REMUNERATION REPORT
Remuneration policy and philosophy
The group’s remuneration policy is based on the “total rewards strategy” which is aimed at driving a high performance culture that consistently delivers above average returns to shareholders through employees who are motivated and fully engaged. This remuneration policy also supports the attraction, development and retention of employees with scarce and critical skills who contribute to sustained business growth.
Remuneration committee
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, in cash, share appreciation rights and other benefits, 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 comparative group when comparing 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.
Remuneration structure
Annual guaranteed remuneration is determined taking the following factors into account:
- The Hay-based job grading level and pay point;
- The competitive position of the Clicks Group pay and benefits structure relative to its defined market position which determine 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. The outcome of this work and a review of the group’s human resources challenges led to the implementation of the total rewards framework. This framework is predicated on the following:
- Increased flexibility to meet differing employee needs;
- Clicks Group’s positioning as an employer of choice;
- Enhanced capability to attract and retain best talent; and
- Improve understanding of the employee value proposition.
The total rewards framework involved the implementation of a new Hay grading methodology to enable credible remuneration benchmarking; a new pay policy which aligned grading levels to pay points; a benefits matrix that aligned the benefits to grading levels; and a detailed RASCI governance framework. These factors have already contributed to a decrease in employee turnover rates over the past year and higher levels of employee commitment and affiliation to the group.
Executive directors
The remuneration package of executive directors consists of three components:
- annual guaranteed pay, which allows for flexible structuring of retirement fund contributions, medical aid and car allowance;
- short-term cash-based incentive bonus; and
- participation in the long-term incentive scheme.
The remuneration structure of executive directors is aligned with shareholder interests as expressed in the group’s medium-term financial targets. A significant portion of executive remuneration is therefore 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, and are subject to annual review by the remuneration committee.
The performance of the chief executive officer is assessed by the chairman and the board, while the performance of the other executive directors and other reportees to the chief executive officer is evaluated by the chief executive officer and reviewed by the remuneration committee. The annual pay increase of the executive directors is based on the individual performance rating and position in range, as determined by the remuneration committee during the annual review of remuneration.
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. 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. 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 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 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 salary increase is paid to all staff and the average increase for the financial year was 5.8% (2009: 7.0%). The annual increase date is 1 September which is aligned with the group’s financial year and budgeting period.
A retention scheme was approved by the remuneration committee and implemented during the year for high potential, high performing employees who are critical to the group’s strategic talent and succession plans. The scheme is aimed at retaining the employees over a three-year period. One-third of the retention value was allocated upfront and the remaining two-thirds will be paid at the end of the three-year retention period. A total of 18 senior employees, of which one-third are black, benefited from this scheme.
Staff
A one-year wage settlement with an increase of 10.8% (2009: 11.3%) was granted to all permanent employees in the Clicks bargaining unit. All staff in the bargaining unit also participate in the group’s short-term incentive scheme. For UPD staff, a one-year wage agreement was concluded with an increase of 10.0% (2009: 10.0%). All UPD staff receive a guaranteed 13th cheque.
An annual bonus is paid in mid-December to all qualifying permanent employees within the retail businesses. While this bonus forms part of the group’s compensation strategy, the focus of remuneration remains performance-based.
All staff receive discounts on purchases at group stores which vary by business unit.
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
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 R66.7 million (2009: R54.3 million) was approved by the remuneration committee as the total bonus payable for the 2010 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 this 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 on 7 April 2005 and a further tranche on 11 May 2006. The last of the outstanding rights will mature in May 2011.
As the group’s liability relating to these share appreciation rights is dependent on the future performance of the company’s share price, a derivative hedge was acquired to limit the level of exposure. The group’s maximum exposure in relation to the unhedged portion is R1.4 million (2009: R14 million). Further details on the hedging instrument and the cost of the hedge are contained in notes 16 and 21 to the annual financial statements.
The following share appreciation rights allocated to executive directors matured during the financial year and the proceeds are reflected below:
| Number of | ||
| five-year | ||
| Director | rights | R’000 |
| Michael Harvey | 1 000 000 | 27 779 |
| David Kneale | 750 000 | 20 834 |
| Keith Warburton | 825 000 | 22 917 |
| The following share appreciation rights were outstanding at year-end: | ||
| Number of | ||
| five-year | ||
| Director | rights | |
| Bertina Engelbrecht | 200 000 | |
| David Kneale | 75 000 | |
Long-term incentive scheme
In terms of the group’s long-term incentive scheme, share appreciation rights are allocated to participants 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 36 (2009: 48) employees currently participate in this scheme, collectively holding 12 857 363 (2009: 17 923 136) rights at year-end. The table below details rights which have been allocated to executive directors under this scheme and the relevant amounts have been expensed through the statement of comprehensive income.
| Allocation | Allocation | Allocation | |
| at R12.36 | at R15.83 | at R19.91 | |
| per right | per right | per right | |
| 1 Sept 2007 | 1 Sept 2008 | 1 Sept 2009 | |
| Executive director | (number of rights) | (number of rights) | (number of rights) |
| Bertina Engelbrecht | 396 845 | 335 845 | 294 576 |
| Michael Harvey | 502 670 | 431 333 | 374 887 |
| David Kneale | 1 255 617 | 1 072 331 | 942 240 |
| Keith Warburton | 529 126 | 450 284 | 395 681 |
| Total | 2 684 258 | 2 289 793 | 2 007 384 |
Employee benefits
Retirement funds
Membership of a retirement fund is compulsory for all permanent employees. Employees have the option to join the Clicks Group Retirement Fund, the Clicks Group Negotiated Pension Fund or the Clicks Group Negotiated Provident Fund. Employees of UPD can join the Clicks Group funds, the New UPD Corporate Selection Pension Fund or the Chemical Industries’ National Provident Fund.
- Combined membership across the funds was 7 716 (2009: 7 405) at year-end;
- Total assets of the funds (excluding the Chemical Industries’ Provident Fund) amounted to R731 million (2009: R695 million);
- The funds are all defined contribution schemes and the group carries no liability in relation to these funds; and
- All funds provide death and disability cover, while the negotiated funds also include a funeral benefit.
Medical aid
Membership of the Discovery Health Medical Scheme is actively encouraged. At year-end 1 014 (2009: 1 010) employees were members of the Discovery scheme.
The existing Clicks Group Medical Aid Scheme is administered by Medscheme. The fund had 565 (2009: 704) principal members at year-end and a solvency ratio of 76% (2009: 56%). UPD operates a medical scheme administered by Fedhealth and 48 (2009: 58) of the permanent employees are members of the fund.
Directors' remuneration
Executive directors’ remuneration – 2010
| Director (R’000) | Salary | RONA short-term incentive* |
Performance based long- term incentive |
Pension fund |
Other benefits |
Total | ||
| Bertina Engelbrecht | 1 802 | 1 012 | 6 016 | 152 | 1 111 | 10 093 | ||
| Michael Harvey | 2 264 | 1 340 | 7 620 | 193 | 31 | 11 448 | ||
| David Kneale | 4 943 | 4 163 | 19 034 | 416 | 1 | 28 557 | ||
| Keith Warburton | 2 433 | 1 360 | 8 021 | 178 | 14 | 12 006 | ||
| Total | 11 442 | 7 875 | 40 691 | 939 | 1 157 | 62 104 | ||
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Executive directors’ remuneration – 2009
| Director (R’000) | Salary | RONA short-term incentive |
Pension fund | Other benefits |
Total | Gain on sale of share options |
| Bertina Engelbrecht | 1 621 | 1 001 | 131 | 49 | 2 802 | – |
| Michael Harvey | 1 905 | 1 206 | 184 | 212 | 3 507 | 3 761 |
| David Kneale | 4 451 | 4 116 | 398 | 86 | 9 051 | – |
| Keith Warburton | 2 025 | 1 344 | 192 | 182 | 3 743 | – |
| Total | 10 002 | 7 667 | 905 | 529 | 19 103 | 3 761 |
Non-executive directors’ remuneration
| 2010 | 2009 | |||||||||||
| Directors’ | Directors’ | Consultancy | ||||||||||
| Director (R’000) | fees | fees | fees | Total | ||||||||
| David Nurek | 648 | 594 | – | 594 | ||||||||
| Fatima Abrahams | 251 | 225 | – | 225 | ||||||||
| John Bester1 | 313 | 253 | – | 253 | ||||||||
| Peter Eagles2 | n/a | 157 | 300 | 457 | ||||||||
| Fatima Jakoet | 274 | 247 | – | 247 | ||||||||
| Robert Lumb3 | n/a | 63 | – | 63 | ||||||||
| Nkaki Matlala4 | – | n/a | n/a | n/a | ||||||||
| Martin Rosen | 153 | 144 | – | 144 | ||||||||
| Total | 1 639 | 1 683 | 300 | 1 983 | ||||||||
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| Total directors’ remuneration (R’000) | 2010 | 2009 | ||||||||||
| Executive directors (excluding share appreciation rights) | 62 104 | 19 103 | ||||||||||
| Non-executive directors | 1 639 | 1 983 | ||||||||||
| Total directors’ remuneration | 63 743 | 21 086 | ||||||||||
Directors’ shareholdings at 31 August
| 2010 | 2009 | |||||
| Direct | Indirect | Direct | Indirect | |||
| Director | beneficial | beneficial | Total | beneficial | beneficial | Total |
| David Nurek | – | 329 682 | 329 682 | – | 129 682 | 129 682 |
| Fatima Abrahams | – | – | – | – | – | – |
| John Bester | 10 000 | 10 000 | 20 000 | 10 000 | – | 10 000 |
| Bertina Engelbrecht | 34 591 | – | 34 591 | – | – | – |
| Michael Harvey | 143 815 | – | 143 815 | 100 000 | – | 100 000 |
| Fatima Jakoet | – | – | – | – | – | – |
| David Kneale | 214 646 | – | 214 646 | 105 200 | – | 105 200 |
| Nkaki Matlala | – | – | – | n/a | n/a | n/a |
| Martin Rosen | 2 000 | – | 2 000 | 2 000 | – | 2 000 |
| Keith Warburton | 46 121 | 5 000 | 51 121 | – | 5 000 | 5 000 |
| Total | 451 173 | 344 682 | 795 855 | 217 200 | 134 682 | 351 882 |
The number of issued shares are 284 006 929 (2009: 302 841 401). Percentage of issued share capital held by directors is 0.28% (2009: 0.12%). Details of all dealings in Clicks Group shares by directors during the financial year are contained in the Directors’ Report.
Non-executive director fees
The fee structure for non-executive directors has been adjusted for the 2011 financial year and is subject to retrospective approval by shareholders at the annual general meeting in January 2011.
The fee structure has been amended to include a base fee for appointment to the board or any committee as a member or chairman of a committee, together with an attendance fee. The higher increase in the fees for the audit and risk committee recognises the amalgamation of the audit committee and risk committee and the increased level of accountability vested in the committee following the adoption of the King III principles. The non-executive directors’ fees are also reviewed annually against a defined retail comparator group.
| Proposed fees for 2011 | Fees paid for 2010 | |||
| Board position | Anticipated total fees R | Base fee R | Fee per meeting R | R |
| Chair of the board | 440 000 | 330 000 | 27 500 | 387 000 |
| Board member | 140 000 | 105 000 | 8 750 | 121 000 |
| Chair: Audit and risk committee | 180 000 | 135 000 | 9 000 | 110 000 |
| Audit and risk committee member | 100 000 | 75 000 | 5 000 | 55 000 |
| Chair: Remuneration committee | 70 000 | 52 500 | 8 750 | 65 000 |
| Remuneration committee member | 35 000 | 26 250 | 4 375 | 32 500 |
| Chair: Nominations committee | 70 000 | 52 500 | 8 750 | 63 000 |
| Nominations committee member | 35 000 | 26 250 | 4 375 | 31 500 |
| Chair: Transformation committee | 70 000 | 52 500 | 8 750 | 63 000 |
| Transformation committee member | 35 000 | 26 250 | 4 375 | 31 500 |