Remuneration

Dear Shareholder

I am pleased to present the Directors’ Remuneration Report for the year ended 30 June 2021.

Following this letter we have set out the following additional information:

• Our Pay Principles, which we adopted in 2020, together with a summary of the market reference points considered by the Committee and our approach to wider workforce remuneration.
• Remuneration Philosophy: The link between our Directors’ Remuneration Policy and our Strategy.
• Governance: How our Remuneration Policy is aligned with the requirements of the UK Corporate Governance Code.
• Remuneration at a glance: Summary of Executive Director Total Remuneration for the 2020 and 2021 financial years.

There then follows the two principal sections of the Remuneration Report: the Annual Report on Remuneration followed by an abbreviated form of the Directors’ Remuneration Policy(the full version can be found at www.dechra.com). The Annual Report on Remuneration provides details of the amounts earned in respect of the 2021 financial year and how the Directors’ Remuneration Policy(the Policy) will be implemented in the 2022 financial year.

The Directors’ Remuneration Report(excluding the Policy) will be subject to an advisory vote at the 2021 Annual General Meeting.

Our Directors’ Remuneration Policy

The Policy was approved by shareholders at the Annual General Meeting on 27 October 2020, with 90.81% of all votes cast in favour, and will remain in force until 2023. We review the application of this Policy regularly, with a view to it remaining appropriate, linked to strategy and reflective of developing market practices.No changes to the Policy are proposed for the forthcoming year.

Further details on how the Policy was implemented during the 2021 financial year and our approach to the implementation of the Policy in the 2022 financial year, including our approach to performance measures for the annual bonus and LTIP awards are described later in this letter.

Remuneration Committee Decisions in 2021

In last year’s Remuneration Report we reported that we had decided to postpone the next remuneration review until later in the 2021 financial year to allow the Committee time to review any impact on the business of COVID-19. We are pleased to report that the business has continued to perform strongly and successfully managed to remain operational throughout the COVID-19 period.In the 2021 financial year, the Group has delivered revenue of £608.0 million, representing an increase of 21.0% (at constant exchange rates) on the prior year, and underlying operating profit of £162.2 million, which represents an increase of 29.2% (at constant exchange rates) on the prior year.In addition, we have:

• not furloughed any of our employees;
• not taken advantage of, or utilised, any government assistance in any country; and
• not undertaken any redundancy programmes related to the pandemic.

Remuneration Review

The Committee has been concerned for some time that certain of our senior executives’ base salaries have not kept up with the growth of the Group and its complexity and have become uncompetitive. As a result of this concern the Committee resolved to undertake a business wide review of remuneration, focusing in particular on the lowest paid in our organisation and the top 60 Senior Leaders (the Review).

By way of context, in the last four years:

• underlying operating profit has grown by 18.8% on a compound annual growth rate basis;
• dividends have grown by 17.2% on a compound annual growth rate basis; and
• market capitalisation (12-month average) has increased by 315% (September 2016 to August 2021); and
• acquisitions have been made including manufacturing activities in Brazil and in the US, as well as of products, most recently Osurnia and Mirataz.

The Group has operations in 25 countries; markets products in 68 other countries; has over 5,600 product registrations; and has a market capitalisation of over £5.7 billion (as at 27 August 2021). The scope and complexity of the Executive Director roles have therefore increased significantly.

Over this period, Ian Page, our Chief Executive Officer, has had one base salary increase of 4% in the 2020 financial year. Ian Page’s salary had not previously been increased since 2016. Ian’s decision to waive increases in line with the workforce, combined with the increased complexity of the role means that his current base salary is significantly below the lower end of the market competitive benchmark reference points.

We considered the conclusions of the Review in the context of the Dechra Pay Principles, which we adopted in 2020.

Executive Director Remuneration Decisions

The Review highlighted that the base pay of our Chief Executive Officer, Ian Page, and our Chief Financial Officer, Paul Sandland, was significantly below the lower end of the market competitive range (looking at companies ranked 51 to 150 in the FTSE350 and companies with a market capitalisation of £2.5 billion to £4.5 billion. The base salary of our third Executive Director, Tony Griffin, which was also benchmarked locally, is already at a competitive level.

The Committee believes that the base salary of our top Executives should be positioned appropriately for a number of reasons:

• we are fortunate to have an exceptional top management team and wish to lock in continuity for at least the next three years;
• unless we raise salaries to an appropriate level, we are at risk of salary compression below Board level, which will impact our ability to recruit successfully, particularly in the US and Europe;
• appropriate remuneration for our top executives is important to our succession planning, at and below Board level; and
• the Committee, having embraced Dechra’s Pay Principles, believes that these principles should apply at every level in the organisation.

With this in mind we undertook extensive engagement with our shareholders to discuss:

• increasing the base salary for our Chief Executive Officer and Chief Financial Officer with effect from 1 January 2021 in order to bring their base salaries closer to the market median (consistent with the approach being adopted for executives below Board level as described above); and
• increasing the bonus potential for the Executive Directors to 125% of salary for the 2022 financial year. This is below the maximum of 150% of salary approved by shareholders when our Policy was approved last year.

Although we have used benchmarking as a guide; this is not the primary driver for the increases. As detailed above, over the last four years the Group’s business has not only increased significantly in scale and profitability but has also increased in complexity. The scope and complexity of the Executive Director roles have therefore increased significantly.

Furthermore, on his appointment in October 2019, the base pay for our Chief Financial Officer, Paul Sandland, was set at circa 19% less than that of his predecessor. This was deliberately set at below market to allow him to prove himself in the role. It is the unanimous view of the Board that Paul has excelled as our Chief Financial Officer, particularly during the COVID-19 period. In addition, he has taken on additional responsibility for IT and our ESG strategy.

Responding to Shareholder Feedback

The consultation period with our largest shareholders has been important to us. Over a four month period we had a number of conversations with investors and we had feedback from 35 shareholders, representing over 60% of our share capital. I am pleased to report that the vast majority of shareholders consulted were supportive of the proposed increases.

Responding to the feedback received, the Committee decided to phase the base salary increases for both our Chief Executive Officer and Chief Financial Officer over two financial years as detailed in the table below.

	Previous base salary	1 January 2021*	1 January 2022**
Ian Page – Chief Executive Officer Market positioning for Chief Executive Officer	£520,000 Significantly below lower quartile	12% to £582,400 Around lower quartile	circa 5% to £612,000 Around 90% of market median
Paul Sandland – Chief Financial Officer Market positioning for Chief Financial Officer	£300,000 Significantly below lower quartile	20% to £360,000 Below lower quartile	12.5% to £405,000 Around 90% of market media

* The increases were effective 1 January 2021, but were paid post year end following the end of the consultation with our shareholders.

** Subject to continued strong performance of the Group and excellent individual performance.

Implementation of the Policy for Executive Directors in respect of the 2021 financial year.

Performance Conditions for LTIP Awards

As detailed in the Directors’ Remuneration Report last year, the impact of the Akston licensing agreement is relevant for the 2019 Grant (three year performance period to 30 June 2021) and 2020 Grant (three year performance period to 30 June 2022). In order to measure performance on a fair and consistent basis, the Committee has adjusted the final year EPS for the 2019 Grant to reflect the actual Akston R&D costs incurred at the vesting date. This adjustment recognises that these R&D costs were not included in the base year of the performance period and maintains the overall level of stretch in the targets so the targets are not less difficult to satisfy.

For the 2021 Grant (three year performance period to 30 June 2023) and future years, the Committee is mindful that the base year will have some R&D actual costs from the Akston deal. Therefore, the actual Akston R&D costs will be adjusted for both the base year and the year of vesting to enable performance to be measured on a like-for-like basis. The Committee believes that this is the right approach as the payments for the development of Akston are lumpy and uncertain as to timing between financial years.

Forward Looking: Implementation of Policy for 2022 Financial Year

We will apply the Policy in the 2022 financial year as follows

Salary: Executive Directors’ salaries will continue to be reviewed in January. As detailed above we are intending to make a further increase to the base salary for Ian Page to £612,000 and Paul Sandland to £405,000 from 1 January 2022 which would move their base salaries closer to (albeit below) market median. This second increase will be subject to the continued strong performance of the Group and excellent individual performance. It is planned that any increases to Tony Griffin’s salary will be in line with the range of any increases proposed for the wider workforce.

Pension: In order to align the pension contributions/cash in lieu of pension for Ian Page and Tony Griffin to that of the workforce, from 1 July 2022, the pension contributions for Ian Page and Tony Griffin will decrease to 8%. Reflecting the enhanced employer contribution rate for wider workforce rate, Paul Sandland’s pension increased to 6% from 1 July 2021 and will increase to 8% when the employer pension contribution rate for the UK wider workforce increases to 8% on 1 July 2021.

Bonus: Our Executive Directors’ current annual bonus opportunity is 100% of salary. Our Policy, approved by shareholders at the 2020 Annual General Meeting, allows for a maximum opportunity of 150% of base salary. As noted above, for the 2022 financial year, we propose to utilise some, but not all, of the additional headroom in our Policy. The maximum bonus opportunity for the 2022 financial year will increase from 100% to 125% of salary, which still remains below lower quartile of the market range.

In line with our Policy for Executive Directors, we will also introduce bonus deferral, requiring that 20% of any bonus earned (and not just any additional bonus earned) is deferred into Dechra shares for two years. In connection with the introduction of bonus deferral, we are seeking shareholder approval at the 2021 Annual General Meeting for a new Deferred Bonus Plan, the principal terms of which are summarised in the Notice of Annual General Meeting. As we explained in the Directors’ Remuneration Report last year, the level of deferral is set so that amount of cash earned for any level of performance is not increased by the increase in the opportunity. Therefore, for instance, the level of deferral would increase to 33% of bonus were the bonus opportunity be raised the 150% of base salary permitted by our Policy. The bonus will be based on a mix of stretching underlying profit before tax targets (in respect of a bonus of up to 110% of salary), personal objectives (in respect of a bonus of up to 10% of salary) and an ESG measure (in respect of a bonus of up to 5% of salary). For Tony Griffin, and consistent with the approach for the 2021 financial year, half of the opportunity based on underlying profit (i.e. up to 55% of salary) will be assessed by reference to the underlying operating profit of Dechra Veterinary Products EU, reflecting his responsibility for that part of our business, and the other half of the profit based opportunity by reference to Group profit in line with the other Executive Directors, and so that a significant part of the profit based opportunity is aligned with the shareholder experience in respect of overall Group performance.

The increase in the annual bonus opportunity for the 2022 financial year recognises the increase in the size and complexity of the Group. The Committee has also reviewed the level of stretch in the annual bonus targets to reassure themselves that the higher maximum opportunity for the 2022 financial year will only be earned for delivery of higher levels of performance. For the 2022 financial year the maximum bonus will only be earned for materially improved year on year performance from a strong 2021 base year where we delivered 25% year on year improvement in underlying profit before tax (on a constant currency basis). The threshold to maximum range has been set at 95% to 110% of a stretching target level of performance in order to align the maximum level of potential reward with the achievement of more stretching performance targets.

LTIP: No changes are proposed to the maximum LTIP opportunity for the 2022 financial year. Awards for the 2022 financial year will be granted at the level of 200% of salary for Ian Page, 150% of salary for Paul Sandland and 100% of salary for Tony Griffin. Any shares that vest will be subject to a two year holding period. The performance measures remain as per the grant of LTIP awards made on 22 September 2020, details of which can be found here. The upper target for the EPS performance condition will be 15% CAGR. Taking account of internal forecasts of performance over the performance period, the markets in which the Group operates, our long-term growth ambitions and the expectations of the investment community on the Group’s future potential performance, this upper target is considered to be a stretching and ambitious upper target which requires significant out-performance. This also reflects the strong performance delivered in the 2021 financial year which is the base year for the 2022 LTIP grant.

Impact of changes on overall total compensation: The Committee is mindful of the impact of base salary increases on the value of the total package. However, the value of the total package continues to be modest against the market norm for a company of our size and complexity. The changes outlined above move the value of total package for our Chief Executive Officer and Chief Financial Officer towards the lower quartile of the market. The majority of the package continues to be performance related, which is aligned with the interests of our shareholders. We also recognise that increasing the level of competitiveness in salaries and the annual bonus will require the continued delivery of performance, coupled with stretching targets for annual variable and long term compensation. The proposed maximum targets for both the 2022 annual bonus and LTIP grant require continued double digit growth from the strong performance delivered in 2021. This will deliver alignment to shareholders’ interests as we continue to grow.

Chairman and Non-Executive Directors

We have also taken the opportunity to review our Chairman fee level. We were mindful that the fee for Chairman varies considerably depending on sector and time commitment. However, at less than £135,000 per annum, the total fee for our Chairman by any measure is very low. The Committee agreed to increase the Chairman’s fee in two stages, with an increase to £159,000 (which includes the fee for being Chairman of the Nomination Committee, currently £5,000) from 1 January 2021 and to £188,000 from 1 January 2022. This will position the Chairman’s fee between the lower end and median of the market.

A committee appointed by the Executive Directors and the Chairman has reviewed fees for the other Non-Executive Directors. Details of the proposed changes to the fee for the Non-Executives Directors are set out here. These increases bring the fees closer to the market median (consistent with the approach being adopted for executives below Board level as described above) and reflect the increase in the size and complexity of the business over the last four years. A review of the Non-Executive Directors’ base and additional fees will be undertaken in January 2022 along with the pay review process for the wider workforce.

Wider Workforce remuneration and employee engagement

We recruit and promote people on the basis of their personal ability, contribution and potential. We are committed to promoting, supporting and maintaining a culture of fairness, respect and equal opportunity for all. We are also committed to fair employment practices and comply with national legal requirements regarding wages and working hours.

The Group aims to provide a remuneration package that is competitive in an employee’s country of employment and which is appropriate to promote the long term success of the Group. The Company’s SAYE scheme and Employee Stock Purchase Plan (ESPP) encourage share ownership by qualifying employees and enable them to share in value created for shareholders. In the 2022 financial year we propose to offer the SAYE more widely than we have in the past, expanding its operation to 18 additional countries and so offering 921 additional employees the opportunity to acquire shares in Dechra.

As the Non-Executive Director designated under the 2018 Code for employee engagement, Lisa Bright engages directly with employees on a range of topics of interest to them. Workforce engagement activities during the 2021 financial year included five one-to-one hour discussions with cross function teams in the EU and US. These have provided an upward channel for views, comments and debate, as well as an opportunity to provide positive feedback on the Group’s decision not to furlough employees during the pandemic. The Committee provided an update on the Remuneration Review, including the Executive Directors’ remuneration increases, to the wider workforce and a channel for further information and discussion.

Gender Pay

We are pleased to report that as a result of our proactive management with regards to our gender pay gap in Dechra Limited (who employ 67.3% of our UK employees), the gap has reduced from 9.2% in 2018 to 7.4% in 2019 and further again to 5.5% in 2020. This is something that we are looking to build upon as we continue to make Dechra an increasingly attractive place to work.

In Conclusion

We greatly appreciate the feedback and the level of support we have received from our shareholders regarding our approach to remuneration and the changes outlined above. We are firmly of the view they are in the best interests of the business and its shareholders. Dechra is a high performing Group and we believe that setting the salaries of our top Executives at more appropriate levels will help to keep it so.

We remain committed to a responsible approach to executive pay, as I trust this Directors’ Remuneration Report demonstrates. We believe that the Policy operated as intended and consider that the remuneration received by the Executive Directors in respect of the 2021 financial year was appropriate, taking into account Group performance, personal performance and the experience of shareholders and employees.

On behalf of the Board, I would like to thank you, our shareholders, for your engagement, and I hope that we will continue to receive your support at the Annual General Meeting later this year. Should you have any queries in relation to this report, please contact me or the Company Secretary.