Pick n Pay Stores Limited

Remuneration committee report continued

Summary of the remuneration structure:

Category	Nature	Objective	Includes
Guaranteed base pay	Fixed	Must fairly represent the scope and nature of the employee’s role, the skill and experience required and the performance expected	Base salary 13th cheque (not applicable to senior management) Contributions to retirement fund Contributions to medical aid Fringe and other benefits, including: Car allowances Low-interest loans
Short-term incentive	Variable	Must motivate and reward the achievement of strategic performance objectives	Annual bonus, less the payment of a 13th cheque (where applicable)
Long-term incentive	Variable	Must encourage longer-term performance and loyalty, and retain key skills by linking remuneration to long-term value creation	The allocation of: Standard share options Binary share options Forfeitable performance shares

Guaranteed base pay

Base salary

The remuneration committee reviews the salaries of the CEO, other executive directors and senior management annually. Remuneration reflects the relative skill, experience, contribution and performance of the individual. Base pay is set at levels that are competitive with the rest of the market so that the Group can attract, motivate and retain the right calibre of people to achieve the Group’s strategic business objectives. The annual remuneration is directly related to annual performance assessments, which are undertaken in April each year. Annual increases in base pay are determined with reference to the scope of the employee’s role, the competence and performance of the employee, as well as the projected consumer price index. The performance of the CEO is assessed by the Chairman and the Board, while the performance of the other executive directors is evaluated by the CEO and reviewed by the remuneration committee.

CEO – when setting Richard Brasher’s annual base salary at R7 million, the remuneration committee considered the following factors:

• His extensive experience in the retail industry, which spans over 27 years
• His tenure as the former CEO of Tesco UK/Republic of Ireland
• Richard was instrumental in transforming Tesco into the market share leader in the United Kingdom and a global retailer

The remuneration committee benchmarked Richard’s base salary against similar sized South African companies and his salary is considered fair in relation to the market and his expertise.

Retirement fund and medical aid contributions

Pick n Pay contributes 17.35% of salary expenditure towards retirement funding for executive directors and employees. In addition, the Group also contributes towards medical aid. For further details please refer to note 22 of the financial statements where retirement benefits are disclosed.

Fringe and other benefits

Car allowances
Executive directors and management are granted a travel allowance or the use of a Company vehicle which includes maintenance, fuel and insurance.

Low-interest loans
Salaried employees have access to low-interest loans from the Group, generally to assist with the acquisition of residential property. Loan values are capped at varying amounts, depending on the employee’s position in the Group. Affordability tests are performed before any loan is granted, to ensure the employee does not experience financial strain. Interest rates average 3.4%.

The value of executive directors’ low interest loans at the end of the 2014 financial year is R0.4 million. For further details please refer to note 15 of the financial statements where employee loans are disclosed.

All housing loans are secured against the employee's retirement funding. No financial assistance is provided for the purpose of assisting an executive to buy shares in the Group.

Short-term incentive

Annual bonus

Executives and management participate in the annual bonus scheme. It is designed to motivate management to achieve the Group’s short-term strategic objectives and to reward performance.

The Group operates two bonus schemes:
The senior management incentive scheme – applies to divisional managers and above (approximately 200 people). The bonus payment (if any) is made in May each year, after the finalisation of the Group’s financial performance of the previous financial year.

The management bonus scheme – applies to all employees of manager grade and above. These employees also participate in the bonus pay-out at the end of May (if applicable), except that in this category employees are guaranteed a 13th cheque (an amount equal to one month’s basic salary) which is paid in November and deducted from any bonus pay-out in the following May.

Bonuses awarded to executives and management are discretionary and are linked to the achievement of profit before tax targets, excluding any exceptional capital items (PBTAE). Targets are set by the remuneration committee on an annual basis. PBTAE is a product of all the efforts of the Pick n Pay team and is thus to a large extent under the control of the participants in the bonus scheme.

The bonus pool is self-funding and is created after achieving a pre-defined PBTAE target, inclusive of the value of the incentive. The bonus pool increases in value as threshold, target or stretch PBTAE levels are attained. Bonuses are paid as a multiple of basic monthly salary and each individual’s share of the bonus pool will depend on the PBTAE target reached and their own individual performance, as measured through the Group’s annual performance appraisal process. Bonuses are capped at a multiple of two times annual basic salary.

No bonuses are paid if the threshold target is not met. In addition, the short-term incentive scheme mitigates the risk that management focuses on managing the share price rather than the business, thus protecting the dividend flow for all shareholders.

All bonuses paid to management and executives are subject to approval by the remuneration committee.

Review of performance – aligning rewards with strategy and performance

The poor financial results over the past few years have seen the executive team forego annual bonuses (other than the 13th cheque where applicable). In addition, the 2010 share option awards under the long-term binary share incentive scheme are expected to lapse in May 2014, without the share price performance conditions being met. Both examples reflect the Group’s remuneration philosophy of aligning performance with reward.

The remuneration committee has a crucial role to play in ensuring that the Group’s remuneration policy not only supports the Group’s strategic goals, but also ensures that management are remunerated fairly and reasonably, in line with industry benchmarks and shareholder expectation. The committee has experienced challenges in its role over the last few years, because while the senior team cannot be unduly rewarded during times of poor financial performance, a balance must be achieved in order to retain key employees and attract quality managers from outside the business.

The remuneration committee sets annual performance targets (threshold, target and stretch) that must be achieved before a short-term incentive bonus will be payable. The targets are based on PBTAE, which is inclusive of the cost of the short-term incentive.

This has been a significant year for the Pick n Pay senior team who, under the leadership of Richard Brasher, has worked hard to stabilise the business and to deliver on the Group’s short-term strategic objectives. The Group has delivered an improved financial performance in the 2014 year, and while there is still a great deal of hard work ahead and much expected from the senior team, we are encouraged by the progress shown.

The remuneration committee’s threshold target of 18% growth on comparable PBTAE was met in 2014, with the Group achieving PBTAE of R937.2 million (32% growth). The target (55% growth) and stretch (90% growth) targets were not met. As a result, a bonus was agreed to by the remuneration committee for the first time in four years. The quantum of the bonus pool is at the discretion of the remuneration committee and is informed by the overall performance of the Group and the personal performances of the individual senior managers. The directors’ remuneration table here reflects the bonus accrued for the current financial year for executive directors based on 2014 performance.

The remuneration committee will set new and appropriate targets for the 2015 financial year.