Christopher Richards

Christopher Richards

Remuneration Committee Chairman

Dear Shareholder

On behalf of the Board, I am pleased to present the Directors' Remuneration Report for the year ended 30 June 2015.

The Directors' Remuneration Report is divided into two sections: the Annual Report on Remuneration followed by an abbreviated form of the Directors' Remuneration Policy. The Annual Report on Remuneration provides details of the amounts earned in respect of the year ended 30 June 2015 and how the Directors' Remuneration Policy will be implemented in the year commenced 1 July 2015. The Directors' Remuneration Report (excluding the Directors' Remuneration Policy) will be subject to an advisory vote at the 2015 Annual General Meeting.

Our Directors' Remuneration Policy

The Directors' Remuneration Policy was approved by shareholders at the Annual General Meeting held on 24 October 2014, with 98.32% of all votes cast in favour, and will remain in force until 2017. We review the application of the Policy regularly, to ensure it remains appropriate, linked to strategy and reflective of developing market practices; there have been no changes to the Policy since its approval.

The performance metrics for the bonus and LTIP Awards for 2016 are set out in the Directors' Remuneration Report. In previous years, we have conducted the annual review of Executive Directors' salaries in June. However, we are now moving these reviews to September, for all employees, to improve alignment with the annual performance development review calendar. This will allow us to enhance the link between performance and reward for all employees. It is our expectation that any revisions to Executive Directors' salaries for 2016 will be in line with the range of increases awarded to the wider workforce.

The Link between our Directors' Remuneration Policy and our Strategy

Dechra's Policy is designed to promote the long term success of the Group and to reward the creation of long term value for shareholders. The performance targets for all incentive elements are set to reward high performance whilst not encouraging inappropriate business risks.

The table below describes how certain remuneration elements are linked to our strategy.

Remuneration ElementStrategic
Pillar and Enabler
Link to our Key Performance Indicators

Annual Bonus
Our annual bonus rewards key executives by reference to short term financial metrics (based on profit) and personal objectives, which are designed to incentivise the delivery of the long term strategy through the short term objectives.

The use of a profit measure in the annual bonus focuses executives on the delivery of strong financial performance to generate the profit growth which is a key strategic priority of our pipeline delivery and portfolio focus. The annual bonus has a stretching profit target which requires performance above budget and market expectations to trigger the payment of a maximum bonus.

Part of the bonus is based on the achievement of personal objectives. These personal objectives are set at the beginning of each financial year and reflect the corporate, financial, strategic and other non-financial priorities of the business, achievement of which is necessary to deliver the longer term strategy. During the year the Executive Directors were set a number of personal objectives, which were linked to the delivery of the four strategic pillars together with leadership development of senior management below the Board and enhanced use of technology within the business to drive efficiency.

Dechra further recognises the importance of being a responsible business leader, with the health and safety of our employees being central to everything we do. Therefore, the Remuneration Committee (the Committee) has discretion to amend any bonus pay-out to take into account wider business considerations including the achievement of the highest standards in respect of our health and safety procedures.

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  • Sales Growth
    Strong sales performance is required to maximise profit
  • Cash Conversion
    Strong cash conversion reduces liquidity risk
  • Lost Time Accident Frequency Rate
    The reduction in accidents is an important consideration in the Committee's assessment of wider business performance for the purposes of any bonus pay-out

Long Term Incentive Plan
The LTIP is designed to reward the generation of long term value for shareholders and to aid the retention of key executives recognising the importance of attracting, retaining and developing a management team of the appropriate calibre. Performance measures are set that reflect our long term objectives including sustainable profit growth and the enhancement of shareholder value.

LTIP Awards are based 50% on the delivery of stretching growth in EPS linking the incentive reward opportunity to the longer term profitability of the business, which should encourage innovation, launch of new products and commercial focus.

The other 50% relates to the delivery of superior shareholder returns compared to companies of a similar size to Dechra, linking the reward opportunity for executives to the generation of long term value for shareholders.

The application of an underpin to LTIP Awards based on ROCE ensures that our executives are focused on using capital efficiently and appropriately to allow the business to seize growth opportunities in new territories and markets whilst maintaining returns.

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  • Underlying Diluted EPS Growth
  • Return on Capital Employed
  • New Product Sale
    This measure encourages innovation, growth and sustainability
All Employee Share Plans

It is our aim to make Dechra a great place to work. As part of this, Dechra's remuneration policy for the wider workforce seeks to deliver a competitive package to reward employees for the value they create for shareholders. All UK employees, who represent 39.9% of the entire workforce, may participate in the SAYE Scheme that encourages share ownership and rewards employees in a way which is linked to the increase in shareholder value. The SAYE Scheme also aids retention recognising the need to retain and develop the right talent at all levels to facilitate the high performance culture and stability required to deliver the longer term strategy.

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  • Employee Turnover
    Retention of skilled employees will help grow the business

Generation of Long Term Value for Shareholders/Alignment of Interests
The Directors' Remuneration Policy is designed to promote long term Group success and to reward the generation of shareholder value. In this regard, a significant proportion of the remuneration opportunity is linked to the achievement of stretching performance targets.

The interests of shareholders and executives are aligned by formal shareholding guidelines. Executive Directors are required to have a holding of Dechra shares equivalent to at least 100% of salary by the third anniversary of appointment. Moreover, the Chief Executive Officer and Chief Financial Officer are further expected to build up a holding equivalent to at least 200% and 150% of salary respectively by the fifth anniversary of appointment.

Incentive Outturns in 2015

As a result of the progress in our strategy, we have delivered underlying profit before tax on continuing operations during the year of £45.1 million, an improvement of 13.0% at actual exchange rates on the prior year. Reflecting the performance of the Group in relation to profit targets and the performance of Executive Directors against personal objectives as described in the Directors' Remuneration Report, bonuses for the year equal to 80% of salary have been earned by the Executive Directors.

LTIP Awards were granted to Ian Page and Tony Griffin in March 2013 and vested by reference to performance over the three year period ended 30 June 2015. Each Award was subject to a total shareholder return (TSR) performance condition as regards to 50% of the Award and an Earnings per Share (EPS) performance condition as regards to 50% of the Award, with an underpin based on Return on Capital Employed (ROCE) applying to each element. As disclosed in the Directors' Remuneration Report, the Awards granted in March 2013 are due to vest in March 2016:

  • as to 87.2% of the TSR element (43.6% of the total Award) by reference to TSR performance (reflecting median to upper quartile performance); and
  • as to 98.9% of the underlying diluted EPS element (49.5% of the total Award) by reference to EPS performance (reflecting that the underlying diluted EPS at 39.90 pence was between 33.00 pence and 40.00 pence).

In aggregate, taking into account the ROCE underpin (reflecting that the ROCE at 20.0% had not fallen below 15.0%), the LTIP Awards vested as to 93.1%.

As disclosed in the Directors' Remuneration Report, the second of Anne-Francoise Nesmes' recruitment awards was subject to the same performance conditions and have vested to the same extent.

Application of Malus and Clawback

The Executive Directors' bonus opportunity is subject to a malus provision and, since 2013, LTIP Awards have also been subject to malus provisions. In line with best practice, and reflecting the UK Corporate Governance Code, a clawback provision has been introduced for bonuses earned for 2016 and future years and for LTIP Awards granted in respect of 2016 and future years. The clawback provisions will enable the Committee to recover payments made for up to two years following the date of payment (in the case of the annual bonus) or vesting (in the case of LTIP Awards), in the event of material misstatement in the financial statements or gross misconduct on the part of the participant.

Shareholding Policy

In June 2015, the Shareholding Policy was amended by the Committee to require that the Chief Executive Officer and the Chief Financial Officer should retain shareholdings of 200% and 150% respectively of base salary within five years of appointment.

Shareholder Views

We consult with shareholders on policy and on any significant events and take shareholders' views into account before any decisions are taken. The Committee and I believe that ongoing dialogue with our major shareholders is of key importance. Should you have any queries in relation to this report please do not hesitate to contact me or the Company Secretary.

Dr Christopher Richards
Remuneration Committee Chairman
7 September 2015