Marks and Spencer : Remuneration 2021

Andrew Fisher, Chair of the Remuneration Committee

REMUNERATION

REMUNERATION OVERVIEW

"Retail at its heart is a people business. The Committee takes a keen interest in all colleague pay arrangements to ensure fairness and appropriateness of pay principles"across the business.

IN THIS SECTION

REMUNERATION

Remuneration overview p84-87 Remuneration in context p88-89 Summary Remuneration Policy p90-93

ANNUAL REPORT ON

REMUNERATION

Remuneration structure p94

Total single figure remuneration p94 Salary and benefits p95

Annual Bonus Scheme p96-97 Performance Share Plan p97-98 Directors' share interests p99-100 Changes to Board membership p102

Non-executive directors' remuneration p102

Remuneration Committee remit p104

INTRODUCTION

On behalf of the Board, I am pleased to present our 2020/21 Remuneration Report.

The Remuneration Report provides a comprehensive picture of the structure and 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 for this year and the intended arrangements for 2021/22.

IMPACT OF COVID-19 ON REMUNERATION ARRANGEMENTS

As highlighted in last year's report, the Committee applied robust and proactive discretion to the 2020/21 application of the Remuneration Policy. This took the form of cancelling the bonus scheme for the year and mitigating against the risk of windfall gains in Performance Share Plan (PSP) outcomes by significantly reducing the grant level for the year. In addition, and with shareholders' support, target setting for the PSP award was delayed until December 2020 to ensure, as best as possible, that specific metrics were challenging but achievable following the significant impact of the pandemic.

The Committee remains focused on ensuring flexibility in pay structures allowing for appropriate reward and recognition of executives, balanced against shareholder interests and uncertain external influences. As detailed earlier in this Annual Report, the events of the past year have had a marked impact on customer behaviours, M&S's trading results and the delivery of the transformation. The transformation plan has been turbocharged and a reshaped business has been forged from the pandemic. As such, the Committee reflected on the appropriateness of the executive pay framework. It concluded that there remains sufficient flexibility in the current structures and metrics and alignment with the business plans to motivate and reward strong performance at both the Group and individual level.

Following continued dialogue and engagement with shareholders, the Committee has agreed to reinstate in full the incentive arrangement policies previously approved by shareholders. For 2021/22, executive directors will, subject to the satisfaction of challenging performance conditions, be eligible to receive a bonus payment of up to 200% of salary (split equally between cash and deferred shares) and a PSP award of

the typical level, 250% of salary. The Committee believes that this approach is appropriate when retention and motivation of the senior leadership team remains critical. In approving this decision, the Committee carefully considered how to appropriately reward executives where a successful Covid-19 recovery performance would be in the best interests of shareholders and 70,000 M&S colleagues. Further details of the specifics of these incentives are detailed on pages 96 to 98 of this report.

SHAREHOLDER ENGAGEMENT AND FEEDBACK

As referenced earlier, the setting of performance targets for the 2020 PSP award was delayed to allow the business time to assess the initial impact of Covid-19 on the business and to review the proposed strategic measures in light of the business's response to the post- pandemic trading environment. Ahead of confirmation, the Committee consulted with our major shareholders (representing almost 50% of total shares in issue) and shareholder representative bodies to discuss the proposed strategic measures and targets.

This dialogue followed engagement at the end of the last financial year confirming the proposed approach to delaying the targets and the weightings of performance measures. As a result of this ongoing process of consultation and adjustments made to the proposed measures and weightings disclosed in last year's report, no further adjustments to the proposed targets and strategic measures were made. Shareholders were positive in their feedback and we thank them for their continued support.

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The Committee, represented by the Chair, confirmed that targets set will support the business over the remaining performance period and are aligned with investor expectations. The measures and targets for the 2020 PSP awards are detailed on page 97 of this report.

In addition, to explicitly support key areas of transformation delivery, the Committee with the support of its shareholders, introduced a basket of strategic measures comprising 20% of the total award. Metrics in this basket include digital growth and food sales targets aligned with financial plans and the provision of a better customer experience in stores as a result of the delivery of the strategic measures. There will be no associated payment for threshold performance levels. The Committee is clear that the delivery of these measures is vital to M&S's future success; reward for partial achievement is

not considered appropriate. While shareholders acknowledged that a cliff-edge vesting for measures is unusual, they recognised the clear message being sent by the Committee and welcomed the simplicity of these key targets. Balanced against the remaining 80% of the performance targets being measured on a sliding scale, no significant issues were raised during consultation.

STRATEGIC ALIGNMENT OF PAY

The Covid-19 pandemic has increased focus at M&S on transformation, with a view to never being the same again.

The measures and targets used in M&S's incentive schemes, namely those of the Performance Share Plan and Annual Bonus Scheme, were reviewed again during the year to ensure alignment with the key performance indictors (KPIs) and strategic

priorities being used across the business. The illustration below demonstrates this strong linkage between the KPIs and strategic priorities with executive remuneration at M&S. This strength of alignment will enable the Committee to ensure pay arrangements help to deliver transformation and fulfil M&S's potential for long-term sustainable growth.

The Committee will continue to thoroughly review the pay structures and incentive arrangements for the senior leadership team to ensure strong alignment between the delivery of business performance and the associated remuneration arrangements, as the business continues along this accelerated transformation journey to emerge stronger and more competitive.

STRATEGIC ALIGNMENT OF REMUNERATION FRAMEWORK WITH KPIS

								Performance	Annual Bonus
		KPI/Strategic priority		As measured by		Share Plan (PSP)	Scheme (ABS)
		KPI		Adjusted earnings per share (EPS)
		See KPIs		Return on capital employed (ROCE)	Financial Results
		on p37
			Group PBT before adjusting items (PBT)
		Strategic		Food with Ocado re-positioned for growth
		priority
		Delivering a reshaped and increasingly
		See		omni-channel Clothing & Home business	Achievement
		Strategic		Accelerating the rotation of the Store Estate	against objectives
		priorities
			An International business focused on major
		on p7
				partnerships and online growth
					2020/21 PERFORMANCE
		ADJUSTED EARNINGS PER SHARE	RETURN ON CAPITAL EMPLOYED	GROUP PBT BEFORE ADJUSTING ITEMS
			1.1p	9.3%	£41.6m
		Adjusted EPS in 2020/21 was 1.1p. This was	Average three-year ROCE performance was 9.3%.	As reported in the 2019/20 Directors' Remuneration
		below the 26.9p threshold required for any vesting	This was below the required 11.1% threshold for any	Report, as a result of performance in the prior
		under this element of the 2018 PSP award.	vesting under this element of the 2018 PSP award.	year and the unprecedented impact of the
							Covid-19 pandemic, the Committee decided that
							for 2020/21 only, there would be no bonus scheme
							in operation for the executive directors.

USE OF DISCRETION

GOVERNANCE

To ensure that pay outcomes appropriately reflect individual and business performance, together with the wider economic and societal climate, the Committee has overriding discretions on directors' pay in addition to the ability to apply malus, clawback and responsible application of discretion to override formulaic outcomes of the incentive schemes.

During the year, the Committee did not apply any discretion to the variable pay outcomes of the bonus and PSP. The Committee agreed that the final vesting of the 2018 PSP was reflective of the last three years of M&S's performance and that the Policy operated as intended.

As was disclosed in last year's report, the Committee applied its discretion to cancel the operation of the 2020/21 directors' bonus scheme. The quantum of PSP grants were also significantly reduced, reflecting the Committee's pro-active decision to mitigate against future windfall profits on vesting in view of the impact of Covid-19 on the share price at the time of grant.

Annual Report & Financial Statements 2021

85

REMUNERATION OVERVIEW CONTINUED

WIDER WORKFORCE PAY ARRANGEMENTS

The Committee received regular and varied updates during the year relating to M&S pay arrangements. In addition to those already outlined in the Committee's remit, detailed discussions ranged from hourly pay for store colleagues, the review of the pay and benefits package which was undertaken during the year, to approving an increase in the Save As You Earn share scheme savings limit based on colleague participation levels in prior years.

The Committee welcomes the collaboration with the Business Involvement Group (BIG) in receiving direct feedback on colleagues' views in formal meetings. This dialogue ensures a close link between the pay philosophies at

the most senior levels with those for the broader population and understanding at a colleague level any pay concerns and questions raised.

To demonstrate the Committee's keen interest in wider workforce pay arrangements within M&S, we have this year expanded disclosure on these specific areas; see pages 88 and 89.

As referenced earlier in this Annual Report, the business has taken great care to support all colleagues during the Covid-19 pandemic, which the Committee and the Board were supportive of. From a pay perspective, these have included supporting every colleague either to self-isolate or shield themselves to do so

on full pay; paying full pay for those lower-paid colleagues placed on furlough; and rewarding hardworking front-line store and e-commerce distribution colleagues with an additional short-term 15% supplementary payment.

For the financial year 2021/22 the hourly rate for customer assistants increased by 5.6% to £9.50 an hour, compared with a 1% increase for the CEO. Between 2016 and 2021 the hourly rate paid to customer assistants has increased by 24% and over the same period the increase in base salary for the CEO has totalled 4%, as illustrated in the charts below.

Customer assistant hourly rate progression	Percentage change in pay for customer assistants
	and the CEO

£10.00					Customer	%
					Assistant	130
£9.50					hourly rate
				changes	125
£9.00					CEO base	120
				salary
					changes	115
£8.50
						110
£8.00						105
£7.50						100
£7.00						95
2016/17	2017/18	2018/19	2019/20	2020/21	2021/22	2016/17	2017/18	2018/19	2019/20 2020/21	2021/22

SINGLE FIGURE AND INCENTIVE SCHEME OUTCOMES

As is shown in the table on page 94, the total pay for the CEO was c.11% lower this year, reflecting the lapse in full of the 2018 PSP award. Payments made to the CFO reflect the annual contractual remuneration payments since his employment on 8 June together with the specific arrangements made to facilitate his recruitment. Further details are provided on page 94.

None of the 2018 PSP will vest in respect of the three-year performance period up to 3 April 2021. Page 98 of this report provides further detail on the specifics of the targets set and the respective achievement under each measure. The remit of the Committee is to ensure that targets set are stretching yet achievable, rewarding the delivery of sustainable, ambitious long-term performance. Vesting under the PSP remains low when reviewed in the context of the wider market. However, the Committee is satisfied that this level of vesting is reflective of the challenging business

environment Steve Rowe and Archie Norman have both highlighted earlier in this Annual Report.

As previously disclosed, the 2020/21 Annual Bonus Scheme was not operated for executive directors. To ensure continued strong governance and transparent reporting to shareholders, and in line with the normal Committee processes, executive directors continued to be measured against a scorecard of individual objectives aligned with the strategic priorities set out earlier in this report. No financial payment will be made in respect of their achievements. The Committee discussed each director's achievement against the relevant individual performance targets and final achievement against these individual objectives and this is detailed on page 96 of this report. In particular, the Committee noted the strong and responsible action taken by Eoin Tonge to strengthen liquidity and preserve cashflow during the pandemic.

Under Steve Rowe's leadership, M&S successfully harnessed the impact of Covid-19, ensuring the turbo charging of the transformation while supporting colleagues through this difficult period.

CEO single figure as a percentage of maximum opportunity

22%

Fixed

PSP

Annual

Bonus

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PAY ARRANGEMENTS FOR 2021/22

When reviewing salary levels, the Committee considers a number of internal and external factors, primarily the salary review principles applied to the rest of the organisation, but also Company performance during the year and external market data. As a result of performance in the year and the considerable effort and resilience shown by colleagues across the wider organisation, despite the impact of the Covid-19 pandemic, it was decided to implement salary increases in the wider organisation of between 1% and 5.6%. The Committee agreed to award a salary increase of 1% to the executive directors. This increase is aligned to the increase awarded to other management colleagues.

As already referenced, the Annual Bonus Scheme will resume operation for 2021/22 as per the shareholder approved Policy.

Performance will once again be measured against corporate financial targets (currently 70%) and individual objectives (30%). The Committee believes it remains appropriate for PBT to continue to represent the largest element of bonus potential as M&S seeks to return to significant levels of profitability. The maximum opportunity will remain at 200% of base salary.

The Committee continues to ensure that the remuneration framework for executives is aligned with shareholder interests. This means fully aligning performance measures used in the incentive schemes with the business strategy and setting targets which are stretching and yet motivating for directors. It is proposed that the 2021 PSP will maintain measures applied to the 2020 PSP awards, being 30% adjusted EPS, 30% ROCE, 20% relative TSR and 20% strategic measures. Given the continuing uncertainty of the impact of the pandemic on macroeconomic factors, the Committee has again delayed the setting of PSP targets. Targets will be disclosed by 31 December 2021 and will be discussed with shareholders prior to confirmation. Any targets proposed will be set with reference to estimated outturn, the business's long-term financial plans, consensus and brokers' forecasts to ensure they are appropriately stretching with maximum payments only possible for significant outperformance of expectations.

Having reduced award levels in 2020 to acknowledge the shareholder experience of Covid-19 and to mitigate against windfall gains, the Committee believes, in light of the return of the share price to pre-pandemic levels, it is appropriate to incentivise executives and ensure that they remain aligned with shareholders' long-term interests. It is therefore intended to grant PSP awards of 250% of salary in June 2021 to executive directors. In determining the size of the 2021 PSP awards, the Committee noted that as a result of the share price recovery over the last 12 months, fewer shares would be awarded than in 2020. Further details are set out on page 98.

SHAREHOLDING AGAINST

SHAREHOLDING GUIDELINES

The Committee is aware that an executive's level of shareholding is one of the measures used by investors to determine the alignment of interests between shareholders and directors. While the CEO has not reached the targeted level of shareholding within five years of his appointment to the role, the Committee is satisfied that this does not reflect Steve Rowe's life-long commitment to M&S. Rather, this is a consequence

of the challenging targets set by the business in its incentive arrangements. The Committee recognises that the CEO demonstrably continues to make sound decisions in the best interests of M&S shareholders and colleagues, including the voluntary reduction in his contractual pension arrangements that was reported last year. That said, the Committee continues to keep a watching brief on executives' shareholdings against targets to ensure that their attentions are focused on the delivery of a positive shareholder experience. The decisions implemented for 2021/22 incentive arrangements

will help to provide an opportunity for an increase in shareholdings, subject to achievement of associated performance targets.

LOOKING AHEAD

Looking to the future, the Committee intends to continue to review M&S's pay policies, ensuring appropriate alignment between executive pay arrangements and the wider workforce with a focus on flexibility of reward and recognition in uncertain times while maintaining fundamental M&S values of fairness and value for money. The Committee will continue to carefully monitor the pay frameworks at the most senior levels and the organisation's incentive arrangements with a focus on M&S being an employer of choice where hard work and financial results are appropriately recognised and rewarded.

As is detailed later in this report on page 104, the Committee intends to also discuss senior succession planning and the link between Plan A and executive reward, ensuring that solid foundations are in place to nurture and develop the leaders of the future, as M&S plans for long-term financial and environmental, social and governance (ESG) success.

On behalf of the Remuneration Committee, I would like to thank our shareholders for their continued support and open dialogue during this challenging year.

Andrew Fisher, Chair of the

Remuneration Committee

GOVERNANCE

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REMUNERATION

REMUNERATION

IN CONTEXT

COLLEAGUE ENGAGEMENT

• Share ownership across our colleagues: M&S is a proud advocate of employee share ownership. The Board believes that this supports colleagues to not only share in M&S's success but also to behave as owners of our business, aligned with our shareholders' interests. Across our UK and Irish colleagues, M&S has a significant number of participants in all employee share schemes; colleagues hold over 120m SAYE options in our ShareSave scheme and over 3,000 colleagues hold shares in our Share Incentive Plan ShareBuy. During the year, the Board approved an increase to the monthly savings limit for the 2020 ShareSave scheme, from £250 to £500. Over 67% of colleagues benefiting from the increased limits are our front-linecolleagues.

• Direct engagement with our colleagues: Since 2018, the Chair of the National Business Involvement Group (BIG), our colleague representative body, is invited to attend a Remuneration Committee meeting each year to engage and contribute on a range of topics and activities. During the year, representatives from BIG have been engaged on a number of pay-relatedtopics, beyond the executive level, including encouraging colleagues to participate in the review of our pay and benefits package; and providing feedback and support on increasing the monthly savings limit for our ShareSave scheme. The collaborative relationship that we have with BIG strongly reflects our belief in the key role that BIG plays in ensuring that the Committee has greater visibility of the

things that really matter to our colleagues. This also gives the Committee the opportunity to explain and discuss our pay practices and how executive pay aligns with pay across the wider workforce. In addition, the Head of Executive Reward & Pay Governance provides updates to the Committee as appropriate on pay and people-related issues during the year.

• Pay budgets: Under the remit of the Remuneration Committee, total budgeted salary expenditure across M&S for salary review is noted, as are bonus and share scheme budgets ensuring principles for reward allocation are aligned across the full workforce, inclusive of senior leaders.

CONSIDERATION OF COLLEAGUE PAY

The Committee monitors and reviews the effectiveness of the executive reward policy and its impact and compatibility with remuneration policies in the wider workforce. Throughout the year, the Committee reviews the frameworks and budgets for key components of colleague pay arrangements, together with the broader structure of Group bonus provisions, which ensures appropriate alignment with senior pay arrangements.

The Committee is provided throughout the year with information detailing pay in the wider workforce, which gives additional context for the Committee to make informed decisions. The Head of Executive Reward & Pay Governance advises the Committee of the approach which will be adopted with the forthcoming UK pay review and

the Committee then considers the executive directors' pay in line with these arrangements.

In approving the budget for the annual bonus, the Committee reviews all bonus costs for the Company against the operating plan. The Committee also reviews and approves any PSP awards made to executive directors and directors below the Board prior to their grant.

The Committee receives updates on a variety of colleague engagement initiatives. During the year, we moved away from an annual survey to more 'in the moment' direct feedback. The new monthly digital colleague pulse tracks colleague sentiment throughout the year.

This year, a thorough review of M&S's total reward proposition was carried out and all colleagues were asked to give their views on the current reward package and to highlight what really matters to them both now and for the future. Over 14,000 colleagues provided their views. Results were presented to the Remuneration Committee which discussed findings and the proposed policy updates as a result of colleagues' feedback.

Colleagues are encouraged to raise questions at the periodic all-colleague announcements led by the CEO. All questions raised at this time are answered, and comments made during the year through surveys or our network of elected colleague representatives via BIG are considered. The Head of Executive Reward

• Pay Governance typically provides an annual update to these colleague representatives with an explanation of the executive directors' pay arrangements during the year, and they are able to ask questions on the arrangements and their fit with the other reward policies
  at this time.

CONSIDERATION OF

STAKEHOLDER VIEWS

The Committee is committed to an open and transparent dialogue with shareholders on the issue of executive remuneration. Where appropriate, the Committee will actively engage with shareholders and shareholder representative bodies, seeking views which may be considered when making any decisions about changes to the directors' Remuneration Policy.

The Committee seeks the views of the largest shareholders individually and others through shareholder representative bodies when considering making any significant changes to the Remuneration Policy; this may be done annually or on an ad hoc basis, dependent upon the issue. This year, the Committee consulted on the proposed strategic measures and targets to be applied to the PSP. The Committee, led by the Chair, annually engages in a process of investor consultation, which is typically in written format, but has included face-to-face meetings, telephone or video calls.

The Committee Chair is available to answer questions at the AGM and the answers to specific questions are posted on our website.

As part of our socially responsible reporting strategy, an annual shareholder meeting is normally held and the consideration of views on a variety

of topics, including executive pay, is taken into account.

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