Remuneration at Diageo

• Base salary supports the attraction and retention of the best global talent with the capability to deliver Diageo’s strategy and performance goals.

  • Base salaries are normally reviewed annually or following a change in responsibilities, with any increases usually taking effect from 1 October.
  • The Remuneration Committee considers the following parameters when reviewing base salary levels:
  • Pay increases for other employees across the group
  • Economic conditions and governance trends
  • The individual’s performance, skills and responsibilities
  • Base salaries (and total remuneration) at companies of similar size and international scope to Diageo, with roles typically benchmarked against the FTSE 30 excluding financial services companies, or against similar comparator groups in other locations dependent on the Executive Director’s home market.
  • Salary increases will be made in the context of the broader employee pay environment and will normally be in line with those made to other employees in relevant markets in which Diageo operates, typically the UK and the US, unless there is a change in role or responsibility or other exceptional circumstances.

Benefits and post-retirement provisions are a core part of a market-competitive and cost-effective remuneration package.

• The provision of benefits depends on the country of residence of the Executive Director and may include but is not limited to a company car or travel allowance, the provision of a contracted car service or equivalent, product allowance, life insurance, accidental death and disability insurance, medical cover, financial counselling and tax advice.
• The Remuneration Committee has discretion to offer additional allowances, or benefits, to Executive Directors, if considered appropriate and reasonable. These may include relocation expenses, housing allowance and school fees where a Director is asked to relocate from his/her home location as part of their appointment.
• The benefits package is set at a level which the Remuneration Committee considers provides an appropriate level of benefits depending on the role and individual circumstances, is appropriate in the context of the benefits offered to the wider workforce in the relevant market and is in line with comparable roles in companies of a similar size and complexity in the relevant market.
• Market-competitive pension arrangements or a cash alternative based on a percentage of base salary are provided. The maximum company pension contribution under the 2020 remuneration policy is 14% of salary for any new Executive Director appointments.
• Current legacy company contributions for Ivan Menezes in the year ended 30 June 2022 was 20% of base salary. The company contribution for Ivan Menezes was reduced from 40% to 30% effective 1 July 2016, and from 30% to 20% effective 1 July 2019. It is the company’s intention to reduce the pension contribution for Ivan Menezes to 14% of salary, in line with the maximum company contribution to new-hire employees in the United Kingdom, by 1 January 2023. The CFO, Lavanya Chandrashekar, who was appointed on 1 July 2021, receives a pension contribution of 14% of salary.

The Annual Incentive Plan (AIP) incentivises year-on-year delivery of Diageo’s financial and strategic targets over the year and provides focus on key financial metrics and the individual’s contribution to the company’s performance.

• Performance measures, weightings and targets are set by the Remuneration Committee. Appropriately stretching targets are set by reference to the operating plan and historical and projected performance for the company and its peer group.
• The level of award is determined with reference to Diageo’s overall financial and strategic performance and individual performance.
• A minimum of one-third of the actual earned bonus payment will normally be deferred into shares under the Deferred Bonus Share Plan, to be held for a minimum period of three years, other than in exceptional circumstances. The remainder of the bonus payment will be paid out in cash after the end of the financial year.
• The Committee has discretion to adjust the level of payment if it is not deemed to reflect appropriately the individual’s contribution or the overall business performance. Any discretionary adjustments will be detailed in the following year’s annual report on remuneration.
• The Committee has discretion to apply malus or clawback to bonus, i.e. the company may seek to recover bonus paid or deferral into shares, in exceptional circumstances such as gross misconduct or gross negligence during the performance period.
• Notional dividends accrue on deferred bonus share awards, delivered as shares or cash at the discretion of the Remuneration Committee at the end of the vesting period.
• For threshold performance, up to 50% of salary may be earned, with up to 100% of salary earned for on-target performance and a maximum of 200% of salary payable for outstanding performance. Performance conditions Annual incentive plan awards are normally based 70%-100% on financial measures which may include, but are not limited to, measures of sales, profit and cash; and 0%-30% on broader objectives based on strategic goals and/or individual contribution.

Diageo Long-Term Incentive Plan (DLTIP) provides focus on delivering superior long-term returns to shareholders.

• An annual grant of performance shares and/or market-price share options which vest subject to a performance test and continued employment, normally over a period of three years.
• Measures and stretching targets are reviewed annually by the Remuneration Committee for each new award.
• The Remuneration Committee has the authority to exercise discretion to adjust the vesting outcome based on its assessment of underlying business performance over the performance period. This may include the consideration of factors such as holistic performance relative to peers, stakeholder outcomes and significant investment projects, for example.
• Following vesting there is normally a further retention period of two years. Executive Directors are able to exercise an option or sell sufficient shares to cover any tax liability when an award vests, provided they retain the net shares arising for the two-year retention period.
• Notional dividends accrue on performance share awards to the extent that the performance conditions have been met, delivered as shares or cash at the discretion of the Remuneration Committee at the end of the vesting period.
• The Committee has discretion to reduce the number of shares which vest (subject to HMRC rules regarding approved share options), for example in the event of a material performance failure, or a material restatement of the financial statements. There is an extensive malus clause for awards made from September 2014. The Committee has discretion to decide that:
• the number of shares subject to the award will be reduced
• the award will lapse
• retention shares (i.e. vested shares subject to the additional two-year retention period) will be forfeited
• vesting of the award or the end of any retention period will be delayed (e.g. until an investigation is completed)
• conditions will be imposed on the vesting of the award or the end of the retention period; and/or
• any award, bonus or other benefit which might have been granted or paid to the participant in any later year will be reduced or not awarded
• Malus and clawback provisions will apply up to delivery of shares at the end of the retention period (as opposed to the vesting date). The company also has the standard discretion to take account of unforeseen events such as a variation to share capital.
• The maximum annual grants for the Chief Executive and Chief Financial Officer are 500% and 480% of salary in performance share equivalents respectively (where a market-price option is valued at one-third of a performance share). Included within that maximum no more than 375% of salary will be awarded in face-value terms in options to any Executive Director in any year.
• Awards vest at 20% of maximum for threshold performance and 100% of maximum if the performance conditions are met in full. The vesting schedule related to the levels of performance between threshold and maximum, including whether or not this will include an interim stretch performance level, will be determined by the Committee on an annual basis and disclosed in the relevant remuneration report for that year. There is a ranking profile for the vesting of the part of the award based on relative total shareholder return, starting at 20% of maximum for achieving the threshold.
• The vesting of awards is linked to a range of measures which may include, but are not limited to:
• a growth measure (e.g. net sales growth, operating profit growth)
• a measure of efficiency (e.g. operating margin, cumulative free cash flow, return on invested capital)
• a measure of Diageo’s performance in relation to its peers (e.g. relative total shareholder return) and
• a measure relating to ESG (environmental, social or governance) priorities.
• Measures that apply to performance shares and market-price options may differ, as is the case for current awards. Weightings of these measures may also vary year on year.
• The Remuneration Committee has discretion to amend the performance conditions in exceptional circumstances if it considers it appropriate to do so, e.g. in cases of accounting policy changes, merger and acquisition activities or disposals. Any such amendments would be fully disclosed and explained in the following year’s annual report on remuneration.

All-employee share plans encourage broader employee share ownership through locally approved plans.

• Limits for all-employee share plans are set by the tax authorities. The company may choose to set its own lower limits.
• The company operates tax-efficient all-employee share acquisition plans in various jurisdictions.
• Executive Directors’ eligibility may depend on their country of residence, tax status and employment company.
• Under the UK Share Incentive Plan, the annual award of Freeshares is based on Diageo plc financial measures which may include, but are not limited to, measures of sales, profit and cash.

The shareholding requirement policy ensures alignment between the interests of Executive Directors and shareholders.

• The minimum in-employment shareholding requirement is 500% of base salary for the Chief Executive and 400% of base salary for any other Executive Directors.
• Executive Directors are expected to build up their in-employment shareholding within five years of their appointment to the Board.
• Executive Directors will be restricted from selling more than 50% of shares which vest under the long-term incentive plan or deferred bonus share plan (excluding the sale of shares to cover tax on vesting and other exceptional circumstances to be specifically approved by the Chief Executive and/or Chairman), until the shareholding requirement is met.
• In order to provide further long-term alignment with shareholders, Executive Directors will normally be expected to maintain a holding of shares in Diageo for a two-year period after leaving the company. Executive Directors will normally be required to continue to hold 100% of the in-employment shareholding requirement (or, if lower, their actual shareholding on cessation) for the first year after leaving the company, reducing to 50% for the second year after leaving the company.

Remuneration for the Chairman of the Board and Non-Executive Directors supports the attraction, motivation and retention of world-class talent and reflects the value of the individual, their skills and experience, and performance.

• Fees for the Chairman and Non-Executive Directors are normally reviewed every year.
• A proportion of the Chairman’s annual fee is used for the monthly purchase of Diageo ordinary shares, which have to be retained until the Chairman retires from the company or ceases to be a Director.
• Fees are reviewed in the light of market practice in the FTSE 30, excluding financial services companies, and anticipated workload, tasks and potential liabilities.
• The Chairman and Non-Executive Directors do not participate in any of the company’s incentive plans nor do they receive pension contributions or benefits. Their travel and accommodation expenses in connection with attendance at Board meetings (and any tax thereon) are paid by the company.
• The Chairman and the Non-Executive Directors are eligible to receive a product allowance or cash equivalent at the same level as the Executive Directors.
• All Non-Executive Directors have letters of appointment. A summary of their terms and conditions of appointment is available at www.diageo.com. The Chairman of the Board, Javier Ferrán, was re-appointed on 10 October 2019 for a three-year term, terminable on three months’ notice by either party or, if terminated by the company, by payment of three months’ fees in lieu of notice.
• Fees for Non-Executive Directors are within the limits set by the shareholders from time to time, with an aggregate limit of £1,750,000, excluding the Chairman’s fees.