Part I: Remuneration governance
Remuneration remains a complex issue and practices and policies continue to be enhanced to improve the Group's ability to attract, engage, motivate and retain high-performing employees. Remuneration practices and policies aim to entrench a high-performance culture across the Group, ensure the delivery of sustained value creation and align performance and reward with the Group's business philosophy. The achievement of Group, team and individual performance remains central to driving remuneration strategies.
The Remuneration Committee (the committee) has oversight of the Group's remuneration practices and policies, and is responsible for reviewing, recommending and approving the remuneration for non-executive directors and executive directors of Truworths International Ltd, and directors, divisional directors and key executives of principal subsidiaries. The committee periodically reviews the Group's remuneration strategy to ensure it remains aligned with the objective of enhancing shareholder value and is focused on achieving the following:
- Attracting, engaging, motivating and retaining a high-performing executive team.
- Ensuring that the Chief Executive Officer (CEO) and executive team pursue the long-term sustainable growth and success of the Group.
- Demonstrating a clear relationship between performance and remuneration.
- Ensuring an appropriate balance between guaranteed and variable remuneration, taking into account both the short and long-term objectives of the Group.
- Differentiating pay between higher and average performers through effective performance management and assessment.
The committee comprises independent non-executive directors Rob Dow (chairman) and Hilton Saven. The CEO is an invitee to committee meetings and is excused from discussions that relate to his performance and remuneration.
The following activities were undertaken by the committee during the period:
- Conducted an extensive external remuneration benchmarking exercise for executive directors of Truworths International Ltd, and directors, divisional directors and key executives of principal subsidiaries (hereafter collectively referred to as ‘executives').
- Reviewed and approved the remuneration of the executives.
- Confirmed that all long-term remuneration allocations and payments were made in accordance with the rules of the long-term incentive schemes.
- Approved the payment of vested long-term incentives to scheme participants.
- Approved the payment of dividends to share scheme participants.
- Conducted a formal review of the committee charter to ensure it remains current and aligned to acceptable standards.
- Based on a benchmark exercise, reviewed and recommended for approval by shareholders the non-executive directors' remuneration for the 2016 calendar year.
- Approved the issue of share-based awards in terms of the 2012 share scheme.
- Agreed and recommended for approval by the board the revised future performance targets for unvested instruments in the 2012 share scheme following the inclusion of the Office results in the Group's results.
- Agreed and recommended for approval by the board the performance targets for the relevant share schemes in respect of awards being made in the current reporting period.
- Refined the Group policies regarding the payment of short-term incentives to executives and employees subsequent to the acquisition of Office, including the adjustment of the target performance measurements.
- Considered and reviewed the terms and structure of the proposed Office long-term equity performance plan.
- Conducted an assessment of the reward policy for store employees as well as for employees below management level to further align reward to performance.
- Approved the conversion to total guaranteed packages (TGP), which offer flexible benefits and seek to improve retention and comparative internal equity of earnings.
- Reviewed and amended the employment contract of the CEO.
The committee plans to undertake the following in the 2017 reporting period:
- Further review of Group policies regarding the payment of long-term incentives to executives and employees.
- Further refine the performance management process with the aim of improving the alignment of reward for performance in accordance with Group requirements as well as emerging requirements from King IV.
- Implement and further refine reward policies, practices and communication for performance in store operations.
The committee ensures that the Group takes cognisance of evolving legislation and remuneration practices through continuous research. In this regard, remuneration governance will continue to evolve and improve as the Group responds to feedback from shareholders and takes account of evolving international best practice and King IV recommendations. The chairman of the committee reports back to the board on all aspects of its work as a standing agenda item at each board meeting.
This report of the committee focuses primarily on the remuneration of the Truworths International executive and non-executive directors.
Part II: Remuneration policy
Remuneration philosophy and principles
The Group's remuneration philosophy is aimed at attracting, engaging, motivating and retaining key employees to drive a high-performance culture that delivers the Group's long-term strategy as well as sustainable shareholder returns. This ‘total remuneration' philosophy underpins the Group's equitable reward mechanisms. Total remuneration comprises all elements of financial reward, including guaranteed earnings, short-term incentives and long-term incentives. The combination of financial and non-financial reward elements constitutes ‘total reward' and supports the holistic employee value proposition.
Remuneration practices are closely linked to the achievement of Group, team and individual performance objectives. The composition of total remuneration is based on the employee's role and level in the Group and there is a strong and sustainable link between performance, contribution and potential on the one hand, and the rewards received by the employee on the other.
The Group's reward policy is based on the following:
- Enabling the Group to attract, engage, motivate and retain key employees.
- Internal equity, which ensures employees are rewarded appropriately in relation to peers.
- External equity, to ensure employees are competitively rewarded in relation to the employment market.
- An appropriate mix of short and long-term incentives to promote sustained high levels of performance and achieve alignment of employee and shareholder interests.
- Alignment of risk and rewards, with remuneration practices and schemes designed to encourage superior medium to long-term performance relative to competitors, while operating within prudent risk parameters to ensure sustainability.
Executive directors' remuneration structure
Executive directors' remuneration is determined according to the nature and responsibilities of the executive's role in relation to market benchmarks and the performance of the individual in relation to Group performance and individual performance targets. Rewarding executive performance through guaranteed and performance-related remuneration is aimed at achieving the following:
- Ensures alignment of the executives' and shareholders' interests.
- Promotes a culture of executive share ownership.
- Promotes excellence in individual executive performance.
- Supports the retention of executives.
The core principles of the Group's performance management process are the effective alignment of Group strategic objectives (refer to Group Strategy) with individual outputs. Internal and external surveys as well as professional advisers are consulted in determining comparable remuneration practices. The Group utilises external service providers and best practices for continued remuneration benchmarking and for job evaluation. Remuneration is further benchmarked against other JSE-listed retailers and comparable top 40 JSE-listed companies. All data is appropriately aged, and weighted averages, medians and ranges are applied to establish the most appropriate remuneration levels.
The total remuneration mix is determined as follows:
|Guaranteed Remuneration||Variable and performance-related remuneration|
|Annual guaranteed remuneration||Short-term performance||Long-term performance|
|Retention shares||Performance shares|
Total guaranteed package is based on performance, contribution, experience and market value relative to responsibilities within the Group.
Benefits are of a compulsory nature but offer flexibility in option choices.
|Incentives are based on Group and individual performance criteria (short-term incentives are only paid if the Group achieves its threshold performance levels).||Long-term share-based incentives are aimed at retention as well as encouraging sustainable shareholder wealth creation.|
Guaranteed remuneration is determined in relation to employment market norms. The Group conducts annual benchmarking against comparable JSE-listed companies and also utilises the services of professional advisers to conduct external surveys with the aim of maintaining guaranteed remuneration at the median market level. The Group further deploys a process of job profiling and evaluation to ensure consistency in the evaluation and sizing of roles, ensuring the correct benchmarking of guaranteed remuneration levels.
A combination of performance and market remuneration positioning is utilised to adjust guaranteed remuneration levels annually. Adjustments to guaranteed remuneration outside of the annual review process are done on an exceptional basis and linked to changes in responsibility level.
The performance of executive directors is reviewed annually by the committee against predetermined financial and non-financial targets to ensure alignment with shareholder interests.
The primary performance indicators on which executive directors are measured include:
- Return on assets (ROA)
- Growth in earnings before interest paid and tax (EBIT)
For incentive purposes, Group targets for ROA and EBIT growth are determined by the committee and approved by the board. The ROA target range is disclosed in the Group's Integrated Report each year, however the EBIT growth target is not disclosed as this is considered by the board to be market and price-sensitive information. However, target ranges for gross profit margin and operating profit margin, two of the key drivers of EBIT growth, are disclosed to shareholders.
The CEO's performance is further measured with reference to headline earnings growth and maintaining the quality of such earnings, the achievement of long-term strategic goals, including succession planning, and the determination of the overall direction of the business.
The short-term cash incentive (STI) scheme aims to drive performance and retain key talent. Individual performance is measured with reference to a scorecard of metrics to encourage executives to focus on both the financial and non-financial performance targets of the Group.
Financial targets are based primarily on earnings growth and no short-term incentive is paid to executives if the threshold performance measures and the Group's published medium-term financial targets are not achieved (refer to the Chief Financial Officer's report).
Non-financial targets are based on the long-term strategic goals of the business. The scheme is self-funded and the short-term incentives are only paid if the Group exceeds the financial performance targets after the cost of the incentives is taken into account.
Participation in the scheme is at the discretion of the committee and generally limited to employees whose role and contribution could directly influence the performance of the Group. No portion of any executive director's STI is guaranteed. STIs are in the form of cash and the employee must be in service (and not in their notice period) on the date of payment.
There are no deferred STI arrangements as STIs are only paid up to the capped amount. All executive director STIs are approved by the committee.
A short-term incentive of 70% of annual guaranteed earnings in the case of the CEO (50% in the case of other executive directors) is paid on the achievement of an on-target performance level. Incentive payments are capped at a maximum of 130% of guaranteed annual remuneration in the case of the CEO and 100% in the case of other executive directors with a sliding scale between the threshold and the maximum.
|Multiple of annual guaranteed earnings for
|Under Threshold||Threshold||On target||Maximum|
The STI in respect of the 2016 reporting period, determined with reference to Group headline earnings per share (HEPS) with the performance hurdles set at 100% of the targeted Group HEPS growth, only became payable if the threshold HEPS growth level was achieved after the cost of the incentive was taken into account. Threshold, target and stretch levels were pre-agreed in line with budgeted Group performance.
Based on further feedback and consultation with shareholders the STI measures were reviewed by the committee and amended for the 2017 reporting period.
The STI for the 2017 reporting period will be determined with reference to earnings before interest paid and tax (EBIT) growth, with the performance hurdles set at 100% of the targeted Group EBIT growth. The change from the HEPS growth measure in respect of the 2016 reporting period is to ensure that short and long-term incentive measures and targets use a common measurement metric. STIs will only be paid if the threshold EBIT growth levels are achieved after the cost of the incentive is taken into account. Threshold, target and maximum levels are pre-agreed annually in line with anticipated Group performance.
Long-term incentive (LTI) schemes are aimed at aligning executive remuneration with shareholder interests by rewarding executives for the creation of shareholder value over the medium-term. The LTI schemes are reviewed regularly to ensure alignment with overall reward as well as with best practice.
The Group operates four share-based LTI schemes in terms of the 2012 share plan:
|Retention Shares||Performance Shares|
The following core principles apply to the Group's share-based schemes:
- The restricted share plan and share appreciation rights scheme have no performance conditions, and are utilised to support the retention of key executives and employees.
- The performance share plan and performance appreciation rights scheme have performance targets, and are utilised to support and reward good long-term decision-making and financial performance.
- Awards can be made across all four schemes and can vest over a period of up to six years.
- Where awards lapse, there is no replacement compensation.
- The allocation under the Group's LTI arrangement is approved in advance by the committee.
- The committee assesses and approves all Group performance targets to ensure that the interests of all stakeholders are appropriately considered, and financial targets are set as an incentive for employees to perform and simultaneously for the business to achieve stretch goals.
- All unvested shares and unvested and vested rights are forfeited upon an employee's resignation or dismissal in terms of the scheme rules.
- Retention-focused long-term incentives to existing executive directors may not make up more than 50% of the total long-term incentive allocations in any particular year. These will only be issued in exceptional circumstances as the intention is for all awards for executive directors to be performance linked.
- Performance-focused long-term incentives issued to executive directors will be subject to corporate performance targets.
- Financial performance hurdles for previously awarded long-term incentives have been amended to ROA and EBIT growth in line with STI targets. There are no non-financial targets for long-term incentives.
- Loans to employees pursuant to the legacy 1998 share option scheme have been discontinued (historical loans will remain in place until they expire in 2020).
- The maximum allocation resulting from the schemes is limited to 10% of issued shares at June 2012 over the life of the schemes in terms of the policy, but the committee's guideline is to keep this below 7.5%.
- Annual allocations are capped at 1.25% of issued shares at June 2012 in any one year and no more than 5% in any five-year period in terms of the policy, but committee guidelines are to limit annual allocations to below 1% in any one year.
- The committee regularly monitors the overall actual and forecast impact and costs of these schemes on Group earnings.
Legacy share schemes
The legacy long-term incentive scheme (1998 share option scheme) remains in operation but no further awards are currently planned to be made under this scheme. The final High Performance Share Scheme payment was made during 2016 and this scheme will no longer continue. Potential payments relating to unvested instruments under the 1998 share option scheme as well as the number of instruments issued in terms of this scheme are taken into account in the allocation of shares under the 2012 share plan.
Non-executive directors' remuneration
Non-executive directors receive fixed fees for services rendered as directors and as members of board committees. These fees are based on an assessment of the non-executive directors' time commitment, responsibilities, skills and experience. All non-executive directors receive the same base board fees, regardless of their length of service. In line with best governance and remuneration practice, non-executive directors may not participate in incentive schemes and do not receive any other benefits or performance-related remuneration from the Group. None of the non-executive directors have service contracts with the Group and no consultancy fees were paid to non-executive directors during the period. The remuneration of non-executive directors is reviewed annually by the committee using benchmarks from similar businesses and, in line with best practice, recommendations for increases are made to the shareholders at the AGM for consideration and approval. Fees are determined in advance for a calendar year.
Part III: Application of the remuneration policy in 2016
Guaranteed remuneration is reviewed annually with effect from 1 March and is based on a combination of prevailing inflation levels, Group performance, retail market data, internal comparatives, as well as individual performance.
To ensure compliance with changing legislation in terms of ‘equal pay for work of equal value', the Group has streamlined all contract types to ensure alignment in earnings and benefits levels across roles of equal value. All existing full-time employees in specialised roles were converted to total guaranteed remuneration packages with effect from 1 January 2016 to allow employees greater freedom of choice in determining benefit contributions. This has ensured that remuneration remains highly competitive in the marketplace. Additional benefits were introduced for longer-serving flexi-time staff to improve retention and align these employees to their permanent counterparts, ensuring equality in line with the recent labour law amendments.
All directors', divisional directors' and specialised full-time employees' increases are based on total annual guaranteed package, while all core full-time employees' increases are based on cash salary plus benefits.
All store employees' compensation complies with the sectoral determination or statutory requirements and the minimum rates of pay as determined for the retail industry are either met or exceeded.
Executives and management participate in the annual short-term incentive scheme. The Group achieved its financial targets for the reporting period and the committee approved the payment of incentive awards to participating employees where their individual performance targets were achieved. An amount of R45 million will be paid in terms of these short-term incentive payments.
Financial performance conditions and targets are determined by the committee. Measuring performance over a longer period ensures a focus on longer-term, sustainable growth in shareholder value.
These targets are intended to focus management's attention on growing revenue, constraining the fixed cost base, making well-reasoned and profitable capital expenditure decisions, and maintaining a healthy and efficient balance sheet structure.
During the period the committee agreed and recommended for approval by the board the revised performance targets, after the inclusion of the Office business results, for all unvested shares in the relevant share schemes where performance achievement levels are still to be determined.
The committee further agreed and recommended for approval by the board the performance targets for the relevant share schemes in relation to awards being made in the 2016 reporting period.
The performance measures for awards made to executive directors in March 2015 with a variable vesting scale from 0% to 120% were based on ROA and HEPS growth.
The performance measures for awards made to executive directors in March 2016 were based on ROA and EBIT growth with a variable vesting scale from 0% to 150%. These awards were all performance-based with a vesting period of between three and five years.
The rules for the proposed Office equity performance plan were drafted and reviewed by the committee. That company's articles and plan rules will be finalised, approved and introduced during the 2017 reporting period.
Share scheme allocations in 2016
|Scheme||Number of participants||Value of awards Rm|
|Restricted share plan (with no performance targets)||358||49|
|Performance share plan (with performance targets)||179||38|
|Share appreciation rights (with no performance targets)||136||18|
|Performance appreciation rights (with performance targets)||136||18|
Executive directors' remuneration
|Short-term benefits||Post-retirement benefits||Long-term benefits|
|Months paid||Directors' fees R'000||Salaries R'000||Per-formance bonus R'000||Allow-ances R'000||Pension contri-butions R'000||Interest benefit on loans R'000||Total remune-ration R'000||Fair value of equity-based awards granted R'000||Loans pursuant to share scheme R'000*|
|* No further loans pursuant to the share scheme are being issued. Prior loans will remain in place.|
|Michael Mark||12||-||8 145||7 963||12||348||3 199||19 667||6 908||43 254|
|David Pfaff||12||-||3 814||2 097||18||228||-||6 157||1 982||-|
|Total||-||11 959||10 060||30||576||3 199||25 824||8 890||43 254|
|Michael Mark||12||-||6 423||-||46||1 317||2 911||10 697||4 564||43 254|
|David Pfaff||12||-||3 037||1 400||34||318||-||4 789||1 075||-|
|Total||-||9 460||1 400||80||1 635||2 911||15 486||5 639||43 254|
Non-executive directors' remuneration
The proposed fees of non-executive directors for the 2017 calendar year were benchmarked against fees payable by other JSE-listed companies with a similar profile and are detailed below.
|Proposed fees for 12 months to December 2017 R'000||Proposed % increase|
|Audit Committee chairman||255||9|
|Audit Committee member||135||8|
|Remuneration Committee chairman||140||-|
|Remuneration Committee member||85||6|
|Risk Committee chairman||-||-|
|Risk Committee member||85||6|
|Non-executive and Nomination Committee chairman||105||5|
|Non-executive and Nomination Committee member||60||20|
|Social and Ethics Committee chairman||60||20|
|Social and Ethics Committee member (non-executive only)||30||20|
|Months paid||2016 R'000||2015 R'000|
|Total||3 488||3 119|