Remuneration report
Remuneration policy and philosophy
The group’s remuneration policy is based on the "total rewards strategy". This strategy drives a high-performance culture which consistently delivers above-average returns to shareholders through employees who are motivated, engaged and committed. This remuneration policy also supports the attraction, development and retention of employees with scarce and critical skills who contribute to sustained business growth. The group's remuneration policy is transparent with pay bands established for each job grade and this assists in creating trust and ensuring that employees are equitably compensated.
Remuneration structure
The purpose of the total rewards framework is to enhance the group's employment proposition through:
- flexibility to meet differing employee needs;
- positioning the Clicks Group as an employer of choice for scarce and critical skill areas;
- capability to attract talent and retain top-performing employees.
All new employees are appointed on a total rewards basis. All existing employees, excluding the bargaining unit employees, have been converted to the total rewards methodology.
The total reward and associated pay and benefits policies have contributed to higher levels of employee commitment and affiliation to the group (as measured in the annual employee satisfaction index which increased from 67% in 2010 to 68% in 2011) and to a decrease in labour turnover (from 19.8% in 2010 to 19.4% in 2011). The total rewards approach has also assisted in improving the turnover rate of pharmacy employees from 53% in 2009 to 23% in 2011. The group’s employee turnover rate compares favourably to the retail industry survey result as reported by remuneration consultants, 21st Century, indicating an average turnover of 19%, and the highest reported turnover being 35%.
Annual guaranteed remuneration is determined by considering the following factors:
- the Hay-based job grading level and pay point;
- the competitive position of the Clicks Group’s pay and benefits structure relative to its defined market position which determines the remuneration ranges applicable to each job level and skills pool;
- individual performance as assessed during the annual performance appraisal process; and
- individual position in the pay band range relative to competence and performance.
External compensation and benefit consultants advise the group on best pay practices, competitive positioning and benchmarking on strategic human capital issues.
Aligning business strategy and remuneration policy
The performance of all non-bargaining unit employees is appraised biannually, and alignment and performance expectations are clarified with individualised performance contracts. An employee’s performance appraisal outcome is linked to the annual salary increase awarded, creating a direct line of sight between reward and performance. The performance appraisal process utilises a five-point scale and appraisal results are moderated centrally to ensure fairness and consistency across business units. Salary increases are awarded within the range approved for each performance level, after taking into account other relevant information including the employees’ position within the pay band. Employees’ performance ratings are confirmed in the communication regarding their annual increases.
Remuneration governance
The remuneration committee assists the board in ensuring that the group has a competitive remuneration policy which is aligned with the group’s strategy and performance goals. The key duties of the committee include:
- ensuring the group has a remuneration policy that promotes the achievement of strategic objectives and encourages individual performance;
- ensuring the combination of fixed and variable pay meets the group’s needs and strategic objectives;
- ensuring all benefits, including retirement benefits and other financial arrangements, are justified and correctly valued;
- considering the results of the evaluation of the performance of the chief executive officer and other executive directors, both as directors and as executives in determining remuneration;
- selecting an appropriate comparator group when benchmarking remuneration levels;
- reviewing incentive schemes to ensure continued contribution to shareholder value and that these are administered in terms of the rules; and
- advising on the remuneration of non-executive directors.
The remuneration committee comprises three independent non-executive directors: Professor Fatima Abrahams (chair), John Bester and David Nurek. The chief executive officer and group human resources director attend meetings by invitation, but are excused when their own remuneration and ratings are discussed by the committee. Detail on the remuneration committee and meeting attendance is included in the Corporate Governance Report. The group’s remuneration and nominations committees have been amalgamated with effect from 1 September 2011 and a fourth independent non-executive director, Martin Rosen, has been appointed to the committee.
An external consultant, Barbara Maughan, has been appointed on a retainer basis to advise the committee on remuneration trends and the benchmarking of non-executive and executive remuneration. The members of the committee have independent access to the remuneration consultant and may request her professional advice on any remuneration matter. She holds the position of lead: total reward: human capital at Deloitte Consulting and also serves as a remuneration adviser to a number of listed companies.
Remuneration policies and practices were reviewed during the year to align with the recommendations of King lll. The group’s remuneration policy will be proposed to shareholders for a non-binding advisory vote at the annual general meeting (AGM) in January 2012.
Composition of remuneration
Executive directors
The remuneration package of executive directors consists of three components:
- annual guaranteed pay, which allows for flexible structuring of retirement fund contributions;
- short-term cash-based incentive bonus; and
- participation in the long-term incentive scheme.
The remuneration structure of executive directors is linked to the group's medium-term financial targets and is therefore aligned to shareholder interests. A significant portion of executive remuneration is performance-related.
Base salaries are set according to an annual benchmarking exercise of medium-sized market capitalisation companies on the JSE Limited and a defined retail comparator group of 11 listed companies. This benchmarking scope recognises the complexity in the group's business model and product ranges and the regulatory environment within which the group operates.
The performance of the chief executive officer is assessed by the chairman and the board, while the performance of the other executive directors is evaluated by the chief executive officer and reviewed by the remuneration committee. The annual pay increase of the executive directors is directly related to individual performance ratings and aligned to the annual increase ranges per performance rating as determined by the remuneration committee.
Executive directors participate in the annual short-term cash-based incentive scheme. Financial targets, based on the group's average monthly return on net assets (RONA), are set by the board and embedded in the budgets, operating plans and the performance contracts, and are aligned to the group's published medium-term financial targets. The achievement of these targets is reviewed by the remuneration committee before any incentive payments are made to executive directors and is also subject to review by the group's external auditor.
A bonus of 40% (60% in the case of the chief executive officer) of annual guaranteed pay is paid on the achievement of an on-target performance. The performance hurdle is 100% of the targeted group RONA and at least 95% of the targeted group operating profit. Performance exceeding the targeted performance may result in the payment of a higher bonus. This is, however, self-funded and only paid if the group exceeds the targeted operating profit. The scheme also provides for a stretch performance incentive to drive extraordinary performance. The stretch performance hurdle is met when the targeted group RONA is achieved and the operating profit target has been exceeded by at least 5% (as verified by an external remuneration consultant and a non-executive director). Bonus payments for all employees, including the executive directors, are capped at two times the value of an on-target bonus due to any employee. The targets and value of all bonuses awarded to executives are approved by the remuneration committee.
The group's performance for the 2011 financial year achieved the levels required in terms of the RONA targets.
The sustainability of the group's business is critical in determining remuneration and the board is satisfied that the performance targets do not encourage increased risk taking by the executives.
The long-term incentive scheme in which executive directors participate is based on the allocation of share appreciation rights and is detailed later in the report.
Management
Senior managers receive an annual guaranteed salary and participate in the short-term incentive bonus scheme. Salaries may include premiums for scarce and critical skills. A limited number of senior managers participate in the long-term incentive scheme, based on strategic contribution to their business unit and their individual performance levels.
An annual performance-based salary increase is paid to all non-bargaining unit employees. The average performance-linked increases for the new financial year will result in an overall increase in payroll of 5% (2010: 5.8%). The annual increase date is 1 September which is aligned with the group's financial year and budgeting period.
Staff
Collective salary increases are negotiated with the representative trade union for the Clicks bargaining unit. Negotiations regarding the salary increase for 2011/2012 are still under way and in 2010 an increase of 10.8% was agreed. All staff in the bargaining unit also participate in the group's short-term incentive scheme. For UPD staff, the transition was made during the past year from collective wage agreement salary increases to individual performance-based increases. All UPD staff receive a guaranteed 13th cheque.
All store employees' compensation complies with the sectoral determination requirements and the minimum rates of pay as determined for the retail industry are either met or exceeded.
All staff receive discounts on purchases at group stores which vary by business unit.
Group retention scheme
A retention scheme was implemented during 2009 for employees who are critical to the group's strategic talent and succession plans. This includes high-potential employees, black staff and employees with scarce and critical skills. The candidates recommended for inclusion are reviewed and approved by the nominations committee and the remuneration committee, which also approves all payments made under the scheme. The scheme is aimed at retaining the employees over a three-year period. One-third of the retention value is allocated upfront and the remaining two-thirds will be paid at the end of the three-year retention period. There are currently 30 employees participating in the scheme, of which 43% are black and 37% are women.
Employee share ownership programme
The group implemented an employee share ownership programme (ESOP) in February 2011 whereby 10% of the group's issued shares after the issue of "A" shares (equating to 29.2 million "A" shares) have been placed in a share trust for allocation to all full-time permanent staff.
The ESOP is aimed at enabling the group to attract and retain scarce and critical skills, to accelerate transformation, to build employee commitment and to reward employees for their contribution by sharing in the growth and success of the company.
Employees with more than five years' service, pharmacists and senior employees from the designated employment equity groups received a 15% enhancement of their share allocation.
The ESOP has a minimum term of three years and a maximum of seven years, with a sliding scale that applies to employees who leave the group within the three to seven-year period.
Senior executives currently participating in the group's long-term incentive scheme do not participate in the ESOP.
Non-executive directors
Non-executive directors receive fees for their services as directors and for serving on board committees. These fees reward the directors fairly for the time, service and expertise provided to the group. The fee structure is based on an annual benchmarking of non-executive directors' fees in a defined retail comparator group. Non-executive directors do not participate in incentive schemes. There are no options held by non-executive directors.
Incentive schemes
Both long and short-term incentive schemes have been developed as an integral part of the total rewards framework to ensure that employee performance is aligned to the interests of shareholders, and to reward and retain employees.
Short-term incentive scheme
All permanent employees in the retail businesses and the majority of employees in UPD participate in the short-term incentive scheme which rewards the achievement of performance targets based on the RONA of the business.
The performance measurement is based on each employee's area of responsibility and can be determined for a specific store, region, business unit or at the group level. The scheme is self-funding as the value of an on-target bonus is included in the annual budget.
Performance exceeding the targeted performance may result in the payment of a higher bonus provided this is funded by the increase in the operating profit. A total of R47.6 million (2010: R66.7 million) was approved by the remuneration committee as the total bonus payable for the 2011 financial year.
Long-term incentive schemes
The group's long-term incentive scheme detailed below replaced the staff share option scheme and aligns executive remuneration with the creation of shareholder value. Share options were last issued in August 2005.
Share appreciation rights scheme
Under the 2005 scheme share appreciation rights were allocated to executive directors and senior employees. The rights vest equally after three years and five years and the exercise price of the rights is linked to the performance of the share price. The first tranche of rights was allocated in April 2005 and a further tranche in May 2006. The last of the outstanding rights matured in May 2011.
The following share appreciation rights allocated to executive directors matured during the financial year and the proceeds are as follows:
| Number of | ||
|---|---|---|
| five-year | ||
| Director | rights | R'000 |
| Bertina Engelbrecht | 200 000 | 8 142 |
| David Kneale | 75 000 | 3 053 |
Long-term incentive scheme
Share appreciation rights are allocated to participants in this scheme and these rights are cash-settled at the end of the three-year performance period.
The value of the rights is linked to the group's reported diluted headline earnings per share multiplied by an internal price earnings ratio of 12. The long-term incentive scheme charge is accrued over the three-year performance period. In determining the charge, the amount reflected in the statement of comprehensive income takes account of the actual and projected annual growth in diluted headline earnings per share over the three-year performance period. The annual charge is discounted to present value using market yields on high quality bonds that most closely match the term of the share appreciation rights. Rights are forfeited if an employee resigns within the performance period.
On the expiry of the three-year period, employees are required to apply 25% of the after-tax cash settlement value to purchase Clicks Group shares in the open market and to retain these shares for a minimum of one year. A total of 28 (2010: 36) employees currently participate in this scheme, collectively holding 10 506 321 (2010: 12 857 363) rights at year-end.
The table below details rights which have been allocated to executive directors under this scheme over the last three years. The relevant amounts have been expensed through the statement of comprehensive income.
| Allocation | Allocation | Allocation | |
|---|---|---|---|
| at R15.83 | at R19.91 | at R25.37 | |
| per right | per right | per right | |
| 1 Sept 2008 | 1 Sept 2009 | 1 Sept 2010 | |
| (number of | (number of | (number of | |
| Executive director | rights) | rights) | rights) |
| Bertina Engelbrecht | 335 845 | 294 576 | 335 987 |
| Michael Fleming1 | – | – | 551 832 |
| Michael Harvey | 431 333 | 374 887 | 473 000 |
| David Kneale | 1 072 331 | 942 240 | 1 407 174 |
| Keith Warburton2 | 450 284 | 395 681 | – |
| Total | 2 289 793 | 2 007 384 | 2 767 993 |
| 1 Appointed to the board 31 March 2011. Allocation made retrospectively as part of appointment package. | |||
| 2 Resigned 31 March 2011 and these rights have been settled. | |||
Employee benefits
Retirement funds
Membership of a retirement fund is compulsory for all permanent employees. Employees based in South Africa have the option to join the Clicks Group Retirement Fund, the Clicks Group Negotiated Pension Fund or the Clicks Group Negotiated Provident Fund. The group's employees based in Namibia are all members of the Namflex Umbrella Pension Fund.
The negotiated and retirement funds have boards of trustees, with 50% employee and 50% employer representation. The company representatives include finance executives from across the group who provide financial expertise to the boards. The retirement fund trustees have appointed an independent financial consultant to provide professional investment advice.
- Combined membership across the funds was 8 181 (2010: 7 716) at year-end.
- The funds are all defined contribution schemes and the group carries no liability in relation to these funds.
- All funds provide death and disability cover, while the negotiated funds also include a funeral benefit.
Medical aid
The Clicks Group Medical Aid Scheme was merged with Moremed to form Horizon Medical Aid Scheme, administered by Medscheme, on 1 January 2011. Membership of one of the Horizon options is actively encouraged and existing members of Discovery Health may continue their membership. At year-end 477 employees were principal members with Horizon and 970 employees were principal members of a Discovery Health medical aid scheme. UPD employees may join either Fedhealth or Discovery Health medical schemes.
Approximately 17% of employees are covered by a medical scheme. Increasing the health benefits available to employees will be a focus area for the group in the years ahead.
Directors' remuneration
Executive directors' remuneration - 2011
| Perform- | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ance | ||||||||||||||
| RONA | based | |||||||||||||
| short-term | long-term | Pension | Other | |||||||||||
| Director (R’000) | Salary | incentive* | incentive* | fund | benefits | Total | ||||||||
| Bertina Engelbrecht | 1 862 | 852 | 4 740 | 268 | 1 | 7 723 | ||||||||
| Michael Fleming1 | 1 252 | 817 | – | 183 | 23 | 2 275 | ||||||||
| Michael Harvey | 2 489 | 1 200 | 6 095 | 229 | 238 | 10 251 | ||||||||
| David Kneale | 5 201 | 3 570 | 15 152 | 747 | 2 | 24 672 | ||||||||
| Keith Warburton2 | 1 599 | – | – | 117 | 7 135 | 8 851 | ||||||||
| Total | 12 403 | 6 439 | 25 987 | 1 544 | 7 399 | 53 772 | ||||||||
| 1 Appointed to the board 31 March 2011. | ||||||||||||||
| 2 Resigned 31 March 2011. | ||||||||||||||
Executive directors' remuneration – 2010 |
||||||||||||||
| Perform- | ||||||||||||||
| ance | ||||||||||||||
| RONA | based | |||||||||||||
| short-term | long-term | Pension | Other | |||||||||||
| Director (R’000) | Salary | incentive* | incentive* | fund | benefits | Total | ||||||||
| Bertina Engelbrecht | 1 802 | 1 012 | 5 163 | 152 | 1 111 | 9 240 | ||||||||
| Michael Harvey | 2 264 | 1 340 | 6 540 | 193 | 31 | 10 368 | ||||||||
| David Kneale | 4 943 | 4 163 | 16 335 | 416 | 1 | 25 858 | ||||||||
| Keith Warburton | 2 433 | 1 360 | 6 884 | 178 | 14 | 10 869 | ||||||||
| Total | 11 442 | 7 875 | 34 922 | 939 | 1 157 | 56 335 | ||||||||
Non-executive directors' remuneration |
||||||||||||||
| 2011 | 2010 | |||||||||||||
| Directors' | Directors' | |||||||||||||
| Director (0'000) | fees | fees | ||||||||||||
| David Nurek | 680 | 648 | ||||||||||||
| Fatima Abrahams4 | 315 | 251 | ||||||||||||
| John Bester | 355 | 313 | ||||||||||||
| Fatima Jakoet | 240 | 274 | ||||||||||||
| Nkaki Matlala3 | 213 | – | ||||||||||||
| Martin Rosen | 175 | 153 | ||||||||||||
| Total | 1 978 | 1 639 | ||||||||||||
|
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The total number of ordinary shares in issue is 270 652 112 (2010: 284 006 929). Percentage of issued share capital held by directors is 0.25% (2010: 0.28%). Details of all dealings in Clicks Group shares by directors during the financial year are contained in the
Directors' Report.
Non-executive director fees for 2012
The fee structure is aligned to the King lll remuneration guidelines that non-executive directors receive a base fee for appointment to the board or any committee, together with an attendance fee per meeting. The base fee comprises approximately 75% of the total fee. The chairman of the board or any committee receives a higher fee.
Fees are currently approved in line with the group's financial year. In future, the fees for a calendar year will be proposed for approval to shareholders at the AGM in January. The fee structure has accordingly been adjusted and shareholder approval will be sought for an increase in the fees for a 16-month period in January 2012. The proposed total fees for non-executive directors represent an increase of 6.9% on the fee structure for the 2011 financial year and adjusted for the 16 months equates to a 9.2% increase.
| Board position | Proposed total fees for 4 months from 1 September to 31 December 2012 R |
Proposed total fees for 12 months to 31 August 2012 R |
Total fees paid for 12 months to 31 August 2011 R |
% change for 12 months to 31 August 2012 |
||
|---|---|---|---|---|---|---|
| Board chairman | 167 300 | 470 000 | 440 000 | 6.8 | ||
| Board member | 53 600 | 150 000 | 140 000 | 7.1 | ||
| Chair: audit and risk committee | 66 900 | 190 000 | 180 000 | 5.6 | ||
| Audit and risk committee member | 37 500 | 106 000 | 100 000 | 6.0 | ||
| Chair: remuneration and nominations committee | 28 200 | 77 000 | 70 000 | 10.0 | ||
| Remuneration and nominations committee member | 14 100 | 38 500 | 35 000 | 10.0 | ||
| Chair: social and ethics committee | 28 200 | 77 000 | 70 000 | 10.0* | ||
| Social and ethics committee member | 14 100 | 38 500 | 35 000 | 10.0* | ||
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Clicks Group Limited