Remuneration report

Remuneration policy

The group’s remuneration policy is based on the “total rewards strategy”. This strategy is aimed at driving a high performance culture that delivers sustainable returns to shareholders through employees who are motivated and committed. The reward principles of market competitiveness, internal equity and performance are entrenched in the policy.

The remuneration policy supports the attraction, development and retention of employees who contribute to sustained business growth. Remuneration is optimised through a mix of annual guaranteed pay, variable pay including both short and long-term incentives, benefits and non-monetary rewards.

Salary premiums are paid for scarce and critical skills such as pharmacists, pharmacy assistants, merchandise buyers and planners, information technology specialists and finance specialists. These premiums are based on market benchmarking data and are reviewed annually to ensure the group remains competitive in the employment market.

The policy is transparent with pay bands established for each job grade and this assists in creating trust and ensuring that employees are equitably rewarded.

Annual salary increases are merit based, with increases being directly related to the employee’s annual performance rating. The annual increase for employees in the bargaining unit is based on a collective bargaining process.

Remuneration structure

The total rewards framework enhances the group’s employment proposition by providing flexibility to meet the differing needs of employees and positioning the group as an employer of choice.

Annual guaranteed pay is determined by considering the following factors:

  • The size and nature of the job based on the Hay job evaluation methodology
  • The competitive position of the Clicks Group pay and benefits structure relative to its defined market position, including any market premiums for scarce and critical skills
  • Individual performance as assessed during the biannual performance appraisal process
  • Individual position in the pay band range relative to competence and performance

Variable pay includes all discretionary, performance-based pay, including short-term incentives such as performance bonuses, sales incentives and commissions.

Benchmarking

The remuneration and nominations committee reviews the group’s overall pay framework annually against defined market benchmarks per job size or job family against the median of all industries at the executive level and at the median of the South African retail sector or local market for the remainder of the non-bargaining unit.

External compensation and benefit consultants advise the group, including the remuneration and nominations committee, on best pay practices, competitive positioning and benchmarking on strategic human capital issues.

The group’s benchmarking and market information is based on independent surveys, including the PricewaterhouseCoopers Remchannel, Hay Group, Deloitte Senior Manager and Deloitte Execeval surveys.

In addition, the group commissioned an independent benchmarking survey of the pharmacy industry. All major corporate retail pharmacy groups, as well as the three largest independent hospital groups, participated in the survey.

Remuneration governance

The remuneration and nominations committee has oversight of the group’s remuneration practices and is constituted as a committee of the board. The committee comprises independent non-executive directors, as recommended by King lll. During the period under review the following directors served on the committee: Professor Fatima Abrahams (chair), John Bester, David Nurek and Martin Rosen. The chief executive officer and the group human resources director are permanent invitees of the remuneration committee and are recused from discussions that relate to their own performance appraisal and remuneration. Detail on the committee and meeting attendance is included in the Corporate Governance Report.

The committee assists the board in ensuring the group has a competitive remuneration policy and governance framework that is aligned with the group’s strategy and performance goals.

The primary responsibilities of the committee include:

  • Ensuring the remuneration policy is aligned to and promotes the achievement of the group’s strategic objectives and encourages individual performance
  • Ensuring the critical elements of the remuneration policy, including annual guaranteed pay, scarce skills premiums, benefits and incentives, are benchmarked to ensure the group is competitive in the employment market
  • Ensuring all benefits, including retirement benefits and other financial arrangements, are justified and correctly valued
  • Reviewing and approving the performance evaluation of the chief executive officer and executive directors against agreed deliverables
  • Reviewing incentive schemes to ensure alignment to shareholder value creation and that the schemes are administered in terms of the rules
  • Reviewing the remuneration of non-executive directors and recommending adjustments to the fees at the annual general meeting

The group’s remuneration policy was proposed to shareholders for a non-binding advisory vote at the annual general meeting in January 2012 for the first time and was approved by 100% of the votes cast. The policy will now be proposed to shareholders annually.

An external rewards specialist, Barbara Maughan, is retained to advise the committee on remuneration trends and benchmarking of both executive and non-executive remuneration. She holds the position of lead: total reward at Deloitte Consulting and is a remuneration adviser to a number of listed companies. The members of the committee have independent access to her services and may request her professional advice on any remuneration issue.

Executive directors’ remuneration

The remuneration structure of executive directors is linked to the achievement of the group’s medium-term financial and operating targets, and is therefore aligned to shareholder interests.

The target indicators are as follows:

  • Return on shareholders’ interest (ROE)
  • Shareholders’ interest to total assets
  • Return on total assets
  • Operating margin

Detail on the targets and the group’s performance relative to the targets for the 2012 financial year is included here.

The remuneration of executive directors consists of three components, with a significant portion of remuneration being performance-related:

  • annual guaranteed pay, which allows for flexible structuring of retirement fund contributions
  • short-term cash-based incentive bonus
  • participation in the long-term incentive scheme

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.

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 and nominations 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 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 – refer to Definitions), are set by the board and embedded in the budgets, operating plans and the performance contracts, and are aligned to the group’s medium-term financial targets. The incentive scheme is designed to encourage employees to focus on both financial and non-financial levers across financial, customer, people and internal business process improvement metrics.

The achievement of targets is reviewed by the remuneration and nominations 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 with the performance hurdles set at 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 has been exceeded by at least 5% (as verified by an external remuneration consultant and a non-executive director).

Bonus payments are capped at 120% of annual guaranteed remuneration for the chief executive officer and at 80% for the other executive directors. The targets and value of all bonuses awarded to executives are approved by the remuneration and nominations committee.

The group’s performance for the 2012 financial year did not achieve the RONA target and no bonuses were paid for the year.

Executive directors participate in the cash-settled long-term incentive scheme that is detailed later in this report.

The remuneration paid to executive directors is disclosed here. As the group’s three prescribed officers in terms of the Companies Act are all executive directors, this meets the King lll requirement to disclose all remuneration paid to prescribed officers.

Management and staff

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 units 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 6.1% (2011: 5.0%). The annual increase date is 1 September which is aligned with the group’s financial year and budgeting period.

Collective salary increases are negotiated with the representative trade union for the Clicks bargaining unit. A salary increase of 8% or R355, whichever is the greater, was agreed for 2012/13. All staff in the bargaining unit also participate in the group’s short-term incentive scheme.

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.

Employee share ownership programme

An employee share ownership programme (ESOP) was implemented in 2011. Through this scheme 10% of the group’s issued shares after the issue of “A” shares (equating to 29.2 million “A” shares) were 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 designated employment equity groups received a 15% enhancement of their share allocation.

Senior executives currently participating in the group’s long-term incentive scheme do not participate in the ESOP.

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.

Shares have been allocated to 7 855 permanent employees, with black staff receiving 86% and women 63% of the shares. Pharmacists comprise 5% of the ESOP beneficiaries.

Group retention scheme

The group retention scheme was implemented in 2009 to retain talented employees by providing them with a long-term financial incentive linked to growth in the group’s earnings. This includes high-potential employees, black staff and employees with scarce and critical skills. One-quarter of the retention value is allocated upfront and the balance is payable at the end of the three-year retention period.

There are currently 39 employees participating in the scheme, of which 33% are black and 44% are women. The candidates recommended for inclusion in the retention scheme are reviewed and approved by the remuneration and nominations committee, which also approves all payments made under the scheme. During the financial year, R3.1 million was paid out to participants in the retention scheme.

Incentive schemes

Short-term and long-term incentives are an integral part of the total rewards framework and aim to align employee performance with the interests of shareholders.

Short-term incentive scheme

All permanent employees in Clicks 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.

Performance is measured at the group, business unit and team level against agreed targets. Although the scheme rewards team performance, individual performance as measured through the group’s annual performance appraisal process may limit the value of the payment should an employee not meet individual performance targets.

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. Bonuses for management and staff are capped at two times the value of an on-target bonus due to the employee.

The remuneration and nominations committee annually reviews the short-term incentive scheme and any allocation and payment is approved. No short-term incentive payments were made for the financial year as neither the group nor the business units met the required performance hurdles.

Retail store incentive scheme

A retail store incentive scheme was introduced during the period to reward staff in Musica and The Body Shop stores for exceeding the quarterly store sales budgets above a defined threshold. This is set at 105% for Musica and 110% for The Body Shop. This scheme is self-funded as the value of the payment may not exceed the gross profit on the defined qualifying store turnover. A total of 211 staff in Musica qualified for the incentive with the total payout value being R413 000; in The Body Shop 41 staff members qualified for a total payout of R92 000.

Long-term incentive scheme

The long-term incentive scheme aligns executive remuneration with the creation of shareholder value as the scheme is linked to the growth in the group’s earnings over a three-year performance period.

Appreciation units are allocated to participants in this scheme. A base value is determined for each appreciation unit at the date of allocation by multiplying the group’s reported diluted headline earnings per share (HEPS) by a factor of 12.

An exercise value is determined at the end of the three-year period by multiplying the diluted HEPS for the year by the factor of 12. The difference between the exercise value and the base value is the amount paid out in cash.

Executives 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.

Units are forfeited if an executive resigns within the three-year performance period.

During the financial year 3.6 million (2011: 4.7 million) appreciation units were issued. A total of 16 (2011: 28) executives currently participate in this scheme, collectively holding 8.5 million (2011: 10.5 million) units at year-end.

The following table details the appreciation units that 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.

Executive director 2009
allocation
at R19.91
per unit
(number
of units)
2010
allocation
at R25.37
per unit
(number
of units)
2011
allocation
at R29.96
per unit
(number
of units)
Bertina Engelbrecht 294 576 335 987 304 539
Michael Fleming   551 833 495 327
Michael Harvey1 374 887 *473 000 *434 579
David Kneale 942 240 1 407 174 1 286 916
       
1 Resigned 12 June 2012. The units allocated in 2009 have been settled according to scheme rules and the remaining units (*) that were not yet due have been forfeited.

Employee benefits

Retirement funds

Membership of a retirement fund is compulsory for all full-time employees. The group offers South African employees the choice of a pension or provident fund arrangement in their fund selection of either 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.

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. Combined membership across the funds was 8 043 (2011: 8 181) at year-end.

Medical aid

Membership of one of the Horizon Medical Aid Scheme benefit options is actively encouraged and all existing members of Discovery Health may continue their membership.

At year-end 594 employees were principal members with Horizon and 763 employees were principal members of a Discovery Health medical-aid scheme.

At year-end 18% (2011: 17%) of the permanent full-time employees were members of a medical aid 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 – 2012

Director (R’000) Salary RONA
short-
term
incentive
Perfor-
mance-
based
long-term
incentive*
Pension
fund
Other
benefits
Total
Bertina Engelbrecht 1 993 3 800 286 1 6 080
Michael Fleming 3 185 466 59 3 710
Michael Harvey1 2 284 5 001 210 2 188 9 683
David Kneale 5 617 12 155 807 1 18 580
Total 13 079 20 956 1 769 2 249 38 053
1 Resigned 12 June 2012. Amount reflected under Other benefits includes contractual payments for six months’ notice pay, leave pay due and a pro rata payment of 13th cheque. Under the long-term incentive (LTI) scheme rules, Michael Harvey qualified for the LTI payment due at the end of November 2012. This amount was settled and is reflected above under Performance-based long-term incentive. In addition, a restraint of trade payment of R3 255 000 was paid, which precludes him from being employed in corporate retail pharmacy for a period of 12 months.

Executive directors’ remuneration – 2011

Director (R’000) Salary RONA
short-term
incentive*
Perfor-
mance-
based
long-term
incentive*
Pension
fund
Other
benefits
Total
Bertina Engelbrecht 1 862 852 4 740 268 1 7 723
Michael Fleming2 1 252 817 183 23 2 275
Michael Harvey 2 489 1 183 6 095 229 238 10 234
David Kneale 5 201 3 570 15 152 747 2 24 672
Keith Warburton3 1 599 117 7 135 8 851
Total 12 403 6 422 25 987 1 544 7 399 53 755
2 Appointed to the board March 2011
3 Resigned 31 March 2011
* Payments relating to the performance for the year ended 31 August are paid in November. However, these amounts are provided for in the relevant financial year.

Non-executive directors’ remuneration

Director (R’000) 2012
Directors’
fees
2011
Directors’
fees
David Nurek 692 680
Fatima Abrahams4 281 315
John Bester 379 355
Fatima Jakoet 256 240
Nkaki Matlala 295 213
Martin Rosen 189 175
Total 2 092 1 978
4 The directors’ fees paid to Prof. Abrahams include an amount of R15 000 (2011: R30 000) for performing the role of chairman of The Clicks Group Employee Share Ownership Trust.

Total directors’ remuneration

R’000 2012 2011
Executive directors (excluding the appreciation units scheme) 38 053 53 755
Non-executive directors 2 092 1 978
Total directors’ remuneration 40 145 55 733

Directors’ shareholdings at 31 August

Director 2012 2011
Direct
beneficial
shares
Indirect
beneficial
shares
Total Direct
beneficial
shares
Indirect
beneficial
shares
Total
David Nurek 240 000 240 000 279 682 279 682
John Bester 12 000 10 000 22 000 12 000 10 000 22 000
Bertina Engelbrecht 68 019 68 019 52 353 52 353
Michael Harvey1 n/a n/a n/a 166 314 166 314
David Kneale 220 925 220 925 170 845 170 845
Martin Rosen 2 000 2 000 2 000 2 000
Total 302 944 250 000 552 944 403 512 289 682 693 194
1 Resigned 12 June 2012

The total number of ordinary shares in issue is 276 123 498 (2011: 270 652 112). Percentage of issued share capital held by directors is 0.20% (2011: 0.25%). Details of all dealings in Clicks Group shares by directors during the financial year are contained in the Directors’ Report.

Non-executive directors’ fees for 2013

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 paid for a calendar year. The fee structure has been adjusted for the 2013 calendar year and is subject to approval by shareholders at the AGM in January 2013.

The proposed total fees for non-executive directors for the 2013 calendar year represents an increase of 9.76% on the fee structure for the 2012 financial year.

In line with best practice, non-executive directors do not participate in incentive schemes. None of the non-executive directors have service contracts with the group and no consultancy fees were paid to directors during the year.

  2013** 2012*
Board position Proposed
total fees
R
Proposed
base fee
R
Proposed
meeting
fee
R
Total fee
R
Board chairman*** 750 000 562 500 187 500 691 500
Board member 170 000 127 500 42 500 150 000
Chair: Audit and risk committee 190 000 142 500 47 500 190 000
Audit and risk committee member 106 000 79 500 26 500 106 000
Chair: Remuneration and nominations committee 85 000 63 750 21 250 77 000
Remuneration and nominations committee member 50 000 37 500 12 500 38 500
Chair: Social and ethics committee*** n/a n/a n/a 77 000
Social and ethics committee member 45 000 33 750 11 250 38 500
         
* Reflects the total fees paid for the 2012 financial year
** Fees are payable for the 2013 calendar year
*** Proposed fees for board chairman inclusive of all committee memberships