Barloworld Limited: Leading Brands

Part 1: Background statement

Dear shareholders

I am pleased to provide you with the Barloworld Limited (Barloworld or the company) remuneration report for the year ended 30 September 2018.

As reported in 2017, the company embarked on a strategic review process and as a result the group remuneration philosophy and policy was reviewed to ensure alignment with the new strategy and ambition.

We are satisfied with the response we have received from shareholders in support of our revised policy. Notwithstanding the fact that 97.97% of shareholders endorsed the policy, the remuneration committee will continue to engage shareholders on key issues underpinning the policy.

The main changes that were implemented during the year as per the revised policy were:

• The short-term incentive scheme (STI) was redesigned in order to drive appropriate behaviours and focus senior employees towards shareholder value creation as follows:
  • At executive director and prescribed officer level the weighting for the short-term incentives was revised and a greater weighting has been assigned to company performance, as below:
  • financial performance – 65% (previously 60%). The financial performance is split between group and divisional financial performance objectives depending on grading and divisional responsibility
  • personal performance – 25% (previously 30%)
  • diversity and inclusion metric remained unchanged at 10%.

The remuneration committee is of the view that a 65% weighting on financial performance is justified to ensure a sufficient link between financial returns, shareholder value creation and reward.

• The STI metrics were reviewed and more specifically, economic profit replaced operating profit. At divisional level, return on invested capital (ROIC) was added and the metrics are:

• The STI is capped at 175% of annual basic salary for executives (previously 125%) and 200% for the CEO (previously 150%).
• At least one financial performance metric must achieve threshold before the STI pays. This prerequisite, which is in the form of a financial multiplier curve, escalates at an        increasing rate between threshold and target and at a higher rate between target and outperformance.
• In response to previous comments from certain shareholders, the overall retention component on our long-term incentives (LTI) for executive directors and prescribed officers has been reduced from 25% to 7.5%
• The mix between share appreciation rights and full shares granted under our LTIs at executive level was reviewed. The share appreciation rights now bear a greater weighting (70% share appreciation rights (previously 35%) and 30% full shares (previously 65%). We believe that this change aligns with the revised strategy of the company
• The remuneration committee also adopted a malus and claw-back policy applicable to the group and the divisional executive committee members. This policy applies to all variable remuneration.

GRI	102-35 to 102-39

Barloworld delivered strong performance in the 2018 financial year despite challenging macro-economic environments in our respective geographies. It is against the backdrop of this solid performance that STI payments were awarded and the LTI awarded in 2016, will vest.

During the year, the remuneration committee conducted further work on the King IV Code on Corporate Governance and the amended JSE Listings Requirements on remuneration. We are therefore pleased to confirm that this report complies with leading governance and disclosure requirements and is set out in three parts as follows:

• Part 1 contains the background statement
• Part 2 sets out the company's remuneration philosophy and policy
• Part 3 details the implementation of the policy in the 2018 financial year.

Parts 2 and 3 will be put forward for separate non-binding advisory votes.

The company continues with the practice of fair, responsible and equitable remuneration. In this regard, the remuneration committee regularly reviews the company's internal wage gap. The remuneration committee further seeks to find a balance between the interests of executives and shareholders to ensure fair and responsible outcomes. For this reason a significant portion of the pay of our senior employees is at risk and subject to stretching performance conditions.

As in the past, our hope is that this report evidences the company's continued focus on responsible remuneration that is performance based and driven by sound governance principles.

We trust that we have provided a clear summary of the remuneration policy and explanations of the executive management team's remuneration and that you find this to be a comprehensive overview.

NP Dongwana

Chairperson

Remuneration committee

23 November 2018

Part 2: Policy

An overview of the company's revised remuneration policy, implemented during 2018 is provided below.

Governance and the remuneration committee

Role of the remuneration committee

The remuneration committee operates under their terms of reference, a copy of which can be found on our website www.barloworld.com. The remuneration committee also complies with King IV insofar as reporting to the board and attendance at the annual general meeting is concerned.

Members of the remuneration committee

The remuneration committee is constituted as follows:

• NP Dongwana (chairperson) (independent non-executive), appointed on 8 February 2017
• DB Ntsebeza (independent non-executive and chairman of the company)
• SS Ntsaluba (independent non-executive)
• P Schmid (independent non-executive) appointed 11 May 2017
• OI Shongwe (independent non-executive) appointed 11 May 2017.

The CEO attends the 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 (11 months) and Ms A Ndoni (one month) acts as secretary to the remuneration committee.

Advisers

During the 2018 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, general corporate governance standards
• PE Corporate Services – executive salary benchmarking and job grading.

The remuneration committee is satisfied that the advisers acted independently.

Shareholder engagement

The remuneration committee is committed to shareholder engagement and shareholders are engaged on remuneration matters as part of normal shareholder engagements. In the event that 25% or more of the shareholders vote against the remuneration policy or implementation report, the remuneration committee will actively engage with its shareholders and will report on the outcomes of the discussions and measures taken.

Overview of remuneration policy

Barloworld's remuneration philosophy and the reward of our employees, executive directors and prescribed officers, aligns with our dedication towards achieving our strategic objectives. These include being the investment of choice by delivering top quartile returns to our shareholders, as measured by the return we generate on the capital invested.

In line with our philosophy, we are committed to providing remuneration that is competitive in relation to the market benchmarks reviewed by the company annually.

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

Elements of remuneration

The table below summarises the remuneration policy as it applies to all employees, with detailed information on the composition of the total remuneration package for executive directors and prescribed officers.

Package design

Executive remuneration is heavily weighted toward variable remuneration. The graphs set out the CEO, as well as the average of the executive directors and the prescribed officers' potential pay mix at below threshold, at target and at stretch or outperformance.

The pay mix potential reflected includes cost to company (CTC), short-term incentives (STI) and long-term incentives (LTI).

Below threshold performance (R000)		At targeted performance (R000)		At stretch or outperformance level (R000)
* Average CTC ** Indicative expected value of retention FSPs on grant date *** STI is not payable for performance below threshold		* Average CTC ** Indicative expected value on grant date		* Average CTC ** Indicative expected value on grant date assuming full vesting

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 (65% weighting)

A combination of the following metrics and weightings are applied:

The 65% weighting is split between group and divisional financial performance objectives depending on grading and divisional responsibility. Prescribed officers and executives with divisional responsibility have a split of 40% group and 25% division.

The targets are set to 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 immediate prior year actuals.

Individual scorecard objectives
(25% weighting)

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

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

Diversity and inclusion objectives
(10% weighting)

The attainment of specific workforce diversity and inclusions targets (gender and race).

Earning levels

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

CEO

Executive directors and prescribed officers

Long-term incentives

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

Executive contracts

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

Malus and claw-back

To further align the interests of executives with those of the shareholders, the remuneration committee adopted a malus and claw-back policy applicable to members of the group executive committee and the members of the divisional executive committees. This policy applies to all variable remuneration.

Should a trigger event arise before the vesting/payment of any variable remuneration, the remuneration committee can, at its own discretion cancel any unvested/unpaid incentives. If the trigger event arises after variable remuneration that has been paid/settled, the remuneration committee can demand the repayment of an amount equal to the pre-tax value of any bonus paid, or a pre-tax amount equal to the market value of any long-term incentive received. Typically trigger events include gross misconduct, loss to the company due to the failure to observe risk management policies or where misleading financial information has been used and has influenced the incentive amount awarded and/or paid.

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.

Non-executive directors 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 2018, a benchmarking exercise was conducted by PwC, the company's independent remuneration adviser.

The benchmark analysis was against a comparator group comprising JSE-listed companies. The PwC report indicated that some of the committee fees lag the comparator group median. The CEO recommended that increases should be made to fees that were significantly below market levels. However, a staggered approach would be followed to align the fees to market levels over a few years.

The proposed fees for the 2019 financial year are set out in the notice to the annual general meeting (AGM) on page 5 of the AGM booklet. Such fees are exclusive of any value added tax (VAT) that might be applicable, depending on the individual registration circumstances of a particular director. The fees have been adjusted marginally, while the fees which significantly lag the comparator group have been increased to the median.

Non-binding advisory vote

Shareholders are requested to cast a non-binding advisory vote on the aforementioned part 2 of this report.

Part 3: 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 2018:

• Approval of the changes to the company's remuneration policy
• Approval of the long-term incentive awards, inclusive of the mix of instruments to be used and company performance conditions relating thereto
• Approval of the targets and weighting of the performance measures of the STI scheme
• Reviewed personal scorecard objectives of the executives
• Reviewed and approved the adoption of a malus and claw-back policy
• Reviewed global and national developments in respect of executive remuneration
• Reviewed and approved peer group companies for benchmarking in 2018
• Reviewed executive pay equity trends in the group
• Approved salary increases for executive directors and prescribed officers
• Approved the STI payments for executive directors and prescribed officers
• Reviewed King IV principles
• Reviewed and approved the company's remuneration report
• Reviewed and recommended increases to non-executive director fees
• Reviewed the remuneration committee terms of reference
• Reviewed and considered executive shareholding requirements.

Guaranteed package/base salary adjustments

On average the executives received a 6% increase. Details of the basic salary and guaranteed packages (basic salary plus benefits) paid to each of the executive directors and prescribed officers during the 2018 financial year are set out further in this report.

2018 short-term incentive outcomes

Performance against group financial targets

*	Based on weighted average cost of capital ("WACC") at beginning of reporting period.

The financial objectives set out in the table above were approved by the remuneration committee for the divisional executive directors and prescribed officers.

The executive directors, Dominic Sewela (CEO), Don Wilson (finance director) and one prescribed officer, Peter Bulterman (CEO: Equipment Southern Africa, Russia and Iberia) were measured against group financial targets. The other prescribed officers (Emmy Leeka and Keith Rankin) were measured against a combination of group and divisional financial targets (40% group and 25% division).

STI payments

Annual performance bonus payments are made in cash following finalisation of the company's audited financial results for the year in question and are not deferred.

Annual performance bonus payments made to executive directors and prescribed officers are disclosed further in this report.

–	The scheme is calculated based on the following formula which incorporates six variables:
[A + B + C + D] x E x F x Annual basic cash salary
–	Individual Scorecard score [A] counting for up to 25% of the Total Bonus percentage (Total Bonus percentage = [A + B + C + D]).
–	Diversity and Inclusion score [B] counting for up to 10% of the Total Bonus percentage.
–	Group financial performance objectives [C], counting for up to 65% of the Total Bonus percentage.
–	Divisional financial performance score [D], counting for up to 25%, is only applicable for executives with divisional responsibility.
–	Financial Multiplier [E] is a calculated amount based on Group financial performance [C]. (a) If group financial performance % [C] < 50%: Financial Multiplier = group financial performance %/50% x 105% (b) If group financial performance % [C] > 50%: Financial Multiplier = (group financial performance % 50%)/50% x (1 – 105%) +105% (c) Illustrative effect of the above:   (i) If group financial performance % [C] = 0%, financial multiplier = 0%   (ii) If group financial performance % [C] = 25%, financial multiplier = 52.5%   (iii) If group financial performance % [C] = 50%, financial multiplier = 105%   (iv) If group financial performance % [C] = 75%, financial multiplier = 102.5%   (v) If group financial performance % [C] = 100%, financial multiplier = 100%
–	STI Cap [F] is multiplied by the annual basic cash salary.

In this context, STIs represented as a percentage of basic salary for the year ended 30 September 2018 were calculated as follows:

LTI vesting outcomes

Historic and outstanding awards

The table below provides an overview of the actual vesting and likelihood of vesting of historic and outstanding awards made under the SAR and FSP.

Awards with a performance period ending during the 2018 financial year

The vesting profile for awards made during March 2016 with a performance period that commenced on 1 October 2015 and ending 30 September 2018, vesting during March 2019 are as follows:

LTI awards made during the year

In line with the revised policy, executive directors and prescribed officers received a combination of awards under the SAR Scheme and FSP. The mix between SAR and FSP awards, together with the percentage it represents of TGP is depicted below, as well as details of the applicable performance conditions and targets are set out on the next page.

2018 instruments awarded and quantum

Due to prohibited period restrictions, the remuneration committee could not grant equity awards to participants. As a result notional SAR and FSP awards were granted. These awards have the same conditions as equity-settled awards, but will be settled in cash on vesting and exercise.

In the table on the next page the instruments granted, together with the grant expected values per executive director and prescribed officers are provided. Expected value differs from face value (which is the share price on the grant date) and is the indicative fair value of the instrument on the grant date. When determining the expected value of an instrument, the type of instrument and the probability of satisfying the performance conditions were taken into account.

2018 performance conditions

FSP awards

FSP awards were granted on 30 March 2016 with a performance period that commenced on 1 October 2015 and ending 30 September 2018, and the vesting period will expire on 29 March 2019. The following performance targets, weighting and performance periods were applicable to the SARs awarded to executive directors and prescribed officers. Linear vesting on a sliding scale will be applied between threshold and target performance:

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.

*	The following comparator group was set for the 2018 TSR condition:

Bidvest Group Limited Finning International Inc. (Canada) Imperial Holdings Limited KAP Industrial Holdings Limited Remgro Limited

Sime Darby Berhard (Malaysia) Supergroup Limited Tiger Brands Limited Trencor Limited Wilson Bayly Hlm-Ovc Limited

SARs awards

SARs awards were granted on 30 March 2018 and a third of the SARs will vest on the third, fourth and fifth anniversary of the grant date, respectively and participants have until 30 March 2024 to exercise their vested SARs. The following performance targets, weighting and performance periods were applicable to the number of SARs awarded and are tested over a three-year performance period. Linear vesting on a sliding scale will be applied between threshold and target performance: