Insurance Australia : Remuneration report (A)

REMUNERATION REPORT

LETTER FROM THE CHAIRMAN OF THE PEOPLE AND REMUNERATION COMMITTEE

Dear Shareholders,

On behalf of the People and Remuneration Committee (PARC) and the Board I am pleased to present the 2021 Remuneration Report.

The 2021 financial year has seen the continuation of economic challenges across Australia and New Zealand as a consequence of the protracted COVID-19 pandemic as well as other environmental challenges caused by storms, floods, cyclones and the aftermath of bushfires. At the same time the Board was concluding an extensive CEO search process. Against this backdrop, the PARC monitored the health and safety of its employees as they continued with remote work settings as well as oversaw the changes to organisational structure and Executive appointments.

Through all this, the Board has sought to ensure that IAG's remuneration framework appropriately balances the need to reward, motivate and retain employees with the skills and capabilities required to ensure IAG's ongoing success.

Renewed strategy, renewed focus

During the 2021 financial year, IAG refreshed its strategy to focus on becoming more sustainable over the long term. The structure and composition of the Executive Leadership Team was also refreshed during the year to ensure clear accountabilities and alignment with the renewed strategy.

There are four new strategy pillars: grow with our customers, build better businesses, create value through digital and manage our risks. These pillars are now included in the Group Balanced Scorecard, ensuring a clear link between delivery of the strategy and executive remuneration outcomes.

Business performance

While IAG's underlying financial performance was sound and within expectations, profitability was affected by a number of operational risk issues which have been identified and provisioned for in the accounts, the most material of which was the pre-tax $1.15 billion charge IAG announced in November 2020 to provide for potential business interruption claims relating to COVID-19. After excluding the impact of these provisions along with other items identified in the net corporate expense and amortisation and impairment lines, IAG's reported cash earnings for the year was $747 million, up from $279 million in the year ended 30 June 2020. Over the 2021 financial year we have continued to pay dividends and our capital position remains strong.

Alignment of remuneration outcomes with business results

The Board has determined remuneration outcomes for employees through a balanced scorecard assessment that includes financial results, shareholder returns and customer growth, against a challenging work context brought on by the COVID-19 pandemic. This balance is reflected in remuneration outcomes as follows:

Short-term incentives (STI)

In determining STI outcomes, the Board has been mindful of the experience of shareholders, while at the same time recognising the contribution of the Executives. While the 2021 financial year cash earnings result was strong and overall Group Balanced Scorecard performance was above target, in recognition of the impact of operational risk issues, the Board determined STI outcomes for Executives ranging from 0% to 64% of maximum opportunity. In addition, the Board also determined to reduce the overall level of STI funding across IAG for the 2021 financial year to 60% of maximum. It is important to note that no STI awards were approved for the year ended 30 June 2020 when the business interruption insurance exposure was identified. The maximum potential value of the 2020 STI awards relating to Executives would have been approximately $9 million.

Long-term incentives (LTI)

LTI awards with return on equity (ROE) and relative total shareholder return (TSR) performance hurdles were measured during the year ended 30 June 2021.

• The 2017/2018 LTI awards with an ROE performance hurdle reached the end of their three-year performance period on 30 June 2020. Based on the Group's performance over the period against the vesting scale, the Board determined the award would vest at 82%. LTI awards with an ROE performance hurdle granted from 2018/2019 onwards are subject to a four-year performance period. The next ROE performance test will therefore occur after 30 June 2022.
• The 2016/2017 LTI awards with a TSR performance hurdle reached the end of their four-year performance period on 30 September 2020. IAG's TSR was ranked at the 39th percentile of its peer group resulting in 0% vesting of this award. This reflected approximately $3.5 million forgone by Executives. All rights under this award have lapsed. The next TSR performance test will be after 30 September 2021.

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Risk-based adjustments to performance pay

The Board has progressively set higher standards for executive accountability, annually reviewing risk management outcomes and identifying accountable Executives. During the 2021 financial year, the Board responded to complex historical matters that spanned multiple years and involved multiple accountable Executives.

In response to risk matters that emerged during the 2021 financial year, the Board has applied downward adjustments to the remuneration of some former employees, including the accountable Executives during the relevant period and certain individuals who reported to them at that time. The total value of these adjustments to six individuals was approximately $3.4 million. The adjustments took the form of reductions to STI awards for the 2021 financial year and/or adjustments to the value of unvested LTI and deferred STI awards. For some matters, these downward adjustments were in addition to the $3.5 million in adjustments made for the 2020 financial year, and reflect the change in the size and probability of risk as it has evolved across the reporting periods.

Continued focus on risk maturity

Each year IAG reviews and improves the management of its risk and compliance systems and processes. I am pleased to report IAG has made significant progress in its efforts to further enhance risk and compliance management frameworks, processes and practices. Through Project rQ, IAG has progressed with the implementation of a new Integrated Risk Management System, delivered more detailed understanding of material risks across the organisation, and further embedded control management practices. Project rQ and all divisions are now also actively engaged in ensuring that the progress made on risk and compliance management frameworks, processes and practices is sustainably embedded.

This greater focus on risk management has been reflected in the Balanced Scorecard against which performance is measured, and in the application of consequences for poor risk management outcomes.

Review of Non-Executive Director fees and Executive fixed pay

There were no increases to fixed pay for Executives during the 2021 financial year, other than where there was a change in role accountabilities. Following a review of Executive remuneration in August 2021, to reflect market relativities the Board determined to increase the fixed pay for the Managing Director and Chief Executive Officer to $1.8 million and apply increases ranging between 3% and 9% for three other Executives.

There have been no changes to Board or Committee fees since the year ended 30 June 2017. Following a benchmarking exercise, the Board has determined to leave Board and Committee fees unchanged for the year ending 30 June 2022, with the intention to review the following financial year.

Executive remuneration framework review during 2022

The PARC has engaged an external consultant to undertake a formal independent review of IAG's Remuneration Framework. This independent review is being undertaken to ensure IAG's Remuneration Framework continues to support the renewed strategy, while also considering the anticipated regulatory changes within financial services. Any changes made following the independent review will be outlined in next year's Remuneration Report.

Thank you for taking the time to read the Remuneration Report and we welcome your feedback.

George Savvides

Chairman, People and Remuneration Committee

36 IAG ANNUAL REPORT 2021

CONTENTS	PAGE
A.	Key management personnel covered in this report	37
B.	Executive remuneration structure	38
C.	Linking IAG's performance and reward	44
D.	Executive remuneration governance	50
E.	Non-Executive Director remuneration	51
	Appendix 1. Statutory remuneration disclosure requirements	53
	Appendix 2. Executive employment agreements	55
	Appendix 3. Movement in equity plans within the financial year	56
	Appendix 4. Related party interests	57

A. KEY MANAGEMENT PERSONNEL COVERED IN THIS REPORT

This report sets out the remuneration details for IAG's key management personnel (KMP).

KMP is defined as persons having authority and responsibility for planning, directing and controlling the activities of an entity, directly or indirectly, including any director (whether executive or otherwise) of that entity. For the purposes of this report, the term Executive is used to refer to KMP who are Executives.

The full list of KMP for the year ended 30 June 2021 is presented below.

NAME	POSITION	TERM AS KMP(1)
EXECUTIVES
Nick Hawkins	Managing Director and Chief Executive Officer(2)	Full year
Julie Batch	Group Executive, Direct Insurance Australia(3)	Full year
Michelle McPherson	Chief Financial Officer(4)	Full year
Neil Morgan	Chief Operating Officer(5)	From 19 September 2020
Craig Olsen	Chief Executive, New Zealand	Full year
Christine Stasi	Group Executive, People, Performance and Reputation	Full year
David Watts	Chief Risk Officer	Full year
Amanda Whiting	Acting Group Executive, Intermediated Insurance	From 2 November 2020
	Australia(6)
EXECUTIVES WHO CEASED AS KMP
Peter Harmer	Managing Director and Chief Executive Officer(7)	Ceased 1 November 2020
Mark Milliner	Chief Executive Officer, Australia(8)	Ceased 2 November 2020
NON-EXECUTIVE DIRECTORS
Elizabeth Bryan	Chairman, Independent Non-Executive Director	Full year
Simon Allen	Independent Non-Executive Director	Full year
Duncan Boyle	Independent Non-Executive Director	Full year
Sheila McGregor	Independent Non-Executive Director	Full year
Jon Nicholson	Independent Non-Executive Director	Full year
Helen Nugent	Independent Non-Executive Director	Full year
Tom Pockett	Independent Non-Executive Director	Full year
George Savvides	Independent Non-Executive Director	Full year
Michelle Tredenick	Independent Non-Executive Director	Full year

NON-EXECUTIVE DIRECTOR WHO CEASED AS KMP

No Non-Executive Directors ceased as KMP during the 2021 financial year.

1. If an individual did not serve in a KMP role for the full financial year, all remuneration is disclosed from the date the individual was appointed to a KMP role to the date they ceased in a KMP role.
2. Effective 2 November 2020, Nick Hawkins was appointed to the role of Managing Director and Chief Executive Officer. Prior to this appointment, Mr Hawkins was Deputy Chief Executive Officer from 8 April 2020 to 1 November 2020.
3. Effective 10 March 2021, Julie Batch was appointed to the role of Group Executive, Direct Insurance Australia. Prior to this appointment, Ms Batch was Chief Strategy and Innovation Officer from 24 February 2020 to 9 March 2021 and Acting Group Executive, Intermediated Insurance Australia from 2 November 2020 to 9 March 2021.
4. Effective 2 November 2020, Michelle McPherson was appointed as Chief Financial Officer. Prior to this appointment, Ms McPherson was Acting Chief Financial Officer from 8 April 2020 to 1 November 2020.
5. Neil Morgan's role as Group Executive, Technology and Operations became a KMP role on 19 September 2020 as a result of the increasingly significant focus across the Group on IAG's digital strategy. Effective 10 March 2021, Mr Morgan was appointed to the role of Chief Operating Officer.
6. Effective 10 March 2021, Amanda Whiting was appointed as Acting Group Executive, Intermediated Insurance Australia. Prior to this appointment, Ms Whiting was Acting Group Executive, Direct Insurance Australia from 2 November 2020 to 9 March 2021.
7. Peter Harmer retired from IAG effective 31 December 2020. With Nick Hawkins' appointment to the role of Managing Director and Chief Executive Officer effective 2 November 2020, Mr Harmer's last day in a KMP role was 1 November 2020.
8. On 2 November 2020, following the introduction of the new operating model, Mark Milliner ceased to be in a KMP role. He ceased employment on 30 November 2020 due to his role of Chief Executive Officer, Australia becoming redundant.

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B. EXECUTIVE REMUNERATION STRUCTURE

I. Alignment of Executive reward to IAG's purpose and strategy

38 IAG ANNUAL REPORT 2021

II. Summary of remuneration components

Table 1 below describes the structure and purpose of the components of Executive remuneration for the year ended 30 June 2021.

TABLE 1 - REMUNERATION COMPONENTS

COMPONENT	STRUCTURE	PURPOSE
Fixed pay	Fixed pay comprises base salary and superannuation,	Fixed pay remunerates Executives for performing
	determined by reference to the experience and skills an	their ongoing work.
	individual brings to the role, internal relativities between
	Executives and market pay levels for similar external roles.
	Details relating to fixed pay are presented in Table 2.
Short-term	STI is provided on an annual basis, subject to the achievement of	STI rewards annual performance across a range
incentives	short-term goals and an assessment of risk management	of financial and non-financial measures to
(STI)	effectiveness. Half of the STI is delivered in cash and half is	support the delivery of the IAG strategy.
	deferred for a period of up to two years, typically in the form of	Deferral of STI encourages retention of
	Deferred Award Rights (DARs).
		Executives and reinforces the link between
	Details relating to the STI plan are presented in Table 3.	shareholder value creation and Executive reward.

Long-term	LTI grants are determined annually by the Board. They are
incentives	awarded in the form of Executive Performance Rights (EPRs), with
(LTI)	performance hurdles over a four-year period that align with IAG's
	strategic financial targets. The ROE hurdled LTI granted up to
	and including 2017/2018 had a three-year performance period.
	Grants of ROE hurdled LTI since that time have a four-year
	performance period.
	Details relating to the LTI plan are presented in Table 4.

LTI creates a direct link between Executive reward and shareholder returns through two hurdles:

• cash ROE evidences IAG's return on total shareholders' equity. Cash earnings performance is a key component of the ROE calculation and directly influences the dividend paid to shareholders; and
• relative TSR reflects the value created for shareholders through dividends and the movement in the share price. This is measured against the TSR of the top 50 industrial companies in the S&P/ASX 100 Index.

Remuneration received by Executives is based on IAG's performance over different time periods, as illustrated in the following graph. The timeframe for potential payments to Executives is staggered progressively from one to four years to encourage decision- making that supports long-term, sustainable performance.

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