Barloworld

Remuneration report

Remuneration report

This report is part of the remuneration report and will be put to a non-binding advisory vote by shareholders at the upcoming AGM. It summarises the company’s remuneration policy for non-executive directors, executive directors and prescribed officers. The information provided in this report has been approved by the board on the recommendation of the remuneration committee. The full remuneration report is available on the company’s website, www.barloworld.com.

Role of 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 also complies with King III recommendations insofar as reporting to the board and attendance at the annual general meeting is concerned.

Members of 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); and
• B Ngonyama (independent non-executive).

The CE 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 2015 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, remuneration reporting and general corporate governance standards; and
• PE Corporate Services – executive salary benchmarking and job grading.

Linking remuneration to strategic objectives

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

The reward of our employees, in particular our executive directors and prescribed officers, aligns with our dedication to achieving our strategic objectives. Below, we set out our six strategic focus areas, and discuss how our remuneration policy and practices link in to these focus areas.

STRATEGIC FOCUS AREAS		STRATEGIC INTENT		LINK TO REMUNERATION POLICIES AND PRACTICES
People		To attract, develop and retain the people and skills required to deliver on our strategies and create shared value through innovation, collaboration 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 contributions to the company’s corporate objectives and strategy Based on our philosophy, we are committed to providing remuneration that is competitive in relation to market benchmarks reviewed by the company annually
Diversity and inclusion		To maintain and enhance our competitiveness, credibility and legitimacy in the eyes of all stakeholders by leading in diversity and inclusion across all of our businesses		The following KPIs are included in personal scorecard objectives for the STI: B-BBEE rating level targets Workforce diversity and inclusion targets Furthermore, careful consideration is given to internal equity within the group and to align the remuneration paid with shareholder interests and best practice
Sustainable development		To lead in sustainable development through respectable corporate citizenship and by delivering products, services and solutions that generate sustainable outcomes and realise commercial opportunities for revenue enhancement and cost savings		The STI rewards and motivates achievement of agreed group, divisional and individual performance objectives through the inclusion of sustainable development KPIs in personal scorecard objectives
Innovative customer solutions		To drive market leadership by ongoing transformation of our business model from productfocused to service and solutionsfocused, leveraging technology to deliver productivity and performance benefits to our customers		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, the following key performance indicators (KPIs) would be included to drive performance in line with this strategic objective: Market share targets Customer loyalty and satisfaction ftermarket growth targets
Profitable growth		To double revenue and achieve targeted growth in total shareholder returns (TSR) over the five years to 2020		Executive remuneration is heavily weighted towards variable remuneration, to ensure the alignment of executive interests with those of our shareholders Executive variable remuneration includes long-term incentive awards under the Forfeitable Share Plan (FSP) and share appreciation rights under the Share Appreciation Rights scheme (SARs scheme). The vesting of these awards is dependent on the achievement of stretching performance conditions
Financial returns		To achieve financial returns above our cost of capital through the cycle and in the top quartile of our peer group in each of our strategic business segments		A combination of the following metrics are used in the STI, 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) The performance conditions used for the FSP include return on net operating assets and HEPS. The latter condition is also used in respect of the SARs

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.

*Indicative LTI expected value on grant date for retention element of award only. **Indicative LTI expected value on grant date. ***Indicative LTI expected value on grant date assuming full vesting.

Overview of remuneration for executive directors and prescribed officers

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 same grading 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

Below we set out the potential executive director and prescribed officer total remuneration including guaranteed pay (GP), short-term incentive (STI) and long-term incentive (LTI) at different levels of performance.

Executive remuneration is heavily weighted toward variable remuneration. The graphs set out the chief executive’s, as well as the average of the executive directors’ and the prescribed officers’ pay mix at below threshold performance, at targeted performance and at stretch target or outperformance level.

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Elements of remuneration

The table that follows summarises the composition of the total remuneration package for executive directors and prescribed officers during the 2015 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 no major structural changes are envisaged for the 2016 financial year.

Element		OBJECTIVE		POLICY		CHANGES FOR 2016
Fixed Base salary		Reflects scope and nature of role, performance and experience		In most cases, base salary is benchmarked to the market median. 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, PE Corporate Services, to conduct the annual benchmarking exercise, and the results are discussed with PwC, as standing advisers to the remuneration committee The level of base pay paid to executives is considered to be competitive		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 of company contribution to benefits varies by country. In South Africa, a 14% company contribution to retirement funds and risk benefits apply		Contributions may be reviewed due to retirement legislation reform
VariableShort-term incentive (STI)		Rewards and motivates achievement of agreed group, divisional and individual performance objectives		STIs (annual bonuses) are paid in cash and are based on achievement of 12-month targets aimed at increasing shareholder value. The STI operates on an additive basis and is capped at 125% of annual basic salary for executives and 150% for the CE. During 2015, diversity targets were assigned a higher weighting and the criteria for earning a bonus consists of three elements: personal scorecard objectives (incorporating nonfinancial 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, and diversity objectives, yielding a maximum value of up to 10% of annual basic salary, and financial performance targets, counting 60% of annual salary for an on target performance. The attainment of financial objectives will yield a maximum value of up to 85% of annual basic salary for executives and 110% for the CE Threshold, target and stretch performance targets are set by the remuneration committee annually in advance The remuneration committee reviews the actual performance of the executives against the targets set. The ultimate bonus payment is at the discretion of the remuneration committee		No structural changes are anticipated
VariableLong-term incentives (LTIs)		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 LTI’s plans: Forfeitable Share Plan (FSP); and Share Appreciation Rights (SARs scheme) scheme The long-term incentivisation and retention of executive directors is essential to drive sustainable value creation over multiple reporting periods and for shareholders of the company. This is achieved through 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 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 of the company. Similarly, 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 ie 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 respect of executive directors, the vesting (over a three-year period) of the majority of the forfeitable share awards is subject to the satisfaction of performance targets. To the extent that the performance targets are not achieved, those shares will be forfeited and there will be no re-testing of the performance targets Share Appreciation Rights (SARs) The SARs scheme was developed to provide employees with an opportunity to benefit from growth in the value of the ordinary shares of Barloworld The SARs are subject to three, four and five-year vesting periods. All SARs will lapse if not exercised within six (6) years from date of grant. The first four awards (2006 to 2009) were cash-settled. From 2011 onwards, awards are equity-settled. From 2007, the entire SARs award was subject to a performance target		No significant structural changes are anticipated, but the TSR peer group will be reviewed

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.

The metrics are as follows:

Short-term incentive

Financial metrics

A combination of the following metrics are used:

• Operating profit
• Cash flow
• Return on equity (ROE)
• Headline earnings per Share (HEPS)

Group targets apply to the CE and financial director. These are considered appropriate due to the strategic nature of these roles in relation to 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 participants on a group basis in recognition of the collective responsibility for group performance.

The targets set take into account the current trading conditions and challenges 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 scorecard objectives

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

• Operating profit
• Safety performance
• Market share targets
• People development and training
• Sustainable development key performance indicators
• Customer loyalty and satisfaction
• Relationships with principals
• Aftermarket growth targets
• Acquisitions and disposals
• Special projects

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

Diversity objectives

The attainment of workforce diversity targets (gender, race, localisation) will have a value of up to 10% of annual basic salary.

Earning levels

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

CE

Performance metric	Threshold %	Target %	Stretch %
Bonus based on financial targets	25	75	110
Bonus based on personal scorecard objectives	15	22.5	30
Bonus based on diversity objectives		5	10
Toal bonus	40	102.5	150

Executive directors and prescribed officers

Performance metric	Threshold %	Target %	Stretch %
Bonus based on financial targets	25	60	85
Bonus based on personal scorecard objectives	15	22.5	30
Bonus based on diversity objectives		5	10
Toal bonus	40	87.5	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 are used: 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 period		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 CE 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 provisions are covered by FSP and SAR 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

Non-executive directors are appointed subject to the provisions set out in a letter of appointment. The letter sets out, among other things, the term of appointment, duties and responsibilities, fees and other payments, and provisions related to 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. In November 2015 a benchmarking exercise was conducted by PwC, the company’s independent

remuneration adviser. Barloworld’s Memorandum of Incorporation specifies that NED fees must be approved by shareholders at an annual general meeting (AGM). In light of this, the NED fees for 2015 were approved at the AGM held on 4 February 2015. Proposed fees for the 2016 financial year are set out in the notice to the annual general meeting of the AGM booklet.

Non-binding advisory vote

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