Part 1: Policy
Governance and the remuneration committee
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 are 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)
- B Ngonyama (independent non-executive).
The CEO attends remuneration committee meetings by invitation, but does not participate in the voting 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
- 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 |
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|---|---|---|---|---|---|---|---|
 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 |
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 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:
Furthermore, careful consideration is given to internal equity within the group and to align the remuneration paid with shareholder interests and best practice |
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 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 |
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 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:
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 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 |
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 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:
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.
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.
* 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.
Elements of remuneration
The table below 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 | ||||
| Variable Short-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:
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 |
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| Variable Long-term incentive (STI) | 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 plans:
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 CEO 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:
- Safety performance
- Market share targets
- People development and training
- Sustainable development key performance indicators
- Customer loyalty and satisfaction
- Relationships with principals
- After-market 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:
CEO
| 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 | ||
| Total 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 | ||
| Total bonus | 40 | 87.5 | 125 |
Long-term incentives
Details surrounding the performance conditions for the LTIs are set out below:
| SAR 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:
|
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| 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 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 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 (NEDs) 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.
Non-binding advisory vote
Shareholders are requested to cast a non-binding advisory vote on the aforementioned Part 1 of this report.