Pick n Pay Stores Limited

Remuneration committee report continued

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.

The salient features are summarised below:

Details	Share price   November   2017	Annual   compound   growth   rate	Exercise   price
Eligibility hurdle	R68.03	10%	R42.24
Performance hurdle 1	R84.96	15%	R21.12
Performance hurdle 2	R128.91	25%	R1.00

2. The Forfeitable Share Plan for senior management (FSP)

In line with local and global best practice, Pick n Pay Stores Limited has adopted a new share incentive plan. The Pick n Pay Stores Limited Forfeitable Share Plan (FSP) is aimed at executive directors and key senior management personnel. The FSP was approved by shareholders, with an 80% majority vote, at an extraordinary general meeting held at the Company’s head office on 12 February 2014.

The FSP recognises those key Pick n Pay managers who have a significant role to play in delivering Group strategy and ensuring the growth and sustainability of the business in the future.

The award of shares under the share plan recognises the valuable contribution of senior management and through the attachment of performance conditions incentivises management to deliver earnings growth in the future. An award of shares may also be used to attract talented prospective employees.

An important feature of the FSP is that before employees are eligible to participate, they must first meet their individual key performance indicators, as set out in the strategic business plan. This will ensure that employees are appropriately and fairly recognised and rewarded for performance delivery. Therefore, if an employee does not meet his or her performance targets and does not participate in the short-term incentive bonus scheme, the participant will not be eligible for forfeitable shares.

Regular annual awards will be made on a consistent basis to ensure long-term shareholder value creation, while always first considering the overall affordability of the plan for the Group and its benefit for shareholders. The remuneration committee will award the shares to participants. The actual number of shares awarded will take into account recognised market benchmarks, as well as each participant’s individual performance, annual salary, employment grade and other relevant retention and attraction requirements.

Forfeitable shares are performance shares. Shares awarded under the FSP will always have performance conditions attached. If the performance conditions are not met within the specified time period (the vesting period), the employee will forfeit the shares.

The remuneration committee will determine appropriate performance conditions and vesting periods for each individual award of shares, taking into account the current business environment and market best practice at the time of making the award. The performance conditions will be linked to the financial performance of the Group, with headline earnings per share (HEPS) currently being the preferred performance measure. Pick n Pay believes that this is the most appropriate performance measure against which to judge the performance of its management team, because executive performance and successful execution of strategy has a direct impact on the earnings of the Group. However, the remuneration committee will review and determine appropriate performance measures for each award under the FSP.

Performance conditions are applied on a rising scale, allowing for the vesting of an increasing number of shares, as earnings thresholds are met and exceeded.

The first issue of shares under the FSP will be awarded under the following performance conditions and vesting scale:

Growth in HEPS   over three years	Number of shares   which vest
Cumulative HEPS growth of < 10% per annum	No shares will vest (all will be forfeited)
Cumulative HEPS growth of 10% per annum	30% of the shares will vest
Cumulative HEPS growth of 12% per annum	65% of the shares will vest
Cumulative HEPS growth of 15% per annum	100% of the shares will vest

It is important to note that the growth thresholds detailed above are after the applicable IFRS 2 expense, which will be charged to the income statement over the vesting term of the forfeitable shares. The scheme is therefore self-funding. The IFRS 2 charge is significant, with the stretch target of 15% HEPS growth per annum equating to a pre-IFRS earnings growth of almost 80% over the three-year period, based on the 2014 financial result.

The FSP will be run at all times with the best interests of the Company and its shareholders in mind. The performance conditions are subject to an overriding condition that Pick n Pay’s return on capital employed (ROCE) must be greater than its weighted average cost of capital (WACC) over the vesting period, before any FSP shares are allowed to vest. This is to ensure that Pick n Pay has generated real return for shareholders before rewarding its management team.

In addition, sound working capital management and strong cash flow is key to the success of the business. As such, no shares will be awarded under the FSP if the business has not generated sufficient cash flow over the year to be able to buy the shares in the market, after meeting all the working capital and investment needs of the business.

The participant becomes the beneficial owner of the forfeitable shares on the date of the award. Beneficial ownership affords the employee full shareholder voting rights and full rights to any dividends declared. The shares will be held by an escrow agent on behalf of the employee during the time of the vesting period and the employee will not be able to dispose of the shares before the vesting date. If the employee leaves the employ of the Group before the completion of the vesting period (other than on normal retirement or death), all shares will be forfeited.

No shares have yet been awarded under the new FSP. The earnings of the 2014 financial year will be used as a base for the plan and it is anticipated that the first awards will be made in June 2014.

The first award of shares (approximately eight million shares) will be funded by a fresh issue of share capital (approximately 1.7% of current share capital), and all subsequent awards will be met through the open-market purchase of shares to avoid any further dilution.

Service contracts

Executive directors and key management are employed in terms of the Group’s standard contract of employment and are not employed under fixed-term contracts. Senior management are required to give a reasonable notice period of their intention to terminate their services, which varies from one to 12 calendar months. The normal retirement age is 60 years, which applies to all executives. Employment contracts do not provide for any exceptional benefits or compensation on the termination of employment.

Certain managers who are considered key in carrying out the Group’s strategy are subject to contractual restraint of trade provisions and discretionary termination payments  ay be made in this regard (restraint of trade payments).