Responsibilities of the remuneration committee

Executive remuneration packages are prudently designed to attract, motivate and retain Directors of the high calibre needed to maintain the Group's position and to reward them for enhancing Shareholder value. It is the responsibility of the Remuneration Committee to consider the experience and value the individual Directors contribute to the Group; measure the performance of the Executive Directors and key members of senior management, and determine their annual remuneration package.

Members of the remuneration committee

Polly Williams (Chair), Independent Non-Executive Director

Peter Bucher, Independent Non-Executive Director (retired 31 December 2018)

Terry Twigger, Independent Non-Executive Director

Meetings of the remuneration committee

The Remuneration Committee met three times during 2018 with attendance on the dates as follows:

Performance evaluation of the remuneration committee

During the year, the Remuneration Committee reviewed its performance as part of the Board's evaluation process. The Remuneration Committee considered it had adequate skills and experience to perform its responsibilities and, where considered appropriate, employs the services of outside remuneration consultants. The Remuneration Committee used advisory services as outlined in the Remuneration Report - Annual Report.

Remuneration for the Executive Directors

There are five main elements of the remuneration package for Executive Directors and senior management:

• Basic annual salary;
• Benefits-in-kind;
• Pension arrangements;
• Annual bonus; and
• Long-term share incentives.

The Company's policy is that a significant proportion of the remuneration of the Executive Directors should be performance-related. As described below, Executive Directors may earn an annual bonus together with the long-term benefits of participation in share award schemes.

The Remuneration Committee makes recommendations to the Board. No Director plays a part in any discussion regarding his or her own remuneration.

Basic salary

Directors' basic salaries are reviewed by the Remuneration Committee each year and when an individual changes position or responsibility. The basic salaries of our CEO and CFO during 2018 were £390,000 and £280,000 respectively.

Benefits-in-kind

The Executive and Non-Executive Directors receive certain benefits-in-kind, principally life assurance and private medical insurance. In addition, Gavin Griggs receives a car allowance and Andy Sng receives a housing allowance relating to his relocation to Shanghai where he spends approximately half his time.

Pension arrangements

In the UK, the Group operates a "Stakeholder Pension Scheme" and contributes 4% of base salary into this scheme on behalf of the participants including Executive Directors.

In the USA, the Group operates a defined contribution "401K Plan". The Group matches the participants' contribution to this plan, including Executive Directors, up to 4% of the Director's salary.

In Singapore, the Group contributes to the Central Provident Fund "CPF" in line with local statutory requirements. The Group matches the participants' contribution to this plan, including Executive Directors, up to 6% of the Director's salary and bonus.

Annual bonuses

The Remuneration Committee establishes the profit thresholds that must be met for each financial year before a cash or share bonus is to be paid. Account is also taken of the relative success of the different parts of the business for which the Executive Directors are responsible..

* To meet the 100% bonus pay out for each of these Executive Directors, the corresponding adjusted profit before tax target are as follows: Duncan Penny and Gavin Griggs – £45.1 million, Mike Laver - £52.8 million. The remuneration committee will harmonise these stretch targets in 2019. The remuneration committee considered the adjusted profit before tax targets to be sufficiently challenging to justify pay out at 75% of maximum for the CEO and CFO. For Andy Sng to meet the 100% bonus the Asia adjusted operating profit would need to be US$8.2 million. For 2019, annual bonus operation has been amended to align the stretch target across the executive team excluding our VP Asia.

The 2018 annual bonus for Duncan Penny, Gavin Griggs and Mike Laver was based solely on the Group's adjusted profit before tax. The threshold for bonuses to start was £37.9 million, 5% ahead of the adjusted profit before tax achieved in 2017. On-target performance set at £41.5 million, 15% ahead of adjusted profit before tax achieved in 2017. The bonus was structured on a linear pro rata basis.

In line with the Remuneration Policy, 50% of annual bonuses will be paid in cash and the remaining 50% will be awarded in shares vesting over two years from 31 December 2018. The details of each Executive Director are shown in the table in the Remuneration Report - Annual Report.

Long-term share incentives

Details of all outstanding long-term incentive awards and deferred bonus awards held by Executive Directors are laid out later in this report. Details of the terms and performance conditions applied to each round of awards are set out below.

Long-term incentive plan

LTIP awards may be made in the form of conditional share awards, nil or nominal cost or deferred cash. The LTIP will also provide for awards to be structured as stock appreciation or phantom rights, which may be suitable for awards granted in overseas jurisdictions.

The vesting of these awards depends on two separate performance conditions over a three-year period as outlined below. 50% of the award will vest three years after the grant date with the remaining 50% vesting 12 months later. Vesting at threshold performance levels is 25% of the maximum.

Up to 50% of the total Shares subject to the Award will vest dependent upon compound annual growth rates of adjusted Earnings Per Share (EPS) over a three-year period.

Vesting between the adjusted EPS targets will be measured on a straight-line basis.

Up to 50% of the total Shares subject to the Award will vest dependent upon the achievement of the Company's Total Shareholder Return ("TSR") measured against that of the FTSE 250 over the same three-year period.

Vesting between the median and the 75th percentile will be measured on a straight-line basis.

On 16 May 2018, 54,199 nominal-priced options were awarded under this plan and with the performance condition specified above, including to Executive Directors. The performance period for the EPS and TSR condition is measured from 1 January 2018 to 31 December 2020.

On 4 September 2018, 800 nominal-priced options were awarded under this plan and with the performance condition specified above. The performance period for the EPS and TSR condition is measured from 1 January 2018 to 31 December 2020.

The detail of the LTIP awards by Executive Director is shown in the table in the Remuneration Report - Annual Report.

Share option plans

The Group operated The XP Power Share Option Plan (the "Plan") as approved by the Shareholders on 2 April 2012. This Plan allowed the Company to grant options up to 1,924,229 shares, representing 10% of the issued share capital at the time the Plan was set up.

The share options granted in February 2016 under this plan vested in February 2019 as described below. Vesting of these outstanding options is based on Total Shareholder Return relative to the FTSE 350 Electronic and Electrical Equipment Sector.

No awards were due to vest in 2018.

At 31 December 2018, the total number of unvested share options in this scheme was 381,000 of which 85,000 were awarded to Executive Directors. Their potential value, assuming 100% of the awards vest using the closing share price of £21.05 on 31 December 2018, was £2,160,000. The first 50% tranche of awards made to Executive Directors under this plan vested 79% in February 2019. The remaining 50% tranche is due to vest in February 2020.

Following approval of the 2017 LTIP, no further options are intended to be granted to Executive Directors under this Plan.

The detail of historic Share Option Plan awards by Executive Director is shown in the table in the Remuneration Report - Annual Report.

Chief executive officer remuneration

The table below sets out the details of the Director undertaking the role of Chief Executive Officer.

The table below shows the percentage change in remuneration of the Director undertaking the role of Chief Executive Officer and the Company's employees as a whole in 2018.

Note 1 - The chosen employee group for this comparison excludes Chinese employees where there has been significant salary inflation.

All Non-Executive Directors have specific terms of engagement and their remuneration is determined by the Board within the limits set by the Articles of Association. The annual fee for each Non-Executive Director is set out below:

James Peters is the Chairman of the Board. Terry Twigger is the Senior Independent Non-Executive Director.

Aggregate directors' remuneration

The total amounts for Directors' remuneration were as follows:

Directors' remuneration for 2018

Directors' remuneration for 2017

No share options or Long Term Incentive Plan awards vested in either 2017 or 2018.

In the year under review, the base salary of the Chief Executive Officer, Duncan Penny, and Andy Sng, Executive Vice President, Asia were increased as described in the Remuneration Report - Annual Report. There were no increases to the base salaries of the other Executive Directors. For all other staff (excluding Chinese and Vietnamese manufacturing staff) the average increase was approximately 3%.

Directors' interests in ordinary shares of XP Power Limited

The Directors' interests shown below do not include deferred bonus shares.

^(a) - Andy Sng sold 4,300 shares at a price of £34.10 and 700 shares at a price of £35.40 on 15 June 2018.

Executive Directors have a period of five years from 1 April 2016 (the date of approval) or from when they join the Board to build a minimum shareholding equivalent to two years' salary. Restricted shares awarded under the annual bonus plan can be included in this measure.

In addition to the Directors' interests in the ordinary shares of the Company, the following Directors have interests in share options, nominal-priced options and deferred bonus shares:

The share options granted on 10 October 2012 vested four years after the award date.

The share options granted on 23 February 2016 vest 50% after three years and 50% after four years and are subject to the performance criteria outlined in the Remuneration Policy.

The awards granted on 17 March 2017 relate to 50% of the bonus earned in the financial year 2016 and are deferred for two years after 31 December 2016. These awards have now vested.

The awards granted on 16 May 2018 relate to 50% of the bonus earned in the financial year 2017 and are deferred for two years after 31 December 2017.

The nominal-priced options awarded on 30 May 2017, 1 November 2017 and on 16 May 2018 vest 50% after three years and 50% after four years and are subject to the performance criteria outlined in the Remuneration Policy.

The highest and lowest closing mid-market prices of the shares of XP Power Limited during 2018 were £37.40 and £20.90 per share respectively. The closing mid-market price on 31 December 2018 was £21.05 per share.

Relative importance of spend on pay

¹ Refer to Financial Statements – Note 9 for more details.

² Refer to Financial Statements – Note 24 for more details.

³ Group employment costs includes Directors' remunerations. Refer to Financial Statements – Note 5 for more details.

Remuneration in 2019 salary

Basic salaries for all Directors were reviewed against a benchmarking study that had been commissioned by the Remuneration Committee at the end of 2018. The companies used in the study were assessed for their suitability and relevance to the Company. Executive Directors will receive a basic pay increase of 3% with effect from 1 April 2019 which is in line with general increases across the Group as a whole in Europe and North America.

Executive Directors' contracts of service, which include details of remuneration, will be available for inspection at the Annual General Meeting.

Annual bonus

For 2019, the maximum bonus opportunity of the Executive Directors will again be capped at 100% of salary with on target pay-outs at 75% for the CEO, 75% for CFO, 50% for the President, Corporate Development, and 50% for the Executive Vice President, Asia. Bonuses are based 80% on the Group's adjusted profit before tax and 20% on free cash flow generation in respect of the CEO, CFO and President, Corporate Development. In respect of the Executive Vice President, Asia the bonus is based 80% on the operating profit of the Asia sales business and 20% on free cash flow generation. The Company's targets are deemed sufficiently stretching to justify a pay-out at 75% of maximum for the CEO and CFO for on target performance. Following input from shareholder communication stretch targets have been aligned for all Executive Directors which the exception of Andy Sng whose variable bonus is based on the adjusted operating profit of the Asia sales business.

The Remuneration Committee is of the opinion that given the commercial sensitivity arising in relation to the financial targets used for the annual bonus, disclosing precise targets for the bonus plan in advance would not be in Shareholders' interests. The threshold targets for bonus pay-outs in 2019 will not be set at a level lower than the performance in 2018. Actual targets, performance achieved and awards made will be published at the end of the performance periods so Shareholders can fully assess the basis of any pay-outs.

Long-term incentive awards

2019

The Remuneration Committee expects to make further awards to Executive Directors under the 2017 LTIP during 2019. The Remuneration Committee currently intends to make performance share awards to each of the CEO and the CFO at 100% of salary in line with the Company's remuneration policy and within the exceptional maximum of 200% of salary. Performance conditions will be the same as those used for the 2018 LTIP award except that the performance conditions will be weighted as to one third Total Shareholder Return versus the FTSE250 and two thirds as to adjusted earnings per share growth with threshold vesting at 25% compound annual growth and full vesting at 100%.

Non-executive remuneration

No change to the fees of the Non-Executive Directors will be made for 2019. The Board will review Non-Executive fee levels as part of the 2020 remuneration policy review.

Review of policy

The policy will be next be put to Shareholders at the 2020 Annual General Meeting in accordance with the normal triennial cycle. The Remuneration Committee will review the Remuneration Policy during 2019 in advance of this. As noted above, the Committee has already contacted the Company's major shareholders inviting them to express any views and will consult further as it sees effective and appropriate.

Advice on remuneration

During the year, h2glenfern Remuneration Advisory provided advice to the Company with respect to the Executive Directors' remuneration. Fees were charged on a cost incurred basis and totalled £13,500 in the year to 31 December 2018. h2glenfern Remuneration Advisory had previously provided advice to the Company on remuneration and has no other connection with the Company.

h2glenfern Remuneration Advisory has confirmed that it has operated in accordance with the Code of Conduct of the Remuneration Consultants' Group in relation to Executive remuneration consulting in the United Kingdom. The Remuneration Committee has therefore satisfied itself that all advice provided by h2glenfern was objective and independent.

Statement of Voting at the Annual General Meeting

The following table sets out actual voting in respect of the approval of the 2017 Remuneration Policy, the remuneration report and the Long-Term Incentive Plan:

As reflected earlier in this report, the Group is committed to ongoing Shareholders dialogue and takes an active interest in voting outcomes. Where there are substantial votes against resolutions in relation to Directors' remuneration, the reasons for any such vote will be sought, and any actions in response will be detailed.

Statement of consideration of employment conditions elsewhere in the company

The Remuneration Committee takes account of the pay and employment conditions of employees elsewhere in the Company when setting the remuneration of Executive Directors. However, it does not consult other employees when setting Executive Directors' remuneration.

Statement of shareholder views

The Company has received views from Shareholders that James Peters was not considered independent by virtue of him previously holding an executive position within the Company. James Peters is a major Shareholder and the Board considers that his interests would therefore be strongly aligned with all Shareholders.

Approval

This report was approved by the Board of Directors on 5 March 2019.