EXECUTIVE REMUNERATION
The remuneration of executives is determined by taking into consideration market comparisons and an assessment of performance related to the achievement of documented performance targets. Strategic and business objectives, which are reviewed periodically, as well as a general assessment of performance, are taken into account.
The remuneration structure at senior management level consists of:
- guaranteed pay
- made up of cash package and benefits
- variable pay
- short-term incentive bonus schemes, which have set maximum levels; and
- long-term incentives in the form of employee share incentive schemes.
TOTAL REMUNERATION PACKAGE
GUARANTEED PAY
Basic Salary
The cash package of senior management is subject to annual review by the Remuneration Committee and the Board and is set with reference to relevant external market data as well as the assessment of individual performance.
Benefits
Membership of an approved company pension fund is compulsory for all senior management, and other benefits include the provision of medical aid, gratuity at retirement, and death and disability insurance, as well as housing and car schemes for qualifying employees in Mozambique and Zimbabwe operations.
VARIABLE PAY
The primary purpose of the bonus scheme is to serve as a short-term incentive which gives executives and senior managers the opportunity to earn an annual bonus based on the financial performance of Tongaat Hulett and the operations, as well as an element related to individual/team performance.
Incentive Bonus Scheme
The short-term incentive bonus scheme is based on a combination of the achievement of pre-determined targets, and an assessment of the individual's overall general performance. These targets include measures of corporate and, where applicable, operational performance, as well as the achievement of individual and, where applicable, team performance, against pre-determined objectives related to key business strategies and requirements. The performance targets of the executive and senior management schemes in the 2015/16 year were made up of 50% financial targets and 50% non-financial targets, which are strategic objectives and team targets. For the 2016/17 year they will be made up of a greater portion of financial targets ranging from 55% to 65%. The targets and caps are reviewed annually.
There are various caps for the different levels of executives and employees, currently as follows:
| Level of management bonus | Cap as % of cash package |
 |
|
| Chief Executive | 80% |
| Executive Leadership | 65% |
| Senior Management | Up to 50% |
Note: Zero bonus payments are made on these schemes if headline earnings are below a certain level (2015/16: R740 million). The same principle was applied in 2014/15 and will also be applied in 2016/17.
Financial targets for Bonus Scheme
All financial targets have an upper limit and a lower limit. If financial results are below the lower limit, zero points will be earned for the element concerned. If financial results exceed the upper limit, the full score related to the relevant element of the bonus will apply.
The financial targets of this year comprise:
- Headline earnings
- Return on capital employed (ROCE)
- Cash-flow and
- Operating profit
Refer to table on here for further detail on financial targets.
The objective of the long-term share incentive schemes is to strengthen the alignment of shareholder and management interests and assist in the attraction, retention and appropriate reward of management.
The various instruments are the Share Appreciation Right Scheme 2005 (SARS), the Long Term Incentive Plan 2005 (LTIP) and the Deferred Bonus Plan 2005 (DBP) (collectively referred to as “the Plans”). These share-schemes were amended at the AGM on 27 July 2010 to ensure compliance with Schedule 14 of the JSE Listing Requirements and, where appropriate, the King III Report.
In the SARS, participating employees are awarded the right to receive shares equal to the difference between the exercise price and the grant price, less income tax payable on such difference. The employee therefore participates in the after tax share price appreciation in the company. The extent of the vesting of the right is dependant on the achievement of performance conditions over a three year performance period.
In the LTIP, participating employees are granted conditional awards. These awards are converted into shares on the achievement of performance conditions over a three year performance period.
In the DBP, participating employees purchase shares in the company with a portion of their after tax bonus. These pledged shares are held in trust by a third party administrator for a qualifying three year period, after which the company awards the employee a number of shares in the company which matches those pledged shares released from trust.
Under these share incentive schemes, senior management and professional employees of the company are awarded rights to receive shares in the company based on the value of these awards (after the deduction of employees' tax) if performance conditions have been met, the awards have vested and, in the case of the SARS, when the share appreciation rights have been exercised. These shares have a vesting period of three years. The quantum of instruments allocated each year is determined, inter alia, by taking into account the fair value cost of the instruments. The amendment in 2010 of the LTIP scheme also included the introduction of retention shares that may be awarded on the condition that the employee remains in the service of the company for four years after the award. The purpose of such awards of unconditional RLTIPs is to assist with targeted key and high potential employee retention. Retention shares are a small quantum in relation to other share-based instruments and are awarded by exception.
The accounting charges to the income statement required by IFRS 2 Share-based Payment are accounted for as equity-settled instruments. The costs associated with the settlement of awards under the share schemes qualify for a tax deduction by the company.
Details of the schemes and awards made from 2005 to 31 March 2016, after approval by the Remuneration Committee and the Board, are detailed below.
Performance conditions governing the vesting of the scheme instruments are set at the time of each annual award (refer to table below for further details) and currently relate to:
- growth in earnings per share,
- total shareholder return,
- share price,
- return on capital employed,
- strategic goals in areas such as sugar production, renewable energy and extracting value from land conversion.
The performance targets are relative to targets that are intended to be challenging but achievable. Targets are linked, where applicable, to the company's medium-term business plan, over three year performance periods, with actual grants being set each year considering the job level and cash package of the participating employee, their individual performance, and appropriate benchmarks of the expected combined value of the awards.
The King III refers to the application of company performance conditions to govern the vesting of awards under the Plans, and precludes the application of retesting. The application of company performance conditions has been applied since the approval of the Plans. New awards thus have relevant performance conditions, do not provide for retesting, and apply the principle of graduated vesting as recommended by King III.
Bonus and Share Scheme Performance Condition Targets - Financial and Operational Metrics
| Type of Scheme and Performance Condition | Description of Performance Condition | Percentage Actually Achieved for Bonus/Share Vesting Calculation |
|
| 2015/16 | 2014/15 | ||
|
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| Bonuses
(Note 1) |
|||
| Headline Earnings | Specific target range (Rands) for 25% to 100% vesting and 0% if below the lower end of the target range | 0% | 40% |
| Return on Capital Employed (ROCE) | Specific target range (Rands) for 25% to 100% vesting and 0% if below the lower end of the target range | 0% | 0% |
| Cash Flow | Specific target range (Rands) for 25% to 100% vesting and 0% if below the lower end of the target range | 0% | 85% |
|
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| Share Schemes (SARS and LTIPS) (Note 2) |
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| Total Shareholder Return (TSR) - 25% of LTIP (50% in 2015) (Note 3) | 16 pre-selected and relevant other listed companies that Tongaat Hulett "competed" against to determine vesting scale based on "position in the field" | 73% | 33% |
| Return on Capital Employed (ROCE) - 25% of LTIP (50% in 2015) | Specific target range (%) for 30% to 100% vesting and 0% if below the lower end of the target range | 0% | 54% |
| Sugar Production Condition - 25% of LTIP | Specific target range (%) for 30% to 100% vesting and 0% if below the lower end of the target range | 32% | n/a |
| Regulatory Framework for Electricity in South Africa - 25% of LTIP | Specific target range (%) for 30% to 100% vesting and 0% if below the lower end of the target range | 0% | n/a |
| Headline Earnings per Share (HEPS) - SARS | Growth of greater than CPI + 6% over 3 years for 100% vesting, using a three year average HEPS | 70% | 100% |
|
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| Share Scheme Performance Condition Targets which vest in 2016/17 through to the 2019/20 financial year
(Note 4 and Note 5) |
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| Headline Earnings per Share (HEPS) | Growth of greater than CPI + 6% over 3 years for 100% vesting | ||
| Total Shareholder Return (TSR) | 12 to 15 preselected and relevant other listed companies that Tongaat Hulett "competes" against to determine vesting scale based on "position in the field" | ||
| Return on Capital Employed (ROCE) | Specific target range (%) for 30% to 100% vesting and 0% if below the lower end of the target range | ||
| Sugar Production | Target quantums (annual tons of production) - range | ||
| Land Transactions | Target minimum value and cash generation | ||
|
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| Notes | |||
| Note 1: At the executive/senior management level in the 2015/16 year, 50% of the quantum of the bonus is calculated based on the pre-determined performance measures (the remaining 50% being on individual personal performance assessments). This note reflects the performance measures at the consolidated level and for those managers who are based in an operation, then that operation's operating profit and cash flow is also used as a measure on a similar basis, with a similar calibration. The weighting (within the 50% subject to financial performance conditions) of the various performance conditions for the CEO and CFO was Headline Earnings: 30.0%; ROCE: 7.5%; Cash Flow: 12.5%. In the 2016/17 year, there will be a greater proportion of predetermined financial measures and a greater emphasis on cash flow. | |||
| Note 2: In the period to 31 March 2016, the share incentive scheme awards vested in June 2015 and were based on the 2014/15 financial years' results and had the following performance conditions, as detailed in this table: Long Term Incentive Plan (LTIP) had 25% dependant on TSR, 25% on Sugar Production, 25% on Land Transactions and 25% dependant on ROCE while the Share Appreciation Rights were all dependant on HEPS growth. | |||
| Note 3: For the TSR assessment, over time the population of companies that Tongaat Hulett has "raced" against has included: AECI, Astral Foods, AVI, Bidvest, Clover Industries Ltd, Crookes Brothers, Illovo Sugar, Mondi Ltd, Nampak, Omnia Holdings Ltd, Oceana Group, Pioneer Foods, RCL Foods Limited, Sappi Ltd, Tiger Brands. | |||
| Note 4: These are awards made from 2013 onwards, which vest in the financial years 2016/17 onwards and have the performance conditions, detailed in this table: LTIP's are dependant on 4 of these performance measures (25% each), which vary from year to year and SARS are all dependant on HEPS growth. | |||
| Note 5: For the awards vesting in the 2016/17 year, the performance conditions are based on the 2015/16 results and will result in the HEPS condition (SARS) - zero percent vesting; ROCE condition (25% of LTIP) - zero percent vesting; sugar production (25% of LTIP) - zero percent vesting; land transactions (25% of LTIP) - 100% vesting and TSR (25% of LTIP) - 10% vesting. | |||
| Note 6: Further details on specific targets are not disclosed due to commercial sensitivity. | |||
