REMUNERATION COMMITTEE MEETING

REMUNERATION COMMITTEE MEETING

TO BE HELD IN

ROOM 07.374, LEVEL 7, 40 MOUNT STREET NORTH

SYDNEY

AND VIA VC IN

ROOM 16.704, 727 COLLINS STREET MELBOURNE

ON WEDNESDAY 7 MARCH 2018

COMMENCING AT 3.00PM OR IMMEDIATELY FOLLOWING RISK

COMMITTEE

DIAL IN DETAILS: 03 9288 9587 | ENTER VMR: 951296

VMR (FOR VIDEO CONFERENCE): 951296

The information contained in this board pack is confidential and may contain legal advice which is

subject to legal professional privilege.

Please do not copy or distribute its contents without authorisation.

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REMUNERATION COMMITTEE MEETING- 7 MARCH 2018

MLC LIMITED (MLCL)

--AGENDA-

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REMUNERATION COMMITTEE MEETING - 31 JANUARY 2018

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MLC Limited Remuneration Committee

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Performance and Reward Framework Review

Responsible LT member: David Hackett Author: Susan Karson Date paper submitted: 28 February, 2018 Action required:

Key point: To propose to MLC Limited Remuneration Committee (Committee) MLC Life Insurance’s (MLCL) Performance and Reward Framework for approval and implementation in FY18.

Context

At the January Committee meeting an update on progress of the design of the MLCL Performance and Reward Framework was provided to seek the Committee’s preliminary feedback to be incorporated into the final design. This paper outlines the final proposed Performance and Reward Framework taking into consideration feedback received.

Committee Feedback

Feedback from the Committee received at the January meeting is outlined below and responses are included in the supporting information pack.

• Is a profit pool approach preferable than scorecard approach from a funding perspective? • Is straight line vesting of financial measures appropriate and in line with market practice? • Do discretionary ranges create the risk of pay inequity? • Should STI deferral periods be longer than 1 year?

Key Changes

The Working Group has taken the Committee’s feedback into consideration in light of market practice and the MLC context. Specifically, the Working Group recommends:

• Scorecard approach to funding is appropriate for MLC • The vesting schedule for the financial measures to reflect greater consequence to available STI

pool funding for performance below target. • Discretionary STI ranges for each performance rating be introduced • 1 year deferral is appropriate for MLC.

The rationale for these recommendations is outlined in the supporting information pack. In addition, the Working Group also provides for the Committee’s consideration recommendations on:

• Vesting schedule for the non financial measures in the scorecard • An approach to assessing values/behaviours as part of the performance assessment process • Board discretion guidelines

The proposed final Performance and Reward framework is outlined in the supporting information pack.

For Approval

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Next Steps

Pending approval, an implementation plan will be developed to support the introduction of the new framework in FY18. It is intended that the new model be applied for the FY 18 end of year performance review process in December 2018/January 2019.

Recommendation That the Committee RESOLVE to:

• Approve the proposed Performance and Reward Framework for implementation in FY18.

List of appendices: Appendix 1: Proposed Performance and Reward Framework

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APPENDIX 1

Performance & Reward Framework Review - final recommendation

March 2018

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Purpose

Background

At the last Board Remuneration Committee (Committee) meeting in January, the Working Group (comprising management and Nippon representatives) provided the Committee with an update of the review being undertaken of MLC Life Insurance's (MLCL) Performance and Reward framework and sought preliminary feedback on the proposed approach.

The key feedback centered on the following questions from the Committee with respect to the short term incentive (STI): Whether a profit pool approach is preferable to ensure affordability? Is straight line vesting with respect to the achievement of financial STI targets in line with market practice? Does the use of discretionary ranges within individual performance ratings create the risk of pay inequity? Should STI deferral periods be longer than 1 year?

No change is being proposed to fixed annual remuneration (FAR) or the long term incentive plan (L T l). However at the last meeting, guiding principles with respect to these remuneration elements were discussed.

Today's objectives

The purpose of this paper is to: address the Committee's preliminary concerns on the STI proposal; in light of these concerns, highlight changes made since the last Committee meeting to the reward framework proposal; and put management's final recommendation to the Committee for approval.

In the Appendices we have set out high level principles governing elements of the remuneration mix (Appendix 1) and further detail on the final recommendations (Appendices 2-5).

KPMG, as the Working Group's advisor, will separately provide their own qualifications and endorsement of management's recommendation to the Committee.

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Context

It is important to note that the Working Group's final recommendations have been made to support and deliver on MLCL's strategy and reward framework objectives being:

1. To offer market competitive reward to attract and retain talent

We aim to pay competitive reward to attract and retain talent where reward is aligned primarily to the market median for roles in the insurance and finance sector.

2. To align reward to business performance and sustainable returns for shareholders

Our frameworks are structured to promote behaviour that is in line with mid to longer term sustainability, growth of the business and sound risk management.

3. To differentially reward and recognise individual and business out-performance

Our high performers will know that they are valued and recognised through differentiated reward based on out-performance in the delivery of business and individual objectives that create and grow shareholder value.

4. To offer meaningful non-financial rewards that support employee well-being

We want to be known as an employer "that cares for our people like we care for our customers". To support this, the reward framework will also provide non-financial rewards (i.e. employee benefits).

5. To empower people leaders

With appropriate flexibility and guidance, we will trust our leaders to be accountable to make the right performance, reward and recognition decisions to ensure the right outcomes for the business and employee.


Summary of final recommended STI model

The Working Group recommends the following approach to calculating and distributing the STI each year:

Our Results

,---------------~ 1 Enterprise Scorecard : : (CEO scorecard) 1 , _______________ J

+ ,---------------~ I I I Funded STI Pool I I I , _______________ J

The STI pool is calculated based on the sum of employee STI targets adjusted for MLCL performance against enterprise scorecard objectives.

A threshold, target and stretch level of performance is set each year which govern the level of pay out under each scorecard category (financial and non-financial each year).

The Board retains discretion to adjust available STI funding (0% -130%) after taking into consideration quality of financial results, MLCL management of business risks, and shareholder expectations.

See slides 5 and 6 for rationale

Performance

,---------------.. I Scorecard Assessment 1 : Including values : 1 assessment 1

~ (5 point scale) ) , ______________ _

+ ,----Co~d~c7G-;;--- ... ~ : Assessment 1

1 (3 point scale) :

'---------------~ Individual perfonnance is assessed against both 'what' is achieved against scorecard objectives and 'how' those outcomes have been achieved in line with MLCL's values.

Assessment of conduct in accordance with MLCL Code of Conduct reflected in individual's Conduct Gate Assessment.

and Appendix 2 for further detail. See Appendix 3 for further detail.

PERFORMANCE AND REWARD FRAMEWORK I MARCH 2018 20/71

STI Outcomes

,---------------~ I STI Pool Moderator 1 I I

'---------------~

,---------------~ : STI Target ! , _______________ _

,---------------~ 1 Performance Rating ~ ~ Incentive Multiple 1

----------------' -,--------------- ... I : Conduct Gate Multiple 1 , _______________ J

STI outcomes are determined as a multiple of STI target based on perfonnance rating .

People leaders detennine perfonnance rating incentive multiple from a fixed range.

Employees who receive an Amber Conduct Gate will receive a reduction of 25% to their STI total. A Red Conduct Gate results in no STI for the current Performance Year and forfeiture of any STI deferral amount from prior years that are still in restriction.

See Appendix 4 for further detail.

STI Deferral

w1.111;1.;@;;11;;M11 'hi' 0% 0%

mjf 25% 1 year

- 40% 1year

For employees in pay groups 5-7, a percentage of actual STI will be deferred in cash for a period of time after which it will be paid (subject to forfeiture conditions).

See Appendix 5 for further detail.

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Addressing Committee concerns

In addressing the Committee's concerns it is important to note that MLC as a stand alone life insurance is quite different from a bank in terms of size, revenue, volatility etc. We have designed a remuneration framework that aligns with, and supports our strategy and management's recommendations have been made in this context.

Committee concern: is a profit pool approach preferable from a funding perspective?

Management's response: a scorecard approach to form funding is more appropriate for MLCL for the following reasons:

The use of a profit pool may promote too strong a short term focus on profit which may negatively impact the long term sustainability of business (e.g. short term actions such as delaying payment of claims, temporary price increases that boost annual profit but harm long term value). Across the life insurance industry it is widely recognised that profit is not a strong measure by which to measure long term value. The scorecard funding approach drives a mix of behaviours. The use of non-financial measures across customer, execution, people and risk objectives rewards across those imperatives that drive the underlying long term success of MLC. After the last Committee meeting, the Working Group explored the option of imposing a gateway on scorecard outcomes or a cap on STI payments as a % of profit. However decided against this because:

Across the market, there is a shift away from using a gateway on scorecard outcomes given it can lead to 'all or nothing' outcomes. Even under the scorecard approach, the Board will retain the discretion to adjust the pool if financial (Profit and EV outcomes) are missed to ensure that outcomes are consistent with the shareholder experience and expectations. Discretion to reduce the pool would be based on how the Board viewed performance against the other metrics and whether it felt that the performance against those metrics was setting the business up for success in the future and therefore warranted a payout (although rt profit and EV are both missed then unlikely that execution and customer metrics would be hit so any bonus likely to be small). As the vesting schedule is currently proposed, prior to the exercise of discretion (which could reduce the pool further), the pool would never form at 100% if the financial measures were missed. In the event that financials were missed and all other aspects of the scorecard received the maximum payout of 130%, the maximum the STI could pay out would be 78%.

Performance FY18 Weightings % Payout Award STI Pool

Statutory Profit 20% 0% 0%

Embedded Value 20% 0% 0%

Customer 20% 130% 26%

Execution 20% 130% 26%

People 10% 130% 13%

Risk 10% 21m 13% 5

Total 100% 78%


Committee concern: is straight line vesting of financial measures appropriate and in line with market practice?

Management's response: rev ised vesting schedule for financial measures

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Across the market there has been a shift towards a more leveraged vesting schedule either side of 'target' (generally to provide for more upside above target). However, market practice is still mixed and the vesting schedule should always be formulated in light of how stretching the 'target' level of performance is perceived to be. For MLCL, management proposes the 'target' for FY18 under the profit and EV measure is a 'stretch target'. These targets are set against a challenging operating context, both externally and internally, specrrically:

• The industry as a whole continues to grapple with rising pressure on claims and lapses. For instance, industry IFA lapse rate increased by 0.2% to 13.6% last year, while MLC's lapse rate has improved to 13.3%, below the market average despite our relatively old book)

• IFA sales declined 6% to $495m in the year to December (MLC posted a 25% increase to $70m, the only Top 5 player to post an increase)

• In the Group segment, a number of Industry Funds have postponed their tendering activities until next year to allow them to focus on regulatory changes

• Conditions in NAB Bank channels remain challenging, while Aligned Licensees are being impacted by regulatory scrutiny and pressure to further open APLs

• The volume of regulatory activity continues to increase ( PJC, Royal Commission, Code of Practice, LIF impact on advisers, provision of claims data )

• MLC's distribution payment to NAB is still not fully variable and so may 'overpay' for the actual value of business delivered In light of the stretch in the financial targets and balanced against market practice, the vesting schedule has been revised, reflecting greater consequence to available STI pool funding for performance below target. We also considered a vesting schedule which included providing a greater upside for hitting Stretch (up to 150%), and increasing the % of Plan required to meet the EV threshold. Based on feedback from Nippon Life we have capped the upside to 130%, reduced the payout level at threshold to 50%, although left the threshold commencing to payout when 70% of plan is achieved (given expected volatility across both the Profit and EV measures).

Below Threshold

Threshold

Target

% of plan achieved

<70%

70%

100%

Stretch > target


Payout Level

Board Discretion

50%

100%

Up to 130%

6

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Committee concern: do discretionary ranges create the risk of pay inequity?

Management's response: check and balances will be put in place to monitor pay inequity

Management stands by its recommendation that each performance rating will have a STI multiple range. Discretionary ranges will allow People Leaders to differentiate within the same performance rating outcome to reflect relative performance and more easily manage outcomes on a total reward basis. People Leaders will be asked to manage to a STI budget (sum of team's STI targets) and determine individual employee multiples within the relevant performance rating range. Individual outcomes are adjusted for available STI funding. The People T earn will provide reporting and governance on performance rating distributions to ensure no apparent bias is evident in the process.

Committee concern: should STI deferral periods be longer than 1 year?

Management's response: 1 year STI deferral remains sufficient given MLCL's own circumstances

At the top end of the market (ASX50) STI deferral is generally for 2 years (vesting 50% at the end of year one and 50% at the end of year 2) but at the lower levels of the market and in private business generally deferral is not common. Deferral is generally in place to encourage retention and allow the ability for the Board to clawback payments in the case of financial misstatement I misconduct. For the MLCL Leadership Team, longer term alignment and retention is provided via the L Tl. Formal malus provisions will be implemented via the introduction of a malus policy.


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Changes made to reward proposal

Taking on board feedback from the Committee, management has refined their proposal. Key changes include:

Design element

Vesting schedules of measures under funding scorecard

Board discretion guidelines

From

Financial measures (Profit and EV)

Threshold: 70% of plan = 70% payout Target: 100% of plan = 100% payout Stretch: >100% of plan= capped at 130% payout

Straight line vesting between threshold and stretch. Board discretion above stretch and below threshold.

Non-financial measures (Customer Execution, People and Risk)

No proposed vesting schedule

Guidelines setting out circumstances I examples when the Board might exercise discretion.

Adjusted to provide for a lower payout at threshold levels of performance:

Threshold: 70% of plan = 50% payout Target: 100% of plan = 100% payout Stretch: >100% of plan= up to 130% payout

Graduated vesting between threshold and stretch Board discretion above stretch and below threshold

Targets set under each non-financial measure as per the CEO's scorecard The payout range will align with those for financial targets (between 70% and 130%).

High level guiding principles on Board's use of discretion and philosophical approach to revert to when forming a view.

In addition to addressing the Committee's feedback, the Working Group considered the integration of values assessment in the reward review process and proposes the following change to the existing structure:

Design element

Values assessment

From

Individual performance against MLCL's values' is assessed on a 4 point scale (i.e. A-D) and individuals receive a separate rating for values and a separate rating for performance


No separate rating for Values Individual performance against ML Cl's Values will form part of the overall performance assessment . To determine an overall performance rating {using 5 point scale) People Leaders will assess performance against scorecard 'WHAT' and demonstration of behaviours aligned to the Values "HOW"

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Summary of final recommendation

The Working Group is not proposing any major change to the current approach to FAR or L Tl. Proposed changes to the STI are summarised below:

Key features

Funding mechanism

'Our results' Vesting schedules (Appendix 2)

'Performance' (Appendix 3)

'STI outcomes'

(Appendix 4)

Board Discretion

Scorecard Rating

Values Rating

Overall Rating

Compliance Gateway

Incentive multiples

'STI Deferral' Deferral (Appendix 5)

Current approach

STI funded by a pool based on performance against Profit and • EV financial targets with qualitative overlay applied by the Board to reflect the quality of overall business performance including business risks, shareholder expectations and performance against non-financial objectives to determine the final funded sn

No vesting schedules in place to assess performance under the Profit and EV measures.

Discretion to vary pool between 0% - 130%. No guidelines set around the use of discretion in forming the pool.

Individual performance assessed against a 3 point rating scale , based on a set of key objectives in an individual scorecard (i.e. what has been achieved).

Individual outcomes assessed against MLCL's Values using 4 point ratting scale (A-D).

Individuals receive 2 separate ratings - one for performance against scorecard and one for values

Individuals are assessed against compliance gateway. Amber and Red gateways impact reward outcomes.

Fixed incentive multiples per performance rating determined centrally taking into consideration available STI funding and the percentage of employees in each performance rating category. Individual STI multiple capped at 2x. No People Leader discretion.

Groups 5-6: 25% deferred for 1 Yf!2r. Leadership team: 40% deferred~ye'lir.

Proposed approach

STI funded by performance against the enterprise scorecard comprising, a mix of financial and non financial measures. This will encourage the appropriate mix of behaviors across the organisation that support MLCL's broader strategic objectives beyond profit and EV and mitigate against short termism. Board discretion to vary pool from 0%-130%.

Threshold, target and stretch level of performance set each year to govern the level of pay out under each measure (financial and non-financial each year). This will provide a starting point for discussion around what is considered a minimum level of acceptable performance under which each component should pay out and what \'\Quid be considered outperformance under each measure.

Discretion to vary pool (0% to 130% ). A set of Board discretion guidelines to support the Board to determine '!Mlen it is appropriate to exercise its discretion on the size of the STI pool. This will ensure employees are not unreasonably rewarded or penalised for factors out of their control '!Mlich may influence business performance (up or down). This will ensure incentive outcomes are always aligned '!Mth shareholders' interests.

Individual performance assessed on a 5 point rating scale to provide for greater differentiation between high and low performers.

No separate rating for Values assessment Individual performance against MLCL's values' will be assessed by people leaders and taken into account in determining the overall performance rating

Individuals receive one overall rating that takes into account both scorecard performance (what) and values/behaviour assessment (how) using 5 point rating scale.

No change proposed.

Each performance rating will have a STI multiple range. Individual multiples capped at 1.5x (recognising the fact that there are no 'heroes' in the life insurance business). People Leaders manage to a STI budget (sum of team's STI targets) and determine individual employee multiple '!Mthin the range incentive multiples are determined Individual Outcomes re adjusted for available STI funding.

No change proposed.

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Appendices

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Appendix 1 - remuneration mix principles

The Working Group recommends the following concepts to govern MLCL's approach to the elements of the reward framework which comprises three components (FAR, STI and LTI):

Element

FAR

STI

LTI

Purpose

• FAR levels should be set at levels to attract and retain required talent (based on skills and experience. • Based on similar roles comparable in terms of size, scope, responsibility, FAR is set at the market median. • Primarily similar roles from life insurance companies should be used a relevant comparisons (if achievable).

However, general insurance, financial services or companies from different sectors (including from listed organisations) may also provide relevant comparisons if MLCL is chasing particular talent from those industries of for particular roles. This means a couple of comparator groups may be used as has been the case in the past.

• STI 'at target' is commonly awarded across the life insurance sector for achieving annual business objectives and targets. In this light, it is a necessary component of remuneration to attract and retain key talent in the industry.

• STI should act as a reward for delivering annual scorecard goals. Scorecard goals 'at target' should be set as challenging and not 'soft' to promote outperformance.

• The STI should be used as a tool to encourage and foster collaboration, to drive results at a MLCL level. • To encourage a 'one team' philosophy, there should not be a wide degree of variability between levels of

performance as the majority of individual's objectives should be 'shared' Group measures. • To encourage a 'one team' approach, all employees should participate in the STI.

• L Tl is intended to reward value creation over the longer term. • L Tl participation should be limited to those with direct control or influence over longer term outcomes (i.e. the

Executive Leadership T earn ).

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Appendix 2 - 'Our results'

Enterprise scorecard

The Working Group recommends that the pool be funded by an enterprise scorecard. It is proposed that the CEO scorecard, as approved by the Board on an annual basis, acts as the enterprise scorecard governing funding.

The 2018 CEO scorecard is set out below:

FY18 Weightings Performance

20% Statutory Profit

20% Embedded Value

20% Customer

20% Execution

10% People

10% Risk

Financial metrics (40%) have a material impact on outcomes for the executive leadership team and the size of the STI pool through the weighting on Profit and EV in the scorecard, recognising the importance of maximising profit and value to MLCL shareholders. Profit and EV do not act as a gateway on whether an STI pool is awarded. That is, all measures are independent of each other. Non-financial objectives (60% ), if met, can still be awarded if financial measures are not met. This approach is more common across the life insurance sector (and in the Austral ian market more broadly).


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Funding the STI pool

The Working Group recommends that vesting schedules be adopted for the financial and non financial measures.

Failure to meet the minimum performance threshold of 70% for each objective target (both financial and non-financial) will result in no funding being available for that objective. Any funding will also be at Board discretion. Further modelling is on slide

Financial Vesting Schedule

The following vesting schedule is recommended for the financial measures (Profit and EV)

Below Threshold

Threshold

Target

Stretch

% of plan achieved (Target as per CEO's scorecard)

<70%

70%

100%

> 100%


Payout level

Board Discretion

50%

100%

Up to 130%

13

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Appendix 2 - 'Our results' Funding the STI pool

Non Financial Vesting Schedule

The Working Group recommends the following vesting schedule be adopted for non-financial measures (Customer, Execution, People and Risk).

• Targets are set based on those in the CEO's scorecard. • Payout levels for each measure are in line with the financial vesting schedule between 50% (Threshold), 100% (Target) and up to 130%

(Stretch). • Pay out level for below threshold performance for all measures is at Board discretion

Measure Threshold (70%) Target -100% of target as per CEO Scorecard Stretch (>100%)

Customer Maintain FY 17 Roy Morgan Customer Satisfaction - Improve FY17 - Ranking of top 3 against first scores I positions (FY17 Rank 6 of 11 , Score 66.8%) two measures and top 3

position against the third NMG Business Capability Index (Retail) - Improve FY 17 - measure. Rank 9of11 or Score 62.99 (Competitive)

NMG Business Capability Index (Group) - Maintain Score 77.62 (Competitive) or retain top 3 position

Execution Board Discretion Board assessment (based on agreed scope and budget) Key outcomes delivered before key timing for milestones

People Maintain FY 17 Employee Engagement - Top Quartile Global High Performing Norm position (second quartile)

Risk As Per CEO Scorecard

It is recommended no threshold and stretch outcomes be set for Risk measure so as not to promote unintended consequences or inappropriate risk culture.


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Funding the STI pool - vesting schedule modelling

% 01 % 01 % 01 % 01 % 01 % 01

Achieve '0 Achieve '0 Achieve ' 0 Achieve ' 0 Achieve '0 Achieve '0

d Payout d Payout d Payout d Payout d Payout d Payout

70% 50% 80% 67% 90% 83% 100% 100% 110% 110% 120% 120%

71 % 52% 81% 68% 91 % 85% 101 % 101% 111 % 111% 121 % 121 %

72% 53% 82% 70% 92% 87% 102% 102% 112% 112% 122% 122%

73% 55% 83% 72% 93% 88% 103% 103% 113% 113% 123% 123%

74% 57% 84% 73% 94% 90% 104% 104% 114% 114% 124% 124%

75% 58% 85% 75% 95% 92% 105% 105% 115% 115% 125% 125%

76% 60% 86% 77% 96% 93% 106% 106% 116% 116% 126% 126%

77% 62% 87% 78% 97% 95% 107% 107% 117% 117% 127% 127%

78% 63% 88% 80% 98% 97% 108% 108% 118% 118% 128% 128%

79% 65% 89% 82% 99% 98% 109% 109% 119% 119% 129% 129%

Percentage of plan achieved below 70%, payout levels at Board discretion Percentage of plan achieved equal to or greater than 130% capped at 130% Payout percentages rounded to the nearest whole number

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Board discretion

In line with best market practice, the Working Group recommends that the following high level guiding principles be put to the Committee to govern the exercise of discretion:

As per the MLCL Remuneration Policy, the Board, with input from the Committee and Board Risk Committee, reserves the right to cancel or reduce any form of variable reward at any time in its absolute discretion. This includes where rewards are subsequently considered to be inappropriate given individual or business performance, to protect the financial soundness of MLCL or to respond to significant unexpected or unforeseen events.

Initial principles are set out below and are not intended to limit the Board's use of discretion in any way.

Principles governing the use of discretion:

The Board expects management to recommend, and work towards, appropriate performance targets under MLCL's incentive plans that are based upon MLCL's budgets and corporate plans. The Board does recognise that it is not possible to foresee all eventualit ies when setting performance targets under the Company's incentive programs. The Board wants to ensure these performance targets (and the rewards that they attract) are not an impediment or disincentive to management to making business decisions that are in the best interests of MLCL. The Board wishes, as much as possible, to maintain the integrity of the incentive programs in the eyes of both participants and our shareholders, so that both perceive the programs as providing a fair balance between appropriate levels of reward and acceptable levels of company performance. In exercising its discretion, the Board will be led by the principle that management should be held accountable for outcomes within their reasonable control or foresight. In exercising these principles management should be encouraged to transparently include and communicate any proposed STI and L T l effects in discussions or business papers promoting their recommendations during the course of the year. In this way any 'elephants in the room' are called out up front and a mature and clear discussion and decision point can be reached.


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Board discretion continued ...

Criteria used by the Remuneration Committee I Board to apply its discretion may include:

Factors either not known or relevant at the beginning of a financial year, which can impact performance positively or negatively during the course of the financial year (or incentive performance period); Impact of investment decisions (acquisitions and divestments) over the longer term and impairments; Consideration of short, medium and longer term shareholder outcomes; The degree of 'stretch' implicit in the measures and targets and the environment and market context in which the targets were set; Whether the operating environment during the financial year was materially different than forecast; Comparison with the performance of MLCL relative to its competitors; The emergence of any major positive or negative risk, compliance or reputational issues; The quality of the financial result as shown by its composition and consistency; and Whether leadership behaviours and MLCL values have been consistently demonstrated throughout the year.


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Appendix 3 - 'Performance'

Performance Management

It is expected that throughout the performance year people leaders and employees have regular performance discussions (at least monthly).

The conversations aim to allow:

People Leaders to support employees in achieving their scorecard goals People Leaders and employees to review the employees progress against scorecard outcomes, track how they are performing and what is expected People Leaders to provide coaching and feedback on performance against scorecard and demonstration of MLCL values People Leaders to check in on the wellbeing of employees

On at least a quarterly basis, feedback against each scorecard goal will be captured in PeopleCount to ensure a record of the conversation and performance outcomes.

To support People Leader capability to effectively set employee goals and manage performance, we have developed a training program for People Leader, "Leaders for Life - Essentials" . All People Leaders will be expected to attend the program in FY 18.



Individual scorecard goals

We want to sharpen our focus on setting employee's goals to ensure all employees are working on the right things at the right time to deliver MLCL's strategy. To support this we have changed the scorecard process from an annual approach to setting and reviewing employee scorecard goals on a quarterly basis. This will allow us to be agile as an organisation, review goals and where achieved during the year set new ones, and shift focus where it is needed at a given time.

Individual scorecard goals will:

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Scorecard Categories

Financial

Customer

Execution

People Support the Leadership Team to deliver the MLCL's strategy. Cascaded from the enterprise scorecard based on the same overarching objectives (Financial, Customer, Risk Execution, People and Risk). Be specific and meaningful to each employee, based on business unit / line performance and within their ability to directly influence the outcome (e.g. sales, claims, retention of policies etc). Be stretch in nature ( ie beyond 'day' job requirements). Targets should be challenging (but not impossible) for the employee and require significant focus and effort. Be reviewed and re-set quarterly so they remain relevant in line with MLCL's strategic priorities and encourage continuous improvement.

Mandatory Risk Objective All employees will continue to have a mandatory risk goal in their scorecard that is applicable for the whole year.

MLCL Values

Individuals will continue to be assessed against behaviours aligned to MLCL Values as part of the performance assessment process. An individual's demonstration of the values will be considered by their people leader and will form part of determining the overall performance rating. It is noted that the current values may change as as an outcome of our review of our organisational values which is currently underway.


M LC Life Values

Passion for Customers

Will to win

Be bold

Respect for People

Do the right thing

19

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Annual Performance Rating

On an annual basis, an individual's overall performance rating for the year will be determined by their People Leader taking into account:

Conduct Gate - assessment against of our Code of Conduct, compliance and ethical standards

Performance against each goal in the Scorecard (The 'What')

Demonstration of behaviours aligned to MLCL Values (The 'How')

People Leaders will determine the overall performance rating using the 5 point scale.

• The 'What ' is achieved and 'How' it is achieved aspects of performance are equally important and People Leaders will be required to exercise their judgement to determine the overall performance rating.

End of Year Leadership Team alignment sessions will ensure individuals are being assessed consistency across teams and division, that individual outcomes are consistent with team and divisional performance.

Conduct Gate - 3 point rating scale of Green, Amber or Red

Performance against Scorecard "What"

5 Point Rating Scale

Outstanding Highly Effective Effective Partially Effective Underperformance

Assessment of behaviours aligned to MLCL Values " How"

4 point rating scale

Outstanding Consistently Demonstrates Partially Demonstrates Does Not Demonstrate


Overall Assessment • 5 Point rating scale

5 · Outstanding Performance

Performance fa r exceeds expectations due to exceptionally high quality of work performed and outcomes achieved, and made an exceptional or unique contribution to MLCL

4 · Highly Effective Performance

Performance consistently exceeded expectations, and the quality of work overall was excellent.

3 • Effective Performance

Performance consistently met goals, at times possibly exceeding expectations, and the quality of work overall was very good.

2 • Partially Effective Performance

Performance did not consistently meet expectations, may have met some goals

1 • Underperformance

Performance is consistently below expectations , and/or reasonable progress toward achieving objective was not made. Significant improvement is needed in one or more important areas. 20

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Appendix 4 - 'STI outcomes'

The Working Group recommends the following process be adopted to calculating each individual's performance rating and multiple each year:

Individual Performance multiplier

Performance multiples will be determined by the People Leader from within a range aligned to each overall performance rating outcome. To be eligible for an incentive payment, an employee's overall performance rating must be 'Partially Effective Performance' or higher People Leaders will be expected to allocate their allotted STI according to the employee's relative performance throughout the year. Not everyone can outperform or exceed expectations and overall payouts need to be in line with the budgeted payout. The People team will provide reporting and governance on performance rating distributions to ensure no apparent bias is evident in the process.

Overall Individual STI outcome

The enterprise STI scorecard outcome (% of pool awarded) is multiplied by the individual performance multiple to give the overall STI performance outcome for each individual.

Rating Performance Individual multiplier

Underperformance 0%

2 Partially effective performance 0% - 65%

3 Effective performance 75% - 100%

4 Highly effective performance 100% - 120%

5 Outstanding performance 120% - 150%

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Expected distribution for at target MLCL Performance

5%

10%

70%

10%

5%

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Appendix 5 - 'STI deferral'

Approach to STI Deferral

The Working Group recommends the STI deferral amounts and timeframes remain the same as is currently in place, set out as follows:

Pay Group Level

Group 1 - 4

Group 5 - 6

Leadership Team

Deferral

0%

25%

40%

--1 Year

1 Year

The MLCL Leadership Team and Pay Group 6 and 5 roles are responsible for defining and delivering strategies and policies that meet business needs where addit ional t ime may be needed for outcomes of those strategies to be adequately measured. It therefore is considered appropriate that a percentage of any incentive paid to individuals in these roles is deferred to allow full or partial forfeiture of the deferred amount rt rewards are later considered to be inappropriate given individual or business performance. Deferred amounts may act as a retention mechanism over the deferral period. Deferred amounts will be forfeited where an employee resigns or employment is terminated by MLCL (except in circumstances of retrenchment or redundancy or where the Board exercises its discretion) before the completion of the deferral period. Deferral levels and timeframes may need to be adjusted if the Banking Executive Accountability Regime (BEAR) is expanded to capture the life insurance industry.


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