The report is presented in the following three sections:
Letter from the Chairman of the Remuneration Committee to shareholders
On behalf of the Remuneration Committee, I am pleased to present the Massmart Remuneration Review for the year ended December 2020, which complies with best practice reporting as recommended by the King IV report on Corporate Governance for South Africa. The review highlights the key components of Massmart’s remuneration philosophy and describes the way in which it underpins the business strategic objectives.
The Remuneration Committee remains accountable for ensuring that remuneration policies and practices are fair, equitable and in line with market practice and the Group remains committed to the principles of fair and equitable pay. Executive remuneration is measured in the context of overall associate remuneration.
The Group’s Executives, including the Executive Directors, are incentivised through both short and long-term incentives. The short-term incentive plan is based on the achievement of each year’s actual financial performance compared to the annual business plan for that year, as well as non-financial metrics specific to the 2020 financial year as approved by the Board. The long-term incentive plan is in the form of an annual share allocation, which encourages ownership and investment in the Group and is designed to align our Executives with shareholder interests. The full award is subject to Group performance conditions, which vests after three years if performance conditions are met.
Financial performance for 2020 was measured against four dimensions, namely: earnings before interest and tax (EBIT); non-financial metrics; total sales; and return on investment (ROI).
With the implementation of the Turnaround plan, and taking shareholder feedback into account, the Remuneration Committee determined that it would be appropriate to review the Remuneration Policy and incentivisation, ensuring that the total reward of associates is closely aligned with the strategic objectives of the business and delivery of shareholder value.
As part of this process, I appreciated the opportunity to meet with a number of our shareholders to discuss remuneration design during the course of the year. As emphasised during these meetings the changes we considered, and ultimately adopted, ensure alignment with both our business Turnaround plan and shareholder interests, while ensuring a strong pay-for-performance philosophy. I believe that the change in our long-term incentive approach – doing away with the portion of allocations that was not performance linked – strongly demonstrates our commitment in this regard.
To ensure that our intended changes were aligned with the market and the boundaries of strong remuneration governance principles, we also engaged with external consultants to guide us on the development and delivery of the updated incentive frameworks to support our strategic initiatives. While we are still in the process of finalising some of the finer details of the new approach, we are confident that the adjusted structure, which we have outlined in Part 2 of this review, will reward our Executive team fairly for the delivery of appropriate shareholder returns, and drive a high performance culture that will ultimately translate to the achievement of our Turnaround, and the strengthening of our business beyond its current phase.
Part 2 of this review highlights the key components of Massmart’s remuneration philosophy and describes the way in which it underpins the new strategic objectives. Also contained in this review is the policy as it applies to all associates and an in-depth overview of its application at Executive and Non-Executive Director levels. Part 3 of the review provides a description of how the policy has been implemented and discloses payments made to Executive Directors, Non-Executive Directors and Executive Committee members during the year.
Business performance and the impact on remuneration outcomes
We are well into the implementation of our Turnaround plan, with pleasing results having been delivered by our Executive team since the announcement of the new strategy in January 2020. As we continue to implement our Turnaround plan, the Board remains focused on driving profitability and increasing the share price, through methods which include a focus on EBIT margin growth (by increasing sales growth while employing effective expense control) and the Game reset. The Remuneration Committee is satisfied with the efforts of the Massmart leadership to turn around the business under very difficult circumstances.
However, performance has not been without its challenges. As expected, the outbreak of the Covid-19 pandemic and subsequent lockdown measures implemented by government to control the spread of the virus had a significant impact on Massmart’s business results. The Group operating entities lost traction in store sales, particularly in the first period of lockdown as a result of heavily restricted trading and the closure of our Builders stores, under level 5. From level 3, regulated trading resumed in our stores but this extended period of restricted trading, specifically regulations relating to the sale of alcohol, placed immense pressure on Massmart’s financial position at the time.
We worked to mitigate the financial impact of Covid-19 though a number of measures, including, but not limited to, margin management, expense control, rental negotiations and term extensions with suppliers, etc. The TERS payments made available to impacted businesses by government also came in handy during this difficult period. Executives, management and senior associates elected to defer their July 2020 annual increases until January 2021 to preserve cash flow. However, all store, distribution centre, production plant associates and non-management associates received their salary increases in July 2020, as planned. Other key initiatives during this period were driven by our responsible approach to ensuring the continued safety and wellbeing of our associates, their families and the communities within which we operate. These Included:
Despite the trading challenges experienced in 2020, our associates continued to show commitment, by showing up and putting our customers first. Our leaders led with distinction, whilst navigating a new way of working especially for home office teams whose focus was to continue to support our front line teams. It is for this reason that, after relevant adjustments were made, the Group achieved the minimum required threshold performance, which enabled the payment of the Massmart AIP to associates in the Group. These adjustments related to the impact of Covid-19, impairments, retrenchments, foreign exchange losses and other adjustments.
Executive and Non-Executive Director changes
The following changes took place during the year:
On 25 February 2020, the following changes were announced: Enrique Ostalé resigned from the Board, Remuneration and Nominations Committee. JP Suarez was appointed to the Remuneration and Nominations Committees; and Charles Redfield was nominated for appointment as a Non-Executive Director of the Board, effective 25 February 2020.
Shareholder engagement and voting outcomes
At the Annual General Meeting (AGM) held on 21 May 2020, in accordance with King IV, the Group Remuneration Policy and implementation reports were put to separate non-binding advisory votes. We were pleased with the results of the vote on our Remuneration Policy which received the support of 91.26% of our shareholders (2019: 93.30%), but were disappointed with the 74.97% (2019: 93.30%) support for our remuneration implementation report. We understand our shareholders concerns with the exit payments, however, these payments were contractual.
We value the opinion of our shareholders and believe that strong stakeholder engagement strengthens the relationship between our shareholders and our Board, helping to ensure the effectiveness of our Board and its alignment to all stakeholder interests. Prior to voting at the AGM, the Massmart Remuneration Committee, led by its Chair, proactively engaged with shareholders and institutional investors regarding our Remuneration Policy and its implementation. Following the AGM, we again embarked on an extensive shareholder engagement process with institutional shareholders and with Walmart Inc.
In line with the principles set out in King IV, Massmart will table its Remuneration Policy and implementation reports for two separate non-binding advisory votes at its 2021 AGM. Should 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 major issues raised during these consultations together with our responses to these are explained as follows:
Engagement with external consultants
During 2020, Massmart engaged the services of PwC, an external independent consulting organisation with relevant technical experience, listed company and market knowledge to partner with on remuneration related matters. The scope of their work included providing guidance in the design of both the shortand long-term incentives, shareholder engagement preparation, review of the Remuneration Policy and Remuneration Review. The Remuneration Committee is comfortable with the independence of the consultants and the expertise provided.
Key policy changes
To ensure full alignment of the remuneration strategy and policy with the communicated Turnaround plan, the Remuneration Committee has decided on a number of key policy changes for the 2021 financial year, including changes in the STI and LTI structures. These are described in more detail in Part 2 of this review (forward-looking policy).
The short-term incentive formula will remain as is, but the performance conditions will be changed to 60% absolute EBIT (previously 80%), to make room for a new performance measure, namely SG&A (Selling, General and Administrative Expenses). The weighting towards non-financial goals will remain at 20%.
The inclusion of SG&A is linked to the focus on increasing profitability by ensuring that sales growth is higher than expense growth.
In addition, to further focus the Executive team and recognising that the Game reset forms a key part of our Turnaround success, we have introduced a ‘Game modifier’, applicable to Executive Committee members only, which can modify the AIP outcome ranging from -10% to 25% depending on EBIT in Game.
For the long-term incentive, the Remuneration Committee considered the feedback from shareholders and the pay for performance link, and made the decision to change the instrument mix for senior leadership to 100% Performance Shares, utilising the following performance conditions:
The retention component has been removed for senior leadership and from FY21, only performance shares will be awarded at this level.
Between the two STI and LTI, almost 50% of the financial performance aligns to profit.
More details on these changes have been included in Part 2 of the review.
Principle issues considered by the Committee during the year
During this period the Committee delivered the following:
Group-wide remuneration matters
Performance – relating to past performance cycle
Performance – relating to forthcoming performance cycle
Compliance and engagement
Executive management remuneration
Non-Executive Director (NED) remuneration
Future focus areas
In 2021, the Remuneration Committee’s main focus areas and priorities will include:
The information provided in this review has been approved by the Board on the recommendation of the Remuneration Committee.
I am satisfied that the Remuneration Policy achieved its stated objectives in the year under review and I would like to take this opportunity to thank Enrique Ostale for his service to the Committee and welcome JP Suarez as a Committee member. I would further like to express my appreciation to my fellow members of the Remuneration Committee for their support and commitment during the past year.
Chairman of the Remuneration Committee
8 April 2021