Remuneration Report

Remuneration policy and philosophy

New Clicks aims to create a performance-based culture within the group and is committed to attracting, developing and retaining high-performing individuals. The remuneration strategy aligns the compensation of senior executives with the creation of shareholder value. A significant portion of remuneration is therefore performance-based to encourage practices which will optimise company performance.

The remuneration committee of the board is ultimately responsible for ensuring the group has a competitive remuneration strategy which is aligned with the group’s strategy and performance goals. The functions and composition of the committee are outlined in the Corporate Governance Report.

Annual benchmarking exercises are conducted to ensure 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.

Remuneration structure

Executive directors

The remuneration package of executive directors consists of three components:

  • Basic salary and benefits (including retirement fund, medical aid and car allowance);
  • Short-term incentive bonus; and
  • Long-term incentive schemes.

Salaries are set at competitive market rates 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.

Participation in the annual short-term incentive scheme is dependent on the achievement of financial targets which are set by the board. Targets are based on the group’s return on net assets (RONA) and a bonus of 40% of total cost of employment is paid on the achievement of an on-target performance. This process is reviewed by the board remuneration committee.

The long-term incentive scheme is based on the allocation of share appreciation rights and this is detailed later in the report.

Management

The remuneration package of management consists of a basic salary and benefits, as well as participation in the short-term incentive bonus scheme. A limited number of employees participate in the long-term incentive scheme, based on seniority and strategic importance to the business.

An annual salary increase is paid to all staff, with the average increase for the 2008 financial year being 8.0%.

Staff

A collective wage increase is negotiated with the representative trade unions for all employees forming part of the collective bargaining units.

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.

While Musica and The Body Shop do not form part of the bargaining unit, their staff receive similar wage adjustments.

An annual bonus is paid in mid-December to all qualifying permanent employees. The bonus is calculated on a sliding scale from the first year of employment until it is the equivalent of a 13th cheque after six years. While this bonus forms part of the group’s compensation strategy, the focus of remuneration remains performance-based.

For UPD staff, a one-year wage agreement was concluded with an increase of 8.5%. All UPD staff receive a guaranteed 13th cheque.

All staff receive discounts on purchases at group stores.

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 in 2000.

Incentive schemes

Short-term incentive scheme

All permanent retail employees participate in the short-term incentive scheme which rewards the achievement of pre-determined 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 their 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 commensurate increase in operating profit.

A total of R42 million (2007: R46 million) was approved to be paid to employees for the 2008 financial year. UPD and Musica did not achieve the required performance targets and consequently no bonuses were paid to the staff in these businesses.

Long-term incentive schemes

The group currently has two long-term incentive schemes which align executive remuneration with the creation of shareholder value.

Phantom share scheme

Following a board decision to review the use of share options, a phantom share scheme was introduced in April 2005 which is linked to the performance of the share price. Under this scheme share appreciation rights have been allocated to the four executive directors and two senior employees. A total of 3 550 000 rights were outstanding at year-end.

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 and were outstanding at the year-end:

Director Number of three-year rights Number of five-year rights Total
Tranche 1
Michael Harvey* 1 000 000 1 000 000
David Kneale* 750 000 750 000
Keith Warburton* 825 000 825 000
Tranche 2
Bertina Engelbrecht 200 000 200 000 400 000
David Kneale 75 000 75 000 150 000
* Three-year rights in tranche 1 matured in April 2008
The benefit accruing from the rights varies according to the performance of the share price on the vesting date:
Tranche 1: Allocated April 2005 Tranche 2: Allocated May 2006
Share price on vesting date (R) Exercise price (R) Share price on vesting date (R) Exercise price (R)
Three-year rights Three-year rights
All rights have now vested Above 16.04 10.55
Above 18.23 5.27
Above 20.61 0.01
Five-year rights 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 R15.4 million. Further details on the hedging instrument and the cost of the hedge are contained in notes 17 and 23 of the annual financial statements.

Long-term incentive scheme

A revised long-term incentive scheme was introduced in September 2006. Under this scheme share appreciation 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 group’s diluted headline earnings per share multiplied by a fixed internal price earnings ratio based on the three-year performance of New Clicks (refer to note 23).

The allocation of long-term incentive share rights 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 year.

At year-end 9 166 803 rights (held by 44 employees) were outstanding from the first allocation in September 2006 and 6 292 125 rights (38 employees) were outstanding from the September 2007 allocation.

The following rights have been allocated to executive directors under this scheme and the relevant amounts have been expensed through the income statement:

Director Tranche 1 (allocation) 1 Sept 2006 Tranche 2 (allocation) 1 Sept 2007
Bertina Engelbrecht 528 169 396 845
Michael Harvey 669 014 502 670
David Kneale 1 671 127 1 255 617
Keith Warburton 704 225 529 126

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 6 911 (2007: 7 867) at year-end, with the decline in membership reflecting the resignation of the Discom staff from the fund when the business was sold. Total assets of the funds amounted to R759.1 million (2007: R696.1 million).

Medical aid

In May 2008 the company took a decision to introduce an alternative to the existing Clicks Group Medical Scheme for all permanent employees. The decision was based on several factors, including the structure of the current medical aid benefit, the limited day-to-day benefit cover and the limited scope of the current medical aid scheme. A number of options on the Discovery Health Medical Scheme have been made available to permanent employees. Membership of Discovery is actively encouraged and employees joining the scheme receive a subsidy from the company. By year-end 275 employees had joined the Discovery Health Medical Scheme.

The Clicks Group Medical Aid Scheme is administered on behalf of New Clicks by Old Mutual. The fund had 1 427 principal members (2007: 1 848) at the group’s year-end and a solvency ratio of 28.5% (2007: 9.95%).

UPD operates a medical aid scheme administered by Fedhealth and membership is open to all permanent employees.

Directors’ remuneration

Executive directors’ remuneration – 2008
Director (R’000) Salary Bonus Pension fund Other benefits Total Fair value of equity-settled options granted* Amount expensed: Long-term incentive scheme** Amount expensed: Phantom share scheme**
Bertina Engelbrecht1 731 663 61 23 1 478 2 005 233
Michael Harvey 1 607 875 167 194 2 843 228 5 079 (2 267)#
David Kneale 4 054 1 801 364 86 6 305 12 686 (1 525)#
Keith Warburton 1 894 885 176 131 3 086 5 347 (1 870)#
Total 8 286 4 224 768 434 13 712 228 25 117 (5 429)#
1 Appointed as an executive director on 1 March 2008   # The credits reflect the impact of the mark-to-market revaluation

In addition to the remuneration reflected above, the following amounts were paid to executive directors under the phantom share scheme: Michael Harvey, R5.742 million; David Kneale, R4.207 million; and Keith Warburton, R3.506 million. The expense has been recognised over the vesting period from 7 April 2005.

Executive directors’ remuneration – 2007
Director (R’000) Salary Bonus Pension fund Other benefits Total Fair value of equity-
settled options granted*
Amount expensed:
Long-term incentive scheme**
Amount
expensed: Phantom
share 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
* The fair value of equity-settled options granted is the annual expense 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.
Non-executive directors’ remuneration
Director (R’000) Directors’ fees 2008
Consultancy
fees
Total Directors’ fees 2007
fees
Total
David Nurek 529 529 483 483
Fatima Abrahams1 91 91
Peter Eagles* 196 600 796 183 566 749
Fatima Jakoet1 94 94
Robert Lumb 299 299 272 272
Eliot Osrin2 82 82
Martin Rosen 169 169 158 158
Roy Smither3 78 78 162 162
Lucia Swartz4** 75 75 170 170
Total 1 531 600 2 131 1 510 566 2 076
During the year David Nurek disposed of 400 000 shares which were acquired through the share option scheme and realised a gain of R3.48 million.
1 Appointed 1 March 2008 2 Retired 30 January 2007 3 Resigned 31 January 2008 4 Retired 29 January 2008
* 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 R402 000 was paid directly to Professor Eagles and R198 000 to UWC
** Lucia Swartz’s directors’ fees were paid to her employer, Sappi Limited.

Total directors’ remuneration (R’000) 2008 2007
Executive directors 13 712 11 008
Non-executive directors 2 131 2 076
Total directors’ remuneration 15 843 13 084

Directors’ shareholdings

Shares
Director Direct
beneficial shares
2008
Indirect beneficial
shares
Total Direct
beneficial shares
2007
Indirect
beneficial
shares
Total
David Nurek 129 682 129 682 29 682 29 682
Fatima Abrahams
Peter Eagles
Bertina Engelbrecht
Michael Harvey 100 000 100 000 100 000 100 000
Fatima Jakoet
David Kneale 105 200 105 200 100 000 100 000
Robert Lumb 40 000 40 000 20 000 20 000
Martin Rosen 2 000 2 000 2 000 2 000
Keith Warburton 5 000 5 000 5 000 5 000
Total 207 200 174 682 381 882 202 000 54 682 256 682
Issued shares = 324 139 225. Percentage of issued share capital held by directors is 0.12%.
 
Share options
Director Number of options Allocation date Option price (Rands) Expiry date
David Nurek 500 000 September 2000 9.30 September 2010
Michael Harvey 375 000 August 2003 6.30 August 2013

Non-executive director fees 2009

The fee structure for non-executive directors has been adjusted for the 2009 financial year and is subject to retrospective approval by shareholders at the annual general meeting in January 2009.

Board position Proposed fees for 2009 (R) Fees paid for 2008(R)
Chair of the board 355 000 325 000
Board member 111 000 102 000
Chair: Audit committee 100 000 90 000
Audit committee member 50 000 45 000
Chair: Remuneration committee 58 000 53 000
Remuneration committee member 29 000 26 500
Chair: Risk committee 90 000 81 000
Risk committee member 45 000 40 500
Chair: Nominations committee 58 000 53 000
Nominations committee member 29 000 26 500
Chair: Transformation committee 58 000 53 000
Transformation committee member 29 000 26 500