2020 Directors' Remuneration Policy – Key Principles

The Committee seeks to support the delivery of the Group's strategy through establishing appropriate remuneration arrangements. Our goal is to build a strong long-term sustainable business by delivering ongoing sales growth and shareholder returns through an enhanced focus on services-related revenue along-side our traditional authoritative ranges of products, colleague and service excellence, digital participation and helpful retail and service environments.

The overall Remuneration Policy of the Committee, and of the Board, has been developed taking into account the following principles:

• Simple, clear and aligned with our culture and purpose – the remuneration framework has been designed to be simple and transparent to ensure that it is clear to shareholders, participants and other stakeholders. Our Policy is that Executive Directors only participate in an annual bonus and the performance share plan to ensure this simplicity. Incentive opportunities are capped so that the maximum potential pay-out under each scheme is clear. This simple reward framework is aligned with Halfords' culture and purpose of working together to achieve our strategic goals.
• Attract and retain whilst remaining appropriate, taking into account external and internal comparisons – enable the Group to attract and retain management of a high calibre with the necessary retail, customer service, financial, digital and service-industry skills and credentials required to deliver a sustainable business model and drive shareholder returns. Remuneration arrangements are set at levels appropriate to achieving this goal without paying more than is considered necessary. The Committee considers external and internal reference and ratios when determining the reward framework for Executive Directors. External market data is reviewed at appropriate intervals to inform the positioning of Executive Directors' pay relative to the companies of a similar size and in similar sectors, without seeking to 'match the median', to identify and mitigate the risk of losing strong performers. The Committee also regularly reviews remuneration arrangements for the wider workforce population to ensure that Executive Director's pay structure and levels are appropriate in this context.
• Link variable pay to performance and the delivery of the agreed Strategy – provide management with the opportunity to earn competitive remuneration through annual and long-term variable pay arrangements that are designed to support delivery against key financial, strategic and shareholder value creation objectives. Performance measures are aligned with strategic goals so that remuneration arrangements are transparent to executives, shareholders and other stakeholders. Different elements of Executive Directors' pay are delivered over the short and longer term and are designed to ensure that a substantial proportion of the Executive Directors' remuneration is variable and performance-related.
• Align Executive Directors with shareholders – ensure management's interests are aligned with those of shareholders by incentivising management to deliver the Group's long-term strategy of a sustainable, growing business and thus enhance shareholder value. A significant portion of reward is delivered in shares to create alignment of interests. Executive Directors are required to build up a shareholding in Halfords which they are expected to maintain whilst in employment and post-employment to provide an extended period of alignment with shareholders.
• Drive sustainable performance – remuneration arrangements are designed to support the sustainable delivery of performance and to prevent excessive risk-taking. We carry out a robust target-setting process each year taking into account our strategic plan as well as external expectations of performance. Targets are set to ensure that the maximum remuneration can only be earned for delivering exceptional performance whilst not encouraging excessive risk-taking. Our Policy includes provisions which enable the Committee to exercise discretion to ensure that incentive outcomes are appropriate and which allow for the application of clawback and/or malus in specific negative circumstances.

2020 Directors' Remuneration Policy

This section of this report sets out the Directors' Remuneration Policy (the "Policy") that the Company intends to apply, subject to shareholder approval, with effect from 15 September 2020 (the date of the ("AGM")). It is intended that this Policy will apply until the 2023 AGM, unless the Company seeks shareholder approval for a revised Policy which comes into force before this date.

Policy Table

Approved Payments

The Committee reserves the right to make any remuneration payments and/or payments for loss of office (including exercising any discretions available to it in connection with such payments), notwithstanding that they are not in line with the Policy set out above where the terms of the payment were agreed (i) before the Policy set out above came into effect, provided that the terms of the payment were consistent with any applicable shareholder-approved Directors' Remuneration Policy in force at the time they were agreed or where otherwise approved by shareholders; or (ii) at a time when the relevant individual was not a Director of the Company (or other persons to whom the Policy set out above applies) and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a Director of the Company or such other person. For these purposes "payments" includes the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are "agreed" no later than the time the award is granted. This Policy applies equally to any individual who is required to be treated as a director under the applicable regulations.

Information Supporting the Policy

Malus and Clawback

Malus and clawback provisions apply to the cash bonus payments and deferred share awards for a period of three years from award. Malus and clawback provisions apply to PSP awards for a period of two years following its vesting.

The circumstances in which malus and clawback provisions may apply include: a material misstatement of the Company's results; or misconduct by the Executive Director; or where there is a material failure of risk management; or corporate failure; or serious reputational damage; or if the Committee considers there are other similar circumstances which mean that the malus and/or clawback provisions should apply.

Share Plan Operation

Awards under the Company's DBP and PSP:

• may be granted as conditional share awards or nil-cost options or in such other form that the Committee determines has the same economic effect;
• may have any performance conditions applicable to them amended by the Committee if an event occurs which causes the Committee to consider that the existing performance condition should be amended to ensure that the objective criteria against which performance will be measured will be a fairer measure of such performance and that the amended performance condition will afford a more effective incentive to the Executive Director;
• when assessing the level of vesting under the PSP, the Committee will consider the underlying financial performance of the Company and the value generated for shareholders and may adjust the level of vesting if it considers that the outcome based on the assessment of performance against targets does not reflect this;
• may incorporate the right to receive additional shares to the value of dividends which would have been paid on the shares under an award that vests up to the time such shares are delivered. This amount may be calculated assuming that the dividends have been reinvested in the Company's shares on a cumulative basis;
• may in respect of the PSP, be settled in cash or with the grant of a vested option at the Committee's discretion. For Executive Directors, this provision will only be used in exceptional circumstances such as where, for regulatory reasons, it is not possible to settle awards in shares; and
• may be adjusted in the event of any alteration of the Company's share capital by way of capitalisation or rights issue, sub-division, consolidation or reduction, the payment of a special dividend, a demerger or any other variation of the share capital of the Company.

Summary of Decision-Making Process and Changes to Policy

The previous Policy is considered to be fit for purpose and therefore no material changes are proposed. However, the Policy has been updated to reflect the new UK Corporate Governance Code as well as recent developments in best practice. In determining the new Remuneration Policy, the Committee followed a robust process which included discussions on the content of the Policy at Remuneration Committee meetings during the year. The Committee considered the input from management and our independent advisors, and as well as considering best practice and shareholder guidance from major shareholders. A summary of the changes to the Policy compared to the 2017 Policy is set out below:

• Pension – for any Executive Director appointed to the Board from 1 April 2019 the value of any pension contribution and/or pension allowance will be in line with the maximum employer pension contribution available to the majority of the workforce in the UK. This change has been made to align with shareholder expectations. Pension contributions / allowances for the Executive Directors in role will be aligned with the maximum employer pension contribution available to the majority of the workforce from 1 April 2023.
• Malus and clawback – malus and clawback provisions have been expanded to reflect a broader range of circumstances, including a material failure of risk management, corporate failure and serious reputational damage, to reflect best practice.
• Discretion – discretion provisions have been broadened to provide the Committee with the ability to exercise discretion to adjust incentive pay-outs if appropriate.
• Shareholding guideline – a post-employment shareholding guideline has been introduced to comply with the UK Corporate Governance Code.
• Other minor changes have been made to the wording of the Policy to aid operation and to increase clarity.

The changes outlined above in relation to pension, malus and clawback and discretion were disclosed in the 2018/19 Directors' Remuneration Report.

Selection of Performance Measures

Annual Bonus:

The bonus is subject to a mix of financial and strategic measures. These measures are selected each year to provide an appropriate balance between financial and strategic objectives and to incentivise individual Executive Directors to meet corporate targets and drive individual performance.

Performance Share Plan ("PSP"):

The performance measures for 2020 awards are (1) EPS growth; (2) Free Cash Flow; (3) Group Services-Related Revenue; and (4) relative TSR.

EPS growth has been included to incentivise management to both grow revenue and manage cost in a balanced way. Free Cash Flow will also continue to be included as performance measures for the PSP, reflecting our ongoing focus on earnings growth and our objective to increase Free Cash Flow to strengthen the business over the longer term. Group Services-Related Revenue has been introduced to reflect our strategic focus on increasing services-related revenue to generate a higher and more sustainable financial return for shareholders. Relative TSR has been introduced to ensure vesting levels are aligned with relative returns to shareholders.

The Committee may determine that different performance measures will apply to future PSP awards.

Remuneration Arrangements elsewhere in the Group

Whilst our Remuneration Policy follows the same principles across the Group, remuneration packages for colleagues reflect their different roles and experiences, and market practice for similar roles.

The remuneration policy for senior executives in the Group is similar to the Policy for Executive Directors as set out in this report – a substantial proportion of remuneration is performance-related in order to encourage and reward superior business performance and shareholder returns and remuneration is linked to both individual and Company performance. Basic salary is targeted at normal commercial rates for comparable roles and is benchmarked on a regular basis. Bonuses can be earned on a similar basis as the Executive Directors (there are some variations to take account of the specific role performed by the relevant senior executive). Senior executives below Board level also benefit from participation in the PSP.

Increases to executive managers' base salaries are considered at the same time as all other colleagues across the Group and increases are generally in line with all colleagues.

All of the Group's c.10,400 colleagues are eligible to join the Halfords Sharesave Plan (also known as "SAYE") after they have served one complete month's service. Where appropriate, some groups of colleagues are eligible for a quarterly or full-year bonus, although the type, limits and performance conditions vary according to job level. Senior managers and other key management individuals are invited to join the Restricted Share Plan.

In FY20, all newly appointed colleagues and other existing colleagues who had experienced a 'joining-trigger' event were automatically enrolled into the Halfords Pension Plan 2009. All eligible colleagues who have met the auto enrolment criteria have the option to choose to join the Pension Plan from their first day of employment. All members of the Pension Plan are required to make a minimum contribution of 5% and the Company also contributes a minimum of 3%, dependent on length of service and seniority. During the year, the Company has met its obligations under the pensions auto enrolment legislation, auto enrolling all other colleagues as appropriate.

Remuneration Outcomes in Different Performance Scenarios

As outlined above, the Remuneration Policy is designed to ensure that a substantial proportion of the Executive Directors' remuneration is variable and performance-related. By linking the remuneration of the individual Executive Director to the performance of the Company, the Committee seeks, as far as possible, to motivate that individual towards superior business performance and shareholder value creation, and to only pay rewards when these goals have been realised. Performance measures are aligned with strategic goals so that remuneration arrangements are transparent to Executive Directors, shareholders and other stakeholders.

The charts below illustrate remuneration arrangements in different performance scenarios. The assumptions for each scenario are outlined below:

Four performance scenarios have been illustrated for each Executive Director:

The charts have been prepared on the following basis:

• Base salary – the base salary in place at 1 April 2020.
• Benefits – based on the disclosed benefits value in the single figure for 2019/20.
• Pensions – based on a contribution of 15% of salary.
• Bonus – based on the maximum award of 150% of base salary.
• PSP – based on the maximum award of 200% of base salary.

No payment of dividend equivalents has been assumed. Potential benefits under all-employee plans have not been included. No share price growth has been assumed other than where stated.

Graham Stapleton – CEO

Loraine Woodhouse – CFO

Fixed pay has been calculated as follows:

Remuneration Policy for Newly Appointed Directors

When determining the remuneration package for a newly appointed Executive Director, the Committee would seek to apply the following principles:

• The package should be market competitive to facilitate the recruitment of individuals of sufficient calibre to lead the business. At the same time, the Committee would intend to pay no more than it believes is necessary to secure the required talent.
• New Executive Directors will normally receive a base salary, benefits and pension contributions in line with the Policy described in the Directors' Remuneration Policy and would also be eligible to join the bonus and share incentive plans up to the limits set out in the Policy.
• In addition, the Committee has discretion to include any other remuneration component or award which it feels is appropriate, taking into account the specific circumstances of the recruitment, subject to the limit on variable remuneration set out below. The key terms and rationale for any such component would be disclosed as appropriate in the Remuneration Report for the relevant year.
• Where an individual forfeits outstanding variable pay opportunities or contractual rights at a previous employer as a result of appointment, the Committee may offer compensatory payments or awards, in such form as the Committee considers appropriate, taking into account all relevant factors, including the form of awards, expected value and vesting timeframe of forfeited opportunities.
• When determining any such "buy-out", the guiding principle would be that awards would generally be on a "like-for-like" basis unless this is considered by the Committee not to be practical or appropriate.
• The maximum level of variable remuneration which may be awarded (excluding any "buy-out" awards referred to above) in respect of recruitment is 350% of salary, which is in line with the current maximum limit under the annual bonus and PSP.
• Where an Executive Director is required to relocate from their home location to take up their role, the Committee may provide assistance with relocation (either via one-off or ongoing payments or benefits).
• In the event that an internal candidate is promoted to the Board, legacy terms and conditions would normally be honoured, including any accrued pension entitlements and any outstanding incentive awards.

To facilitate any buy-out awards outlined above, in the event of recruitment, the Committee may grant awards to a new Executive Director relying on the exemption in the Listing Rules which allows for the grant of awards, to facilitate, in unusual circumstances, the recruitment of an Executive Director, without seeking prior shareholder approval or under any other appropriate Company incentive plan.

The remuneration package for a newly appointed Non-Executive Director would normally be in line with the structure set out in the policy table for Non-Executive Directors in the Directors' Remuneration Policy.

Executive Directors' Service Agreements

Term and Notice Periods

The Company's policy in relation to contractual terms on termination, and any payments made, is that they should be fair to the individual, the Company and shareholders. Failure should not be rewarded and the departing Executive Director's duty to mitigate any loss he or she suffers should be recognised. The notice period for the current Executive Directors is six months on either side. The Committee policy is that the notice period for new Executive Directors will be no more than 12 months. The Committee will continue to review this policy, to ensure that it remains in line with the Company's overall Remuneration Policy.

Service agreements are available for inspection by shareholders at the Company's registered offices.

Termination of Contract

No compensation would be payable if a service contract were to be terminated by notice from an Executive Director or for lawful termination by the Company (other than as set out below). The Company may terminate service agreements in accordance with the appropriate notice periods. In the event of termination for any reason (other than for a reason justifying summary termination in accordance with the terms of the service agreement) the Company may (but is not obliged to) pay to the Executive Director, in lieu of notice, a sum equal to the Executive Director's then salary, benefits and pension contributions, which he or she would have received during the contractual notice period, the sum of which shall normally be payable in monthly instalments (but may be paid in a fixed amount at the discretion of the Committee).

Executive Directors who are considered to be good leavers may, if the Committee determines, receive a bonus for the financial year in which they leave employment. Such bonus will normally be calculated on a pro rata basis by reference to their period of service in the financial period in which their employment is terminated and performance against targets.

The Committee reserves the right to make any other payments in connection with a Director's cessation of office or employment where the payments are made in good faith in discharge of an existing legal obligation (or by way of damages for breach of such an obligation) or by way of settlement of any claim arising in connection with the cessation of a Director's office or employment. In addition, the Committee reserves the right, acting in good faith, to pay fees for outplacement assistance and/or the Director's legal and/or professional advice fees in connection with his or her cessation of office or employment.

Mitigation on Termination

Where a contract has been terminated early, and the Executive Director is engaged to provide services (under a service agreement, consultancy, or any other arrangement or understanding), with effect from the date upon which these services are provided each subsequent instalment of pay in lieu shall be reduced by an amount equal to any basic salary, fees, remuneration or other financial benefits received during the monthly interval prior to the payment of each instalment.

In good leaver circumstances the Executive Director might be offered a lump sum termination payment paid at the time they cease employment.

Change of Control

The service agreements of Executive Directors do not provide for any enhanced payments in the event of a change of control of the Company.

Inspection of Contracts

The Executive Directors' services contracts are available for inspection by shareholders at the Company's registered office.

Share Plans – Leaver Treatment

The treatment of outstanding share awards in the event that an Executive Director ceases to hold office or employment with the Group of the Company's associated companies is governed by the relevant share plan rules.

The following table summarises leaver provisions under the executive share plans.

'Good leavers' include death, injury, ill-health, disability, redundancy, retirement, sale of the individual's employing business or company out of the Group or to a company which is not associated with the Company or in any other circumstances the Committee determines.

Change of Control

In the event of a change of control of the Company, PSP awards may vest and be released (pro-rated for time elapsed in the performance period unless the Committee determines otherwise) to the extent that the Committee determines the performance condition should be deemed satisfied having regarding to the Company's progress towards that condition. The Committee may allow awards to vest on the same basis in the event of a voluntary winding up or reconstruction of the Company or a demerger except that in the event of a demerger the Committee may determine the extent to which awards shall be time pro-rated.

DBP awards may vest on a change of control, reconstruction, winding up or demerger of the Company.

Alternatively, awards may be rolled over into equivalent awards in a different company.

Remuneration Policy table for Non-Executive Directors

Appointment

None of the Non-Executive Directors has an employment contract with the Company. However, each has entered into a letter of appointment with the Company confirming their appointment for a period of three years, unless terminated by either party giving the other not less than three months' notice or by the Company on payment of fees in lieu of notice.

The remuneration package for a newly appointed Non-Executive Director would normally be in line with the structure set out in the policy table for Non-Executive Directors above.

The appointment period for each Non-Executive Director is set out below:

Terms and Conditions for the Chairman and Non-Executive Directors

The Chairman and Non-Executive Directors serve the Company on the basis of renewable letters of appointment which can be terminated by written notice by either party. The Chairman's appointment is subject to three months' notice and the other Non-Executive Directors are also subject to three months' notice. No compensation is awarded on termination. Letters of appointment are available for inspection at the AGM and the Company's registered office.

Their appointments are subject to the provisions of the Companies Act 1985 and 2006 and the Company's Articles of Association, and, in particular, the need for re-election. Continuation of an individual Non-Executive Director's appointment is also contingent on that Non-Executive Director's satisfactory performance, which is evaluated annually by the Chairman. The Chairman is evaluated by the Senior Independent Director.

Inspection of Contracts

The Non-Executive Directors' letters of appointment are available for inspection by shareholders at the Company's registered offices.

Termination of Non-Executive Directors' Letters of Appointment

No compensation would be payable to a Non-Executive Director if his or her engagement were terminated as a result of him or her retiring by rotation at an Annual General Meeting, not being elected or re-elected at an Annual General Meeting or otherwise ceasing to hold office under the provisions of the Articles of Association of the Company. There are no provisions for compensation being payable upon early termination of the appointment of a Non-Executive Director.

Dialogue with Shareholders

The views of our shareholders are very important to the Committee and it is our policy to consult with our largest shareholders in advance of making any material changes to the executive remuneration arrangements. The Committee consulted in detail regarding changes made to remuneration in 2019 and 2020 and the final proposals were shaped by the feedback provided.

Dialogue with Colleagues

The Committee generally considers pay and employment conditions elsewhere in the Group when considering pay for Executive Directors and senior management. When considering base salary increases, the Committee reviews overall levels of base pay increases offered to other colleagues in the Group.

The Committee does not consult directly with colleagues regarding Executive Directors' remuneration. However, at regular intervals, the Company conducts a survey of the views of colleagues in respect of their experience of working at Halfords, including their own reward. The Company also conducts regular listening groups across the Group; these are chaired by senior executives or Director-level colleagues and cover a wide range of subjects, including communication, pay, benefits and ESG issues.