Further written evidence submitted by
CDC Group plc
Breakdown of the costs of the salary and bonus payments
for CDC in 2009.
Salary: £3.2 million.
Short-term bonus payments: £1.5 million.
Long-Term Incentive Payments: £1.3 million.
Total: £6 million.
This total represents around 45% of the organisation's
costs which is not unusual in a company that has no assets other
than its employees.
Three additional questions on remuneration were asked,
as follows:
5.1 What percentage of an employee's salary
can be awarded in an annual bonus?
5.2 In terms of the LTIP, is it right that
the highest possible pay-out is 240% of basic salary?
5.3 What percentage of pay is contingent on
performance?
CDC RESPONSE TO
THE IDSC'S
SUPPLEMENTARY QUESTIONS
ON REMUNERATION
CDC's remuneration framework was agreed with DFID
and is benchmarked against the lower quartile of the fund-of-funds
industry. The principle of relating pay to performance is central
to the framework. CDC's performance is assessed in terms of financial
sustainability and development impact and all bonus awards are
made within the context of successful performance.
5.1 and 5.3 What percentage of an employee's salary
can be awarded in an annual bonus? What percentage of pay is contingent
on performance?
The percentage of salary that can be awarded as an
annual bonus varies and is dependent on a number of factors. All
these factors are based on performance at the individual and company
levels. The contribution the person's role within CDC makes to
the overall performance of the company is one factor. For example,
a member of the investment team has a higher direct impact in
this respect than a member of the Human Resources or Finance Teams.
In addition, the degree of responsibility and seniority of the
individual within the company is a factor.
Individual performance is assessed and monitored
through an annual performance appraisal system and is reviewed
by the company's Human Resources Committee. At the beginning
of each year, objectives are agreed between line managers and
employees. Individuals' objectives are aligned to the company's
objectives. Therefore, any annual bonus awarded takes into account
both company and individual performance. Any bonus payment is
contingent on the company achieving or exceeding the targets set
by the Remuneration Committee in line with the overall framework
set by DFID.
Performance against objectives is monitored and reviewed
regularly and an annual appraisal is conducted at the end of the
year. Each line manager is asked to score employee performance
against a range of considerations.
Performance and the attainment of high standards,
therefore, are fundamental to the appraisal system and to the
awarding of any bonus. For bonuses paid in March 2010 for 2009
performance, the average percentage was 47.5% of salary.
5.2 In terms of the LTIP, is it right that
the highest possible pay-out is 240% of basic salary?
The Long Term Incentive Plan ("LTIP") is
based on the company's financial and developmental performance
over the longer term. The assessment is made over a three year
rolling basis. Any bonuses paid under the plan are therefore
entirely dependent on CDC achieving the targets set by DFID under
the remuneration framework. This means that if the company does
not meet these targets, no bonuses are paid under the plan. For
example, no LTIP payments will be made for the three year period
ending in 2010 because the financial performance threshold has
not been met. DFID revised the LTIP and an updated plan has been
in place since 2008. Under the new plan, if CDC meets all the
targets set by DFID and achieves an average portfolio annual return
of 10% pa, the maximum pay-out for the CEO would be 0.83 times
base salary.
1. What proportion of the investment decisions
taken by CDC's fund managers does CDC review?
CDC's intermediated model means that it is the fund
managers who are responsible for day to day investment decisions
and for the day to day oversight of the businesses in which CDC
is invested. Before committing capital to a fund, CDC undertakes
a lengthy process to ensure that each fund has a sound investment
strategy, including specific parameters governing the sectors
and geography in which the fund is permitted to make investments.
Furthermore, fund managers must commit to an investment code that
sets out the environmental, social and governance (ESG) standards
to which investments must adhere, programmes to improve these
where necessary, and an "exclusion list" of investments
that are prohibited such as those in armaments.
CDC receives quarterly reports from fund managers
and reviews the progress of all funds on a bi-annual basis. Specific
annual reporting on ESG matters is also required, including inherent
ESG risk ratings and a quality assessment of ESG management systems
at each portfolio company in the Fund as well as any ESG issues,
realised improvements or future targets. Investments which are
regarded as having a high ESG risk rating are visited on an as
needed basis. Twice in the life of a fund a detailed evaluation
to assess development impact is carried out. These evaluations,
at least half of which are carried out by an independent consultant,
consider the development outcome of a fund from the perspective
of financial performance, economic performance, ESG performance
and private sector development. CDC also reviews its own effectiveness
in relation to raising the fund and assisting the fund manager.
2. What happens if CDC disagrees with an investment
decision taken by a fund manager? What power can CDC exercise
in that situation?
As an intermediated investor, CDC conducts lengthy
and thorough due diligence on its fund managers prior to committing
capital to their funds. CDC's investment decision is the
decision whether or not to commit capital to a particular fund.
The fund manager then has the responsibility to source transactions
and to make the investment decisions following the fund strategy
which will have been agreed with CDC.
If CDC has concerns about a fund manager's investment
decisions or performance, it will typically raise those concerns
through the seat it has on its investee funds' advisory boards/committees.
In the event that CDC and other investors conclude
that a fund manager has acted negligently or fraudulently in relation
to an investment decision (and that negligence or fraud is proven),
the relationship may be terminated.
Furthermore, if CDC is dissatisfied with a fund manager's
performance then a "without cause" termination right
can typically be exercised, although in this scenario compensatory
payments would usually be made to the outgoing fund manager.
3. How often is CDC in contact with its fund
managers once CDC has made its investment?
The frequency of contact varies between fund managers.
As mentioned above, the minimum formal requirement is quarterly
reports from fund managers, bi-annual reviews with CDC, and a
specific annual report on ESG matters is also required. Any serious
incident (for example, a fatality or material breach of law) is
obliged to be reported immediately. In addition, CDC often sits
on the fund managers' advisory committees, as well spending time
with fund managers on scheduled investor days. Visits are also
made to investee companies, especially those that have been given
a high ESG risk rating.
On an informal basis, however, CDC will usually be
in contact more frequently than this either by phone or by visiting
the fund manager in their country of operation.
4. Information regarding the 2300 employees
listed in the accounts
A very small number of investee companies held directly
by CDC Group plc are consolidated in the group accounts in 2009
under technical accounting rules. These investee companies are
direct investments originating from CDC Group plc activity prior
to 2004. These investments are managed for CDC Group plc by an
external investment manager (Actis), and it should be appreciated
that CDC Group plc does not set the terms or conditions of employment
in the investee companies.
The following data table (below) relates only to
the remuneration of the employees of those investee companies
consolidated in the group financial statements, and this data
does not include CDC Group plc. Information regarding remuneration
of direct employees of CDC Group plc has been provided separately
by email sent to Emily Harrisson (Tuesday 14 December at 13.51).
The figures are estimated totals for 2010, based
on the information most recently reported to CDC Group plc for
group accounting at 30 June 2010. Note that the total number
of employees for these consolidated companies is now 1,110, down
from 2,154 at year end 2009. This is principally due to the sale
of the Globeleq companies, whose employees and wages are therefore
no longer included in the CDC Group plc accounts.
| Company | Average employee numbers
| Estimated annualised salaries |
| | 2010 | 2010
|
| | | £000
|
| Continuing operations |
| |
| African Forests Group Ltd & Kilombero Valley Teak Co Ltd
| 244 | 463
|
| Tatepa Tea | 200
| 122 |
| DFCU | 401
| 4061 |
| Total - continuing operations | 845
| 4646 |
| | | |
| Operations discontinued during 2010 |
| |
| Equatoria Teak Company Limited | 258
| 373 |
| Equatoria Teak (Services) Limited | 7
| 39 |
| Total - operations discontinued during 2010
| 265 | 413
|
| | | |
| Total - continuing and discontinued operations
| 1,110 | 5058
|
How we choose fund managers
The investment profession is under-developed in many poorer countries
and capacity building the industry is an important part of CDC's
development impact. We want to work with local fund managers
and we do not generally support the "fly-in-fly-out"
model used by some based in the West. The vast majority of our
managers are local teams.
We are looking for fund managers who know the local business environment,
understand CDC's development impact objectives and the importance
of financial sustainability. We also only appoint managers who
will abide by CDC's Investment Code. We are looking for managers
willing to come on the same journey as CDC and who are the best
fit for us.
We start the search for managers with a detailed market mapping
of the particular region or country where we wish to invest to
see what managers there are on the ground. If there are no suitable
managers, we take the initiative and establish a fund. A good
example of this is the GEF Africa Sustainable Forestry Fund.
We recognised Africa's potential in forestry, put out a tender
for fund managers to make proposals, appointed a fund manager
and invested US$50 million. We expect a further US$100 million
to US$150 million to be committed alongside us.
Often we help build a team on the ground. We work with individuals
to bring a team together, provide practical help and support,
give guidance on the prospective fund's structure, advise on managing
environmental, social and governance ("ESG") matters
and help identify possible investors. This is an important developmental
contribution for CDC. 60% of our managers are managing private
equity funds for the first time.
CDC is also well-known in emerging markets and fund managers with
good investment strategies and experience, frequently seek us
out.
Once we are ready to take things to the next stage, we conduct
extensive due diligence on the fund, the prospective manager and
all members of the team. This involves: agreeing with the fund
manager the objectives of the fund; understanding fully how the
fund will operate such as its geographic and sectoral spheres
of operation; agreeing the types of transaction and financial
instrument to be used; investigating the markets in which the
fund will invest; checking and agreeing the governance arrangements;
checking track records of the fund manager and the team; conducting
thorough "know your client" and anti-money laundering
checks; full referencing of the team; and so on. Detailed fund
terms will also need to be agreed.
All funds are regularly reviewed and constantly monitored. We
look at what investments have been made and how the fund is performing
against the strategy agreed. Funds are also reviewed for development
impact at the midpoint and at the end of the fund, often using
independent consultants. If an investment within a fund has ESG
issues, then that investment is thoroughly monitored and appropriate
action is agreed with the fund manager.
SMEs
17% of investee businesses are SMEs (149 out of 882).
15% of all our funds are SME funds (21 out of 139 funds).
7% of our funding has gone into SMEs.
CDC's Investment Policy set by DFID allows us to invest up to
£25 million a year in SME funds in middle income countries.
Policy on offshore financial centres
We do invest in funds domiciled in offshore financial centres
because this is the most efficient way of pooling capital for
investment in businesses in the developing world. We only invest
through OECD's "white list" offshore financial centres,
with the exception of one fund from the mid-1990s for the Pacific
Region which is domiciled in Vanuatu, currently on the OECD's
"grey list", which means that it has committed to making
reforms such that it could progress to the "white list".
Local fund managers
Helping to build capacity in the investment profession in poorer
countries is an important part of CDC's development impact.
61 of our 70 fund managers are based in the countries where CDC
invests. That represents 87% of our fund managers.
96% of new investments made in 2010 (to the end of November) were
made to local fund managers and 89% of CDC's total portfolio of
investments is with local fund managers.
How we measure additionality
The system CDC uses to measure financial additionality has been
agreed by DFID. We look firstly at how much was invested alongside
us by other investors in the funds where our capital is at work.
If the fund is with a first-time fund manager, CDC is deemed
to have had a particularly catalytic effect. This is because
first-time fund managers often find it hard to attract capital
from private investors since they do not have the track record
that other investors usually require. CDC's presence in such
funds acts as a "stamp of approval" for other investors.
Secondly, we look at how much capital is from private investors
and how much is from other DFIs. The long-term aim is to "crowd
in" private investors. A high proportion of private investors
investing alongside CDC in a fund also signifies CDC's additionality.
Thirdly, we look at how many of our funds reached their target
fund levels. Since CDC began operating as a fund-of-funds, nearly
40% of funds to which we have committed capital have failed to
reach their initial target size. This is an important indication
of the extent to which poor countries struggle to attract investment.
Finally, we review other additionality effects such as the value
added by CDC in getting the fund up and running, contributions
to environmental, social and governance standards, advice to the
fund manager, and discussions with other investors.
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