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 groupís 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