This case study illustrates how Leighton Holdings Limited’s refreshed remuneration approach supported cultural change.

1. 2012 Human Capital Conference
23–26 October
Remuneration as a lever for
cultural change

2. Disclaimer
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Page 2 Remuneration as a lever for cultural change

3. Presenters
► Dharma Chandran
Leighton Holdings Limited
dharma.chandran@leighton.com.au
► Mike Hogan
Ernst & Young Australia
michael.hogan@au.ey.com
@
Page 3 Remuneration as a lever for cultural change

4. Session overview
1. Influencing behaviors to support fundamental change
g pp g
2. Case study: Leighton Holdings Limited
Page 4 Remuneration as a lever for cultural change

5. Influencing behaviors to support
fundamental change

6. Remuneration: importance vs. attention
► Poorly designed remuneration p
y g plans can lead to negative
g
outcomes in any situation.
► Typically, remuneration is No. 3 to No. 5 on
yp y
“attraction/retention” considerations.
► Remuneration can be an immediate change lever to
redirect emphasis.
Public focus on performance/reward link
Page 6 Remuneration as a lever for cultural change

7. The balance in measurement emphasis:
an illustration
Objective Shareholder
Safety Profit
return
Risk-adjusted
Risk
Return on capital
Subjective Behavior
Non-financial Financial
Page 7 Remuneration as a lever for cultural change

8. What are companies doing or thinking
about?
“Skin in
► Short-term incentive deferral into
the game”
equity
► Material misstatements, behaviors,
Clawback undue risk
► Reward policies approval processes
policies,
Governance ► Exercise judgment
processes ► Increased remuneration committee/
I d ti itt /
board involvement — policies
Page 8 Remuneration as a lever for cultural change

9. Case study: Leighton Holdings Limited

10. Strategic management company governing
semi autonomous
semi-autonomous operating companies
Leighton Holdings
Leighton Holdings
g g
► 55,000 employees
► US$22 billion revenue
Leighton
Leighton Leighton
Asia, India HLG
Leighton
L i ht John
J h Middl ht
Leighton
L i East
Middle E t Asia, India
A i I di & Leighton
L i ht
Thiess and (45%
Contractors Holland & Africa
Properties Offshore Properties
(LMEA) Offshore
(LAIO) holding)
(LAIO)
Page 10 Remuneration as a lever for cultural change

11. Internal and external drivers for change
► Project challenges:
j g
► Two major public-private partnership projects (each experiencing cost
blowouts)
► Financial challenges:
Fi i l h ll
► AU$408.8 million loss in 2011
► Share price fell by 50% in one year
► Further 2012 earnings downgrade of AU$254m
► HR challenges:
g
► Excessive executive remuneration (especially for CEO of 23 years)
► CEO and senior executive succession
► Board turnover
Resulted in negative external perception
g p p
Page 11 Remuneration as a lever for cultural change

12. A new team
► New Chairman appointed
pp
► Third CEO in 12 months appointed August 2011
► Executive team refresh, including new Chief Risk Officer,
Group General Counsel and Chief Human Resources
Officer
► HR team in Holdings for the first time directly reporting to
CEO, with mandate to review remuneration and
succession planning
i l i
Page 12 Remuneration as a lever for cultural change

13. From old to new: refreshed remuneration
approach
Fixed Individually negotiated
y g Reference to market data, ,
remuneration default positioning policy
Short-term Discretionary, cash-based,
incentive profit-based pool
fit b d l % of TFR*, KPIs**, deferral
Discretionary, cash-based,
cash based,
Medium-term
M di t Discontinued
Di i d
incentive based on profit growth
Irregular grants of options
I l t f ti % of TFR* annual grants
TFR*,
Long-term
(every 2 to 3 years) of share rights
incentive
Service/ Individual contractual Discontinued and replaced
retention payments with equity where possible
*Total fi d
*T t l fixed remuneration
ti
** Key performance indicators
Page 13 Remuneration as a lever for cultural change

14. Response to change
► Positive feedback from all institutional shareholders/proxy
p y
advisory groups consulted to date
► More positive p
p public view
“Executive pay changes introduced ... recognized the need
p y g g
to align executives’ interests with those of shareholders”
— Australian Financial Review, February 2012
“Finally aligned ... with modern governance standards”
— The Australian, February 2012
Page 14 Remuneration as a lever for cultural change

15. Implementation approach
► Medium-term incentive discontinued
and no further service and retention
Abolition
grants (except with explicit committee
approval)
l)
► New contracts
Substitution ► Shift in mix toward longer-term and
equity-based remuneration
q y
► Service and retention payments
Buyout
B t replaced by equity grants where
possible
Page 15 Remuneration as a lever for cultural change

16. Rollout of leadership development program
Why? The quality and capability of our leaders is critical to successfully
meet business challenges and execute our new strategy
Who? The group’s top 75 leaders
group s
► Move to a performance culture
Objectives? ► Define leadership capability needs; gain insight into each
leader’s strengths and development opportunities
► Inform succession plans with robust and comparative data;
input into risk management processes
► Comply phased approach has beenrequirements
Ongoing. A with corporate governance adopted to rollout the
When?
program; conducted in four p
p g phases over a six-month p
period.
Page 16 Remuneration as a lever for cultural change

17. The journey continues
1. Develop and rollout new g
p group HR and remuneration
p
policies
2. Institutionalize and harmonize changes across group
globally
3. Embed new, enhanced governance practices
4. Continue leadership development — three-year journey
Page 17 Remuneration as a lever for cultural change

18. Key takeaways
► Understanding the issues
g
► The key: clearly identify the issues then focus on developing and
implementing solutions to deliver change
► Focus on key levers of change
► In any given year, can only focus on a limited number of levers of
change
► Senior support
► Objectives only achieved with “champions of change” at the top
champions change
level, including Board and CEO
Page 18 Remuneration as a lever for cultural change

19. Questions
Page 19 Remuneration as a lever for cultural change