INTEGRATED ANNUAL REPORT 2011 GRI RESPONSES  

Remuneration report

Dear Shareholder

The board of Barloworld Limited and the remuneration committee present herewith their remuneration report setting out information applicable to the company's remuneration policy, executive remuneration – both fixed and variable – and directors' fees. The information provided in this report has been approved by the board on the recommendation of the remuneration committee.

Barloworld's executive remuneration policy continues to be driven by performance and rewarding executives for considerable value added which results in shareholder returns. For these purposes financial performance measures and executives' scorecards are linked to rewards provided to executives. Barloworld has taken a balanced approach with regard to remuneration ensuring that both the short- and long-term strategic objectives of the company are supported by remuneration paid to executives. Short-term performance is measured against operating profit, cash flow, return on equity ("ROE") and headline earnings per share ("HEPS") targets. As most of the markets where the company operates emerge from the financial crisis, Barloworld has, for the short-term incentive, reduced the weighting on cash flow and increased the weighting on return on equity. Long-term incentives are linked to share price performance and incorporate company performance conditions, to ensure alignment with shareholder interests.

With King III applying to financial years commencing after 1 March 2010, the remuneration committee performed a detailed analysis of the extent to which the Company's remuneration report complies with these principles. Following this review, the level of disclosure included in the remuneration report has been enhanced and the requirements of the Companies Act 71 of 2008 have been incorporated.

The issues covered by this remuneration report are:

A summary of the company's remuneration policy/philosophy;
The remuneration committee and its role;
Key remuneration decisions taken during the 2011 financial year;
Overview of the basis of remuneration and payments made to executive directors;
Funding of share plans and dilution;
Executive contracts and policies; and
Non-executive directors compensation.

On behalf of the company, the remuneration committee hereby reconfirms the commitment to sustained long-term growth underpinned by fair and transparent remuneration policies and looks forward to further growth and successes in the next financial year.

Steve Pfeiffer

Chairman of remuneration committee
14 November 2011

Remuneration philosophy and policy

It is the stated objective of Barloworld to provide a level of remuneration which attracts, retains and motivates executives of the highest calibre. Careful consideration is also given to aligning the remuneration paid with shareholder interests and best practice.

As the global economy recovers, a key strategic focus of the executive team is to take steps to drive profitable growth and enhance the level of financial returns throughout the businesses. An ambitious vision and strategic plan for 2015 have been developed to achieve this. Objectives include organic growth through market leadership, expanding our footprint into new territories, broadening the range of products we distribute and releasing capital from underperforming areas. The remuneration philosophy and metrics incorporated into both the short- and long-term incentive structures have been designed to support achievement of this plan.

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

Guaranteed package (including benefits);
Variable pay;
Performance management;
Employee growth and development; and
Work environment.

Executive remuneration is heavily weighted toward variable remuneration as is illustrated on this page.

The on-target bonus entitlement for the chief executive (CEO) is slightly higher than other executives and will result in a heavier weighting towards variable pay. The mix between fixed and variable pay for the CEO and other executive directors (based on on-target bonuses entitlement and long-term incentives awards made during the year) is:

CEO     Executive directors  
    (Other than CEO)  
     

The overall 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 as explained above. As a result, Barloworld is 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. This contributes to ensuring that Barloworld remains an employer of choice.

During the past year, Barloworld made the following changes to its remuneration philosophy and practices in respect of executive directors:

In line with the requirements of King III, re-testing of performance conditions for the Share Appreciation Right (SAR) Scheme was removed and replaced with linear vesting on a sliding scale to avoid an all-or-nothing vesting profile;
To encourage share ownership amongst employees, the settlement of the Share Appreciation Right Scheme was changed from cash-settlement to equity-settlement; and
An additional financial measure of ROE was added to the short-term incentive scheme.

There are no material changes to incentive structures envisaged for the forthcoming financial year.

There is an alignment of the divisional incentive schemes 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.

Remuneration committee

Role of remuneration committee

The remuneration committee operates under terms of reference approved by the board and which are subject to review every year. The terms of reference were reviewed and aligned with both King III and the Companies Act and approved by the board on 26 January 2011.

In terms of its charter, the key responsibilities and role of the remuneration committee are summarised below:

Determining and agreeing the remuneration and overall compensation package for the CEO and other executive directors appointed to the board;
Determining any criteria necessary to measure the performance of executive directors in discharging their functions and responsibilities;
Reviewing the terms and conditions of the CEO and executive directors' service agreements, taking into account relevant market information and information from comparable companies where relevant, to ensure that they are fairly, but responsibly appraised and rewarded for their individual contributions towards enhancing the company's performance;
Determining the company's overall policy on executive and senior management remuneration, as well as a remuneration philosophy;
Ensuring that competitive reward strategies and programmes are in place to facilitate the recruitment, motivation and retention of high-performance staff at all levels in support of realising corporate objectives and to safeguard stakeholder interests;
Determining and recommending to the Board the level of non-executive director fees after receiving independent professional input;
Reviewing and recommending to the Board the relevant criteria necessary to measure the performance of executives;
Considering other special benefits or arrangements of a substantive financial nature; and
Ensuring compliance with applicable laws and codes.

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 remuneration committee

The remuneration committee comprises five independent non-executive directors and has retained PwC as its independent external remuneration advisor throughout the period under review. The remuneration committee is chaired by an independent non-executive director, which is in line with King III.

Membership of the remuneration committee is constituted as follows:

SB Pfeiffer (Chairman) (independent non-executive) (appointed as chairman with effect from 24 January 2008);
DB Ntsebeza (independent non-executive and Chairman of the Company);
AGK Hamilton (independent non-executive);
SS Ntsaluba (independent non-executive) (appointed 21 July 2011) and
MJN Njeke (independent non-executive) (appointed 21 July 2011).

The CEO attends remuneration committee meetings by invitation. Mr B Ngwenya acts as secretary to the Remuneration Committee. External advisers are used to provide market information as and when required.

Meeting attendance

The remuneration committee had an active year and met seven times during the 2011 financial year. Attendance at meetings is set out on page 118 of the integrated annual report.

Advisers

During the 2011 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 base compensation, short-term incentives, long-term incentives, non-executive directors' fees and general corporate governance standards.
PE Corporate Services – executive salary benchmarking and job grading.

Key remuneration decisions taken in respect of the 2011 financial year

The remuneration committee discussed the following matters and took some key decisions:

Approval of the long-term incentive awards, inclusive of the mix of instruments to be used, and company performance conditions relating thereto;
Changes to the long-term incentive plans and more specifically, in line with King III, the removal of re-testing of the performance conditions of the Share Appreciation Right Scheme. In addition, introducing equity-settlement to the Share Appreciation Right Scheme;
The approval of the targets and weighting of the performance measures of the short-term incentive plan and the introduction of an additional measure to this 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; and
Review of King III principles and alignment of remuneration approach to best practice guidelines.

Overview of remuneration

Remuneration structure

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 Towers Watson global grading system. The CEO approves the salary increases and incentives for executives on the divisional management boards.

The total remuneration package

The table below summarises the composition of the total remuneration package for executives during the 2011 financial year, as well as proposed changes to the total remuneration package for the 2012 financial year:

Element Fixed/ variable Objective Policy Proposed changes for 2012
Base salary Fixed Reflects scope and nature of role, performance and of role, performance and experience In most cases, benchmarked around the median of the market None
Benefits Fixed

Providing employees with contractually agreed basic benefits such as medical aid, retirement funding and a company car or car allowance as per human resource policy.

Separate expatriate benefits apply to international assignments

The % company contribution to benefits varies by country. In South Africa, a 14% company contribution to retirement funds applies No changes to standard employment benefits. Some refinements to the expatriate policy have been made to incorporate best practices
Short-term incentive Variable Rewards and motivates achievement of agreed group, divisional and individual performance objectives The bonus percentages and three of the performance metrics performance metrics (namely operating profit, cash flow, HEPS) remain unchanged from 2010, but with the addition of ROE as a measure of financial performance No material changes to structure
Long-term incentive Variable Creates loyalty and ownership among employees and acts as a retention mechanism. Also aligns with shareholder interests and long-term value creation Approximately 25% of the overall long-term incentive award comprises a retention award and the remainder of the award has performance conditions attached. No material changes to structure

Guaranteed package/base salary

Policy

The executive directors' base salary and guaranteed package is reviewed annually. The current levels are benchmarked, in most cases, around the median of the relevant Towers Watson grade and/or group of comparator companies, which is made up of large international and local South African companies. 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. Given the independent benchmarking done as well as the comparator companies used, this level is considered to be competitive in the appropriate labour market where the executive operates.

Process and benchmarking

Annually, a benchmarking exercise of Barloworld's executive directors' guaranteed pay is conducted against Towers Watson remuneration information based on equivalent positions; and
Barloworld uses independent consultants, namely PE Corporate Services, to conduct the exercise. The results are then discussed with PwC, the standing advisors to the Remuneration Committee.

Remuneration committee

The role of the remuneration committee is to assess the market competitiveness of the guaranteed pay against the result of the benchmarking and the role, responsibility and contribution of each executive director.

Payments

Details of the basic salary and guaranteed packages (basic salary plus benefits) paid to each of the executive directors and prescribed officers during the 2011 financial year are set out on page 233 of the integrated annual report.

King III recommends that the remuneration of the top three earners who are not directors should be disclosed. This recommendation has substantially been incorporated in the Companies Act, 2008 by the prescribed officers disclosure which has been included in note 35 to the annual financial statements. For this reason no further disclosure has been made in addition to that prescribed in the Act.

The increases applicable to the guaranteed packages which will be applicable with effect from 1 October 2011 were in the range of 2 to 3% for overseas executives and approximately 7.5% for South African executives, except where there have been changes in responsibilities. The remainder of the employees in South Africa have generally received average increases in line with this, but slightly higher increases on average have been awarded at the lower levels.

Short-term incentives

Policy

Short-term incentives (annual bonuses) are paid in cash and are based on achievement against 12-month targets aimed at increasing shareholder value.

The criteria for earning a bonus consists of two elements, namely personal objectives (incorporating non-financial measures) and, financial performance targets. In terms of the financial performance targets, there are four separate conditions to be achieved, each having a different weighting.

For executive directors, where on-target financial performance is achieved, a bonus of 60% of annual cash salary will be awarded and in the case of meeting the financial objectives at stretch level, 95% of the annual basic salary is awarded as a bonus. The maximum bonus potential, including personal objectives, is capped at 125% of basic salary, which is the same as the previous financial year.

The earning potential of the CEO differs slightly from those set out above in that he can earn 75% of his annual basic salary for meeting the financial objectives at target level and 120% of his basic salary for meeting the financial objectives at stretch level. The maximum bonus potential, including personal objectives, is capped at 150% of basic salary, which is the same as the previous financial year.

In respect of personal objectives, a bonus of up to 30% of annual basic salary can be earned where 100% of personal objectives are achieved. The threshold target is 70% achievement of personal objectives in which case 15% of annual basic salary can be earned as a bonus. The personal objectives component of the scheme is the same for the CEO and executive directors.

During the year, the structure of bonuses awarded to executive directors and the threshold, target and stretch levels of performance were reviewed. The levels 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. An additional financial measure, namely ROE was added in 2011, to ensure executives were aligned with driving improved financial returns to shareholders.

Remuneration committee

On an annual basis, the remuneration committee determines the financial measures, the weighting and vesting levels. 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.

Performance targets

The performance targets for the performance bonus are set annually by the remuneration committee. In respect of the 2011 financial year, the performance criteria and targets (threshold, target and stretch) as well as the weighting of the performance criteria were:

Operating profit (35%) – group operating profit applies in the case of the CEO and financial director (FD) and divisional operating profit for the rest of the executive directors;
ROE (15%) – group ROE applies in the case of the CEO and FD and divisional ROE for the rest of the executive directors;
Cash flow (15%) – group cash flow applies in the case of the CEO and FD and divisional cash flow for the rest of the executive directors; and
Group HEPS (35%) – all executive directors are incentivised on group HEPS in recognition of the collective responsibility they bear for the performance of the group as a whole and to encourage teamwork.

In respect of the 2011 financial year, the percentage of basic salary eligible to be paid as a bonus based on relative achievement against targets set in advance by the remuneration committee (threshold, target and stretch) were:

Executive directors

           
Performance metric Threshold
%
  Target
%
  Stretch
%
Operating profit 8.8   21   33
Cash flow 3.8   9   14.3
ROE 3.8   9   14.3
HEPS 8.8   21   33.3
Maximum bonus based on financial targets 25   60   95
Maximum bonus based on personal objectives 30   30   30
Total bonus 55   90   125

CEO

Performance metric Threshold
%
  Target
%
  Stretch
%
Operating profit 8.8   26.3   42
Cash flow 3.8   11.3   18
ROE 3.8   11.3   18
HEPS 8.8   26.3   42
Maximum bonus based on financial targets 25   75   120
Maximum bonus based on personal objectives 30   30   30
Total bonus 55   105   150

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.

Bonus payments

Annual bonus payments made to executive directors and prescribed officers are disclosed on pages 233 to 235 of the integrated annual report.

In this context in the year to 30 September 2011, group operating profit increased by 51%, group HEPS from continuing operations increased by 120%, group ROE increased from 3.2% to 8.6% and the group cash flow before financing activities was a net inflow of R946 million notwithstanding significant investments made to fund future growth. The group share price increased by 54% from 30 September 2010 (R46.80) to 15 November 2011 (R72.06), being 24 hours after the year-end results release and the total dividend for the year was 107% up to 155 cents. Other major milestones were the exceptional results generated from the recently concluded Russian equipment acquisition and the successful execution of the disposal process for Rent a Car Scandinavia.

With respect to group performance, stretch targets were achieved in three performance metrics, while the fourth was marginally below stretch. As a result, the executive directors, subject to performance of group metrics achieved bonus payments slightly below stretch.

In the Handling division, performance was between threshold and target in the three divisional performance metrics. In Equipment southern Africa, results exceeded stretch in all three divisional metrics, while in Equipment Iberia performance was below threshold in two metrics and between threshold and target in the third. Performance in Automotive slightly exceeded target in two metrics and achieved stretch in the third. In Logistics, performance was below threshold in two metrics while target performance was achieved in one metric. OI Shongwe was the executive responsible for Logistics for part of the year. For the balance of the year he was responsible in a group role for human resources, strategy, and sustainability and his individual scorecard was weighted accordingly.

As the stretch target for group headline earnings per share (HEPS) was exceeded, all executive directors achieved stretch on this metric.

Long-term incentives

Policy

It is essential for the group to retain skills over the longer term and to motivate and incentivise executive directors and other employees to drive sustainable value creation over multiple reporting periods. This is achieved through long-term incentive plans and annual awards using the Forfeitable Share Plan and Share Appreciation Right Scheme. In the case of the executive directors, the long-term incentives are approximately 25% retention driven and 75% performance driven.

The company operates the following long-term incentive plans:

The Forfeitable Share Plan (FSP);
Share Appreciation Right (SAR) Scheme; and
The Share Option Scheme (SOS), no longer in use, but with outstanding awards.

Awards made to executive directors during the 2011 financial year, details of vesting/exercise, and a summary of holdings are disclosed on pages 237 and 239 of the integrated annual report.

Remuneration committee

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. In addition, the remuneration committee reviews the performance targets.

FSP

Shareholders adopted the FSP at the annual general meeting held in January 2010. The purpose of the FSP is to provide senior executives with the opportunity to acquire shares in Barloworld and to ensure that key skills are retained and to align the interest of participants with shareholder interests. Non-executive directors are not eligible to participate in the 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 re-testing of the performance targets. The performance targets are measured over a three-year period.

Awards were granted under the FSP on 28 February 2011 and the vesting period will expire on 28 February 2014. The performance period commenced on 1 October 2010 and will expire on 30 September 2013.

The rules of the FSP provide that the maximum number of unvested FSP awards that may be held by any one participant is 568 601.

Performance targets

In respect of awards granted under the FSP on 28 February 2011, the following performance conditions, weighting and performance periods were applicable to the number of shares awarded. Linear vesting on a sliding scale will be applied between threshold and target performance:

Condition Below
threshold
(vesting %)
  Target
(vesting %)
  Maximum
(vesting %)
  Performance
conditions
weighting
  Performance
period
                  Continued employment
Continued employment                 condition applies until
 condition 27   27   27       the vesting date
Performance conditions:                  
– Total shareholder                 1 October 2010 to
    return 0   7.3   24.3   1/3   30 September 2013
Headline earnings                 1 October 2010 to
    per share 0   7.3   24.3   1/3   30 September 2013
                  1 October 2010 to
–Return on equity 0   7.3   24.3   1/3   30 September 2013
Maximum vesting 27   49   100        

The remuneration committee considers the performance targets for Total Shareholder Return (TSR), HEPS and ROE to be stretching in the context of the company's business strategy and the market conditions.

In respect of awards to be granted during the 2012 financial year, it is envisaged that similarly structured performance targets will be set. The exact targets will be determined by the remuneration committee at the time of award.

A comparator group determined in consultation with PwC was used in the TSR condition for awards made under the FSP during 2011. Progress to date indicates that the performance targets relating to HEPS and ROE are likely to be met on the vesting date. None of the FSP awards vested during the year.

SAR

The SAR was adopted by Barloworld in 2006, and this plan has been 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. As from 2011, awards made under the SAR will be equity-settled.

Performance targets

The exercise (strike) price for SARs granted to employees as well as the performance vesting conditions pertaining to the SARs are:

Award 2011 2009 2008 2007 2006
Exercise (strike) price R70.83 R51.04 R61.01 R113.01 R64.18
Performance condition:          
HEPS growth target CPI plus 6% CPI plus 6% CPI plus 6% CPI plus 4% None
  over a over a over a over a  
  three-year three-year three-year two-year  
  performance performance performance performance  
  period period period period  

In line with King III, re-testing of the performance conditions have been removed in 2011 and linear vesting on a sliding scale will be applied between threshold and target.

Progress to date indicates that the performance target for the 2007 award will not be met. The 2008 and 2009 awards are likely to vest.

SOS

The majority of the share options issued under this plan have matured and the remaining options to be exercised constitute a small portion of the current incentives in operation. The scheme is no longer in operation, no share options have been granted since 2004 and all remaining unexercised share options have vested.

416 809 share options remain outstanding under the SOS with the last share options expiring in 2013. Unexercised options are worth approximately R45 each. Unexercised options held by directors total 43 987.

Retention plans and payments

South Africa has an acute skills shortage, making it an extremely challenging task for government and business to grow the economy. Businesses are faced with the challenge of managing retention of critical skills, as loss of key talent to local and international competitors is a threat to business continuity. Barloworld believes that maintaining a stable workforce with minimal loss of key talent will aid in creating long-term shareholder value.

As a consequence, Barloworld uses the FSP as both an incentive tool for long-term value creation as well as for retention purposes. In the case of executive directors, approximately 25% of FSP awards is allocated for retention purposes.

Other retention plans include cash retention awards in certain jurisdictions (or special circumstances), where the award of shares is not feasible.

Overall reward mix

The graphs below show the mix between guaranteed packages, short-term incentives (STI) (paid during the year) and long-term incentives (LTI) (expected value of awards made during the year) for executive directors and prescribed officers.

EXECUTIVE DIRECTORS PRESCRIBED OFFICERS

Share plan dilution

A maximum of 22 744 049 shares may be allocated under the FSP, SAR and SOS. The maximum number of unvested FSP awards which may be made to any one participant is 568 601 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.

Executive contracts and policies

Executive directors are subject to indefinite term service contracts to normal retirement age with a notice period of six months and nine months in the case of the group CEO.

The main terms of the service contracts applicable to executive directors can be summarised as follows:

Provision Policy
Contract term Indefinite (or until normal retirement age in the relevant jurisdiction)
subject to specified notice periods by the executive and company
Expatriate contracts typically have a fixed term usually three to four years
Notice period Nine months for the group CEO and six months for executive directors
Expatriate contracts may have specific provisions
Remuneration Salary
Car benefit
Retirement fund
Medical aid
Eligible to participate in annual short-term incentive plan (subject to rules of plan)
Eligible to participate in the FSP and SAR (subject to rules of plan)
Bonus
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 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

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, instead of a base fee as well as an attendance fee per meeting as recommended by King III. The remuneration committee reviews the level of fees and makes recommendations to the board for consideration. A benchmarking exercise was conducted in November 2010 by the company's outside independent remuneration advisor, and NED fees were benchmarked against nine peer group companies in the industrials and associated sector.

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 26 January 2011.

Fees for NEDs during the current financial year and proposed fees for the 2012 financial year are set out in the notice to the annual general meeting on page 259 of the integrated annual report.