Executive remuneration policy

The policy report sets out the remuneration policy (the "Policy") that the Company intends to apply, subject to shareholder approval, with effect from 29 July 2014 (the date of the AGM). It is intended that this Policy will apply until the 2017 AGM, unless the Company seeks shareholder approval for a revised policy which comes into force before this date.

The Committee seeks to support the delivery of the Group's strategy through establishing appropriate remuneration arrangements. Our goal is to build a strong long-term sustainable business by delivering ongoing sales growth and sustainable shareholder returns through the delivery of authoritative ranges of products, colleague and service excellence, digital participation and helpful store and Autocentre environments.

Consequently, the overall remuneration policy of the Committee, and of the Board, is to provide remuneration packages for Executive Directors and other senior managers in the Group which:

• Attract and retain — Enable the Group to attract and retain management of a high calibre with the necessary retail, customer service, financial, digital and service-industry skills and credentials required to deliver a sustainable business model and drive shareholder returns. Remuneration arrangements are set at levels appropriate to achieving this goal without paying more than is considered necessary. Benchmarking exercises are undertaken at appropriate intervals to inform the positioning of executives' pay relative to the market and, without seeking to "match the median", to identify and mitigate the risk of losing strong performers.
• Link variable pay to performance and the delivery of the agreed strategy — Provide management with the opportunity to earn competitive remuneration through annual and long-term variable pay arrangements that are designed to support delivery against key strategic objectives. Performance measures are aligned with strategic goals so that remuneration arrangements are transparent to executives, shareholders and other stakeholders. Different elements of executive pay are delivered over the short and longer term and are designed to ensure that a substantial proportion of the executives' remuneration is variable and performance-related.
• Align executives as shareholders — Ensure management's interests are aligned with those of shareholders by incentivising management to deliver the Group's long-term strategy of a sustainable, growing business and thus enhance shareholder value. A significant portion of reward is delivered in shares to create alignment of interests.
• Drive sustainable performance — Remuneration arrangements are designed to support the sustainable delivery of performance and to prevent excessive risk taking.

Enhanced displays and, in selected stores, the ability to try pressure washers.

Key elements of executive remuneration policy

Space to assess and consider premium cycles.

Other information

2011 And 2012 psp awards performance condition

Awards made under the PSP in 2011 and 2012 vest subject to the achievement of stretching TSR and EPS targets. The vesting of 50% of the awards will be determined by the Group's relative Total Shareholder Return ("TSR") performance when measured against a general retailers' comparator group chosen from the FTSE 350. The vesting of the other 50% will be determined by the Group's absolute Earnings per Share ("EPS") growth performance compared against RPI over the performance period.

Shareholding guidelines

The Committee believes that it is important that Executive Directors' interests are aligned with those of our shareholders to incentivise them to deliver the corporate strategy, thus creating value for all shareholders. Executive Directors are encouraged to acquire and retain shares with a value equal to 100% of their annual base salary. Executive Directors have a five-year period to build this shareholding following their appointment. However, the Committee retains its discretion to extend this period in instances it considers such extension appropriate. Current Executive Director shareholdings are disclosed in the Annual Remuneration Report.

Legacy awards

The Committee reserves the right to make any remuneration payments and payments for loss of office (including the exercise of any discretions available to it in connection with such payments) notwithstanding that they are not in line with the Policy set out above where the terms of the payment were agreed (i) before the Policy came into effect or (ii) at a time when the relevant individual was not a director of the Company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a director of the Company. For these purposes "payments" includes the Committee satisfying awards of variable remuneration and an award over shares is "agreed" at the time the award is granted.

Minor amendments

The Committee may however make minor amendments to the policy set out above (for regulatory, exchange control, tax or administrative purposes or to take account of a change in legislation) without obtaining shareholder approval for that amendment.

Plan rules

Awards under the Deferred Bonus Plan, Performance Share Plan and Co-Investment Award will be operated in accordance with the rules of the plans. In the event of a variation of the Company's share capital or a demerger, delisting, special dividend, rights issue or other event, which may, in the Committee's opinion, impact the value of awards, the terms of awards may be adjusted. In addition, the Committee may amend an award's performance conditions where an event occurs which causes the Committee to reasonably consider that an amended performance condition would be, in the case of the PSP, a fairer measure of performance and a more effective incentive and, in the case of the Co-Investment Award, more appropriate and not be materially less difficult to satisfy. The rules may be amended in accordance with their terms.

Cash

Awards may be settled in cash at the discretion of the Committee.

Remuneration arrangements in different performance scenarios

As outlined above, the remuneration policy is designed to ensure that a substantial proportion of the Executive Directors' remuneration is variable and performance-related. By linking the remuneration of the individual Executive Director to the performance of the Company, the Committee seeks, as far as possible, to motivate that individual towards superior business performance and shareholder value creation, and to only pay rewards when these goals have been realised. Performance measures are aligned with strategic goals so that remuneration arrangements are transparent to Directors, shareholders and other stakeholders.

The charts below illustrate remuneration arrangements in different performance scenarios. The assumptions for each scenario are outlined below:

The one-off CEO Co-Investment award has not been included in the scenario chart as there is no intention to grant further awards.

The above scenarios do not take into account share price growth and any additional dividends that may be earned are not taken into account.

Performance conditions

Annual bonus: The bonus is subject to a mix of financial and strategic measures. These measures are selected to provide an appropriate balance between profitability and strategic objectives and to incentivise individual directors to meet corporate targets and drive individual performance. Targets are set on an annual basis taking into account internal and external expectations of performance.

Performance Share Plan: The performance measures for 2014 awards are Group Revenue and EBITDA growth. Revenue growth is a clear reaction to the Getting Into Gear 2016 programme and is easily identified by both management and shareholders. However, in order to add value for shareholders, revenue improvements need to lead through to improved profitability. The majority of the PSP award is therefore subject to improved profit performance. Growth in EBITDA is a measure of operational profit performance and operational cash management, with a clear line of sight for management. Given the evolution in strategy and the consequent focus on investment for long term shareholder value, EBITDA is a more appropriate measure of the effective delivery of the strategy. At the same time, to ensure a continued focus on cash management a target/underpin of net debt/EBITDA has been introduced. Targets are set taking into account internal and external expectations of performance.

The Committee may determine that different performance measures will apply to future PSP awards.

Recruitment remuneration policy

When hiring a new Executive Director, it would be expected that the structure and quantum of the variable pay elements would reflect those set out in the policy table above. However, at recruitment, the Committee would retain the discretion to flex the balance between annual and long-term incentives and the measures used to assess performance for these elements, with the intention that a significant proportion would be delivered in shares subject and that variable pay would be subject to performance conditions. In all cases the value of any variable pay that will be granted in respect of an executive's recruitment (excluding any buyout compensation for the 'loss' of existing variable remuneration benefits) will be a maximum of 375% of annual salary.

The Committee may also make arrangements to compensate the new executive for 'loss' of existing remuneration when leaving a previous employer. In doing so the Committee may take account of the form in which they were granted; any relevant performance conditions; the length of time that any relevant performance periods have to run; and the organisation which previously employed the Executive. The Committee will seek to deliver buy-out arrangements on a broadly like for like basis to those forfeited.

When determining salary levels for a new Executive Director, the Committee may set the initial salary level towards the lower end of market practice and may award higher salary increases in the first few years as the individual gains in experience to move them towards a more market normal level.

To facilitate buy-out awards outlined above, in the event of recruitment, the Committee may grant awards to a new Executive Director under the Listing Rule 9.4.2 which allows for the granting of awards to facilitate, in unusual circumstances, the recruitment of an Executive Director without seeking prior shareholder approval or under other relevant Company incentive plans.

In the event that an internal candidate was promoted to the Board legacy terms and conditions would normally be honoured, including pension entitlements and any outstanding incentive awards.

Remuneration arrangements elsewhere in the group

Whilst our remuneration policy follows the same principles across the Group, remuneration packages for colleagues reflect their different roles and experiences, and market practice for similar roles.

The remuneration policy for senior executives in the Group is similar to the policy for Executive Directors as set out in this report - a substantial proportion of remuneration is performance related in order to encourage and reward superior business performance and shareholder returns and remuneration is linked to both individual and Company performance. Basic salary is targeted at normal commercial rates for comparable roles and is benchmarked on a regular basis. Bonuses can be earned on the same basis as the Executive Directors. Senior Executives immediately below Board level also benefit from participation in the PSP.

Increases to executive managers' base salaries are considered at the same time as all other colleagues across the Group and increases are generally in line with all colleagues.

All of the Group's c.12,000 colleagues are eligible to join the Halfords Sharesave Plan (SAYE) after they have served one complete month's service. At the same time they are all eligible for some form of quarterly or full year bonus, although the type, limits and performance conditions vary according to job level. Senior managers and other key management individuals are invited to join the Company Share Option Scheme.

In 2013/14 all newly appointed colleagues and other existing colleagues who had experienced a 'joining-trigger' event were eligible to join the Halfords Pension Plan 2009. All members of the Pension Plan are required to make a minimum contribution of 3% and the Company also contributes a minimum of 3%, dependent on length of service and seniority. During the year the Company has met its obligations under the pensions auto enrolment legislation, auto enrolling all other colleagues as appropriate.

Executive directors' service agreements

Term and notice periods

The Company's policy in relation to contractual terms on termination, and any payments made, is that they should be fair to the individual, the Company and shareholders. Failure should not be rewarded and the departing Executive's duty to mitigate any loss he suffers should be recognised. The Committee periodically reviews the Group's policy on the duration of Executive Directors' service agreements, and the notice periods and termination provisions contained in those agreements. The Company is aware that companies are encouraged to consider notice periods of less than 12 months, and in contracting with the CEO it was agreed that a notice period of six months was appropriate. The notice periods of the other Executive Directors remains limited to 12 months. The Committee policy is that notice period for new Executive Directors will be no more than 12 months. The Committee will continue to review this policy, to ensure that it remains in line with the Company's overall remuneration policy

1. Andrew Findlay was appointed to the Board on 1 February 2011 and his service agreement was effective from that date.
2. Paul McClenaghan resigned on 12 April 2013.

Termination of contract

No compensation would be payable if a service contract were to be terminated by notice from an Executive Director or for lawful termination by the Company (other than as set out below). The Company may terminate service agreements in accordance with the appropriate notice periods. In the event of early termination (other than for a reason justifying summary termination in accordance with the terms of the service agreement) the Company may (but is not obliged to) pay to the Executive Director, in lieu of notice, a sum equal to the Executive Director's then salary, benefits and pension contributions, which he would have received during the contractual notice period (12 months for the CFO and six months for the CEO), the sum of which shall normally be payable in monthly instalments.

Executive Directors who are considered to be good leavers may, if the Committee determines, receive a bonus for the financial year in which they leave employment. Such bonus will normally be calculated on a pro rata basis by reference to their period of service in the financial period in which their employment is terminated and performance against targets.

Mitigation on termination

Where a contract has been terminated early the Executive Director shall use their best endeavours to secure an alternative source of remuneration, thus mitigating any loss to the Company, and shall provide the Board with evidence of such endeavours upon their reasonable request. If the Executive Director fails to provide such evidence the Board may cease all further payments of compensation. To the extent that the Executive Director receives any sums as a result of alternative employment or provision of services while he is receiving such payments from the Company, the payments may be reduced by the amount of such sums. In good leaver circumstances the Executive Director might be offered a lump sum termination payment paid at the time they cease employment which would normally be less than he would receive if he were to be paid his annual salary and benefits over 12 months (six months for the CEO).

Change of control

The service agreements of Executive Directors do not provide for any enhanced payments in the event of a change of control of the Company.

The Executive Directors' services contracts are available for inspection by shareholders at the Company's registered office.

Share plans – leaver treatment

The treatment of outstanding share awards in the event that an Executive Director ceases to hold office or employment with the Group of the Company's associated companies is governed by the relevant share plan rules. The following table summarises leaver provisions under the executive share plans.

The leavers' treatment under the Halfords Sharesave Scheme is determined in accordance with HMRC provisions.

In the event of an individual's misconduct all outstanding share awards would generally be forfeited.

Change of control

In the event of a change of control of the Company, PSP awards may vest (pro-rated for time elapsed in the performance period unless the Committee determines otherwise) to the extent that the Committee determines the performance condition should be deemed satisfied having regarding to the Company's progress towards that condition. The Committee may allow awards to vest on the same basis in the event of a voluntary winding up or reconstruction of the company or a demerger except that in the event of a demerger [or reconstruction] the Committee may determine the extent to which awards shall be time pro-rated.

In the event of a change of control, the co-investment award may vest to the extent the Committee determines, taking into account the extent to which the performance conditions have been met and, unless the Committee determines otherwise, the period of time between grant and the relevant event and such other relevant factors (such as the performance of the Company) as the Committee considers appropriate. The Committee may determine that awards should vest on the same basis in the event of a winding-up of the Company or if the Company is affected by a demerger, de-listing, special dividend or other event which may in the Committee's opinion affect the value of awards.

DBP awards may vest on a change of control, winding up or demerger of the Company.

Alternatively awards may be rolled over into equivalent awards in a different company.

Key elements of non-executive remuneration policy

Appointment

None of the Non-Executive Directors has an employment contract with the Company. However, each has entered into a letter of appointment with the Company confirming their appointment for a period of three years, unless terminated by either party giving the other not less than three months' notice or by the Company on payment of fees in lieu of notice.

The remuneration package for a newly appointed Non-Executive Director would normally be in line with the structure set out in the policy table for Non-Executive Directors above.

The appointment period for each Non-Executive Director is set out below:

Their appointments are subject to the provisions of the Companies Act 1985 and 2006 and the Company's Articles of Association and in particular the need for re-election. Continuation of an individual Non-Executive Director's appointment is also contingent on that Non-Executive Director's satisfactory performance, which is evaluated annually by the Chairman. The Chairman is evaluated by the Senior Independent Director.

The Non-Executive Directors' letters of appointment are available for inspection by shareholders at the Company's registered offices.

Termination of non-executive directors' letters of appointment

No compensation would be payable to a Non-Executive Director if his or her engagement were terminated as a result of him or her retiring by rotation at an Annual General Meeting, not being elected or re-elected at an Annual General Meeting or otherwise ceasing to hold office under the provisions of the Articles of Association of the Company. There are no provisions for compensation being payable upon early termination of the appointment of a Non-Executive Director.

Dialogue with shareholders

The views of our shareholders are very important to the Committee and it is our policy to consult with our largest shareholders in advance of making any material changes to the executive remuneration arrangements.

In 2013 the Committee consulted with shareholders regarding changing the performance measures for the PSP from TSR and EPS to Revenue and EBITDA with a net debt underpin. The Committee found the consultation constructive and the feedback from shareholders resulted in a change in the ratio of Revenue and EBITDA and the introduction of a retention period of two years for shares that vest by virtue of employing the performance multiplier.

Dialogue with employees

The Committee generally considers pay and employment conditions elsewhere in the Group when considering pay for Executive Directors and senior management. When considering base salary increases, the Committee reviews overall levels of base pay increases offered to other employees in the Group.

The Committee does not consult directly with employees regarding Executive Directors' remuneration. However, at regular intervals the Company conducts a survey of the views of employees in respect of their experience of working at Halfords including their own reward.

Bright and engaging product brands.