Integrated Annual Report 2017

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Rewarding value creation

Clicks Group’s remuneration policy is aimed at driving a high-performance culture that creates sustainable value for shareholders.

The remuneration policy, which is outlined in part 1 of this report, will again be proposed to shareholders for a non-binding vote at the annual general meeting (AGM) in January 2018. The application of the remuneration policy in 2017, which details how the group has rewarded value creation, is covered in part 2 of this report. In accordance with the recently introduced King IV governance code, this implementation report will be tabled separately to shareholders for a non-binding vote at the AGM.

Clicks Group values the views and insights of investors, and encourages shareholders to proactively engage with management on remuneration issues to enable informed decisions to be made when voting on the group’s remuneration policy.

In addition to this commitment, and in accordance with King IV, in the event that either the remuneration policy or the implementation report receives 25% or more dissenting votes, management will seek to engage directly with these shareholders to:

  • ascertain the reasons for the dissenting votes; and
  • address legitimate and reasonable objections or concerns by clarifying or amending the remuneration policy, its implementation or processes, or reviewing the remuneration governance, or taking other steps to resolve the concerns.

The steps taken to address legitimate and reasonable concerns will be disclosed in the following years’ rewarding value creation report.

The remuneration philosophy and reward principles remain consistent with last year while the remuneration policy has been aligned to King IV to outline the group’s approach to fair, responsible and transparent remuneration practices across the business. At the 2017 AGM, 98.3% of shareholders who voted supported the group’s remuneration policy.

This report provides an overview of the remuneration of all group employees as well as disclosing executive director remuneration and the alignment with shareholder value creation. The remuneration paid to executive and non-executive directors for the 2017 financial year is detailed below.

Clicks staff

Part 1: remuneration policy


The group’s remuneration policy is based on the total rewards model and integrates the five key elements that attract, motivate and retain human capital to achieve the desired business results:

  • compensation;
  • benefits;
  • performance and recognition;
  • learning and development; and
  • work-life integration.

The reward principles of fair and responsible remuneration, market competitiveness, and pay for performance are entrenched in the policy. The policy is transparent with a pay framework that clearly differentiates between occupational levels and pay grades that facilitate remuneration benchmarking for each job within a skill pool.

The remuneration mix includes a combination of monetary and non-monetary rewards for employees in exchange for their time, efforts, talent and performance at an individual, team and company level.

Monetary rewards include annual guaranteed pay, variable pay such as short and long-term incentives that relate to performance to agreed targets, as well as other benefits.

Non-monetary rewards are less tangible and range from formal and informal recognition programmes, training and job rotation opportunities and exposure to stimulating work assignments, all of which are designed to motivate, affiliate and retain employees.

Employees receive a total reward statement annually which provides a personalised comprehensive view of all their rewards.

Pay levels are based on national and retail market benchmark data and are reviewed annually to ensure the group remains competitive in the employment market. Premiums are paid for scarce and critical skills such as pharmacy, buying and planning, finance and IT skills based on the relevant market data.

Annual salary increases are merit based, with increases being directly related to each employee’s annual performance rating. The range of increase percentages per performance rating is applied consistently across the group, including to the executive directors. The annual increase for an employee in the bargaining unit is based on a collective bargaining process (refer to the section on remuneration of management and staff).

Remuneration structure

The total rewards framework provides flexibility to meet the differing needs of employees.

Annual guaranteed pay is determined by considering the following factors:

  • the size of the job, based on the Hay job evaluation methodology;
  • the nature of the job relative to its defined market position, including any market premiums for scarce and critical skills;
  • individual performance as assessed during the performance review process; and
  • individual position in the pay band range relative to competence and talent positioning.

The remuneration and nominations committee (the committee) reviews the group’s overall pay framework annually against defined market benchmarks per job grade, job size or skill pool.

The group’s benchmarking and market information is based on independent surveys, including the PricewaterhouseCoopers REMchannel, Deloitte Top Executive and The Hay Group surveys. These benchmarking exercises recognise the complexity in the group’s business model and the regulatory environment within which the group operates.

The group also participates in a biannual benchmarking exercise to maintain a competitive remuneration position in respect of pharmacists and pharmacy managers.

The biannual performance review of all employees focuses on both financial and non-financial levers across the following metrics:

  • Financial performance
  • Business process improvement metrics, including transformation targets, where this can be influenced by the employee
  • Customer satisfaction
  • Learning and growth

Executives are also measured against the objectives set by the social and ethics committee in relation to all the elements of the BBBEE scorecard.

All employees are required to achieve a satisfactory performance rating to fully qualify for participation in the short-term incentive scheme.

Executive directors’ remuneration

The group’s remuneration policy has been reviewed by the committee to ensure that executive directors’ remuneration is fair and responsible in the context of overall employee remuneration, particularly given the nature of the retail industry and considering South Africa’s socio-economic landscape.

The policy prescribes that the levels of pay and incentives awarded to executive directors are set rationally and impartially, and are free from discrimination, self-interest, prejudice or favouritism. Executive pay is linked to value creation and positive outcomes, is subject to independent oversight and approval by the committee, and is considered by the directors to be sustainable and responsible.

To align with shareholder interests, executive remuneration is linked to the group’s performance, with clearly defined and measurable one-year and three-year deliverables.

The remuneration of executive directors consists of three components:

Guaranteed remuneration Variable and performance-related remuneration
Annual guaranteed pay, comprising base salary, retirement and other benefits; allows for flexible retirement fund contributions Annual short-term cash-based incentive bonus Long-term incentive schemes

Performance measurement

Annual individual performance review

Average monthly return on net assets (RONA)

Operating profit

Diluted headline earnings per share growth over a three-year period subject to performance hurdles

Total shareholder return growth over a three-year period subject to performance hurdles

The performance of the chief executive officer is assessed by the committee, while the performance of the other executive directors is evaluated by the chief executive officer and reviewed by the 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 and applied consistently across the group. 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.

Incentive schemes

A significant portion of short-term and long-term remuneration is variable and designed to incentivise executive directors.

Should executive directors not meet the targets set by the committee for the short-term and long-term incentive schemes, then no amounts will be payable under the schemes and executive directors will only receive their guaranteed remuneration. Performance hurdles and caps for both the short-term and long-term incentive schemes apply to the participants, including the executive directors, which are set out below and elsewhere in this report

Short-term incentive scheme

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 of at least 95% of the targeted group RONA and 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 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 targeted operating profit has been exceeded by at least 5%.
  • Bonus payments are capped at 120% of annual guaranteed remuneration for the chief executive officer and at 80% for the other executive directors.

The achievement of targets is reviewed by the committee before any incentive payments are made to executive directors and is also subject to review by the group’s external auditor.

Long-term incentive scheme

Executive directors participate in the cash-settled long-term incentive scheme which is detailed below.

Remuneration of 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 unit and their individual performance levels.

An annual performance-based salary increase is paid to all permanent non-bargaining unit employees. 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. The negotiation team is headed by the Clicks human resources executive. Trade union membership comprises 18% of the total group employees (2016: 18%). The employees in the bargaining unit also participate in the group’s short-term incentive schemes.

All store employees’ compensation complies with the sectoral determination or statutory requirements in all countries in which the group operates and the minimum rates of pay as determined for the retail industry are either met or exceeded.

Employee share ownership programme

The employee share ownership programme (ESOP) was implemented in 2011 to attract and retain scarce and critical skills, accelerate transformation, build employee commitment and enable employees to share in the growth and success of the business.

Entry to this scheme closed in 2015 and the scheme matures in 2018 and 2019.

The executive directors and senior employees who participate in the group’s long-term incentive scheme did not participate in the ESOP.

Through the ESOP 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. Employees with more than five years’ service, pharmacists and senior employees from designated employment equity groups received a 15% enhancement of their share allocation.

Shares are held by 5 882 employees, with black staff receiving 88% and women 66% of the shares. Pharmacists comprise 5% of the ESOP beneficiaries. Participating employees receive a cash dividend annually, equal to 10% of the total dividend paid to ordinary shareholders each year.

Group retention scheme

The group retention scheme is aimed at retaining talented employees by providing them with a long-term financial incentive which is aligned with shareholders’ interests.

The scheme targets high-potential employees, black staff and employees with scarce and critical skills. There are currently 46 employees participating in the scheme, of whom 35% are black and 33% are women.

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 schemes

All permanent employees in the group participate in the short-term incentive schemes which reward the achievement of performance targets of the business.

  • RONA-based short-term incentive scheme

    Performance for the group’s RONA-based short-term incentive scheme 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 incentive, provided this is funded by an increase in the operating profit. Incentives for management and staff are capped at two times the value of an on-target bonus.

  • Retail store incentive scheme

    The retail store incentive scheme rewards staff in retail stores for outperforming quarterly store sales targets.

Long-term incentive scheme

Long-term incentive (LTI) schemes are aimed at aligning executive remuneration with shareholder interests by rewarding executives for the creation of shareholder value. The LTI schemes have a three-year term with performance hurdles attached and successive annual allocations ensure that the executives and senior managers who participate in the scheme are incentivised based on the sustained performance of the group measured by the increase in diluted headline earnings per share (HEPS) and the increase in total shareholder return (TSR).

The LTI schemes are regularly reviewed and enhanced to align with evolving best practice locally and internationally, and based on engagement with major shareholders.

  • The schemes are cash settled and based on share appreciation units. As there are no shares issued in terms of the LTI schemes, there is no share dilution.
  • The remuneration multiple used to determine the number of appreciation units granted is unchanged.
  • A cap limits the value payable at the end of the three-year performance period to no more than five times the annual guaranteed pay of participants in the scheme.
  • The Clicks Group has implemented a programme to hedge against the economic risk linked to the share price based on the anticipated payout of the TSR portion of the long-term incentive.

Currently 15 (2016: 14) executives participate in the schemes. The relevant amounts are expensed through the statement of comprehensive income.

  • 2014 to 2017, 2015 to 2018 and 2016 to 2019 schemes

    The LTI schemes align executive and long-term investor interests by including both an earnings performance metric as well as exposing participants to market volatility.

    The value of appreciation units are apportioned equally between two performance components:

    (1) diluted HEPS; and
    (2) total shareholder return (TSR).

    (1) HEPS appreciation units

    The base value for the HEPS appreciation units is calculated at the date of allocation by multiplying the group’s reported diluted headline earnings per share (HEPS) by an internal price earnings ratio of 12.

    An exercise value is determined at the end of the three-year period by multiplying the published diluted HEPS for the year by the same factor of 12.

    The difference between the exercise value and the base value is the amount paid out in cash.

    In order to enhance the alignment between executive and shareholder interests, the HEPS appreciation units are subject to performance hurdles as follows:

    Diluted headline earnings per share
    Performance hurdle Range (based on three-year CAGR in
    diluted HEPS)
    Percentage of LTI payout
    Weak 0% or negative growth 0%
    Below target Up to 7.9% growth 70%
    On target 8% to 14.9% growth 100%
    Above target 15% to 19.9% growth 150%
    Exceptional Above 20% growth 200%
    (2) TSR appreciation units

    The base value for the TSR appreciation units is the 20-day volume weighted average price (VWAP) of the Clicks Group shares, measured over the 20 business days at the end of the previous financial year.

    The exercise value is the corresponding 20-day VWAP at the end of the three-year period. The financial incentive received by the participants is the appreciation in the Clicks Group share price over the three-year period.

    The TSR units are subject to the following performance hurdles:

    Total shareholder return
    Performance hurdle (based on three-year CAGR in TSR) Percentage of LTI payout
    Below 10% Unit allocation forfeited
    Above 15% Unit allocation increased by 50%
    Above 20% Unit allocation increased by 100%
    For the purposes of calculating the TSR growth in relation to the performance hurdles, TSR is defined as the overall return to shareholders, being the appreciation in the 20-day VWAP of the Clicks Group share, plus dividend payments reinvested over the three-year performance period, divided by the VWAP of the Clicks Group share at the commencement of the period, expressed as a percentage.
    2017 to 2020 LTI scheme

    The design of the 2017 scheme is unchanged from previous schemes, with the value of appreciation units being apportioned equally between diluted HEPS and TSR units, which are subject to performance hurdles.

    The performance hurdles for the diluted HEPS appreciation units have remained unchanged, as follows:

    Diluted headline earnings per share
    Performance hurdle Range (based on three-year CAGR in
    diluted HEPS)
    Percentage of LTI payout
    Weak 0% or negative growth 0%
    Below target Up to 7.9% growth 70%
    On target 8% to 14.9% growth 100%
    Above target 15% to 19.9% growth 150%
    Exceptional Above 20% growth 200%
    However, based on current market conditions, in particular the lower inflation rate and South African economic growth forecasts compared to expectations at the commencement of the previous schemes, the TSR hurdles have been revised as follows:
    Total shareholder return
    Performance hurdle (based on three-year CAGR in TSR) Percentage of LTI payout
    Below 9% Unit allocation forfeited
    Above 12% Unit allocation increased by 50%
    Above 15% Unit allocation increased by 100%
Directors’ participation in the LTI

Executive directors have been awarded the following appreciation units:

2015 – 2018 scheme 2016 – 2019 scheme 2017 – 2020 scheme
HEPS units
at R46.07
per unit
TSR units
at R93.82
per unit
HEPS units
at R52.62
per unit
TSR units
at R126.03
per unit
HEPS units
at R60.25
per unit
TSR units
at R146.10
per unit
Bertina Engelbrecht 143 484 70 454 136 830 57 129 129 461 53 388
Michael Fleming 207 736 102 004 198 404 82 837 189 212 78 029
David Kneale 571 438 280 590 547 320 228 517 525 809 216 838

In line with best governance practice, non-executive directors do not participate in incentive schemes.

Executive service conditions

The chief executive officer is subject to a 12-month notice period and the other executive directors to a six-month period. The retirement age for the chief executive is 65 while the other executive directors retire at the age of 63. None of the executive directors are appointed on fixed-term contracts.

Non-executive directors’ fees

The fee structure for non-executive directors is based on a review of a number of internal, economic and market factors, and is benchmarked annually by an independent party. The group’s policy is to pay non-executive director fees in a range of 80% to 120% of the median of a comparator group of JSE-listed retail companies. The median is based on the number of board and committee meetings held per annum. Non-executive directors receive a base fee for serving on the board or any committee, together with an attendance fee per meeting. The base fee comprises 75% of the total fee. The chairman of the board or any committee receives a higher fee. Directors’ fees are paid for a calendar year.

Remuneration governance

The committee, operating under the authority delegated by the board, is responsible for overseeing the establishment and maintenance of the group’s remuneration policy, policy outcomes and pay practices. The committee assists the board in ensuring the group has a competitive remuneration policy and governance framework which is aligned with the group’s strategic and organisational performance objectives.

In line with the recommendations of King IV the committee comprises only independent non-executive directors, namely Professor Fatima Abrahams (chair), John Bester, David Nurek and Martin Rosen. The chief executive officer and the group human resources director attend committee meetings by invitation but are recused from discussions that relate to their own performance appraisal and remuneration. Detail on the committee meeting attendance is included in the creating value through good governance report .

An external rewards specialist is retained to advise the committee on remuneration trends and benchmarking of both executive and non-executive remuneration. The members of the committee have independent access to the adviser and may request professional advice on any remuneration issue.

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 appropriately 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; and
  • reviewing the remuneration of non-executive directors and recommending adjustments to the fees at the AGM.

Part 2: remuneration implementation report 2017

Annual salary increase

The average performance-linked increase effective from 1 September 2017 is 5.8% (2016: 6.6%). An annual salary increase of 7.8% (2016: 7.7%) was granted to all staff in the bargaining unit in South Africa.

Short-term incentive schemes

RONA-based short-term incentive scheme: The targeted average monthly RONA was 82.9% and the group achieved 93.6%. The group exceeded the targeted operating profit by 4.7%. The Clicks, UPD, The Body Shop and group services business units exceeded the short-term targets and R97.5 million will be paid in accordance with the scheme rules (2016: R94.3 million). This includes incentives paid in terms of the retail store incentive scheme where R20.3 million (2016: R25.5 million) was paid to retail store staff for the 2017 year.

Employee share ownership scheme

A dividend of R6.8 million (2016: R6.3 million) was paid to scheme participants in 2017.

Group retention scheme

During the financial year R50.4 million (2016: R10.9 million) was paid out to participants in the scheme.

Long-term incentive scheme

For the three-year performance period ended 31 August 2017 the group achieved the following compound annual growth rates (CAGR)

  • Diluted HEPS: 14.2% CAGR: This is within the “on target” performance hurdle range.
  • TSR: 33.2% CAGR: This exceeds the “above 20%” performance hurdle and the TSR share allocations to participants were increased by 100% in accordance with the rules of the scheme.

The payout of the TSR portion has been fully hedged to limit the cost to the group.

The committee approved the long-term incentive payment of R153.5 million (2016: R64.7 million) to the scheme participants.

Directors’ remuneration

Executive directors’ remuneration
Salary Pension
guaranteed pay
Bertina Engelbrecht 3 220 380 3 600 1 508 17 081 18 589 22 189
Michael Fleming 4 879 284 57 5 220 2 186 25 883 28 069 33 289
David Kneale** 9 083 515 2 9 600 6 031 48 000 54 031 63 631
Total 17 182 1 179 59 18 420 9 725 90 964 100 689 119 109
Bertina Engelbrecht 2 833 472 3 305 1 368 5 155 6 523 9 828
Michael Fleming 4 140 587 57 4 784 1 981 7 826 9 807 14 591
David Kneale 7 807 966 2 8 775 5 449 20 876 26 325 35 100
Total 14 780 2 025 59 16 864 8 798 33 857 42 655 59 519
* Payments relating to the performance for the year ended 31 August are paid in November. The expense is provided for over the three-year vesting period in the relevant financial year
** The LTI payment to Mr Kneale has been capped at five times annual guaranteed pay in accordance with the rules of the scheme
Non-executive directors’ remuneration
Director (R’000) 2017
David Nurek 1 059 950
Fatima Abrahams1 459 409
John Bester 581 521
Nonkululeko Gobodo2 213
Fatima Jakoet 408 359
Nkaki Matlala3 161 417
Martin Rosen 329 270
Total 3 210 2 926
1 Includes R24 610 (2016: R21 740) for performing the role of chairperson of the Clicks Group Employee Share Ownership Trust
2 Appointed with effect from 1 March 2017
3 Retired with effect from 26 January 2017

None of the non-executive directors have service contracts with the group and no consultancy fees were paid to directors during the year.

Total directors’ remuneration
R’000 2017 2016
Executive directors (including the long-term incentive scheme) 119 109 59 519
Non-executive directors 3 210 2 926
Total directors’ remuneration 122 319 62 445
Directors’ shareholdings at 31 August
2017 beneficial shares 2016 beneficial shares
Director Direct Indirect Total Direct Indirect Total
David Nurek 100 000 100 000 100 000 100 000
John Bester 12 000 10 000 22 000 12 000 10 000 22 000
Bertina Engelbrecht 105 068 105 068 98 755 98 755
Michael Fleming 30 421 30 421 20 837 20 837
David Kneale 285 370 285 370 259 802 259 802
Martin Rosen 2 000 2 000 2 000 2 000
Total 432 859 112 000 544 859 391 394 112 000 503 394

The total number of ordinary shares in issue is 245 969 and the percentage of issued share capital held by directors is 0.22% (2016: 0.20%). Details of dealings in Clicks Group shares by directors during the financial year are contained in the directors’ report in the annual financial statements on the website.

Non-executive directors’ fees

The fee structure for non-executive directors was benchmarked by PwC against a retail comparator group of The Foschini Group, Mr Price Group, Pick n Pay Stores, Shoprite Holdings, The Spar Group, Truworths International, Massmart Holdings, Woolworths Holdings and
Dis-Chem Pharmacies Limited.

The proposed increases to the fee structure for 2018 take into account these benchmarking results. Higher increases are proposed for the board and audit and risk chairs, and members of the audit and risk committee, which were below the group’s policy range of 80%. The benchmarking of the remuneration committee indicated that these fees were above the median, which has resulted in lower proposed increases. In 2018 the chairman of the board will stand down as chair of the social and ethics committee.

The total fees proposed for non-executive directors for the 2018 calendar year represent an increase of 9.3% over the previous year.

The fees for the 2018 calendar year are subject to approval by shareholders at the AGM in January 2018.

2018* 2017*
Board position Proposed
Board chairman** 900 000 300 000 1 200 000 825 000 275 000 1 100 000
Board member 226 500 75 500 302 000 210 000 70 000 280 000
Chair: Audit and risk committee 225 000 75 000 300 000 195 000 65 000 260 000
Member: Audit and risk committee 120 000 40 000 160 000 108 750 36 250 145 000
Chair: Remuneration and nominations committee 86 625 28 875 115 500 82 500 27 500 110 000
Member: Remuneration and nominations committee 48 825 16 275 65 100 46 500 15 500 62 000
Chair: Social and ethics committee 60 000 20 000 80 000 n/a n/a n/a
Member: Social and ethics committee n/a n/a n/a 45 000 15 000 60 000
* Fees relate to the calendar year
** Fees for the board chairman are inclusive of all committee memberships