Deloitte. Carillion pie Paper for the Remuneration Committee

Introduction

This paper prepared for the Remuneration Committee of Carillion pie, by Deloitte LLP, sets out specific decisions for the Committee with regards to changes to terms of the executive pay structure going forward which could be adopted on appointment of the new CEO. These provisions may therefore also impact Zafar Khan.

Executive Summary The table below summarises the changes to the governance and policies to executive pay which the Committee should consider for approval:

Governance and pay arrangements going

Salary and benefits

forward

Shareholder alianment

Governance Exit Policy

New CEO and future appointments

Offer to be candidate specific, structured within the current Policy, with pension reduced to 20%

Shareholding guideline increased to 200% of salarv

Malus and clawback provisions extended to reflect current best practice.

Discretionary policy of waiving deferral periods under the DBP and holding periods under LEAP on exit to be removed

Zafar Khan Not impacted As above New malus and clawback provisions to apply to future LEAP and bonus awards. These could potentially also apply to the 2017 LEAP and bonus, although external legal advice should be souaht.

As above

Next steps

Questions for the Committee: 1. Does the Committee wish to increase the shareholding guideline to 200% for the new CEO? 2. Should this new guideline be extended to Zafar Khan? 3. Is the Committee happy to extend the malus and clawback provisions? 4. Should Zafar Khan be asked to include these extended provisions within 2017 LEAP award and bonus (subject to legal advice being sought)?

Once the Committee has considered and agreed the questions set out above, then: • The LEAP and DBP rules should be updated for new malus and clawback triggers; • Internal communication material (grant documents, bonus letters) should be updated to fully reflect the provisions and that clawback can apply to

the cash element of any bonus;

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Deloitte. The following sections deal with each of the scenarios in more detail with regards to:

1. New arrangements for future appointments 2. Impact and considerations for incumbent executive directors i.e. Zafar Khan

1. New arrangements for future appointments

The proposed remuneration package for the new CEO, which sits within the current policy, is summarised below.

Salary Candidate specific Richard Howson's salary as CEO was £660,000 p.a .. This was set based on benchmarking against a much larger market capitalisation of the business than currently. The Committee should be sensitive to shareholder expectation that the new CEO's salary would reflect this change in market cap. However, ultimately salary will be determined by a number of factors in the recruitment process, most notably the background and experience of the candidate.

Bonus 100% of sala Maximum under the current poli .... LEAP/long term incentive 150% of salary Maximum under the policy is 200% of salary and therefore the Committee will have

some flexibility if required but this should be considered in the context of the recruitment package as a whole and especially any buy-out arrangements. The Committee also has flexibility to change the performance conditions for future awards. The Policy allows for 300% variable pay maximum to be awarded within 12 months of recruitment. In practice we would recommend that any enhanced variable pay award is made via long term incentives rather than bonus. Shareholders would expect a longer term reward focus, particularly in the circumstances here.

Pension 20% of salary The policy allows for a maximum 25% of salary. BlackRock's published Guidelines ask for the pension allowance to be no higher than the allowance provided to the average employee. In practice they expect new appointments to have pension allowances that are lower than their predecessor where the current allowance is more than 20% of base salary. This will become a voting issue for them. We would therefore suggest pension allowance is set at no more than 20% of salarv. There is flexibility in the policy to allow for additional benefits to be provided Benefits

Buy out arrangements The principle here is that the buy-out must be on a comparable basis and no more valuable than what is being forfeited - awards in shares to be abought out in shares, performance conditions to apply, amounts should not be received any sooner than had the individual stayed in their role.

Shareholding guideline Increased from 100% to 200% See below of sala

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Deloitte.

In addition to the quantitative elements of the pay structure we would also recommend that the Committee introduce additional governance measures as follows:

1. Increase the minimum shareholding guideline

The current policy requirement is to hold shares equal to 100% of salary and that the executive is required to hold the after tax value of any DBP or LEAP shares until that requirement is met. Introducing a higher guideline was raised by the IA during the new policy consultation who suggested that a minimum shareholding guideline in line with the annual opportunity under LEAP would be appropriate. Given that there is no time limit, and the disposal of shares is challenging in any circumstance for an executive director, the shareholding requirement could be increased. This would not seem overly onerous to the executives and would be viewed positively by shareholders.

Current practice in the FTSE 250 is that 200% of salary represents both median and upper quartile practice. Lower quartile practice is 100% of salary. We would recommend that the Committee increases the current requirement to 200% of salary.

This change would not require shareholder approval and could be implemented within the existing Policy.

2. Ma/us and Clawback triggers

The provisions currently included in the LEAP and DBP rules are narrower than evolving market practice and do not provide much tlexibility for the Committee to apply them, other than in very limited circumstances. There is also no provision to clawback bonuses that have been paid in cash. The triggers are:

• Material misstatement which requires restatement of the accounts. • Gross misconduct during the performance period.

The Committee may want to extend the triggers under the malus and clawback provisions of the DBP and LEAP. We would suggest the following wording is adopted which gives the Committee appropriate tlexibility and recognises current best practice:

a. Material misstatement of results; b. Error in assessing a performance condition or in the information or assumptions on which the award was granted or vests; c. Material failure of risk management; d. Serious reputational damage; e. Serious misconduct or material error on the part of the participant; f. Any other circumstances which the Remuneration Committee in its discretion considers to be similar in their nature or effect.

We recognise that the last of these is very broad and can be resisted by management, particularly if the Committee seek to apply it after the end of the performance period i.e. once the known amount had been earned. If the Committee considered (f) to be too open, it could apply (a) - (f) across the performance period, but only (a) - (e) over the holding/deferral periods. This would be in keeping with emerging practice.

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Deloitte. These changes to the DBP and LEAP plan rules would not require shareholder approval and could be implemented within the existing Policy.

3. Matus and Clawback operation

Currently the rules operate by reducing or cancelling the award before the vesting date for LEAP or the release date for the DBP. So the Committee has two years after the end of the performance period under LEAP and three years for the deferred element of the bonus to apply the provisions. The Committee could consider extending the periods so that clawback applies beyond the two year (LEAP) and three year (DBP) timeframe, but in practice the current time-frames meet with market norms and we do not consider extending would be appropriate.

We recommend that internal communication to the executive directors re-emphasises the provisions that exist, therefore:

• The bonus letter should make it clear that the cash element of the bonus is subject to the same malus and clawback triggers. To align the DBP and cash elements, clawback should be applied to the cash bonus for three years from payment.

• The grant documents for the DBP and LEAP should include the malus and clawback provisions. • To provide greater legal redress to the Committee, the executives should be asked to acknowledge and agree to the provisions with each Award

grant.

4. Leaver provisions under the DBP and LEAP

Under the terms of the Policy, awards under LEAP can vest at the end of the performance period rather than at the end of the holding period. Similarly, awards under the DBP can be released early and a bonus earned in the year of leaving, or the year before, can be paid wholly in cash. Releasing awards early means that the malus and clawback provisions of the DBP and LEAP can no longer be enforced because they only allow for an Award to be cancelled or reduced before they have vested/been released. We would therefore recommend that either:

a. the Committee operates a policy that the holding period and deferral period will not be waived for any leavers; and/or b. clawback provisions are introduced into the plan rules so that post vesting/release, an award could be reclaimed.

If the Committee adopts (a) in all circumstances (other than in compassionate circumstances of death or disability) then (b) should not be required.

2. Impact and considerations for incumbent executive directors i.e. Zafar Khan

Based on the proposals set out above and an assumption that the Committee will want consistency of treatment for both executive directors, the impact for Zafar Khan would be as follows:

1. No change to the current quantitative value of remuneration. This may mean that the new CEO has a lower pension provision than Zafar however.

2. Shareholding guideline increased to 200%. Practically this should have minimal impact although the likely absence of a bonus in the current year and the possible impact on future LEAP vestings may make his attainment of the shareholding challenging.

3. The same malus and clawback provisions adopted for the new CEO to apply all executives going forward.

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Deloitte. 4. For clarity, and for consistency with any awards granted to the new CEO, the Committee could ask Zafar to agree that the new malus and clawback

provisions will also apply to his April 2017 LEAP grant. As this award had been made, this change to the terms would require his specific consent. We understand that an actual vesting is unlikely and therefore this will not be an issue in practice. If the Committee does wish to pursue this, we would recommend that legal advice is sought. We also assume that no bonus will be payable in respect of performance in 2017 and therefore a discussion on clawback applying to this element of remuneration is not relevant. If the Committee anticipates that this will not be the case then we should discuss the implications further.

5. Zafar holds unvested awards under LEAP awards in 2015 and 2016 which relate to his role before he was an Executive Director. In addition he holds unrealised DBP awards relating to the 2016 bonus. Would the Committee wish to seek to apply malus or clawback provisions under the rules to these unvested/unrealised share awards? Practically it would be difficult to invoke clawback under the current triggers but the Committee could consider this further prior to release/vesting if appropriate in the circumstances.

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Reward arrangements - CEO Carillion

The Remuneration Committee has indicated that the starting point for the reward package should be the current package for Richard Howson which is set

out below. The only variation relates to the value of the pension contribution and pension allowances which will be in line with our investors' requirements

to more closely align pension contributions for executives with those enjoyed by other employees.

Element Amount

Base salary £650,000 per annum

Bonus 100% of base

LEAP 150% of base

Pension 20% of base

Commentary

This is based on benchmarking that considers the market cap (pre-drop) and the complexity of the organisation. There is scope in the policy to raise this amount for the right candidate. The amount will depend on the view of investors regarding the quality of the candidate and they may prefer an uplift in variable pay rather than fully loading base

Measures are likely to be revised from our current arrangements post the strategic review. 50% of any payment awarded is invested in Carillion shares and retained for three years. Dividend equivalents are paid at the end of the holding period

Nil cost options awarded which will vest at the end of three year performance period subject to the performance criteria set. Awards then have a two year holding period post vesting. Dividend equivalents are paid at the end of the holding period. The policy allows for awards up to 200% of base in special circumstances like recruitment subject to Rem Co discretion. This will be a key reward element and the Rem Co would consider a special award on appointment

This can be paid into a Carillion Plan for those with headroom against the LTA and/or the AA or as a gross pay allowance or a mixture of the two

Life Assurance

Car

Medical

London living

8 times base

Car allowance or a car if preferred

Choice of cover, self, partner or family

Daily taxable allowance for use of London based home

Delivered via a separate trust

We don't have a list for this role but would provide the car of choice within reason. Allowance we currently pay is £17k per annum but could move up if required All fuel is provided - taxable benefit on the scale charge or to the extent private if a car allowance

Provided through a self-insured medical trust administered by Bupa

This is for someone whose principal residence is outside London but they use a London home in place of hotels.

The Remuneration Policy provides for some flexibility in the case of new appointments. The maximum level of variable remuneration is 300% of base. Our

advice from Deloitte is that shareholders prefer a weighting towards long term incentives when exceptions are made. For example, 200% of base for LTIP

and 100% on bonus would be the maximum allowable overall if this was considered appropriate. The Committee also has the ability to vary the

performance period, performance measures, vesting and holding period as appropriate. Enhancing variable pay opportunity should be considered in the

round with any requirements to buy out existing remuneration arrangements.

Deloitte. Carillion pie Paper for the Remuneration Committee The treatment of in-flight incentives for members of the CELT on their exit from the business

This paper prepared for the Remuneration Committee of Carillion pie, by Deloitte LLP, sets out specific decisions for the Committee with regards to leaving arrangements for those members of the CELT, including Richard Howson, who will exit the business at the end of September 2017. The proposal is that only contractual payments will be made wherever possible. This paper considers the implications for unvested LEAP awards and DBP awards.

LEAP

LEAP awards that were made in 2015, 2016 and 2017 will not yet have vested by the end of September 2017, when a number of members of the CELT are expected to leave the business. Each of these awards would be due to vest on the third anniversary of the relevant award being made. Participants in the LEAP would be entitled to receive a vested award under LEAP if they are treated as a 'good leaver' under the LEAP Rules and to the extent that the performance tests are met.

There are no vested LEAP awards subject to a Holding Period that need to be considered as part of this review. Holding periods were only introduced for the first time for awards made in 2015.

Summary of the key provisions

(i) ill-health, injury or disability, in each case evidenced to the satisfaction of the Committee;

(ii) the Participant's employing company ceasing to be under the Control of the Company;

(iii) a transfer of the undertaking, or the part of the undertaking, in which the Participant works to a person which is neither under the Control of the Company nor a Member of the Group;

(iv) redundancy (within the meaning of section 139(1) of the Employment Rights Act 1996); or

(v) any other reason, at the discretion of the Committee;

Performance linked to EPS, Cash Conversion and strategic measures (based on sustainability and strategic growth). We understand that based on current projections of performance against each of these measures all three awards are highly unlikely to vest based on the performance of the business in the period since each award was made.

In addition, the letter to participants sent as part of the grant process states that:

"The assessment ofperformance against these targets will be determined by the Remuneration Committee and their decision will be final. In reaching a decision on the extent to which these targets have been achieved they will take into account the underlying performance ofCarillion.,,

Malus and clawback can only be invoked if there is a material misstatement which requires restatement of the accounts or gross misconduct during the performance period.

Clawback can only be applied in respect of executive directors' awards.

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Deloitte. Impact for the Leavers under any of the first four categories described Consideration of vesting will only be relevant for Not in point; as Richard CELT above are automatically treated as entitled to retain those being made redundant. There are two Howson will not be

their awards under the LEAP Rules. There is no approaches that can be adopted by the treated as a good leaver discretion available to the Remuneration Committee in Committee - assess performance when someone his in-flight awards will these circumstances. leaves, or wait until the end of the relevant lapse on cessation.

performance period. This means that Leavers who are being made redundant Not applicable to the will automatically retain their awards with no recourse The performance of the business can be CELT. for the Committee to treat them in any other way. The assessed on the date that a participant ceases awards made to these individuals will be reduced pro­ employment. If the performance conditions are rata for the period of employment since the award was not satisfied at the date of cessation (as made and the pro-rated award would vest to the extent determined by the Committee), the awards that the performance conditions are met. would lapse in full on the date that the individual

ceases employment. A consistent assessment of For all other leavers their awards will lapse on cessation the performance of the business must be made of employment. for all awards that were made on the same date

where the employment of a number of participants ceases on the same date.

Alternatively, the performance of the business can be assessed at the end of each of the performance periods. In the unlikely event an award would vest by reference to the formulaic application of the performance conditions, the Committee may reduce vesting to nil if the underlying performance of the business has been unsatisfactory over the relevant period.The impact of any intervening change of control would need to be considered.

Shares granted under the DBP

• Only relevant for Richard Howson.

• Richard holds DBP shares which are subject to a three year deferral period in respect of 2014, 2015 and 2016 bonuses earned as shown below.

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Deloitte.

• The Committee should therefore decide whether to be consistent with the approach applied to the DBP awards made to Richard Adam under which his deferral period was waived, or to retain the deferral periods. The Committee will recall that Richard Howson received a bonus of 37% of salary in respect of 2016.

• Much of the value of the shares held under the DBP has been eroded by the share price. Given current shareholder sentiment, shareholders are likely to be critical if Richard is able to take the DBP share awards early by virtue of leaving the business, although this could be justified on the basis of providing a clean break. Alternatively, the awards could be allowed to run their course on the basis that the value of the awards may be further diluted.

• The Committee may also wish to consider whether malus should be invoked on the deferred shares. The triggers are the same as for LEAP - a misstatement of the accounts and/or gross misconduct. Given these limited circumstances we anticipate that the provisions will not be applied although the Committee can choose to determine this just prior to the release date of each award.

• The remuneration policy states that clawback can be applied to all elements of the bonus. Bonus documentation to the executive directors does not reference clawback applying to the cash element. Legal advice should be sought if the Committee wishes to consider this further.

Conclusion

The Committee will need to confirm that: 1. Only those individuals who are to be formally made redundant will be treated as good leavers. All others will have their LEAP awards

automatically lapse on cessation of employment, including Richard Howson. 2. LEAP awards for good leavers (redundancies) will vest on the date of cessation of employment, and if the performance conditions have not been

met at this point then they will automatically lapse. Failure to meet the performance conditions at the date of cessation should be clearly documented. Alternatively, the LEAP awards could be allowed to run to the end of each performance period and performance assessed at that point.

3. The deferral periods under the DBP which applies to Richard Howson will not be waived. 4. Any decision on whether to apply malus to the unrealised deferred shares held by Richard which relate to the 2014, 2015 and 2016 bonuses will

be made prior to the release of each award. 5. Accordingly the CELT members who leave employment at the end of September including Richard Howson, will receive contractual entitlements

only relating to salary, benefits and redundancy where applicable.

DELOITTE LLP SEPTEMBER 2017

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