Consolidated responses to queries submitted by shareholders for the 21 January 2021 GM

Renewal of the 2020 Melrose Employee Share Plan (the “Plan”)

Since Melrose’s formation in 2003, the executive remuneration structure has been consistent with having lower quartile levels of salary, bonus, pension contributions and other benefits compared to our FTSE100 peers, with the opportunity for greater reward weighted heavily to the long-term incentive arrangements, which pay only for performance and enable management to share in future value creation together with shareholders.  In a remuneration structure that is so heavily weighted to performance driven reward, it is critical that there is a structure in place to facilitate effective management incentivisation, in order for exceptional value creation to continue to be driven for the benefit of all shareholders.

As detailed in the Circular to Shareholders dated 29 December 2020 (the “Circular”), as a direct result of the impact of COVID-19 on the Company’s short and medium term prospects, it was determined in March 2020 that any renewal of the Plan would need to be deferred to a more appropriate time.  Therefore on expiry of the 2017 Plan in May 2020 (which generated no award for management due to the impact of COVID-19), the management team were operating without any long-term incentive arrangements in place.  The Board had determined that it was the appropriate time to make a revised proposal to shareholders for renewal of the Plan, following the publication of the Company’s interim results in September 2020 and trading update in November 2020, and the encouraging signs being shown in some of the end markets of the Group’s businesses, with faster than expected recovery in automotive markets and the continued strong performance in Nortek Air Management, despite the more challenging market conditions in Aerospace. 

As announced through our various trading updates in 2020, management have taken decisive action since the beginning of the crisis to address the significant immediate challenges facing the Group, and to position it well to emerge from the crisis in good shape.  This has included robust cash management, agreeing amended arrangements with our banking syndicate (including temporary covenant waivers and improved financial covenants to 31 December 2022), allowing us to focus on cash generation, and implementing restructuring and cost saving actions.  This work will continue over the remainder of the performance period of the Plan.

Plan Participation

The Circular includes on page 10 the participation rates for the executive directors, as they hold the largest interests in the Plan.  However, as stated in the Circular, all employees are eligible for selection to participation in the Plan at the discretion of the Board.  In practice, participation in the Plan has been focused on the Melrose senior management team, who are in the best position to influence shareholder returns.  This is a wider group of employees than simply the executive directors and typically includes approximately 40% of Melrose central employees directly and a much wider group indirectly.  It is critical to properly incentivise this group as part of the success for Melrose and its stakeholders, including shareholders.

Approval at a General Meeting

The renewal of the Plan requires shareholder approval, which therefore requires a general meeting of the Company to be held.  Similar to many publicly listed companies, we cannot use written shareholders’ resolutions to make decisions.

As a result of the current COVID-19 pandemic and the legislative measures and associated guidance introduced by the UK Government in response, for the safety of shareholders, our employees, our advisers and the general public, the Board determined that the general meeting to approve the Plan would be held as a closed meeting with only director shareholders necessary for a quorum in physical attendance. 

However, in order to ensure that shareholders had appropriate access to the Board to raise questions on the proposal, we provided shareholders with the opportunity to submit questions to us using an online platform that was specifically set up for the purpose of the general meeting.  We also ran a comprehensive consultation exercise prior to posting the Circular that included shareholders holding approximately 75% of the issued shares in the Company.  Their feedback was instrumental in finalising the proposals put to shareholders today.

Our intention is to return to holding physical shareholder meetings as soon as this is permitted.

Short-term incentive arrangements

As set out in the 2020 Directors’ Remuneration Policy, which was approved with over 98% of votes in favour at the 2020 AGM, and consistent with previous remuneration policies, annual bonuses for executive directors are entirely performance driven.  The maximum bonus opportunity is set at 100% of base salary, which is significantly below the lower quartile maximum bonus opportunity for other FTSE100 companies. 

Neither of the Executive Vice-Chairmen participate in the annual bonus scheme and therefore participation is limited to the Chief Executive, the Group Finance Director and (following his appointment effective 1 January 2021) the Chief Operating Officer.

Malus and clawback provisions

In line with best corporate governance guidance, all executive directors are subject to malus and clawback provisions with respect to the annual bonus scheme and the Plan.  In practice, these protections have not been required as there have been no departures from the executive team since Melrose’s formation in 2003.  Indeed, it is the success of previous plans that has been instrumental in Melrose retaining its executive talent.