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Section 01
Letter from the Chairman of the Remuneration Committee to shareholders
Chris Seabrooke, Chairman of the Remuneration Committee

I am pleased to present the Massmart Remuneration Report for the year ended December 2017. Within this report you will find information applicable to Massmart’s remuneration philosophy and the policy for Executive and non-Executive Directors’ remuneration. The report provides a description of how the policy has been implemented and discloses payments made to Executive Directors, non-Executive Directors and Prescribed Officers during the year.

The year under review was challenging but despite the volatile environment Massmart’s total sales for the year ended December 2017 were R93.7 billion, an increase of 2.7% over the prior year (2016: R91.3 billion, 2015: R84.7 billion and 2014: R78.2 billion). The difficult consumer environment demanded an intense focus on expense management; and our efforts resulted in total expense increases being limited to 1.7%. Group profit before tax (PBT) improved by 12.1% to R2.2 billion (2016: R1.9 billion, 2015: R1.7 billion and 2014: R1.6 billion) and return on investment (ROI) for the year was 17.8% (2016: 18.3%, 2015: 17.1%, and 2014: 17.0%).

Per our policy, the Group’s Executives, including the Executive Directors, are incentivised based on the achievement of each year’s actual financial performance compared to the annual business plan for that year, approved by the Board in the previous year. As we detail within the remuneration policy, performance is measured against three dimensions namely: PBT; total sales; and ROI. In 2017 the performance measure for the Annual Incentive Plan (AIP) changed from ‘profit before interest and taxation’ to ‘profit before taxation’, this was in order to enforce more accountability for the Group’s net working capital and overall level of interest-bearing debt.

When we finalise the annual business plan for the following financial year, the Board takes into consideration multiple factors including the prevailing and forecast economic conditions in all countries where we operate, key business objectives, the pursuit of growth, capital investment programmes, the relative business maturity and the appropriate degree of improvement in business performance. As can be seen from the historical targets noted in the implementation report, our previous annual business plans have incorporated real growth in total sales, improved operating performance and improved returns on invested capital. We do not disclose these forecast figures within this report, as this would reveal confidential and commercially sensitive information.

Director changes

In 2017 a number of non-Executive Director changes took place. On 26 May 2017, we announced the resignations of Walmart-appointees Mr JP Suarez and Mr Andy Clarke and welcomed in their places Ms Susan Muigai and Mr Roger Burnley. On 4 July 2017 it was announced that I would retire as a non-Executive Director, Deputy Chairman of the Board, Chairman of the Remuneration Committee and a member of the Nominations Committee, with effect from 31 December 2017. However, following the announcement on 13 September 2017 that Mr Moses Kgosana had resigned as a non-Executive Director and Chairman of the Audit and Risk Committees, I agreed to remain on as a non-Executive Director and Chairman and member of the aforementioned Committees, also assuming the role of Chairman of the Audit and Risk Committees, until such time as required by the Board. Further, on 22 November 2017, we announced that Ms Phumzile Langeni, who is currently Chairman of the Social and Ethics Committee, was appointed as a member of each of the Remuneration and Nominations Committees.

Alignment with King IV

In the previous financial year, we took steps to materially align our remuneration reporting with King IV and at the same time we updated the Remuneration Committee’s charter to align it with the principles introduced by King IV. To ensure ethical remuneration outcomes and improved collaboration between the Social and Ethics Committee and the Remuneration Committee, Ms Phumzile Langeni, who is currently Chairman of the Social and Ethics Committee, has been appointed as a member of each of the Remuneration and Nominations Committees.

During this King IV alignment process, the Group Remuneration Policy was reviewed and, where required, updated. An important area of consideration was around non-financial metrics and the following decisions were made in this regard:

  • For 2017 the Remuneration Committee agreed to utilise the discretionary 25% cap for an additional AIP to drive the achievement of an improved BBBEE score. The results determining the achievement of this goal will only be available in June 2018. Following this, the payment of the additional 25% will then be determined and approved. This additional AIP will not be calculated on a sliding scale, i.e. the 25% will only be paid if the goal is achieved in full, no part measure or payment will be considered. The actual payments will be reported in the 2018 report.
  • From 2018 onwards the Remuneration Committee has approved a split in the AIP metrics where 80% of the AIP will be based on the approved PBT target, and the remaining 20% will be based on non-financial metrics. The Committee has delegated to approval of these non-financial or personal performance metrics to the Group CEO. Each Group Executive Committee member will be allocated a maximum of four objectives within this category, at least one of which will be improving the Group’s annual BBBEE score. Many of these metrics may be subjective and therefore difficult to measure but are still important nonetheless. Potential objectives within this category may include, not in order of importance: improved customer satisfaction, addressing team or business unit management succession, food safety, market share gains, completing specific significant projects or interventions, new product category or geographic market developments, etc.
  • Massmart’s guaranteed remuneration was benchmarked using data from the PwC Remchannel, Mercer and the Korn Ferry Hay Group salary surveys, as well as specific benchmarking to other similar sized JSE listed companies. We are satisfied that the surveys used are independent and objective.

The above-listed amendments and changes to the Remuneration Policy will be presented for shareholder vote at the Annual General Meeting (AGM) in May 2018.

Remuneration priorities for 2018

Key remuneration priorities for 2018 include the implementation of the new 20% non-financial AIP metrics, as well as continued entrenchment of our commitment to remunerate employees fairly, responsibly and transparently. In order to achieve this, the Remuneration Committee is committed to the ongoing review of remuneration as explained in part two of this report. Furthermore the Remuneration Committee undertakes to support the Group in enhancing its Employee Value Proposition to retain key talent as well as to attract critical skills as may be required to meet strategic objectives.

Stakeholder engagement

At the May 2017 AGM, in accordance with King III, the Group remuneration policy was put to a separate non-binding advisory vote, allowing shareholders to express their views on the policy adopted. We received a 95.8% vote in favour of the policy at the AGM held on 25 May 2017.

We value the opinion of our stakeholders and believe that strong stakeholder engagement strengthens the relationship between our stakeholders and our Board, helping to ensure the effectiveness of our Board and its alignment to all stakeholder interests. Prior to voting at the AGM, Massmart Executives engage with shareholders and institutional investors regarding components of the remuneration policy. We proactively engaged with our key shareholders on this policy in 2017, and during this time a query was raised regarding the disclosure of Executive Directors’ service contracts, severance payments and restraints of trade within the remuneration policy.

Following this, we have included additional information on termination/severance payments, restraints of trade and retention payments.

In line with the principles set out in King IV, Massmart will table its remuneration policy and implementation report for two separate non-binding advisory votes at its 2018 AGM. If 25% or more of the shareholders vote against either resolution at the AGM, the Board will invite dissenting shareholders to engage with the Remuneration Committee on their concerns.

The Remuneration Committee is confident that the remuneration policy promotes the achievement of strategic objectives and that the levels of remuneration are fair and equitable to support the attraction, motivation, reward and retention of human capital. On this basis we recommend the remuneration policy and implementation report to shareholders.

Executive Directors’ single total figure remuneration overview

King IV prescribes that companies must provide a single total figure of remuneration, received and receivable, for the reporting period and all the remuneration elements that it comprises, each disclosed at fair value. The following table provides an overview of the Executive Directors’ remuneration for 2017, explained in detail in Section 3 of this report.

  • The ‘Guaranteed package’ and ‘Other benefits’ reflect actual payments made in the reporting period.
  • In order to match incentive awards with the performance to which they relate, the ‘Short-term incentives’ and the ‘Long-term incentive performance shares vested’ reflect the amounts accrued in respect of the year and not amounts paid in that year.
  • As per guidance received in terms of the single total figure remuneration definition, the ‘Long-term incentive restricted shares’ number represents restricted shares granted in the financial year, valued at the closing share price for the financial year.
 

 

 

 

 

 

 

Definition of SIP performance measures:
Nominal sales: total sales of the Massmart Group for a financial year.
Return on investment (%): adjusted operating profit/average invested capital. Adjusted operating profit includes finance income and adds back depreciation, amortisation and rentals. Average invested capital is average total assets of continuing operations plus average accumulated depreciation and amortisation less average accounts payable less average accrued liabilities plus occupancy costs x8.

  Guy Hayward   Johannes van Lierop
R’000          
Guaranteed package     6,529.4   5,250.0
Other benefits     504.2   4,035.2
Short-term incentive Actual paid (90.2% of target achieved)   3,148.5   2,383.9
Long-term incentive Value of Performance Shares vested March 2018, based on the performance of years 2015, 2016 and 2017   4,329.8   11,232.1
  Value of Restricted Shares granted September 2017   2,237.9   1,686.5
Total 2017   16,749.8   24,587.7
Total 2016   17,350.5   14,658.4
% increase (excluding long-term incentive vestings)   -21.7%   -11.9%
% increase (including long-term incentive vestings)   -3.5%   67.7%*
% of earnings performance based: short-term   18.8%   9.7%
% of earnings performance based: long-term   39.2%   52.5%
* Johannes van Lierop had no shares vesting prior to 2018 as he only joined Massmart in 2015.

 

The information provided in this report has been approved by the Board on the recommendation of the Remuneration Committee.

I would like to take this opportunity to express appreciation to the members of the Committee for their support and efforts during the past year.

Chris Seabrooke
Chairman of the Remuneration Committee
29 March 2018