7

Remuneration Committee meetings held

Committee Composition

During the year, the Committee comprised:

Jill Caseberry

Helen Jones

Tom Singer (appointed 31 March 2021)

Keith Williams (stepped down as a member on 22 March 2021)

David Adams resigned 31 December 2020

Chair's Letter
Dear Shareholder

On behalf of the Remuneration Committee, I am pleased to present the Remuneration Report for the financial period ended 2 April 2021.

The Report consists of three sections:

• A summary of the pay outcomes for FY21, and our approach for FY22;
• A summary of our Directors' Remuneration Policy – The Company's Directors' Remuneration Policy (the "Policy") was approved at the 2020 Annual General Meeting. A copy of our full Policy is available on our website; and
• The annual Directors' Remuneration Report – this summarises the remuneration outcomes for FY21 and explains how we intend to apply the Remuneration Policy in FY22.

2020 Directors' Remuneration Policy

At the 2020 AGM we put forward our Directors' Remuneration Policy (the "Policy") to shareholders. The policy was largely the same as the 2017 Directors' Remuneration Policy however the Committee made a number of changes to reflect the introduction of the 2018 UK Corporate Governance Code (the "Code") and to align with best practice.

We were pleased that over 97% of shareholders voted in support of the policy and the Committee believes it remains appropriate in supporting the Company's execution of the strategy and long-term shareholder value creation. As a result, no changes have been made to the Policy and accordingly, we are not seeking approval for a new Policy this year.

Performance in the Year

Against the backdrop of one of the most disrupted trading environments in recent history, we are pleased to have achieved such strong performance. Although we have continued to experience challenges across the year, overall performance has been stronger than was initially anticipated across the business, and full year underlying profit before tax at £99.5m (post-IFRS 16) is higher than expected at the start of the year and represents an increase of85.6% on the prior year. As a result, the Board took the decision to repay in full £10.5m of support received under government furlough schemes, and reported profit is after this repayment.

Furthermore, despite journeys being 25% below pre-pandemic levels, our Autocentre business has continued to demonstrate signs of growing market share, with strong demand for both our garage business and Halfords Mobile Expert vans. Cycling has also seen exceptional growth over the year and is up 54% LFL.

This performance has not been without its challenges. Although designated a key retailer, at points through the year we were significantly impacted by lockdown changes with our stores often only able to open on a collection only basis. Furthermore, there was considerable supply disruption which remains at sub-optimal levels.

The safety of our colleagues and customers has remained our number one priority throughout and whilst we were subject to greater costs and challenges in keeping our stores safe, we were pleased to maintain high NPS and colleague engagement scores.

I would like to take this opportunity to thank all our colleagues for their work, and due to their efforts, not only have we achieved great results against this backdrop but throughout the crisis, we were privileged to have been able to offer free checks and discounts to 480,000 NHS workers, teachers and Armed Forces staff to help them keep their vehicles safe and roadworthy.

As restrictions continue to ease, we look forward to continuing our progression in our key areas of strategic focus with a renewed emphasis on increasing services related revenue, whilst continuing to deliver value for shareholders. This approach has been reflected in our performance measures for FY22 as I outline below.

Remuneration in the Year

For FY21, to ensure that management focused on the key financial and strategic KPIs that were critical for the business during a period of great uncertainty, the bonus was based on underlying Group profit before tax – 15%, Net debt – 30%, Cost reduction – 25%, Operating Cash Flow – 7.5% and 22.5% based on strategic metrics (NPS, Employee Engagement and Digital Sales). Full details are available in the Remuneration Committee Report.

As a result of the strong performance in the year, the annual bonus paid out at 92.5%of maximum. Consistent financial metrics were applicable across all central bonus schemes.

The 2018 Performance Share Plan ("PSP") also performed strongly with vesting at 84.9%. Both our EPS and Free Cash Flow vested in full whilst revenue was at 39.8% of maximum.

The Committee supports shareholder sentiment that outcomes should reflect the experience of the company, stakeholders and colleagues. Therefore, as is the case every year the Committee also evaluated performance in the round against a range of factors to assess whether the level of annual bonus and PSP payout was appropriate.

In addition to the results discussed above, the Committee considered that the Company had made the decision to repay in full £10.5m of furlough support received, the strong performance of the share price in the year (+260% based on a one month average to the start and the end of the financial year), that PBT was up by 85.6% from FY20 and the continued support of colleagues, with engagement remaining upper quartile when compared externally and £2.3m invested in-year in rewarding front line colleagues for their support during the pandemic.

Therefore, given the key role that the CEO and CFO played in implementing the strategy and managing the operation of the business amid such challenging circumstance to produce these results the Committee felt that the pay out of incentives was appropriate. As a result, the Committee determined that no changes needed to be made for the formulaic outcome and the pay-outs were approved.

Remuneration for FY22

In light of the impact of the COVID-19 pandemic on the business and the wider economy, the Committee re-assessed our approach to assessing performance for the annual bonus and PSP 2020/21 and sought to ensure that pay reflected the current circumstances of the business and the experience of our shareholders.

In the annual bonus the Committee broadened the range of financial measures targeted to reflect our critical priorities of cost reduction as well as debt and cash management. Under the PSP we increased the weighting on relative TSR in light of the uncertainty around financial target setting and to ensure that outcomes aligned with the shareholders' experience. We also increased the weighting on Free Cash Flow to ensure focus on the management of our cash position during this critical period.

In 2019 we set out our intention to accelerate growth of the motoring services business and to generate higher and more sustainable financial returns for shareholders.

As we progress from the initial impact of the pandemic, we feel we are now able to revert to a more normalised approach to performance measures which are more reflective of our ongoing strategy. Further detail is set out below.

Annual Bonus

For FY22 the performance measures for the annual bonus will be as follows: 50% underlying Group PBT; 15% Group revenue; 15% operating cash flow; 5% Group NPS; 5% Group services-related sales; 5% colleague engagement and 5% ESG.

This represents an increase in the weighting of PBT, and the cash flow metric and includes a new Group revenue metric. Both net debt and cost reduction have now been removed. To assist in implementing the new strategic priorities of the business we have replaced digital sales with Group services-related sales and to reflect best practice, we will also incorporate a new ESG metric.

PSP

Similarly, under the PSP, although uncertainties in the market outlook remain, we have reviewed the measures and weightings and now feel we can revert to measures and weightings that are best positioned to support our ongoing strategy as we move away from the initial impact of the pandemic. We have therefore reduced TSR to 30% (from 40%) and increased EPS growth to 50%. Group services-related sales will increase to a 20% weighting reflecting our ongoing focus on accelerating the growth of the motor services business. Free Cash Flow has been removed as a performance measure as the Committee considered that this was no longer appropriate in the context of our enhanced investment plans.

The PSP will be weighted towards EPS growth which the Committee considers incentivises management to both grow revenue and manage cost in a balanced way.

Additionally, given our continued focus on increasing services related revenue the Committee considered that it was appropriate to increase the weighting of this metric whilst relative total shareholder return is included to ensure that PSP outcomes are aligned with the value we have returned to our shareholders relative to our key retail peers.

The Committee sees these metrics as a good balance of reflecting the shareholder/stakeholder experience, ensuring a renewed focus on profit performance whilst helping to drive forward the success of our current strategy.

There will be no changes in incentive opportunities for FY22 with the maximum annual bonus remaining at 150% of base salary and the PSP remaining at 200% of base salary.

Concluding Remarks

I hope that you find the report clear, transparent and informative. The Committee has sought to promote a remuneration environment that strongly aligns the commercial direction of the Group with the interests of shareholders, whilst reflecting best practice developments and market trends.

I look forward to your support on the 2020/21 annual Directors' Remuneration Report at the Annual General Meeting.