, compared to 13.5% in FY21 after net natural peril costs of $1,119 million ($354 million above our original allowance); prior period reserve strengthening of $172 million; and negative credit spread impacts of $45 million.

FY22 short term incentives (STI) outcomes

The Board determined it was appropriate to establish an Executive STI pool for FY22 at 20% of maximum, representing 33% of target payout. In making this decision, the Board recognised the strength of the overall balanced scorecard outcome. However, the Board used the NPAT before amortisation result as the key factor in determining the size of the STI pool to closely align executive remuneration outcomes with shareholder outcomes.

The NPAT before amortisation result used to determine STI outcomes excluded the

$200m pre-tax benefit associated with the reversal of a portion of the Business Interruption provision. The adjusted FY22 NPAT before amortisation result of $214m (which was 33% of target) was significantly affected by the high level of natural peril claims, volatile investment markets and strengthening of prior period reserves.

Each Executive's share of the STI pool was determined based on an assessment of their performance against Group and Divisional scorecards. In line with the size of the Executive STI pool, the Group CEO STI outcome was 20% of maximum, with the outcome for other Executives ranging from 17% to 22%.

LTI relating to performance periods ending in FY22

The FY18 LTI award with a relative total shareholder return (TSR) performance hurdle was measured during the year ended 30 June 2022 following

the conclusion of the performance period on

30 September 2021. The FY19 LTI awards with cash ROE and relative TSR performance hurdles were measured at the end of the 30 June 2022 performance period.

Both the FY18 TSR LTI award and the FY19 TSR LTI awards did not meet the performance threshold and as a result there has been nil vesting of these awards.

We included all FY21 and FY22 one-off items in the cash Return on Equity (ROE) calculation for the FY19 LTI award with a performance period ending 30 June 2022; this resulted in nil vesting for that tranche.

We will replace cash ROE with reported ROE for the LTI to be granted in November 2022 (FY23 award), using a simple and transparent reported ROE measurement approach that is explained in detail in Section E III.

As in past years, the Managing Director and CEO's LTI grant will be subject to shareholder approval at the AGM.

Risk based adjustments to performance pay

In response to risk matters that emerged during FY22, the Board applied downward adjustments to reduce the FY22 STI awards of three employees and the accountable executive.

Changes to Executive pay and Non Executive Director fees

There were no increases to Executive pay recommended for FY23 as part of the August 2022 review. Likewise, the Board has left Board and Committee fees unchanged for the year ending 30 June 2023; these have now been unchanged since the year ended 30 June 2017.

Executive remuneration review during FY23

It is important that we continue to attract, motivate, and reward executives for their work, and we acknowledge the improved underlying performance of the business, which is reflected in the improved outlook that management has provided for FY23.

From FY23, we will more closely link STI outcomes to progress in the four strategic ambitions to ensure executives are motivated to drive IAG's long-term aspirational goals.

We will maintain our focus on aligning executive and shareholder outcomes. At the same time, we will ensure our remuneration framework is fit-for- purpose and complies with regulatory changes such as APRA Prudential Standard CPS511 as they become effective.

Thank you for taking the time to read the Remuneration Report and we welcome your feedback.

George Savvides

Chairman, People and Remuneration Committee

26	Annual Review and Sustainability Report 2022

Actual remuneration received by Executives

The table below presents remuneration paid or vested for Executive KMP in relation to FY22 which includes:

• Fixed Pay and other benefits paid during the financial year;
• the value of cash STI awards earned in relation to the financial year;
• the value of STI deferred from previous years that vested during the financial year; and
• the value of LTI awarded in previous years that has been tested since the publication of the last Remuneration Report.

The LTI values presented exclude the value of LTI awards granted during FY22. There were no increases to Executive pay for FY23 as part of the August 2022 review.

For remuneration details provided in accordance with the Australian Accounting Standards, refer to Section H.

			Other
			benefits					Total actual
	Financial		and leave	Termination		Deferred STI		remuneration
	year	Fixed pay1	accruals2	benefits	Cash STI3	vested4	LTI vested5	received
Executives		$000	$000	$000	$000	$000	$000	$000
Nick Hawkins1	2022	1,763	83	-	264	162	-	2,272
2021	1,465	109	-	634	272	-	2,480
Julie Batch	2022	900	4	-	119	91	-	1,114
2021	875	4	-	327	148	-	1,354
Jarrod Hill6	2022	721	386	-	74	-	-	1,181
Peter Horton7	2022	900	61	-	79	210	-	1,250
Michelle McPherson1	2022	845	15	-	99	319	-	1,278
2021	817	509	-	286	-	-	1,612
Neil Morgan8	2022	880	50	-	116	96	-	1,142
2021	658	35	-	252	-	-	945
Tim Plant6	2022	534	367	-	71	-	-	972
Christine Stasi1	2022	788	23	-	104	135	-	1,050
2021	750	36	-	280	129	-	1,195
Peter Taylor6	2022	107	7	-	-	-	-	114
Amanda Whiting8,9	2022	802	137	-	94	23	-	1,056
2021	478	21	-	168	-	-	667
Former Executive KMP
David Watts1, 10	2022	575	16	-	-	59	-	650
2021	875	34	-	224	331	-	1,464

1. Fixed Pay includes amounts paid in cash, superannuation contributions plus the portion of IAG's superannuation contribution that is paid as cash instead of being paid into superannuation. Fixed Pay also includes salary sacrifice items such as cars and parking as determined in accordance with AASB 119 Employee Benefits. In September 2021, Nick Hawkins, Michelle McPherson, Christine Stasi and David Watts received increases to their Fixed Pay following external benchmarking of their roles as referenced in the
   2021 Remuneration Report. Amounts paid to Nick Hawkins in 2021 reflect remuneration in his role as Deputy Chief Executive Officer from 8 April 2020 to 1 November 2020 and remuneration as the Managing Director and Chief Executive Officer role from 2 November 2020.
2. Further details are provided in Section H.
3. Cash STI earned within the year ended 30 June 2022, to be paid in September 2022 (representing 50% of the award made for the financial year).
4. Deferred STI vesting on 13 August 2021 was valued using the five day VWAP of $5.28. Deferred STI vesting on 11 August 2020 was valued using the five day VWAP of $5.28.
5. LTI in FY22 includes FY18 TSR hurdled tranche of LTI that reached the end of its performance period in September 2021 (nil vesting) as well as the FY19 LTI which reached the end of its performance period on 30 June 2022 (nil vesting). This allows for consistent reporting of all STI and LTI awards that had a performance period ending 30 June 2022. The FY19 award which will vest on 16 August 2022 and has been valued using the five day VWAP of $4.38 on 30 June 2022 (11 August 2020: $5.06) (nil vesting). The FY21 prior year comparatives have been restated to be consistent with the current year presentation. Only Nick Hawkins and Julie Batch had amounts included in the LTI vested column in 2021 and the amounts disclosed were $469,000 and $274,000 respectively. Should the treatment in 2022 have remained consistent with prior year, the current year would have shown a $0 balance for all KMP who held FY19 LTI awards.
6. Remuneration reflects part year service for Jarrod Hill (from 13 September 2021), Tim Plant (from 15 November 2021) and Peter Taylor (from 18 May 2022).
7. Prior year remuneration amounts are not shown for Peter Horton as he became Executive KMP from 1 July 2021.
8. Amounts paid in 2021 for Neil Morgan and Amanda Whiting reflect part year remuneration for time in Executive KMP roles during FY21.
9. Remuneration for Amanda Whiting was determined in New Zealand dollars (NZD) and reported in Australian dollars (AUD) using the average exchange rate for the year ended 30 June 2022 which was 1 NZD = 0.93752 AUD.
10. David Watts ceased as Executive KMP on 11 February 2022. Remuneration reflects part year service.

Full details of IAG's remuneration framework and FY22 outcomes are contained in the remuneration report on pages 29 - 53 of the Annual Report 2022. Non-Executive Director statutory remuneration is presented on page 50.

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