Pick n Pay Stores Limited

Remuneration committee report continued

Long-term incentive

The Group operates two share incentive schemes for the benefit of its executive directors, senior management and employees:

• The 1997 Employee Share Option Scheme
• The Forfeitable Share Plan (FSP) (approved February 2014 – no awards have been issued yet)

Funding of share plans and dilution

The directors have received shareholder approval to utilise up to 63 892 444 shares of the issued share capital of Pick n Pay Stores Limited (13.3%) and 92 268 590 shares of the issued share capital of Pick n Pay Holdings Limited RF (17.5%) for the purposes of managing the Group’s share schemes.

It is Group policy to maintain a generous share option scheme for all employees. The Group was among the first of our peers to implement a broad employee share scheme and did so long before it became the corporate norm. All employees, at all levels, are rewarded with share options for both long-service and performance. This is an integral part of our remuneration philosophy and ensures that all employees (not just senior management and executives) are recognised, and that their interests are aligned with our shareholders. It gives all our employees the opportunity to acquire shares in the Group, affording them the opportunity for economic upliftment, and encourages employee retention. It is a key differentiator for us against other retail employers in South Africa.

Both the Group’s share schemes fall within the limits detailed above, which means the aggregate of instruments awarded under both schemes cannot exceed the authorised limits.

The Group has always been mindful of preventing the dilution of our shareholders’ interests and as such, it is Group policy to buy shares to cover obligations under the employee share schemes. The two share schemes are further constrained by an aggregate limit of 5% in respect of the amount of new share capital that can be issued to cover obligations under the employee share schemes. It is not standard practice for the Group to issue new share capital to cover its share scheme obligations and has only done so once in the past, with an issue of 2.7 million shares or 0.6% of share capital in the 2005 financial year. The debut issuance under the FSP will be funded by the issue of share capital, but this will not exceed 1.7% of issued share capital.

Please refer to note 5 of the financial statements for further details of the outstanding options and limits available under the schemes.

1. The 1997 Employee Share Option Scheme

The Group operates the 1997 Employee Share Option Scheme (the Scheme) in order to facilitate broad employee share ownership and to foster trust and loyalty among employees. The Scheme incentivises management and employees by providing them with an opportunity to acquire shares in the Group, thereby aligning interests with shareholders and encouraging employee retention.

Pick n Pay Holdings Limited RF (PWK)
Standard share options

Long-service share options – are granted to all permanent employees who have been with the Group for five years and further options are granted every five years thereafter. There are no vesting conditions – long-service share options may be taken up immediately on granting.

During the 2014 financial year 2.2 million PWK share options were granted to employees in respect of long-service. At year-end 15.3 million PWK share options were held by employees, amounting to 2.9% of shares in issue. Please refer to note 5 of the financial statements for further information.

Pick n Pay Stores Limited (PIK)
Standard share options
Status share options – are granted to employees who attain manager grade and further options are granted at each promotion to higher levels of management. In order to encourage employee retention, status shares vest in three instalments (vesting periods) as follows:

• 40% after three years
• 30% after five years
• 30% after seven years

There are no performance conditions attached to these share options. Vesting is only dependent on the employee meeting the service requirement of remaining in the employ of the Group over the specified vesting period. If the employee leaves before the vesting period, unvested share options will lapse.

Retention share options – these share options specifically encourage the retention of key individuals and have longer vesting periods of up to 10 years.

Performance top-up options – senior management may be eligible for a performance “top-up”, as recognition of their valuable contribution to the Group. These options vest in the same manner as status share options.

During the 2014 financial year, 2.6 million standard Pick n Pay Stores Limited (PIK) options were issued to management in respect of their progress and performance. At year-end 50.2 million PIK share options (including binary options that are detailed separately below) were held by employees at year-end, amounting to 10.4% of shares in issue. Please refer to note 5 of the financial statements for further information.

Binary share options (share options with performance conditions)

These are granted to senior management. These three to five year options may only be taken up when prescribed performance conditions linked to the growth of the PIK share price are met. If the conditions are not met, these options are automatically forfeited. Should further performance hurdles be achieved, discounted grant prices may apply.

There are currently three outstanding binary share option issues. The first was issued in October 2010 to senior management, the second in October 2011 to deputy CEO Richard van Rensburg, and the third to CEO Richard Brasher on his appointment in November 2012.

a. October 2010 binary share option issue to senior management

On 23 October 2010, 14.5 million binary share options were issued to 71 participants. The binary share options were issued at a grant price of R41.23. At year-end, 2.8 million binary share options have been forfeited due to termination of service, and 11.7 million options are currently outstanding.

If the 20-day volume weighted average share price (VWAP) up to 23 May 2014 is R65.28 or greater, the options can be exercised at the full grant price of R41.23. Should this 20-day VWAP be less than R65.28, then the options will lapse. Thereafter, if further performance hurdles are met discounted grant prices will apply on exercise.

The salient features are summarised below:

Details	Share price   May   2014	Annual   compound   growth   rate	Exercise   price
Eligibility hurdle	R65.28	12%	R41.23
Performance hurdle 1	R78.87	18%	R20.62
Performance hurdle 2	R97.25	25%	R1.00

b. Binary share option issue to deputy CEO Richard van Rensburg

In October 2011, 400 000 binary share options were issued to deputy CEO Richard van Rensburg. The binary share options were issued at a grant price of R36.55.

If the 20-day volume weighted average share price (VWAP) up to 23 May 2015 is R73.11 or greater, the options can be exercised at the full grant price of R36.55. Should this 20-day VWAP be less than R73.11, then the options will lapse. Thereafter, if further performance hurdles are met, discounted grant prices will apply on exercise.

The salient features are summarised below:

Details	Share price   May   2015	Annual   compound   growth   rate	Exercise   price
Eligibility hurdle	R73.11	20%	R36.55
Performance hurdle 1	R93.07	30%	R18.28
Performance hurdle 2	R121.56	40%	R1.00

c. Binary share option issue to CEO Richard Brasher

In November 2012, 1 000 000 binary share options were issued to CEO Richard Brasher on his appointment as CEO. The binary share options were issued at a grant price of R42.24.

If the 20-day volume weighted average share price (VWAP) up to 14 November 2017 is R68.03 or greater, the options can be exercised at the full grant price of R42.24. Should this 20-day VWAP be less than R68.03, then the options will lapse. Thereafter, if performance hurdles are met discounted grant prices will apply on exercise.