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Integrated Annual Report 2016

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 2017. The application of the remuneration policy in 2016, and how the group has rewarded value creation, is covered in part 2 of this report.

The report focuses primarily on the remuneration of the Clicks Group executive and non-executive directors, with the remuneration paid to directors for the 2016 financial year detailed here. 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.

PART 1: Remuneration policy

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

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

The reward principles of market competitiveness, internal equity, equitable treatment and pay for performance are entrenched in the policy.

The policy is transparent with a pay framework that clearly differentiates between occupational levels of work 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 provided to 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 set with reference to benchmarked national and retail market data; premiums are paid for scarce and critical skills such as pharmacy, buying and planning, finance and IT skills based on such market data; and are reviewed annually to ensure the group remains competitive in the employment market.

Annual salary increases are merit based, with increases being directly related to the 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 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 bi-annual 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. The group also participates in a bi-annual benchmarking exercise to maintain a competitive remuneration position in respect of pharmacists and pharmacy managers.

Executive directors’ remuneration

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) Diluted headline earnings per share growth over a three-year period subject to performance hurdles
Operating profit Total shareholder return growth over a three-year period subject to performance hurdles

Guaranteed remuneration

Base salaries are set according to an annual benchmarking exercise of the executive roles in similar-sized market capitalisation companies on the JSE using data in the Deloitte Top Executive survey. This benchmarking exercise recognises the complexity in the group’s business model and the regulatory environment within which the group operates.

The annual 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

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

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 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.

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

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 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 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 schemes

Executive directors participate in the cash-settled long-term incentive schemes which are detailed here.

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 monthly 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 (2015: 28%). 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. Executive directors and senior employees participating in the group’s LTI schemes did not participate in the ESOP.

Entry to the scheme closed in 2015 and the scheme vests in 2018 and 2019.

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 6 814 employees, with black staff holding 87% and women 64% 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 schemes

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

The schemes target high-potential employees, black staff and employees with scarce and critical skills. There are currently 35 employees participating in the scheme, of which 26% are black and 49% 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 bonus, provided this is funded by an increase in the operating profit. Bonuses 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 schemes

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. Participation in the long-term incentive schemes is limited to senior executives.

The LTI schemes are regularly reviewed and enhanced to align with evolving best practice locally and internationally, 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. Awards are made annually, with each scheme having a three-year performance period.

2013 to 2016 LTI scheme

Appreciation units are allocated to participants in the scheme based on a multiple of the annual guaranteed pay. The base value for each appreciation unit 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 factor of 12.

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

Participants 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.

Following engagement with shareholders to further align executive and shareholder interests, the LTI scheme was enhanced by implementing performance hurdles. These performance hurdles are 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%

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.

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 granted is apportioned equally between two performance components:

(1) diluted HEPS, as applied in the 2013 to 2016 scheme above; and

(2) total shareholder return (TSR).

The financial incentive received by the participants is the gain earned on the appreciation units over a three-year period. The TSR units are also 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%

TSR is defined as “the overall return to shareholders which is equal to the 20-day volume weighted average price (VWAP) appreciation of a Clicks Group Limited share plus dividend payments reinvested over the three-year performance period divided by the VWAP of a Clicks Group Limited share at the commencement of the three-year performance period, expressed as a percentage”.

Refer to the chief financial officer’s report for detail on the group’s TSR CAGR performance of 32.7% per annum over the past three years.

The remuneration multiple used to determine the number of appreciation units granted is unchanged from previous schemes.

A cap has been introduced to limit 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.

The requirement for scheme participants to purchase shares with the proceeds does not apply to this scheme as the TSR portion of the LTI is already correlated to the Clicks Group share price plus dividends paid to shareholders over a three-year period.

Currently 14 (2015: 14) executives participate in the schemes. The appreciation units allocated to executive directors under the three schemes is detailed in the table below. The relevant amounts have been expensed through the statement of comprehensive income.

2014 – 2017 scheme 2015 – 2018 scheme 2016 – 2019 scheme
HEPS units allocated at R40.42 per unit TSR units allocated at R66.34 per unit HEPS units allocated at R46.07 per unit TSR units allocated at R93.82 per unit HEPS units allocated at R52.62 per unit HEPS units allocated at R126.03 per unit
Bertina Engelbrecht 145 967 88 936 143 484 70 454 136 830 57 129
Michael Fleming 221 178 134 760 207 736 102 004 198 404 82 837
David Kneale 597 476 364 034 571 438 280 590 547 320 228 517

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

The fee structure is aligned to the King lll remuneration guidelines that 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 approximately 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.

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 eight JSE-listed retail companies. The fee structure for non-executive directors is benchmarked annually.

In line with best governance practice, non-executive directors do not participate in incentive schemes and none of the non-executive directors have service contracts with the group.

Remuneration governance

The committee is responsible for overseeing all elements of remuneration, including the remuneration philosophy and policy, and the implementation of the policy. The committee operates under the authority delegated by the board and ensures the group has a competitive remuneration policy and governance framework which is aligned with the group’s strategic and organisational performance objectives.

As recommended by King III, the committee comprises only independent non-executive directors. The committee is chaired by Professor Fatima Abrahams and includes John Bester, David Nurek and Martin Rosen. The chief executive officer and the group human resources director attend committee meetings by invitation to provide input on remuneration issues and are recused from discussions that relate to their own performance appraisal and remuneration. Detail on the committee meeting attendance is included here.

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 that 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: Rewarding value creation in 2016

Annual salary increase

The average performance-linked increase effective from 1 September 2016 is 6.6% (2015: 5.6%). An annual salary increase of 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 group, Clicks, UPD and group services exceeded the short-term targets and R94.3 million will be paid in accordance with the scheme rules (2015: R77.5 million). This includes incentives paid in terms of the retail store incentive scheme where R25.5 million (2015: R9.8 million) was paid to retail store staff for the 2016 year.

Employee share ownership scheme

A dividend of R6.3 million (2015: R4.9 million) was paid to scheme participants in 2016.

Group retention schemes

During the financial year R10.9 million (2015: R5.5 million) was paid out to participants in the schemes.

Long-term incentive scheme

The group achieved a three-year 13.7% per annum CAGR in diluted HEPS for the year ended 31 August 2016. This represented an on-target achievement and the remuneration committee approved the long-term incentive payment of R64.7 million (2015: R53.0 million) to scheme participants.

Directors’ remuneration

Executive directors’ remuneration
Salary Pension fund Other benefits Total annual guaranteed package RONA short-term incentive Performance-based long-term incentive** Total variable pay Total
*Resigned as an executive director on 28 January 2015, with remuneration disclosed until this date.
**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.
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
Bertina Engelbrecht 2 579 371 2 950 1 239 4 041 5 280 8 230
Michael Fleming 3 819 594 57 4 470 1 877 6 304 8 181 12 651
David Kneale 7 037 1 011 2 8 050 5 072 16 668 21 740 29 790
Keith Warburton* 1 425 190 27 1 642 n/a n/a n/a 1 642
Total 14 860 2 166 86 17 112 8 188 27 013 35 201 52 313

Non-executive directors’ remuneration
Directors’ fees
Directors’ fees

1 Includes R21 740 (2015: R19 800) for performing the role of chairperson of The Clicks Group Employee Share Ownership Trust.
David Nurek 950 878
Fatima Abrahams1 409 368
John Bester 521 476
Fatima Jakoet 359 326
Nkaki Matlala 417 376
Martin Rosen 270 260
Total 2 926 2 684

Total directors’ remuneration
R’000 2016 2015
Executive directors (including the long-term incentive scheme) 59 519 52 313
Non-executive directors 2 926 2 684
Total directors’ remuneration 62 445 54 997

Directors’ shareholdings at 31 August
2016 Beneficial shares 2015 Beneficial shares
Director Direct Indirect Total Direct Indirect Total
David Nurek 100 000 100 000 200 000 200 000
John Bester 12 000 10 000 22 000 12 000 10 000 22 000
Bertina Engelbrecht 98 755 98 755 91 701 91 701
Michael Fleming 20 837 20 837 24 833 24 833
David Kneale 259 802 259 802 309 256 309 256
Martin Rosen 2 000 2 000 2 000 2 000
Total 391 394 112 000 503 394 437 790 212 000 649 790

The total number of ordinary shares in issue is 246 137 763 and the percentage of issued share capital held by directors is 0.20% (2015: 0.26%). Details of dealings in Clicks Group shares by directors during the financial year are contained in the directors’ report in the annual financial statements.

Non-executive directors’ fees

The fee structure for non-executive directors is benchmarked annually 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 and Woolworths Holdings.

Following the 2016 benchmarking survey the proposed fees for non-executive directors for 2017 have been revised to bring the board and committee members within the group’s policy range of 80% to 120% of the comparator median.

The proposed total fees for non-executive directors for the 2017 calendar year represents an increase of 13.2% over the previous year. The fees for the 2017 calendar year are subject to approval by shareholders at the AGM in January 2017.

2017* 2016*
Board position Proposed base fee
Proposed meeting fee
Proposed total fee
Base fee
Meeting fee
Total fee
*Fees relate to the calendar year.
**Fees for the board chairman are inclusive of all committee memberships.
Board chairman** 825 000 275 000 1 100 000 727 500 242 500 970 000
Board member 210 000 70 000 280 000 180 000 60 000 240 000
Chair: Audit and risk committee 195 000 65 000 260 000 177 375 59 125 236 500
Member: Audit and risk committee 108 750 36 250 145 000 97 500 32 500 130 000
Chair: Remuneration and nominations committee 82 500 27 500 110 000 75 000 25 000 100 000
Member: Remuneration and nominations committee 46 500 15 500 62 000 45 000 15 000 60 000
Chair: Social and ethics committee n/a n/a n/a n/a n/a n/a
Member: Social and ethics committee 45 000 15 000 60 000 45 000 15 000 60 000
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