Directors’ Remuneration Report

“2022 has been a year full of challenge, but also of significant financial, operational and strategic achievements. ”

This Report

This Directors’ Remuneration Report for 2022 has been prepared in accordance with relevant UK corporate governance and legal requirements, in particular Schedule 8 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended). The Board has approved this report.

This report consists of two further sections:

• the Annual Report on Remuneration (describing 2022 remuneration and the planned implementation of the Directors’ Remuneration Policy (Policy) in 2023); and
• the Policy, which is subject to a binding shareholder vote at the 2023 AGM.

Dear Shareholders,

Shell delivered a very strong set of financial results in 2022, with income of $43 billion and record Adjusted Earnings of $40 billion, and generated more than $68 billion of cash flow from operations (CFFO) and $46 billion of free cash flow (FCF). This level of financial performance undoubtedly reflects macro-environmental conditions, but is enabled by disciplined operational delivery and the ongoing work to create a resilient and profitable portfolio. From a shareholder perspective Shell has made almost $26 billion of shareholder distributions for 2022 through dividends and share buybacks, including the increased fourth quarter 2022 dividend.

However, financial outcomes must be placed in a much wider context. Two of our contractor colleagues in Shell-operated ventures sadly died in the course of their work for Shell. We reflected on these incidents, as we always do, when we determined the final pay outcomes for 2022, as set out over the page.

Shell embraces the challenges and opportunities presented by the necessary transition of the world’s energy system to a low-carbon future. We also seek to play our part in meeting today’s energy needs against the backdrop of soaring energy demand as the world recovers from COVID-19 and the disruption caused by Russia’s invasion of Ukraine. This has resulted in inflationary and cost-of-living pressures for many, particularly when it comes to the supply of energy, and has often had a significant impact on the most vulnerable members of society. The REMCO, therefore, has also paid close attention to the impact on a wide group of stakeholders of these events and factors, including:

• The response to the Russian invasion of Ukraine, with Shell announcing, in early March 2022, its intended withdrawal from its involvement in all Russian hydrocarbons, including crude oil, petroleum products, gas and liquefied natural gas (LNG). This is accompanied by the ongoing efforts to support our Ukrainian operations, employees and contractors;
• Shell’s role in helping to ensure the security of energy supplies, as we build a resilient portfolio to address short- and long-term energy needs. In 2022, this included final investment decisions on the Jackdaw field in the UK, Rosmari-Marjoram in Sarawak, Malaysia, the Crux Field in Australia which will supply gas to Prelude (the floating LNG facility), and the North Field East expansion in Qatar. As the world’s largest supplier of LNG, Shell continues to supply energy where it is needed most. Part of this was the announcement that Shell UK intends to invest £20-25 billion in the UK energy system over the next 10 years, subject to Board approval and a stable policy framework, to ensure the continuity of an energy supply that is affordable and secure. More than 75% of this is intended for low- and zero-carbon products and services, including offshore wind, hydrogen, carbon capture utilisation and storage (CCUS) and electric mobility;
• Initiatives to support customers and those in society facing fuel poverty; and
• The impact on Shell’s employees, where alongside its usual evaluation of markers such as the UK diversity pay gap, the REMCO took particular note of the planned salary increases for 2023 for employees. The REMCO also noted the exceptional reward to employees in 2022, including the vesting of an extraordinary award of Shell shares made in June 2021 to the broader employee population to give them an equity stake in the delivery of the Powering Progress strategy and a one-off Special Recognition Award of 8% of salary to around 81,000 individual employees (excluding Executive Directors and the Executive Committee) globally. This was to recognise and thank them for their collective delivery through a challenging period to keep Shell running safely, reliably and profitably. The Special Recognition Award reflects management’s desire to share Shell’s success with employees, as well as shareholders.

On April 1, 2022, Sinead Gorman succeeded Jessica Uhl as CFO as part of an accelerated management succession process. This was because a long-term relocation from the Netherlands to the UK was unsustainable for Jessica Uhl on account of family circumstances. On January 1, 2023, Wael Sawan succeeded Ben van Beurden as CEO. This was a proactively managed succession that enabled Shell to appoint a new CEO with the proven acumen and experience to guide us through the next stage of our energy transition journey. See The Board of Shell plc for further details of the Executive Director changes, the incoming Directors’ remuneration packages, and the treatment of the outgoing Directors’ remuneration.

At the May 2023 Annual General Meeting (AGM) shareholders will have the opportunity to vote on the revised Directors’ Remuneration Policy (Policy). The REMCO has spent much time over the past year reviewing the Policy. Our conclusion is that, on the whole, the Policy is robust and well aligned with best governance practice. However, we are proposing a small number of changes to maintain that strong governance framework and support the delivery of our Powering Progress strategy. In this report, I share the REMCO’s thinking on a number of the key proposed developments. We will also be seeking shareholder approval for a revised Long-term Incentive Plan (LTIP) at the AGM. The revised plan remains largely unchanged from before, save for minor amendments to align with market practice. Further information is provided in the Notice of AGM.

2022 remuneration outcomes

2022 annual bonus

The overall mathematical outcome of the annual bonus scorecard was above target, at 1.46. The REMCO also paid close attention to the two fatalities which occurred in 2022. One contractor colleague in Nigeria died from injuries sustained during a fire incident. In Pakistan, a contractor colleague died during road transport activities under operational control of Shell. After reflecting on Shell’s overall performance in 2022, and particularly on safety performance (see below), the REMCO decided not to use any discretion in determining the final outcome for Executive Directors. This brings our 10-year average scorecard outcome to 1.04.

The complete scorecard with all targets, ranges and weightings, and a detailed discussion of performance against targets are set out the "Directors' remuneration" section.

Vesting of the 2020 LTIP awards

Overall, the mathematical outcome of the LTIP was 81%. For the avoidance of doubt, no LTIP targets were adjusted as a result of the COVID-19 pandemic or for any other reason. In addition, the REMCO was satisfied that no windfall gain had arisen. For further information, see below.

The REMCO believes the vesting outcome to be representative of Shell’s performance over the period and that no adjustment was required. This brings the 10-year average vesting outcome to 87% of target. This is broadly aligned with our target grant, although there have been a number of high and low vesting outcomes over the last 10 years. The REMCO believes this illustrates the fundamental effectiveness of the LTIP and the close alignment between pay and performance that the structure has provided over time.

Full details of LTIP targets and weightings, and discussion of performance against targets, are set out below.

Finalising the 2022 pay outcomes

In finalising pay outcomes, the REMCO considered the wider performance of Shell and the broader context during 2022 and over the LTIP performance period, paying particular attention to:

• The strong financial performance in 2022, with more than $68 billion of CFFO, including working capital, and $46 billion of FCF generated in the year, which has enabled Shell to continue to pay down debt, and return $26 billion to shareholders in the form of share buybacks and dividends;
• The ongoing work to transform Shell as part of the energy transition, including the completion of the simplification of the Shell Group with the assimilation of the A and B shares into a single class of shares effective as of January 29, 2022, and the ongoing work to strengthen and simplify the portfolio;
• Adjusted Earnings for 2022 was $17 billion higher than for 2014, when the Brent price was similar, evidencing strong management performance in addition to price tailwinds;
• The shareholder experience, including total shareholder distributions over the LTIP performance period of $44 billion, with almost $26 billion for 2022 alone;
• Shareholders’ views on remuneration, as shared with the REMCO during engagements in March and November 2022;
• The employee experience, where the REMCO noted the discretionary uplift applied to the 2021 bonus for below-Board employees, the vesting of the Powering Progress share award to all employees, the Special Recognition Award of 8% of salary made to employees below senior executive level in August in recognition of the contribution staff made to Shell’s strong operational performance in a challenging period, the Group scorecard outcome of 1.46, and the Performance Share Plan, used to make discretionary share awards below senior executive level, which vested at 115% of target, and the average employee salary increases;
• The year-on-year comparison between single figure outcomes in 2021 and 2022; and
• The 10-year average outcomes of the annual bonus scorecard (1.04) and LTIP (87% of target), which demonstrate the effectiveness of the current reward structures in aligning pay outcomes with targets over the longer term.

This resulted in a single figure outcome of £9.7 million for the CEO, an increase of 53% from 2021. The CFO’s single figure outcome was £2.9 million, noting that this is the first single figure of remuneration disclosed for her, and that her LTIP award which has just vested was made prior to her appointment as an Executive Director. The REMCO was satisfied that the prevailing shareholder-approved Policy had operated as intended, and these outcomes were appropriate in the context of Company performance and the target pay opportunity under the Policy.

2023 remuneration

2023 salaries

Wael Sawan was appointed as CEO on January 1, 2023, on a salary of £1,400,000. No increases are anticipated during 2023. Effective January 1, 2023, Sinead Gorman received an increase of 2.8% and her salary for 2023 is £925,000. In reviewing the CFO’s salary, the REMCO considered carefully the external environment, and the increases provided to the general workforce in the key markets of the UK, the USA, and the Netherlands (average 5.8%). The CFO’s increase for 2023 was positioned below this level and the REMCO recognized the “multiplier effect on total remuneration”.

2023 LTIP performance conditions

In terms of variable pay, the REMCO reviewed alternative reward mechanisms such as restricted shares as part of the Policy review. However, we believe that the focus on pay-for-performance provided by the existing design of an annual bonus and performance-based long-term incentive remains the best mechanism to support the achievement of Shell’s strategic objectives under Powering Progress.

The REMCO focused extensively on the LTIP performance metrics during the Policy review and intends a number of changes to ensure strong alignment with delivering Powering Progress and meeting the challenges of the coming years. Shell’s strategy is based on generating cash from its existing businesses to fund the investment necessary to accelerate the transition of Shell’s businesses to net zero, while creating shareholder value. To support this, the REMCO is proposing a simplified set of LTIP performance metrics that incentivise and reward the key priorities of:

• Financial delivery;
• Disciplined capital spending;
• Generating shareholder returns; and
• Developing Shell’s business for the energy transition.

The REMCO has a strong track record of ensuring reward outcomes are appropriate (note that the 10-year average vesting outcome of the LTIP is close to target at 87% of target) and will provide a full disclosure of all factors taken into account in making the vesting decision at the conclusion of each vesting cycle.

Cash generation and disciplined capital expenditure

• Absolute organic free cash flow (OFCF) provides a marker of the cash available for financing activities, including shareholder distributions and debt servicing, after investment in maintaining and growing our business. To date, the existing FCF performance has been assessed on a total basis, including net divestment proceeds and cash flows from acquisitions. This reflects the strategic priority in delivering the divestment programme necessary since the acquisition of BG Group Plc in 2016. Under the proposed Policy, the REMCO intends to shift to a measurement of organic FCF (i.e. excluding net divestment proceeds and cash flows from acquisitions) in order to place greater emphasis on the operational outcomes. Performance will be assessed on an absolute basis to support an alignment between pay outcomes and the shareholder experience.
• Relative cash generation (defined as CFFO/average capital employed) provides a measure of Shell’s ability to generate the top-line cash flows to finance investment in our business and shareholder distributions. Performance will be assessed on a relative basis, measuring how efficiently Shell generates cash relative to our peers. This is designed to ensure an ongoing tight alignment with strategy as Shell concentrates on developing a higher-value and more resilient portfolio, and replaces the existing CFFO metric which was based on relative growth.
• The REMCO also considered the overall balance of the LTIP metrics and intends to remove the current ROACE performance metric from the 2023 performance assessment framework. Capital discipline remains a key consideration, particularly as Shell enters a period which may require an investment in new forms of business models for the energy transition. It is critical that this investment is done in a disciplined manner which generates shareholder value. The REMCO believes capital discipline is adequately incentivised through the LTIP by both FCF and relative cash generation (which takes account of capital employed).

Shareholder returns

Relative total shareholder returns (TSR): there is no change to this measure, with performance measured on a relative basis against the peer group to provide an assessment of value created for shareholders relative to our closest peers.

Energy transition

Growing Shell’s future business: in 2019, Shell introduced the Energy Transition performance condition to the LTIP. We were the first major energy company to introduce such a condition, which directly tied reward outcomes to Shell’s success in reducing net carbon emissions from all energy products sold, measured against our Net Carbon Intensity (NCI) target, as well as the delivery of the key strategic initiatives that will get us there. For the 2023 LTIP awards, we are increasing the weighting of this condition to 25%.

As we explained when the performance condition was introduced, we expected that we had much to learn about the transition to low-carbon energy as it evolved and therefore also much to learn about how to measure progress. There is no right answer, and it was important that we got started on this journey and developed that understanding of how to best measure performance as we proceeded. In our LTIP metrics to date, we have tracked NCI reduction and rewarded participants for getting going on a range of the strategic levers for energy transition. We agreed a number of performance indicators for each strategic theme, with a target outcome range supported by strong discretionary overlay, rather than seeking to maximise output in specific remuneration periods or in precise ways that do not match non-linear business development.

Even so, in the context of a changing energy system which requires agility from Shell’s businesses as they identify and capitalise on the opportunities presented by the energy transition, we have found that detailed performance indicators and targets can quickly become outdated. Assessing progress requires, in turn, agility from the REMCO as we ensure the right behaviours and actions are rewarded.

Going forward, we will continue to track progress against performance indicators for the essential strategic levers for the energy transition, with the focus of the REMCO’s performance assessment shifting to an approach which emphasises a more holistic view of achievement of strategic intent, using performance indicators as guidance. This approach is intended to support experimentation and learning what will deliver net zero in a profitable way.

For the 2023 LTIP awards, an assessment of performance will continue to be based on those things that matter most: NCI reduction and supporting strategic themes of reducing Scope 1 and 2 emissions; building a renewable power business; growing new low-carbon energy offerings; and developing emission sinks and offsets.

The REMCO will make an assessment of progress against the NCI target and Shell’s longer-term performance indicators for each strategic theme when making the vesting decision for each reward cycle. This approach will maintain a clear quantitative target through the NCI target.

We have noted strong support for a more holistic assessment of progress in our engagement with shareholders. The REMCO is also aware that some shareholders have a preference for fixed targets set upfront for all LTIP metrics. This is something the REMCO intends to evolve towards over time. However, at this time, the optimal design is to support management in delivering our strategy and capturing value from the opportunities presented by the energy transition.

Other LTIP considerations

Comparator group: the REMCO has given much consideration to the appropriate peer group for assessing relative performance as part of the Policy review. For many years, this has consisted of BP, Chevron, ExxonMobil and TotalEnergies. Changing strategies for the energy transition, including differing timeframes and level of ambition, prompt a regular reconsideration of this group. The REMCO has evaluated a number of alternative peer companies, including smaller European energy producers with similar strategic ambitions, power and pure-play renewables companies, and smaller oil and gas producers. Following this, the REMCO has determined that the existing comparator group remains the appropriate reference point for assessing relative performance for the TSR and cash generation metrics. Despite strategic differences, these companies remain Shell’s closest peers in terms of scale and business model. Critically, they are also similarly tasked with reinventing legacy positions. While they have the financial capability that comes from those positions, they also have the constraints of growth from existing scale and supply responsibilities to society. The REMCO intends to keep this under review.

The REMCO also considered the threshold vesting level for the relative metrics and determined not to make any changes.

Further information is provided in the "Annual Report on Remuneration".

2023 Policy

The REMCO believes the 2020 Policy is robust and well aligned with reward governance best practice. But the REMCO is proposing adjustments to maintain the strong governance framework and support the delivery of the Powering Progress strategy. We consulted with shareholders on the proposed changes and have taken into account a diverse range of shareholder views in our decision-making. It is worth noting that as a result, we have not proceeded with all of our initial proposals but believe there is majority support for those changes we are choosing to take forward. The full proposed Policy is set out in the "Annual Report on Remuneration". To highlight some of the key changes:

Severance policy: under Wael Sawan and Sinead Gorman’s service contracts, both the employee and the employer can terminate employment by giving 12 months’ written notice, replacing the previous policy which accounted for Dutch statutory provisions.

Pension: Shell’s long-standing policy has been to provide Executive Directors with pension benefits aligned with those for the wider workforce in their home country. To enhance transparency and ensure retirement benefits are consistent with the UK headquarters of Shell, Executive Director pensions (including for Wael Sawan and Sinead Gorman) will be aligned with defined contribution pension arrangements offered to Shell’s UK employees (currently 20% of salary).

TSR underpin: the existing LTIP has the added complexity of an underpin, whereby the vesting outcome is capped at 100% should the TSR performance condition fail to rank in a vesting position. This was introduced as a mechanism to support alignment between pay outcomes and the shareholder experience at a time when the LTIP was wholly based on relative performance. However, this provision adds complexity to the plan and is not market aligned, with the REMCO not being aware of any similar examples of a TSR-based underpin being used by any other FTSE30 company. Nor has experience proven it a necessary Policy feature as the underpin has not been invoked to date. Therefore, in the interests of simplifying the plan, the REMCO are proposing to remove the TSR underpin from the 2024 awards onwards.

Looking ahead

The year ahead brings the vote on the proposed Policy at the AGM and I look forward to ongoing dialogue with our shareholders in the coming months.

Neil Carson
Chair of the Remuneration Committee
March 8, 2023