Remuneration report

DEAR SHAREHOLDER

The board of Barloworld Limited (Barloworld or the company) and the remuneration committee present its remuneration report for the year ended 30 September 2014 setting out information applicable to the company’s remuneration policy and in particular the policy for executive directors, prescribed officers and non-executive directors. The information provided in this report has been approved by the board on the recommendation of the remuneration committee.

The remuneration committee has taken cognisance of the performance of the group and the value creation for shareholders during the year and believe that our remuneration policy and the implementation thereof reflect the alignment with the group’s business strategy and long- term goals. The company continues to focus on responsible remuneration that is driven by sound governance principles.

In line with best practice, the remuneration report has again been segmented into two parts, separating the disclosure of the company’s remuneration philosophy and policy (Part 1) from the implementation thereof (Part 2).

PART 1: POLICY

Governance and the remuneration committee

Role of the remuneration committee

The remuneration committee operates under terms of reference, a copy of which can be found on our website www.barloworld.com. The remuneration committee chairman reports formally to the board on the proceedings of the remuneration committee after each meeting and, in line with King III, will attend the annual general meeting of Barloworld to respond to any questions from shareholders regarding the remuneration committee’s areas of responsibility.

Members of the remuneration committee

The remuneration committee is constituted as follows:

SB Pfeiffer (chairman) (independent non-executive)
DB Ntsebeza (independent non-executive and chairman of the company)
AGK Hamilton (independent non-executive)
SS Ntsaluba (independent non-executive)
B Ngonyama (independent non-executive).

The CEO attends remuneration committee meetings by invitation, but does not participate in the vote process, and is not present when his own remuneration is discussed or considered. PricewaterhouseCoopers (PwC), the company’s independent advisers, attend the meetings in an advisory capacity. The company secretary, Ms L Manaka, acts as secretary to the remuneration committee.

Advisers

During the 2014 financial year, the remuneration committee received advice and guidance from the following independent advisers:

PwC – standing adviser to the remuneration committee on all executive and non-executive remuneration matters including guaranteed pay, short-term incentives, long-term incentives, non-executive directors’ fees and general corporate governance standards
PE Corporate Services – executive salary benchmarking and job grading.

Linking remuneration to strategic objective

Our business strategy concentrates on six strategic focus areas, which are supported by performance indicators.

How we reward our staff, in particular our executive staff and prescribed officers, is in line with our dedication to achieving our strategic objectives. Below, we set out our six strategic focus areas, and how our remuneration policy and practices link in to these focus areas.

Strategic focus area   Strategic objectives   Link to remuneration policies and practices
         
  Achieve targeted compound growth in total shareholder returns over five years to September 2015.  
Executive remuneration is heavily weighted towards variable remuneration, to ensure the alignment of executive interests with those of our shareholders. As part of the variable remuneration offered to our executives, long-term incentive (LTI) awards under the Forfeitable Share Plan (FSP) and Share Appreciation Right Scheme (SAR) are made. The vesting of these awards is dependent on the achievement of stretching performance conditions
  Build an organisation that adds value to employees as our success is based on inspired, aligned, empowered, resultsdriven, globally competitive, passionate people who create value through strategic innovation and continuous improvement.  
Barloworld aims to provide a level of remuneration which attracts, retains and motivates staff, in particular executives, of the highest calibre
Barloworld’s overall remuneration philosophy is to ensure that executive directors and the senior executive team are fairly rewarded for their individual contribution to the company’s operating and financial performance in line with its corporate objectives and strategy, and in line with this, we are committed to paying remuneration that is competitive relative to the target labour market in each country based on industry and market benchmarks reviewed by the company on an annual basis
  Drive market leadership through competitive differentiation by accelerating the evolution of our business model from pure distribution to the provision of flexible, value-adding, integrated customer solutio  
The short-term incentive (STI) rewards and motivates the achievement of agreed group, divisional and individual performance objectives.
In respect of personal scorecard objectives for the STI, key performance indicators (KPIs) such as the following would be included to drive performance in line with this strategic objective:
Market share targets
Customer loyalty and growth
Aftermarket growth targets
  Develop products and services to capitalise on emerging sustainable business opportunities, realise cost savings through energy efficiency and other sustainable business practices, and enhance Barloworld’s reputation by leading in sustainable development.  
The STI rewards and motivates achievement of agreed group, divisional and individual performance objectives, and sustainable development KPIs are included in personal scorecard objectives
  Enhance competitiveness, credibility, legitimacy and reputation in the eyes of all stakeholders by leading in broad-based empowerment and transformation.  
In respect of personal scorecard objectives for the STI, key performance indicators such as the following would be included:
B-BBEE rating level targets
Workforce diversity targets
Further, careful consideration is also given to internal equity within the group and to align the remuneration paid with shareholder interest and best practice
  Achieve top-quartile financial returns as measured against peer groups in each of our chosen business segments.  
For the STI, a combination of the following metrics are used to ensure that financial returns remain a top priority for our executives:
Operating profit
Cash flow
Return on equity (ROE)
Headline earnings per share (HEPS)
For the LTI, returns on net operating assets is a performance condition for the FSP
Additionally, HEPS has been used, and continues to be used as a performance condition for both the FSP and the SAR

Barloworld has adopted a holistic approach to its remuneration philosophy for senior executives and general staff and has implemented a balanced design which consists of the following monetary and non-monetary components:

Divisional incentive plans are aligned such that divisional executives and management are incentivised on similar financial targets to executive directors, with total incentives benchmarked against market comparisons for equivalent levels of management.

Overview of remuneration

Role of benchmarking and salary adjustments

Barloworld operates the Towers Watson global grading methodology and structure. This assesses an executive’s remuneration against an independently determined grade which is based on a number of factors including the “size” of the job (as measured by revenue and number of employees) as well as its “complexity” (incorporating aspects such as whether it is a domestic, international or global business).

Remuneration of divisional executives and senior management below executive director level is also benchmarked to independent market information based on the samegrading system.

The remuneration committee approves salary increases and incentives for executive directors and prescribed officers on an individual basis. The salary adjustments for other employees are cascaded downwards throughout the group to the appropriate heads of divisions starting with the divisional CEO that approves the salary increases and incentives for executives on the divisional management boards.

Package design

Executive remuneration is heavily weighted toward variable remuneration as is illustrated below.

Package design

Elements of remuneration

The table below summarises the composition of the total remuneration package for executive directors and prescribed officers during the 2014 financial year. No material changes to the remuneration philosophy and practices in respect of executive directors and prescribed officers were made during the year, and none are envisaged for the 2015 financial year.

Element   Objective   Policy   Changes for 2015
FIXED
Base salary   Reflects scope and nature of role, performance and experience.  

In most cases, base salary is benchmarked around the median of the market. Variations around the median may be influenced by factors such as the nature of the assignment, level of experience of the executive, changes in responsibilities, performance track record and strategic importance of the role.

The company uses independent consultants, namely PE Corporate Services, to conduct the annual benchmarking exercise, and the results are discussed with PwC, as standing advisors to the remuneration committee.

The level of base pay paid to executives is considered to be competitive in the appropriate labour market where the executive operates, as a result of the independent benchmarking performed, as well as the selection of comparator companies used.

  None
Benefits   Provides employees with contractually agreed basic benefits such as medical aid, retirement funding and a company car or car allowance as per the human resource policy.   The percentage company contribution to benefits varies by country. In South Africa, a 14% company contribution to retirement funds applies.   None
VARIABLE
Short-term incentive   Rewards and motivates achievement of agreed group, divisional and individual performance objectives.   Short-term incentives (annual bonuses) are paid in cash and are based on achievement against 12-month targets aimed at increasing shareholder value. The bonus operates on an additive basis and is capped at 125% of annual basic salary for executives and 150% for the CEO. The criteria for earning a bonus consist of two elements, namely:
Personal objectives (incorporating non-financial measures). The attainment of agreed personal objectives will yield a maximum value of up to 30% of annual basic salary. The participant will need to have achieved a minimum of 70% of these objectives to qualify for this portion of the bonus
Financial performance targets. The attainment of financial objectives will yield a maximum value of up to 95% of annual basic salary for executives and 120% for the CEO.

Threshold, target and stretch performance targets are set by the remuneration committee annually in advance.

In addition, the remuneration committee reviews the actual performance of the executives against the targets set at the beginning of the relevant year. The ultimate bonus payment is at the discretion of the remuneration committee.

  No material changes expected
Long-term incentive   Creates loyalty and ownership among employees and acts as a retention mechanism. Also aligns with shareholder interests and long-term value creation.   The company operates the following long-term incentive plans:
Forfeitable Share Plan (FSP)
Share Appreciation Rights scheme (SARs scheme)

It is essential for the group to retain skills over the longer term and to motivate and incentivise executive directors and other senior employees to drive sustainable value creation over multiple reporting periods and to be shareholders of the company. This is achieved through long-term incentive plans and annual awards using the FSP and SARs scheme. In line with these objectives, in the case of the executive directors and prescribed officers, the FSP is 25% retention driven and 75% performance driven, and the SARs scheme is 100% performance driven.

An aggregate limit of 22 744 049 (twenty two million, seven hundred and forty-four thousand and forty-nine) shares equating to approximately 10% (ten percent) of the current issued share capital of the company applies to all the share plans (including the old share option scheme). The maximum number of unvested FSP awards which may be made to any one participant is 0.25% of the issued ordinary share capital and the maximum number of unvested SARs granted to any one participant may not exceed 1% of the issued ordinary share capital of the company.

On an annual basis, the remuneration committee determines the quantum of awards to be made, the performance targets and mix of instruments to be granted to eligible employees.

Forfeitable Share Plan (FSP)

Awards are structured as forfeitable share awards. This means that participants receive shares (including dividend and voting rights) on the date of award but those shares are subject to restrictions and a risk of forfeiture during a three-year vesting period. In addition, in respect of executive directors, the vesting of the majority of the forfeitable share award is subject to the satisfaction of performance targets. To the extent that the performance targets are not achieved, those shares subject to the targets will be forfeited and there will be no retesting of the performance targets. The performance targets are measured over a three-year period.

Share Appreciation Rights scheme (SARs scheme)

The SARs scheme was developed with the object and purpose of providing employees with an opportunity to benefit from growth in the value of the ordinary shares of Barloworld. The SARs are subject to a three-, four- and five-year vesting period. All SARs will lapse if not exercised within six years from date of grant. The first four awards (2006 to 2009) were cash-settled. From 2011, awards are equity-settled. From 2007, the entire SARs award was subject to a performance target.

  None

Performance targets

The financial metrics for short- and long-term incentives are set by the remuneration committee on an annual basis, and are carefully selected based on key business drivers over the short and long term.

Short-term incentive

Financial metrics

The financial metrics are set by the remuneration committee on an annual basis. These metrics are elected based on key business drivers over the short-term. A combination of the following metrics has been used in the past and is envisaged to be used in future:

Operating profit
Cash flow
Return on equity (ROE)
Headline earnings per share (HEPS).

Group targets apply in the case of the CEO and financial director. Group targets are considered appropriate for these individuals due to the strategic nature of these roles and their responsibility for the performance of the group as a whole.

Divisional targets apply for the rest of the executive directors and prescribed officers, with the exception of HEPS, which is measured for all on a group basis in recognition of the collective responsibility they bear for the performance of the group as a whole.

The targets set take into account the current trading conditions and challenges being faced by the company or relevant division and incorporate a meaningful level of stretch to motivate and retain senior employees. The threshold targets are set at a level which represents the minimum level of acceptable performance for the business.

Personal objectives

In respect of personal scorecard objectives, these would typically include aspects such as:

Safety performance
Market share targets
People development and training
Sustainable development key performance indicators
Empowerment and transformation objectives
Customer loyalty and growth
Relationships with principals
Aftermarket growth targets
Acquisitions and disposals
Special projects.

The personal objectives component of the scheme is the same for the CEO, executive directors and prescribed officers. The percentage of annual basic salary which will be paid as the portion of the STI which is attributable to personal performance is represented in the graphic below.

Earning leve

The percentage of basic salary eligible to be paid as a bonus based on relative achievement against targets (threshold, target and stretch) is:

CEO

Performance metric Threshold
%
Target
%
Stretch
%
Bonus based on financial targets 25 75 120
Bonus based on personal scorecard objectives 15 22.5 30
Total bonus 40 97.5 150

Executive directors and prescribed officers

Performance metric Threshold
%
Target
%
Stretch
%
Bonus based on financial targets 25 60 95
Bonus based on personal scorecard objectives 15 22.5 30
Total bonus 40 82.5 125

Long-term incentives

Details surrounding the performance conditions for the LTIs are set out below:

    SARs scheme   FSP
Performance condition(s) and weighting      Headline earnings per share (HEPS)

SARs are also subject to the inherent performance condition of share price appreciation above the strike price (being the current share price at the date of issue)

  The following performance targets have been used and are envisaged to be used in future:
Relative total shareholder return (TSR)
HEPS
Return on net operating assets (RONOA)
Vesting of awards at threshold performance      25%      30%
Vesting of awards at on-target performance      100%      100%
Performance peri  

The performance conditions are measured over a three-year period, commensurately with the financial years of the company

Executive contracts

The main terms of the service contracts applicable to executive directors are summarised below:

PROVISION   POLICY
Contract term   Indefinite (or until normal retirement age in the relevant jurisdiction) subject to specified notice periods by the executive and the company
Notice period   Nine months for the group CEO Six months for other executive directors
Termination of employment and change of control payments and/or automatic vesting of long-term incentives   Change of control clauses are covered by FSP and SARs scheme rules and allow for proportionate vesting of awards. Change of control clauses in employment contracts provide for redundancy terms, based on established guidelines, in the event of termination of employment within six months of change of control
Restraint of trade   Not applicable
Other benefits   Certain executives may be employed in terms of expatriate contracts which include typical expatriate benefits in addition to the standard benefits

Non-executive directors

The appointment of non-executive directors (NEDs) is governed by a letter of appointment that sets out, among other things, the term of appointment, duties and responsibilities, fees and other payments, and termination of services.

NEDs receive a standard fee for their services on the board and board committees. The remuneration committee reviews the level of fees and makes recommendations to the board for consideration. A benchmarking exercise was conducted in November 2014 by PwC, the company’s independent remuneration adviser. In terms of Barloworld’s Memorandum of Incorporation, fees payable to NEDs must be approved by shareholders in general meeting. The current level of fees payable to non-executive directors was approved by Barloworld’s shareholders at the annual general meeting held on 29 January 2014. Proposed fees for the 2015 financial year are set out in the notice to the annual general meeting.

Non-binding advisory vote

Shareholders are requested to cast a non-binding advisory vote on the aforementioned Part 1 of this report.

PART 2: DISCLOSURE OF THE IMPLEMENTATION OF THE POLICIES FOR THE PERIOD UNDER REVIEW

Key remuneration decisions taken during the year

The remuneration committee discussed the following matters during 2014:

Approval of the long-term incentive awards, inclusive of the mix of instruments to be used and company performance conditions relating thereto
The approval of the targets and weighting of the performance measures of the short-term incentive plan
Approval of executive salary increases
Approval of the short-term incentive payments
Review and approval of the company’s remuneration report and policy
Review and recommendation of non-executive director fees
Review of King III principles and alignment of remuneration approach to best practice guidelines
Review of global and national developments in respect of executive remuneration
The remuneration committee terms of reference
Executive shareholding requirements
Pay equity.

Guaranteed package/base salary adjustments

Details of the basic salary and guaranteed packages (basic salary plus benefits) paid to each of the executive directors and

prescribed officers during the 2014 financial year are set out in this report. We have also continued to disclose prescribed officer remuneration relating to the prescribed officers.

In the 2014 financial year, there were a number of factors which impacted guaranteed packages of individual executive directors and prescribed officers as explained below.

Dominic Sewela was appointed as CEO of Equipment southern Africa and to the Barloworld Limited board as an executive director and received a commensurate salary increase based on market benchmarks.

In respect of the 2015 financial year, the increases in the guaranteed packages which were approved with effect from 1 October 2014 were in the range of 2% for overseas executive directors and in the range of 4% to 6% for South African executive directors, except where there have been changes in responsibilities.

Being cognisant of the pay equity gap, increases for the remainder of the employees in South Africa generally ranged between 6% to 8% on average, with higher increases being applicable to the lower paid workers. The company will continue to review the pay differential between the highest and lowest paid employees.

2014 short-term incentive outcomes

Performance against group financial targets

Operating profit   Return on equity   Headline earnings per share   Cash flow
Operating profit for the year ended 30 September 2014 increased by 16%. This exceeded target but fell just short of the stretch target approved by the remuneration committee.   Group ROE of 11.6% did not meet the threshold target.   HEPS from continuing operations increased by 10%. This exceeded threshold but fell short of the target approved by the remuneration committee.   Cash outflow for the group was R279 million, before dividends paid and acquisitions and disposals of subsidiaries and investments. This performance exceeded threshold but did not meet the target approved by the remuneration committee.

Performance against divisional financial targets

Specific divisional financial targets for operating profit, ROE and cash flow are approved by the remuneration committee for the divisional executive directors and prescribed officers. However, group HEPS is also used as one of the targets in view of their group-wide responsibility as members of the Barloworld executive committee.

The divisional performances were as follows:

Equipment southern Africa exceeded stretch target for operating profit and exceeded ROE threshold but fell short of the target. The business did not meet the threshold for cash flow
Equipment Russia exceeded stretch target for cash flow and exceeded operating profit threshold but fell short of the target. For ROE the business did not meet the threshold
Equipment Iberia fell short of threshold for operating profit, cash flow and ROE
Handling slightly exceeded threshold in respect of operating profit, but fell short of the target. Thresholds for cash flow and ROE were not met
The Automotive and Logistics division exceeded stretch targets for all the metrics.

The above financial achievements determined the bonus levels for the divisional executive directors and prescribed officer. In the case of P Bulterman, given his responsibilities for Equipment in southern Africa, Iberia and Russia, there was an appropriate weighting on the financial metrics to reflect the relative size of the respective businesses. In respect of J Blackbeard and V Salzmann, there was an appropriate weighting on targets set for the Global Power business as their respective responsibilities included developing this operation.

STI payments

Annual bonus payments are paid in cash following finalisation of the company’s audited financial results for the year in question, and are not deferred.

Annual bonus payments made to executive directors and the prescribed officer are disclosed below.

  Personal
scorecard
component
(% of basic)
Financial metric component (% of basic) Total bonus
as % of
basic
Potential
maximum
bonus as a
% of basic
    Operating
profit (30%)
ROE
(20%)
Cash flow
(20%)
HEPS
(30%)
   
CEO              
CB Thomson 24 33.4 0 14.4 16.5 88.3 150
Executive directors              
PJ Blackbeard 24 2.2 0 0 13.8 40 125
PJ Bulterman 25.8 21.5 4.8 3.8 13.8 69.7 125
M Laubscher 24.5 28.5 19 19 13.8 104.8 125
DM Sewela 25.5 28.5 7.4 0 13.8 75.2 125
DG Wilson 24 26.5 0 11.6 13.8 75.9 125
Prescribed officer              
V Salzmann 18.5 0 0 0 13.8 32.3 125

2014 total remuneration outcomes

The composition of remuneration outcomes in 2014 for executive directors and the prescribed officers is represented graphically below:

2014 Salary
R000
Retirement
and medical
contributions
R000
Car
benefit
R000
Other
benefits
R000
Guaranteed
package
R000
Bonus
R000
Total
2014
R000
Executive directors              
Residents              
PJ Bulterman 4 801 772 231 78 5 882 3 241 9 123
M Laubscher 5 480 1 210 256 82 7 028 5 585 12 613
OI Shongwe (resigned31 May 2014) 2 108 378 152 295 2 933   2 933
CB Thomson 7 592 1 362 266 48 9 268 6 359 15 627
DG Wilson 3 864 896 246 25 5 031 2 767 7 798
DM Sewela (appointed19 March 2014) 3 525 579 240 54 4 398 2 652 7 050
Non-resident              
PJ Blackbeard# 5 937 772 195 4 6 908 2 490 9 398
Total executive directors 33 307 5 969 1 586 586 41 448 23 094 64 542
Prescribed officers              
Non-resident              
V Salzmann# 4 162   172   4 334 1 337 5 671
Total prescribed officers 4 162   172   4 334 1 337 5 671
Grand total 37 469 5 969 1 758 586 45 782 24 431 70 213
# J Blackbeard is based in the UK and his remuneration is paid in pounds sterling, while V Salzmann is based in Spain and his remuneration is paid in euro. Due to the sharp depreciation of the rand against the pound and euro during the year the rand salaries disclosed above will reflect a much higher increase year-on-year in rand terms than the underlying increases in hard currency.

Long-term incentive vesting outcomes

Historic awards

The table below provides an overview of the actual and likelihood of vesting of historic awards made under the SARs scheme and FSP:

Award SARs scheme FSP
2008 100% (A)  
2010 N/A 100% (A)
2011 100% (A) 100% (A)
2012 100% (L) 84% (L)
2013 100% (L) 83% (L)
Actual (A), proportion likely to vest (L).

2014 FSP awards

FSP awards were granted on 18 March 2014 and the vesting period will expire on 17 March 2017. The following performance targets, weighting and performance periods were applicable to the number of shares awarded and are tested over a three-year performance period. Linear vesting on a sliding scale will be applied between threshold and target performance:

Performance condition Weighting
of performance
conditions (%)
Below
threshold
(vesting %)
Threshold
(vesting %)
Target
(100 vesting%)
TSR 20 0 4.5 15
HEPS 30 0 6.75 22.5
RONOA# 50 0 11.25 37.5
Maximum vesting 100 0 22.5 75
# Return on net operating assets.

The following targets were set for the respective performance conditions, and are considered by the remuneration committee to be stretching in the context of the company’s business strategy and the market conditions. Linear vesting applies between threshold and target performance:

Condition Threshold
(30% vesting)
  Target
(100% vesting)
TSR Median of peer group   Upper quartile
of peer group*
HEPS 0% real growth   15% real growth
RONOA 15%   22%
* The following comparator group was set for the TSR condition:
Aveng Limited
Bell Equipment Limited
Bidvest Group Limited
Eqstra Holding Limited
Imperial Holdings Limited
Murray and Roberts Holdings Limited
Nampak Limited
Remgro Limited
Reunert Limited
Steinhoff International Holdings

2014 SARs awards

SARs awards were granted on 18 March 2014 and a third of the SARs will vest on each of the third, fourth and fifth anniversary of the grant date. The following performance targets, weighting and performance periods were applicable to the number of shares awarded and are tested over a three-year performance period. Linear vesting on a sliding scale will be applied between threshold and target performance:

Condition   Threshold
(25% vesting)
  Target
(100% vesting)
Real growth in HEPS   0% real growth   6% real growth

Total LTI awards

The total interests of executive directors and prescribed officers of the company in share options, FSPs and SARs are disclosed in detail on pages 97 to 103 of the consolidated annual financial statements.

Non-executive directors’ fees for 2014

Fees for NEDs during the current financial year are set out on page 94 of the consolidated annual financial statements, as approved by the remuneration committee and by the board, on authority granted by shareholders at the annual general meeting held on 29 January 2014.

Proposed non-executive director fees for 2015

Refer to special resolution 1 set out in the notice of annual general meeting for approval by shareholders in terms of section 66 of the Companies Act on pages 6 and 7 of the AGM booklet.

SB Pfeiffer
Chairman of the remuneration committee

12 November 2014