Remuneration Committee Report

Remuneration policy

The group’s remuneration philosophy is based on the total rewards strategy which integrates the five key elements of compensation, benefits, performance and recognition, talent development and work-life integration that attract, motivate and retain the human capital necessary to deliver the group’s long-term objectives.

This philosophy is aimed at driving a high-performance culture that delivers sustainable returns to shareholders, through employees who are engaged and committed, underpinned by equitable reward and recognition mechanisms.

The remuneration policy supports the attraction, development and retention of employees who contribute to sustained business growth. 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 reward principles of market competitiveness, internal equity, equitable treatment and pay for performance are entrenched in the policy.

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 are contingent upon 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 enhances the group’s employment proposition as an employer of choice while providing 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 biannual performance review process; and
individual position in the pay band range relative to competence and talent positioning.

Benchmarking

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.

External compensation and benefit consultants conduct an independent review of the group’s pay policy outcomes and practices, and advise the group, including the committee, on best pay practices, competitive positioning and benchmarking.

The group’s benchmarking and market information is based on independent surveys, including the PricewaterhouseCoopers Remchannel, Hay Group and Deloitte Execeval surveys. The group also participates in a biannual benchmarking exercise aimed at ensuring the maintenance of a competitive remuneration position in respect of pharmacists and pharmacy managers.

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.

As recommended by King III, the committee comprises independent non-executive directors, chaired by Professor Fatima Abrahams and also 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 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 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 annual general meeting (AGM).

The group’s remuneration policy was proposed to shareholders for a non-binding advisory vote at the AGM in January 2015 and was approved by 97.6% (2014: 99.1%) of the votes cast. The policy is proposed to shareholders annually.

The remuneration paid to directors is disclosed here. The group’s prescribed officers in terms of the Companies Act are all executive directors and their remuneration is, in accordance with the King III requirements, fully disclosed in this report.

Executive directors’ remuneration

The remuneration of executive directors consists of three components:

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

The remuneration of executive directors is aligned to the achievement of the group’s published medium-term financial and operating targets. A significant portion of remuneration is variable and designed to incentivise executive directors’ performance and ensure alignment of their interests with those of shareholders. Base salaries are set according to an annual benchmarking exercise of the executive roles in similar-sized market capitalisation companies on the JSE. This benchmarking scope recognises the complexity in the group’s business model, product and service offering, and the regulatory environment within which the group operates.

The sustainability of the group’s business is critical in determining remuneration and the board is satisfied that the performance targets do not encourage increased risk-taking by the executives.

The 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.

Short-term incentive scheme

Executive directors participate in the annual short-term cash-based incentive scheme. Financial targets, based on the group’s average monthly return on net assets (RONA), are set by the board and embedded in the budgets, operating plans and the performance contracts, and are aligned to the group’s published medium-term financial targets. The incentive scheme is designed to encourage all employees to focus on both financial and non-financial levers across financial, customer, learning and growth as well as internal business process improvement metrics.

The achievement of targets is reviewed by the committee before any incentive payments are made to executive directors.

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 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% (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 committee.

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 average performance-linked increases for the new financial year will result in a 5.6% (2014: 5.6%) increase in payroll costs. 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. Following a private mediation process, a two-year wage agreement was concluded in 2014 in terms of which an annual salary increase of 8.0% for 2014 and 7.9% for 2015 was granted to all staff in the bargaining unit in South Africa. Trade union membership comprises 27.5% of the total group employees (2014: 30%). 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) is aimed at attracting and retaining scarce and critical skills, accelerating transformation, building employee commitment and enabling employees to share in the growth and success of the business. Executive directors and senior employees who participate in the group’s long-term incentive schemes do not also 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) have been 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 have been allocated to 7 993 employees, with black staff receiving 87% and women 64% of the shares. Pharmacists comprise 5% of the ESOP beneficiaries. A dividend of R4.9 million (2014: R4.3 million) was paid to 7 777 (2014: 7 161) qualifying employees during the year.

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.

Group retention scheme

The group retention scheme is aimed at retaining talented employees by providing them with a long-term financial incentive linked to the growth in the group’s earnings. In 2014, the scheme was revised to align the interests of these key employees with shareholders’ interests.

The scheme targets high-potential employees, black staff and employees with scarce and critical skills. There are currently 51 employees participating in the scheme, of which 29% are black and 45% are women. The candidates recommended for inclusion in the retention scheme are reviewed and approved by the committee, which also approves all payments made under the scheme. During the financial year R5.5 million (2014: R5.9 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 schemes

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

The committee annually reviews the short-term incentive schemes and any allocation and payment is approved.

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 due.

The group and all business units achieved the short-term targets and R77.5 million will be paid in accordance with the scheme rules (2014: R60.9 million).

Retail store incentive scheme

The retail store incentive scheme rewards staff in retail stores for outperforming quarterly store sales targets. The scheme paid out R9.8 million to retail store staff for the 2015 year.

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, based on consultation with major shareholders.

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.

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

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:

2014 to 2017 and 2015 to 2018 LTI schemes

Based on further feedback from shareholders the LTI scheme was amended to strengthen the alignment between executive and long-term investor interests by exposing participants to market volatility, in addition to the earnings performance metric applied in the other LTI scheme.

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) units based on the Clicks Group share price (VWAP). 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”.

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 requirement for scheme participants to purchase shares with the proceeds does not apply to this scheme.

Currently 14 (2014: 16) 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.

	2013 to 2016 scheme	2014 to 2017 scheme		2015 to 2018 scheme
	HEPS units allocated at R35.83 per unit	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
Bertina Engelbrecht	307 005	145 967	88 936	143 484	70 454
Michael Fleming	466 090	221 178	134 760	207 736	102 004
David Kneale	1 243 371	597 476	364 034	571 438	280 590

Directors' remuneration

Executive directors' remuneration

Director (R’000)	Salary	RONA short-term incentive	Performance- based long-term incentive ***	Pension fund	Other benefits	Total
2015
Bertina Engelbrecht	2 579	1 239	4 041	371	–	8 230
Michael Fleming	3 819	1 877	6 304	594	57	12 651
David Kneale	7 037	5 072	16 668	1 011	2	29 790
Keith Warburton*	1 425	n/a	n/a	190	27	1 642
Total	14 860	8 188	27 013	2 166	86	52 313

2014
Bertina Engelbrecht	2 405	1 100	3 185	345	–	7 035
Michael Fleming	3 593	1 670	5 181	524	57	11 025
David Kneale	6 491	4 455	13 461	933	2	25 342
Keith Warburton**	1 827	1 500	n/a	157	32	3 516
Total	14 316	8 725	21 827	1 959	91	46 918

Resigned as an executive director on 28 January 2015, with remuneration disclosed until this date. Appointed as an executive director on 18 February 2014, with remuneration disclosed from 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.

Non-executive directors' remuneration

Director (R’000)	2015 Directors’ fees	2014 Directors’ fees
David Nurek	878	798
Fatima Abrahams¹	368	337
John Bester	476	437
Fatima Jakoet	326	297
Nkaki Matlala	376	344
Martin Rosen	260	236
Total	2 684	2 449

1The fees paid to Professor Abrahams include an amount of R19 800 (2014: R18 082) for performing the role of chairperson of The Clicks Group Employee Share Ownership Trust.

Total directors remuneration

R’000	2015	2014
Executive directors (including the long-term incentive scheme)	52 313	46 918
Non-executive directors	2 684	2 449
Total directors' remuneration	54 997	49 367

Directors' shareholdings at 31 August

	2015 Beneficial shares			2014 Beneficial shares
Director	Direct	Indirect	Total	Direct	Indirect	Total
David Nurek	–	200 000	200 000	–	240 000	240 000
John Bester	12 000	10 000	22 000	12 000	10 000	22 000
Bertina Engelbrecht	91 701	–	91 701	85 560	–	85 560
Michael Fleming	24 833	–	24 833	14 844	–	14 844
David Kneale	309 256	–	309 256	285 974	–	285 974
Martin Rosen	–	2 000	2 000	–	2 000	2 000
Total	437 790	212 000	649 790	398 378	252 000	650 378

The total number of ordinary shares in issue is 246 137 763 (2014: 246 137 763). The percentage of issued share capital held by directors is 0.26% (2014: 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 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.

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 10 JSE listed retail companies.

The committee commissioned a survey to benchmark the current fee structure against this comparator group. The results indicated that the fees for board and social and ethics committee members were significantly below the comparator median. The proposed fees for 2016 will bring the board and committee members within the group’s policy range of 80% to 120% of the comparator median. The fee structure for non-executive directors will be benchmarked annually.

Directors’ fees are paid for a calendar year. The fees have been adjusted for the 2016 calendar year and are subject to approval by shareholders at the AGM in January 2016. The proposed total fees for non-executive directors for the 2016 calendar year represents an increase of 9.8% over the previous year.

In line with best governance 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.

	2016*
Board position	Proposed total fee R	Proposed base fee R	Proposed meeting fee R	2015* Total fees R
Board chairman**	970 000	727 500	242 500	905 000
Board member	240 000	180 000	60 000	210 000
Chair: Audit and risk committee	236 500	177 375	59 125	220 000
Member: Audit and risk committee	130 000	97 500	32 500	125 000
Chair: Remuneration and nominations committee	100 000	75 000	25 000	96 000
Member: Remuneration and nominations committee	60 000	45 000	15 000	57 750
Chair: Social and ethics committee	n/a	n/a	n/a	n/a
Member: Social and ethics committee	60 000	45 000	15 000	51 200

Fees relate to the calendar year. *The total 2015 fee and proposed 2016 fee for the board chairman is inclusive of all committee memberships.

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%