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 2020. The application of the remuneration policy in 2019, which details how the group has rewarded value creation, is covered in part 2 of this report. In accordance with the 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 engage directly with these shareholders to:

• determine 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’ integrated report.

The remuneration philosophy and reward principles are consistent with last year. The remuneration policy is aligned to King IV and outlines the group’s approach to fair, responsible and transparent remuneration practices across the business. At the 2019 AGM, 94.9% of shareholders who voted supported the group’s remuneration policy and 96.0% supported the group’s remuneration implementation report.

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 2019 financial year is detailed here.

Part 1: Remuneration policy

Introduction

The group’s remuneration policy is based on the total rewards model and integrates the five key elements that the group believes attracts, motivates and retains 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 and incorporates 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 against 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 benchmarked on national and retail market benchmark data. The 2018 benchmarking process and the resultant pay framework was peer reviewed by independent reward consultants, 21st Century, who verified the accuracy of the benchmarking process and outcomes, as well as compliance to King IV. An inflation-related adjustment has been applied to the pay framework for 2019, and verified against survey benchmarks to ensure that the group’s pay remains competitive. 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 Korn Ferry 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 biennial benchmarking exercise to maintain a competitive remuneration position in respect of pharmacists and pharmacy managers.

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

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 qualify for full 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:

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 here.

Short-term incentive scheme

In terms of the short-term incentive scheme design, a percentage of annual guaranteed pay is paid on the achievement of an on-target performance with performance hurdles of at least 95% of the targeted group RONA and operating profit. After reviewing the short-term incentive scheme rules and the sharing percentages across the group’s executives, the committee confirmed that the chief executive officer’s on-target bonus remains 60% of annual guaranteed pay, but has increased the percentage for the other executive directors from 40% to 50% of annual guaranteed pay from 1 January 2019.

• Performance exceeding the targeted performance may result in the payment of a higher bonus. This is 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 100% for the other executive directors.

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

Long-term incentive scheme

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

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 their strategic contribution, the retention of key talent and their individual performance levels.

An annual performance-based salary increase is paid to all permanent monthly paid 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 11% of the total group employees (2018: 13%). 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 9: Wholesale & Retail Sector, South Africa and is above the national minimum wage 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.

Healthcare benefits

As an additional benefit within the total reward strategy, 9 000 employees with six months continuous service in customer service, clerical and supervisory roles were enrolled on the Discovery Primary Care Advanced plan on 1 January 2019. The employee’s membership is funded by the company. Employees were given the option to include their spouse and child dependants at their own cost through a monthly payroll deduction. The plan provides comprehensive primary and trauma care, including unlimited access to a general practitioner, optical and dental benefits, ambulance and casualty services. The introduction of this health benefit has contributed to reducing the inequality in healthcare services provided to the group’s employees, as well as improving the health and well-being of employees and their family members.

The healthcare needs of all other permanent employees are catered for through membership of one of the company’s approved medical aid schemes: Horizon Medical Scheme, Discovery Health Medical Scheme and Profmed Medical Aid Scheme.

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 matured 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 were held by 7 798 beneficiaries, with black employees receiving 86% and women 65% of the shares. Pharmacists comprised 5% of the ESOP beneficiaries. Participating employees received 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 48 employees participating in the scheme, of whom 35% are black and 31% 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. 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 except for the chief executive officer’s role. After reviewing the scheme design and the multiples that applied to the group’s executive team, the committee approved a reduction in the multiple that applies to the chief executive officer from six to five times annual guaranteed pay. This change applies to all future LTI scheme allocations, commencing with the 2019 to 2022 scheme.
• A cap limits the value payable for the normal vesting of each LTI tranche at the end of the three-year performance period to a maximum of five times the annual guaranteed pay of participants in the scheme.
• The schemes’ rules provide that, subject to remuneration committee approval, in the event of the retirement, disability or death of a participant, the settlement amount for outstanding LTI tranches shall be calculated based on the HEPS and TSR appreciation unit values as at the most recently completed financial year. Such settlement will be subject to a separate cap of a maximum of five times the participant’s annual guaranteed pay.
• The 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 14 (2018: 15) executives participate in the schemes. The relevant amounts are expensed through the statement of comprehensive income.

• 2016 to 2019 scheme

  The LTI scheme aligns 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) Diluted HEPS appreciation units

  The base value for the diluted HEPS appreciation units is calculated at the date of allocation by multiplying the group’s reported diluted 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 shares, plus dividend payments reinvested over the three-year performance period, divided by the VWAP of the Clicks Group shares at the commencement of the period, expressed as a percentage.

• 2017, 2018 and 2019 LTI schemes

  The design of the 2017, 2018 and 2019 tranches of the LTI scheme are unchanged from the previous scheme, with the value of appreciation units being apportioned equally between diluted HEPS and TSR units, which are subject to performance hurdles.

  The group will adopt IFRS 16 – Leases in 2020, using the full retrospective approach. As a result of this adoption diluted HEPS will be restated and accordingly the base value of this component for the respective tranches in the existing LTI scheme will also be restated.

  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 market conditions, in particular the lower inflation rate and South African economic growth forecasts compared to expectations at the commencement of the previous scheme, the TSR hurdles have been revised for the 2017 to 2020, 2018 to 2021 and 2019 to 2022 LTI schemes 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:

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 executive directors is 63 years of age. 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. 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. Following the independent benchmarking conducted in 2019 and resultant increases proposed to the non-executive directors’ fees for 2020, the group’s fee structure will be aligned to the comparator group and the group’s policy. The fee structure will be benchmarked again in 2021 in order to inform the 2022 proposed increases, and thereafter, benchmarked every three years in conjunction with the calibration of the group’s pay frameworks. For intervening years the average pay increase awarded to the group’s employees will be applied to the non-executive directors’ fees.

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 here.

The members of the committee have independent access to an 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 2019

Annual salary increase

The average performance-linked increase effective from 1 September 2019 is 5.9% (2018: 6.0%). Negotiations regarding the salary increase for the bargaining unit employees in South Africa in 2018 resulted in a two-year agreement. In 2019 the average salary increase for bargaining unit staff was 7.8% (2018: 7.7%).

The annual guaranteed pay of the newly appointed chief executive officer was determined by the committee within the group’s pay range, after reviewing the benchmarks drawn from the group’s comparator group of listed retail companies in South Africa and those provided by surveys of chief executive officer remuneration, being the PricewaterhouseCoopers and Deloitte surveys.

Short-term incentive schemes

RONA-based short-term incentive scheme: The group achieved an average monthly RONA of 97.6% which exceeded the minimum on-target performance hurdle of 93.5%. The group also achieved 100.8% of the targeted operating profit. Clicks, The Body Shop and group services business units met the short-term targets while UPD exceeded the short-term targets. In terms of the scheme rules R105.4 million will be paid to qualifying employees (2018: R90.4 million). This includes incentives paid in terms of the retail store incentive scheme where R19.2 million (2018: R21.0 million) was paid to retail store staff for the 2019 financial year.

Employee share ownership programme

A highlight of the period was the payout in respect of the final 50% of shares held as part of the group’s employee share ownership programme (ESOP).

In February 2019, R1.5 billion was paid to 7 798 beneficiaries (2018: 7 839 beneficiaries) representing the gain on the final 50% of the shares allocated under the ESOP. This payment was in addition to the R1.3 billion paid the previous year, resulting in R2.8 billion paid in total to the programme’s beneficiaries. A dividend of R3.3 million (2018: R7.2 million) was paid to scheme participants in 2019. This payment brings the ESOP to an end.

Group retention scheme

During the financial year R35.6 million (2018: R46.1 million) was paid out to participants in the scheme.

Long-term incentive scheme

For the three-year performance period ended 31 August 2019 the group achieved the following compound annual growth rates (CAGR):

• Diluted HEPS: 15.3% CAGR: This exceeds the “above 15%” performance hurdle range and the HEPS appreciation units allocated to participants were increased by 50% in accordance with the rules of the scheme.
• TSR: 18.8% CAGR: This exceeds the “above 15%” performance hurdle and the TSR appreciation units allocated to participants were increased by 50% 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 R158.6 million (2018: R162.7 million) to the scheme participants.

Directors' remuneration

Executive directors’ remuneration

Non-executive directors’ remuneration

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

Directors’ shareholdings at 31 August

The total number of ordinary shares in issue is 262 083 439 and the percentage of issued share capital held by directors is 0.09% (2018: 0.20%).

Non-executive directors' fees

The fee structure for non-executive directors was benchmarked externally 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 2020 take into account these benchmarking results. In order to achieve alignment with the group's policy and the prevailing fee structures within the comparator group, higher increases are proposed for the board's members and the chairperson, as well as the remuneration and nominations committee chairperson. The total fees proposed for the 2020 year represent an increase of 12.0% over the previous year.

The fees for the 2020 calendar year are subject to approval by shareholders at the AGM in January 2020.