Remuneration structure

Executive directors and employees

The Group structures its remuneration across three broad categories:

• Fixed base salary and benefits
• Short-term variable incentives
• Long-term variable incentives

A balanced mix of fixed base salary and benefits and short-term and long-term variable incentives is intended to meet the following key objectives:

• To ensure employees are fairly awarded for services rendered
• To recognise and reward outstanding individual performance
• To incentivise employees to meet short-term and long-term strategic objectives
• To encourage employees to grow and stay with the Group over the long term

Fixed base salary and benefits

Fixed base salary

Remuneration reflects the relative skill, experience, contribution and performance of the individual. Base salary 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. Remuneration is directly related to annual performance assessments, which are undertaken in April each year. Annual increases in base salary are determined with reference to the scope of the employee’s role, the competence and performance of the employee, the projected consumer price index and comparable increases in the general and retail market.

13th cheque

Paid to qualifying employees in November each year. Variable-time employees3 participate based on the average number of hours worked in a month. Employees must have been in the employ of the Group for at least three months to be eligible. The 13th cheque encourages short-term retention.

Retirement funding

It is a condition of employment that all employees participate in a retirement fund. All employees, including variable-time employees3 , are required to join one of the retirement funds provided by the Group when commencing employment.

The Group contributes up to 16.9% of salary expenditure towards retirement funding, depending on the fund and the terms and conditions of employment.

Medical aid

Medical aid provisions are in place for all full-time1 , part-time2 and variable-time employees3 . The Group provides a number of medical aid schemes and membership is compulsory for all Pick n Pay employees on G-grade and above, unless they are covered by a third-party medical aid. Membership of the medical aids provided is optional for NMBU4 employees. Pick n Pay contributes 50% of the medical aid contributions on behalf of employees.

The Group is committed to furthering the economic empowerment and wellbeing of its employees and as such, the provision of retirement and medical benefits to staff is a key part of remuneration policy.

Car benefit

Employees from D level and above are entitled to a car benefit. Depending on the requirements of their role, it may be in the form of a travel allowance or a company car, including maintenance, fuel and insurance.

Low-interest loans

All employees have access to low-interest loans from the Group. The primary objective of this benefit is to assist our employees 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.

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

For further details please refer to note 15 of the financial statements where employee loans are disclosed.

Leave

Annual leave accumulates from the date of starting employment for all employees and varies between three and four weeks per annum depending on the terms, conditions and length of employment. Variable-time employees3 accumulate leave based on ordinary hours worked. The Group recognises long service with an additional allocation of leave, depending on the terms and conditions of employment, at five-year intervals. The Group also provides family responsibility and religious leave, where applicable.

Variable short-term and long-term incentives

Short-term incentive bonus

The short-term incentive bonus is discretionary and is linked to the achievement of targets linked to profit before tax and exceptional items (PBTAE), as set by the remuneration committee. Please refer to the five-year review for further detail on the calculation of PBTAE. The bonus pool is self-funding and is created after achieving pre-defined targets, inclusive of the value of the incentive. The bonus pool increases in value as threshold, target or stretch targets 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 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. All bonuses paid are subject to approval by the remuneration committee and no bonuses are paid if the threshold target is not met.

The bonus paid to grade C and D employees is reduced by the value of the fixed 13th cheque they received in November.

Other, more frequent, incentive bonuses are paid to qualifying staff at store level, including store and butchery managers. These incentives are linked directly to short-term store performance targets such as turnover, stockholdings, and shrink.

Variable long-term incentives

It is Group policy to maintain a broad share option scheme for all employees. All employees, at all grades, 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 only senior levels) are recognised and that their interests are aligned with those of 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.

The Group operates two share incentive schemes for the benefit of its employees:

• the 1997 Employee Share Option Scheme; and
• the forfeitable share plan (FSP).

Funding of share plans and dilution

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

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 two share schemes are further constrained by an aggregate limit of 5% of issued share capital, of both Pick n Pay Stores Limited and Pick n Pay Holdings Limited RF, in respect of the amount of new shares that can be issued to cover obligations under the employee share schemes. The Group has done so twice in the past:

• an issue of 2.7 million Pick n Pay Stores Limited shares or 0.6% of issued share capital in the 2005 financial year to meet specific share option obligations; and
• the debut allocation of shares under the FSP, in the current financial year, was funded by the issue of 6.9 million Pick n Pay Stores Limited shares, or 1.4% 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, foster trust and loyalty among employees and reward performance. 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. Furthermore, binary shares incentivise senior management to achieve specified performance targets.

Pick n Pay Holdings Limited RF (PWK)

During the 2015 financial year, 3.2 million PWK share options were granted to employees in respect of long service. At year-end 16.6 million PWK share options were held by employees, amounting to 3.1% of shares in issue. Please refer to note 5 of the financial statements for further information.

Long-service share options – no conditions attached

Long-service share options are granted to all long-serving employees at all levels, including full-time1 , part-time2 and variable-time3 employees. Share options are granted on each employee’s five-year service anniversary, with further options granted every five years thereafter. No other service or performance conditions are attached – long-service share options may be taken up immediately on granting.

Pick n Pay Stores Limited (PIK)

During the 2015 financial year, 2.9 million Pick n Pay Stores Limited (PIK) options were issued to management in respect of their progress and performance. At year-end 33.9 million PIK share options were held by employees at year-end, amounting to 6.9% of shares in issue. Please refer to note 5 of the financial statements for further information.

Status share options – service conditions attached

Status share options are granted to employees who attain grade F, 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 of service
• 30% after five years of service
• 30% after seven years of service

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

Performance share options – service conditions attached

Employees on grades C and D may be eligible for performance “top-up” share options, in recognition of their individual performance and valuable contribution to the Group. These options vest in the same manner as status share options.

Retention share options – extended service conditions attached

These share options specifically encourage the retention of key individuals and have varying vesting periods that can be up to 10 years.

A detailed review was done by the remuneration committee of all share options held by executive directors in the interest of achieving fair and balanced reward. As a result, it was agreed to amend the vesting period of performance share options issued to Richard Brasher during November 2012. The vesting period has been adjusted from three equal instalments vesting after three, five and seven years, to one instalment vesting after five years.

Binary share options – service and performance conditions attached

Binary share options are granted to employees on grades A and B. 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.

a. Forfeit of October 2010 binary share option issue during the current financial year

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, with a required employment service period to 23 May 2014.

The salient features of the issue are summarised below:

For the options to vest at full grant price, the 20-day volume-weighted average share price (VWAP) to 23 May 2014 was required to be R65.28 (the eligibility hurdle) or greater. Thereafter, discounted grant prices applied should further performance hurdles be met. Of these binary share options 2.8 million were forfeited prior to vesting date due to termination of service. The PIK 20-day VWAP to 23 May 2014 was R58.02. The eligibility hurdle was not met and all 11.7 million remaining outstanding options were forfeited.

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 VWAP up to 23 May 2016 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:

The initial exercise date of this issue was 23 May 2015. Subsequent to a detailed review by the remuneration committee of all share options held by executive directors, including all the service and performance conditions attached, it was agreed that the terms and conditions of this issue were not in line with those in previous and later allocations. In the interests of achieving fair and balanced reward for executive directors, which provide targets closely aligned with strategic objectives, it was agreed to extend the term of this binary issue to Richard van Rensburg by one year, to 23 May 2016. Richard van Rensburg did not participate in the October 2010 binary issue that was forfeited in May 2014.

c. Binary share option issue to CEO Richard Brasher

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

If the 20-day 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:

In addition to the above, if the 20-day VWAP up to 14 November 2017 is between R105.11 and R128.90 (representing an annual compound growth rate of 20% in the 20-day VWAP share price from grant date), a cash bonus of R10.6 million will be paid.