Remuneration Committee Report -XP Power Annual Report 2018

We seek your support for the Annual Report on Remuneration and the Remuneration Committee welcomes any further comments from Shareholders with respect to our approach to remuneration.

Polly Williams

Remuneration Committee Chair

Dear Shareholder

Introduction

As Chair of the XP Power Remuneration Committee, I am pleased to present the 2018 Remuneration Committee Report on behalf of the Board. It sets out the Remuneration Policy and remuneration details for the Executive and Non-Executive Directors of the Company. It has been prepared in accordance with Schedule 8 of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 and is split into two areas: the Remuneration Policy and the annual report on remuneration. The policy was approved by a binding Shareholder vote at the 2017 Annual General Meeting and the policy took effect from the date on which that resolution was passed. The policy section is not subject to audit. The policy will be next be put to Shareholders at the 2020 Annual General Meeting in accordance with the normal triennial cycle. The objectives of the Remuneration Policy are set out in the policy section below.

The annual report on remuneration provides details on remuneration in the period together with other information required by the Regulations. It will be subject to an advisory Shareholder vote at the 2019 Annual General Meeting. The Auditor has reviewed certain parts of the Directors' Remuneration Report and is required to report if the information is materially inconsistent with the financial statements.

As well as reviewing the Directors' remuneration packages, the Remuneration Committee also keeps under review the fixed and variable elements of remuneration of the key management personnel within the Group to ensure they comprise sufficient reward to motivate and retain whilst remaining prudent.

Performance and decisions on remuneration taken in 2018

The Group performed strongly during 2018 with adjusted pre-tax profits rising from £36.1 million in 2017 to £41.2 million in 2018, an increase of 14%. This followed an increase of 26% in 2017 and 13% in 2016.

During the year, the Remuneration Committee managed executive remuneration in line with the policy.

In line with the annual bonus structure detailed later in this report, annual bonuses of 71% of salary were paid to our CEO and CFO. Half of these amounts are paid in cash with half paid in shares deferred for two years.

No long-term incentive awards were due to vest in 2018.

LTIP awards under the 2017 plan were made during the year to Executive Directors and key management personnel. Following consultation with Shareholders, the Committee increased the threshold and maximum earnings per share targets in respect of the 2018 LTIP awards. The proposed LTIP awards for 2019 and the performance criteria have been disclosed in the remuneration report. As well as the incentive and retention benefits these awards provide, they also align rewards with the long-term nature of the Group's design-in cycles and revenue annuities.

Shareholder consultation

At our 2018 AGM, the resolution to approve the Remuneration Report was approved by 90.6% of votes cast. The principal comments made by proxy advisers in respect of our 2018 AGM related to executive salary increases and some comments were also made on the workings of annual bonus and disclosures on long term incentives. In the light of this vote and the proxy adviser commentary, we have made changes in respect of the workings of annual bonus to harmonise stretch targets for maximum pay outs for 2019 and increased the adjusted earnings per share targets for 2018 and 2019 for long term incentives. We have also corresponded with shareholders in early 2019 in respect of any remuneration issues to seek to understand specific concerns.