The future net realisable value of all outstanding share options

2. The forfeitable share plan (FSP)

The FSP recognises those key Pick n Pay employees 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 FSP recognises the valuable contribution of qualifying employees, and through the attachment of performance conditions, incentivises these employees 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 annual individual key performance indicators, as set out in the strategic long-term plan. If an employee does not meet his or her individual performance targets and therefore is not awarded a short-term incentive bonus, the employee will not be eligible to receive an award of forfeitable shares.

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 are held by a Central Securities Depository Participant (CSDP) 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, disability or death), all shares will be forfeited.

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 awards shares to participants. The actual number of shares awarded takes into account recognised market benchmarks, as well as each participant’s individual performance, annual salary, employment grade and other relevant retention and attraction requirements. The performance conditions will be linked to the financial performance of the Group, with headline earnings per share (HEPS) the preferred performance measure. 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.

To ensure the FSP is aligned with the best interests of the Group 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 a real return for shareholders before rewarding its management team.

The debut FSP issuance took place in August 2014 and was funded through a fresh issue of 6.9 million PIK shares (1.4% of issued share capital). The shares are held in a CSDP on behalf of 150 participants.

The following performance conditions apply:

^* The net realisable value of outstanding FSP shares was calculated using the closing share price of R52.82.

Linear vesting applies, with increasing levels of shares vesting in line with increasing levels of growth delivered.

It is important to note that the growth thresholds detailed above are after recognising the applicable IFRS 2 expense, which is charged to the income statement over the vesting term of the forfeitable shares. The scheme is therefore self-funding.

The 2015 financial year includes a charge of R67.3 million in employee costs in respect of the FSP, representing just over six months of straight-line expense. The shares will vest in August 2017 after the completion of a prescribed three-year service period. However, the three-year compound annual growth rate of HEPS (and thus the level of performance condition met) will be known at the time of the publication of the 2017 financial result. The Group delivered growth in headline earnings per share of 28.0% in the 2015 financial year, with a ROCE of 18.3% and a WACC of 9.5%. Please refer to the five-year review for detail on the calculation of both ROCE and WACC.

Regular annual awards will be made on a consistent basis to encourage long-term value creation, while always first considering the overall affordability of the plan for the Group and its benefit for shareholders. A further 1.1 million estimated new shares (0.2% of issued share capital) will be issued during the 2016 financial year to fund FSP obligations.

Service contracts

Executive directors and senior management are employed in terms of the Group’s standard contract of employment and are not employed under fixed-term contracts. Senior management (grades A and B) are required to give a reasonable notice period of their intention to terminate their services, which varies from one to 12 calendar months. The retirement age is 60 years, which applies to all employees. 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 or restraint of trade payments may be made in this regard.

Remuneration structure

Non-executive directors

In respect of non-executive directors, the remuneration committee proposes fees to be paid for the membership of the Board and Board committees. Such fees are market-related, commensurate with the time required for directors to undertake their duties, and must be approved by the Board and shareholders. Approved fees are set for the financial period. Fees are not subject to attendance at meetings as attendance at Board meetings is generally good.

Remuneration is not linked to the performance of the Group or the Group’s share performance. Non-executive directors do not receive performance-related bonuses and are not granted forfeitable shares or share options. The fees for the 2015 financial period were approved by shareholders at the AGM held on 2 June 2014. The proposed fees for the 2016 financial period will be submitted to shareholders for approval at the AGM to be held on 27 July 2015.

When non-executive directors provide additional consultancy services to the Board and its committees the related fees are determined and approved by the remuneration committee on an ad hoc basis, taking into account the nature and scope of the services rendered.

Section two

Implementation of remuneration policy during the 2015 financial year

1. Work performed and decisions taken by remuneration committee

The main items considered and approved by the remuneration committee during the 2015 financial period were as follows:

a. Executive director remuneration benchmarking, including a review of all benefits provided

The remuneration committee, assisted by an independent third party, reviewed the fixed remuneration paid to executive directors, including all benefits, to ensure alignment with the Group’s strategic objectives and best practice in the market. Remuneration paid is considered fair and competitive against market benchmarks and the role and performance of each individual executive director.

b. Reviewing and setting the annual compensation for the CEO

In setting Richard Brasher’s annual base salary at R7.4 million, the remuneration committee considered his extensive experience in the retail industry, which spans almost 30 years, and the success he has had with developing the strategic long-term recovery plan for Pick n Pay and successfully steering the Group through Stage 1 of that plan.

Under Richard’s stewardship, the business has delivered four consecutive reporting periods of strong profit growth and is in a stronger and more stable financial position than it was two years ago. 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, his expertise and his contribution to date.

c. Annual increases in fixed remuneration for executive directors

The increase in total fixed base salary and benefits paid to executive directors is 5.6%, with a base salary average increase of 6.9%, against an average for the Group of 6.0% to 7.0%, excluding employees governed by a labour union agreement (NMBU). The average annual increase for NMBU employees was between 7.0% and 8.0%. Increases are determined after detailed performance reviews undertaken in April each year. Annual increases are determined with reference to the scope of executives’ roles, their performance against key performance indicators, as well as comparable increases in the general and retail market and the projected consumer price index.

d. Determining an appropriate short-term incentive bonus, and the reasonable allocation thereof to executive directors and qualifying employees

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 is remunerated fairly and reasonably, in line with industry benchmarks and shareholder expectation.

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 profit before tax and exceptional items (PBTAE), which is inclusive of the cost of the short-term incentive.

The business has completed Stage 1 of its recovery plan – Stabilising the business – demonstrating a sound improvement in all key underlying financial metrics. The Group delivered growth in PBTAE ahead of the remuneration committee’s threshold level of 12% and its target of 23%, with the Group achieving PBTAE of R1 205.2 million (28.6% growth). The stretch target of 33% was not met. As a result, a bonus was agreed to by the remuneration committee.

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 executive directors’ remuneration tabl reflects the bonus accrued for the current financial year for executive directors based on 2015 performance. The remuneration committee has set new and appropriate targets for the 2016 financial year.

e. Reviewing the Group’s long-term share option incentive scheme, its alignment to long-term strategy and allocations to executive directors

The remuneration committee undertook a detailed review of all the share options held by the executive directors, including all the service and performance conditions attached. The review highlighted that an issue of binary share options to deputy CEO Richard van Rensburg in October 2011 contained share price performance conditions that were not aligned with issues to other executive directors and senior management personnel. In the interests of achieving fair and balanced reward for executive directors, that is closely aligned to strategic objectives, it was agreed to extend the term of this binary issue by one year, from 23 May 2015 to 23 May 2016.

No new share options were granted to executive directors during the year.

f. Reviewing the Group’s new forfeitable share plan – setting appropriate performance conditions and allocating forfeitable shares to executive directors and qualifying senior management

The remuneration committee set the financial performance conditions to be attached to the debut issuance under the Group’s new forfeitable share plan. Further, the committee agreed on the 150 participants and the level at which each would participate, with particular focus on the allocations to executive directors.

g. Reviewing and recommending non-executive directors’ fees for the 2016 financial period, for final approval by shareholders at the AGM

Fees for the current and proposed periods are as follows:

h. Reviewing and recommending to the Board the overall compensation for the Chairman, for final approval by shareholders at the AGM

In setting the Chairman’s proposed annual fee of R3.7 million, the remuneration committee (with Gareth Ackerman recused from discussion) considered the active role he plays in the corporate governance of Pick n Pay and in formulating overarching strategy for the individual companies within the Group. Gareth does not play a day-to-day role in the executive management and administration of the business, but he does make himself available to the executive team in a valuable advisory capacity.

i. Reviewing and approving of the Group’s remuneration policy and report

This report and the recommendations of the remuneration committee have been approved by the Board and will be submitted to shareholders for consideration at the annual general meeting to be held on 27 July 2015.