remuneration report
Remuneration policy and philosophy
The remuneration philosophy of New Clicks is to attract, develop and retain high performing individuals while also reinforcing, encouraging and promoting superior performance. Remuneration policies are aligned with the strategic direction and operational objectives of the business.
Remuneration committee
The Remuneration committee of the board is ultimately responsible for ensuring that the group has a competitive remuneration strategy which is aligned with the group strategy and performance goals. The functions of the committee include:
- Assessing and reviewing remuneration policies, employee short-term and long-term incentive schemes and performance bonuses;
- Approving the remuneration of executive directors and senior management;
- Proposing fees for non-executive directors; and
- Determining executive and staff participation in the long-term incentive scheme.
The composition of the Remuneration committee is outlined in the Corporate Governance Report.
Remuneration structure
Annual salary benchmarking exercises are conducted to ensure that salaries remain competitive in the market, taking account of national retail and general salary statistics and surveys.
External compensation and benefit consultants advise the group on competitive positioning and benchmarking on strategic human capital issues. In addition, proposed changes to both the short-term and long-term incentive schemes were reviewed by external consultants.
Executive directors
The remuneration package of executive directors consists of three components:
- Basic salary and benefits (including retirement fund, medical aid and car allowance);
- A short-term incentive bonus; and
- A long-term incentive scheme.
The group’s policy is to align the remuneration structure of senior executives with shareholder interests. In order to encourage practices which will optimise company performance, a significant portion of remuneration is performance related, as illustrated in the table below.
Base salaries are set at competitive market rates, taking account of the benchmarking exercise and are subject to annual review. 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 and the board.
Executive directors participate in the annual short-term incentive scheme. Financial targets are set for the group by the board and these targets must be achieved before any incentive payments are made to executive directors.
This process is reviewed by the board Remuneration committee.
Targets are based on the group’s return on net assets (RONA) and a bonus of 40% of pensionable income is paid on the achievement of an on-target performance. The long-term incentive scheme is based on the allocation of share appreciation rights and this is detailed further on in this report.
Management
The remuneration package of management consists of a basic salary and benefits, including participation in the short-term incentive bonus scheme. A limited number of employees participate in the long-term incentive scheme, based on seniority and their strategic importance to the business.
An annual salary increase is paid to all staff, with the average increase for the 2007 financial year being 6.0% and 6.5% for 2008.
Staff
A collective wage increase is negotiated with the representative trade unions for all employees forming part of the collective bargaining units.
The wage increase for 2007 was 8.9% for the Clicks bargaining unit. As part of a two-year wage settlement, a 9.4% increase was granted for the 2008 financial year and 9.2% for 2009.
All staff in the Clicks bargaining unit also participate in the group’s short-term incentive scheme.
An annual bonus is paid in mid-December to all qualifying permanent employees. The bonus is calculated on a sliding scale over a number of years until it is the equivalent of a full 13th cheque. While this bonus forms part of the group’s compensation strategy, the focus of remuneration remains performance-based.
Retail staff receive group discounts on purchases at all group stores.
For UPD staff, a one-year wage agreement was concluded with an increase of 7.5%. All UPD staff receive a guaranteed 13th cheque.
Non-executive directors
Non-executive directors receive fees for their services as directors and for serving on board sub-committees. These fees reward the directors fairly for the time, service and expertise provided to the group. The non-executive directors no longer participate in any company share incentive schemes, although one non-executive director continues to hold share options which were allocated under a previous share incentive scheme.
Incentive schemes
Short-term incentive scheme
All permanent retail employees participate in the short-term incentive scheme which rewards the achievement of predetermined performance targets based on the return on assets managed (ROAM) on an annual basis. Senior UPD employees participate in a similar short-term incentive scheme based on the RONA of the business.
The performance measurement is based on each employee’s area of responsibility and can be determined for a specific store, region, business unit or at a group level.
The scheme is self-funding as the value of an on-target bonus is included in the annual budget. Performance exceeding the targeted performance will result in the payment of a higher bonus, provided this is funded by the increase in operating profit.
A total of R46 million (2006: R28.6 million) was paid to employees for the 2007 financial year.
Long-term incentive schemes
The group’s long-term incentive scheme was introduced in 2005 to align executive remuneration with the creation of shareholder value. This followed a decision by the board to terminate share options as a basis for remuneration.
Under a phantom share scheme introduced in April 2005, share appreciation rights have been allocated to the three executive directors and four senior management employees. A total of 6 275 000 rights had been allocated by year-end.
The exercise price of the rights is dependent on the performance of the share price. The first tranche of share appreciation rights was allocated on 7 April 2005 and a further tranche on 11 May 2006. The rights vest equally after three years and five years.
The following share appreciation rights have been allocated to the executive directors under this scheme:
| Number of | Number of | |||
| Director | three-year rights | five-year rights | Total | |
| Tranche 1 | ||||
| Michael Harvey | 1 000 000 | 1 000 000 | 2 000 000 | |
| David Kneale | 750 000 | 750 000 | 1 500 000 | |
| Keith Warburton | 625 000 | 825 000 | 1 450 000 | |
| Tranche 2 | ||||
| David Kneale | 75 000 | 75 000 | 150 000 |
The exercise price of the rights varies according to the performance of the share price on the vesting date:
| Tranche 1: April 2005 | Tranche 2: May 2006 | |||
| Share price on | Share price on | |||
| vesting date (R) | Exercise price (R) | vesting date (R) | Exercise price (R) | |
| Three-year rights |
above 12.71 | 8.36 | above 16.04 | 10.55 |
| above 14.45 | 4.18 | above 18.23 | 5.27 | |
| above 16.33 | 0.01 | above 20.61 | 0.01 | |
| Five-year rights |
above 16.81 | 8.36 | above 21.22 | 10.55 |
| above 20.80 | 4.18 | above 26.25 | 5.27 | |
| above 25.51 | 0.01 | above 32.20 | 0.01 | |
As the group’s liability relating to these share appreciation rights is dependent on the future performance of the company’s share price, a derivative hedge was acquired to limit the extent of the exposure. The group’s maximum exposure is R27.8 million in aggregate. Further details of the hedging instrument and the cost of the hedge are contained in notes 17 and 23 of the annual financial statements.
The long-term incentive scheme was revised with effect from the start of the 2007 financial year. In terms of this scheme, phantom share rights are allocated to participants and these rights are cash-settled at the end of the three-year performance period. The value of the rights is linked to the performance of the group’s reported diluted headline earnings per share multiplied by an internal price earnings ratio based on the five-year performance of New Clicks and other listed retail companies (refer to note 23).
The number of phantom share rights allocated is based on the annual guaranteed remuneration of each participating employee.
On the expiry of the three-year period, employees are required to apply 25% of the after-tax cash settlement value to purchase New Clicks shares in the open market and to retain these shares for a minimum of one calendar year.
A total of 57 employees currently participate in this scheme, collectively holding 9 695 270 rights at year-end.
The following rights have been allocated to executive directors under this scheme and the relevant amounts for 2007 have been expensed through the income statement:
| Director | Number of rights |
| Michael Harvey | 669 014 |
| David Kneale | 1 671 127 |
| Keith Warburton | 704 225 |
Employee benefits
Retirement funds
The group offers a number of retirement fund options. Employees of New Clicks South Africa have the option to join the Clicks Group Retirement Fund, the Clicks Group Negotiated Pension Fund or the Clicks Group Negotiated Provident Fund. Employees of UPD can join either the New UPD Corporate Selection Pension Fund or the Chemical Industries National Provident Fund. The funds all provide death and disability cover, while the negotiated funds include a funeral benefit.
Membership of a retirement fund is compulsory for all permanent employees.
All funds are defined contribution schemes and the total membership across the funds was 7 867 at year-end. Total assets of the funds amounted to R696.1 million.
Medical aid
Membership of the Clicks Group Medical Aid Scheme is compulsory for all members of management, unless covered by the healthcare scheme of a partner, and voluntary for all other staff. The scheme is administered on behalf of New Clicks by Old Mutual.
The fund had 1 848 principal members and 2 076 member dependants at year-end. Total employer and employee contributions for 2007 amounted to R14.0 million.
UPD operates a medical aid scheme administered by Fedhealth and membership is open to all permanent employees.
The group pays 50% of the monthly medical aid contribution of members and this contribution forms part of an employee’s total remuneration package.
Directors’ remuneration
Executive directors’ remuneration - 2007
| Fair value | ||||||||
| of equity- |
Amount expensed: |
Amount expensed: |
||||||
| settled | long-term | phantom | ||||||
| Director | Pension | Other | options | incentive | share | |||
| R’000 | Salary | Bonus | fund | benefits | Total | granted* | scheme** | scheme** |
| Michael Harvey | 1 583 | 679 | 153 | 188 | 2 603 | 228 | 1 849 | 8 976 |
| David Kneale |
3 711 | 1 521 | 333 | 85 | 5 650 | – | 4 619 | 7 033 |
| Keith Warburton | 1 760 | 735 | 161 | 99 | 2 755 | – | 1 946 | 6 138 |
| Total | 7 054 | 2 935 | 647 | 372 | 11 008 | 228 | 8 414 | 22 147 |
During the year Michael Harvey disposed of 1.04 million shares in the company, acquired through the share option scheme, realising a gain of R7.15 million, resulting in total remuneration of R9.75 million for the year.
| * | The fair value of equity-settled options granted is the annual expense as determined in accordance with IFRS 2, ‘Share-based payments’ and is presented for information purposes only, as it is not regarded as constituting remuneration. |
| ** | These amounts have not vested and payment is conditional on performance criteria being achieved and the directors being employed by the group at maturity date. The performance criteria are outlined in note 23 in the annual financial statements. |
Executive directors’ remuneration - 2006
| Director R’000 |
Salary | Bonus |
Pension fund |
Other benefits |
Contractual payments |
Total |
Amount expensed: share options granted |
Amount expensed: phantom share scheme |
| Raymond Godfrey2 | – | – | – | – | 1 484 | 1 484 | – | – |
| Michael Harvey1 | 610 | 274 | 61 | 46 | – | 991 | 320 | 3 160 |
| Trevor Honneysett3 | 1 384 | – | 267 | 141 | 11 341 | 13 133 | – | – |
| David Kneale1 | 1 415 | 406 | 127 | 36 | – | 1 984 | – | 2 460 |
| Keith Warburton1 | 675 | 265 | 62 | 41 | – | 1 043 | – | 2 209 |
| Total | 4 084 | 945 | 517 | 264 | 12 825 | 18 635 | 320 | 7 829 |
Non-executive directors’ remuneration
| 2007 | 2006 | |||||
| Director | Directors’ | Consultancy | Directors’ | Consultancy | ||
| R’000 | fees | fees | Total | fees | fees | Total |
| David Nurek | 483 | – | 483 | 364 | – | 364 |
| Peter Eagles1* | 183 | 566 | 749 | 51 | 319 | 370 |
| Robert Lumb | 272 | – | 272 | 210 | – | 210 |
| Eliot Osrin4 | 82 | – | 82 | 150 | – | 150 |
| Martin Rosen1 | 158 | – | 158 | 51 | – | 51 |
| Roy Smither5 | 162 | – | 162 | – | – | – |
| Peter Swartz6 | – | – | – | 108 | – | 108 |
| Lucia Swartz** | 170 | – | 170 | 114 | – | 114 |
| Allen Zimbler6 | – | – | – | 84 | – | 84 |
| Total | 1 510 | 566 | 2 076 | 1 132 | 319 | 1 451 |
| 1 | Appointed 10 April 2006 |
|
| 2 | Resigned 31 December 2005 |
|
| 3 | Resigned 23 January 2006 |
|
| 4 | Retired 30 January 2007 |
|
| 5 | Appointed 20 September 2006 |
|
| 6 | Resigned 10 April 2006 |
|
| * | Professor Peter Eagles consults to the group on professional pharmacy issues on a contractual basis with the University of the Western Cape (UWC) where he is employed as professor of pharmaceutical chemistry. During the year R358 000 was paid directly to Professor Eagles and R208 000 to UWC |
|
| ** | Lucia Swartz’s directors’ fees are paid to her employer, Sappi Limited |
Total directors’ remuneration
| R’000 | 2007 | 2006 |
| Executive directors | 11 008 | 18 635 |
| Non-executive directors | 2 076 | 1 451 |
| Total directors’ remuneration | 13 084 | 20 086 |
Directors’ shareholdings
Shares
| 2007 | 2006 | |||||
| Direct | Indirect | Direct | Indirect | |||
| beneficial | beneficial | beneficial | beneficial | |||
| Director | shares | shares | Total | shares | shares | Total |
| David Nurek | – | 29 682 | 29 682 | – | 29 682 | 29 682 |
| Peter Eagles | – | – | – | – | – | – |
| Michael Harvey | 100 000 | – | 100 000 | 10 000 | – | 10 000 |
| David Kneale | 100 000 | – | 100 000 | 100 000 | – | 100 000 |
| Robert Lumb | – | 20 000 | 20 000 | – | 20 000 | 20 000 |
| Martin Rosen | 2 000 | – | 2 000 | – | – | – |
| Roy Smither | – | – | – | – | – | – |
| Lucia Swartz | – | – | – | – | – | – |
| Keith Warburton | – | 5 000 | 5 000 | – | 5 000 | 5 000 |
| Total | 202 000 | 54 682 | 256 682 | 110 000 | 54 682 | 164 682 |
Issued shares = 335 957 242. Percentage of issued share capital held by directors is 0.08%
Share options
| Director | Number of options | Allocation date | Option price | Expiry date |
| David Nurek | 500 000 | January 1999 | R5.35 | January 2009 |
| 500 000 | September 2000 | R9.30 | September 2010 | |
| Michael Harvey | 375 000 | August 2003 | R6.30 | August 2013 |
Non-executive director fees 2008
The fee structure for non-executive directors has been adjusted for the 2008 financial year and is subject to retrospective approval by shareholders at the annual general meeting in January 2008.
The increases are generally in line with the 6.5% average salary increase for group employees. The fee payable to the chairman was adjusted to market-related levels while the higher fees for audit committee members reflect the increased level of responsibility of these directors.
| Board position | Proposed fees for 2008 | Fees paid for 2007 | |
| R | R | ||
| Chairman of the board | 325 000 | 295 000 | |
| Board member | 102 000 | 95 000 | |
| Chairman: Audit committee | 90 000 | 76 000 | |
| Audit committee member | 45 000 | 38 000 | |
| Chairman: Remuneration committee | 53 000 | 50 000 | |
| Remuneration committee member | 26 500 | 25 000 | |
| Chairman: Risk committee | 81 000 | 76 000 | |
| Risk committee member | 40 500 | 38 000 | |
| Chairman: Nominations committee | 53 000 | 50 000 | |
| Nominations committee member | 26 500 | 25 000 | |
| Chairman: Transformation committee | 53 000 | 50 000 | |
| Transformation committee member | 26 500 | 25 000 |
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