Remuneration report

Philosophy

Blue Label's remuneration philosophy is to reward employees and executives in a fair and equitable way in order to attract the best talent and ensure a culture of high performance in the execution and support of Blue Label's business strategy and vision. Rewards are set at levels that are competitive and drive performance in the short and long term, ensuring alignment with shareholder interests and simultaneously promoting an ethical culture and responsible corporate citizenship. Incentive-based rewards are earned through the attainment of demanding key performance indices and targets, consistent with shareholder growth expectations. We consult our key shareholders on any proposed changes to our remuneration and reward policy with due cognisance given to the non-binding advisory votes at the AGM.

Incentive packages, both short and long term, are aligned with best practice and benchmarked regularly where we aim to be in the top quartile of the peer review group. This review is performed from time to time, utilising the services of third-party consultants. Our goal is to profile Blue Label as an "employer of choice", enabling us to attract and retain the best skills required in a constantly evolving technology landscape, enhancing our ethos of entrepreneurship and innovation.

In the previous year we re-aligned the criteria pertaining to the forfeitable share plan as well as introducing an outperformance bonus for senior executives, further enhancing the alignment of executive remuneration with shareholder interests. The RNC strives to meet all requirements of the JSE and King IV and will take cognisance at the AGM of any vote against the remuneration and reward policy of 25% or more of the votes exercised and will, as a matter of policy, engage where necessary to ascertain the reasons thereof and where legitimate reasonable objections are raised, these will be considered by RNC.

We are pleased to report that at the 2016 AGM, votes in respect of the non-binding advisory vote on endorsement of the Group remuneration policy was 97.73% in favour, 2.24% against and 0.03% abstained.

Governance

The Board has delegated to the Remuneration and Nomination Committee (RNC) the responsibility of determining the remuneration of the Executive Directors and Senior Managers, as well as to approve the allocation of shares under the Group's forfeitable share scheme. The RNC also fulfils the functions of the Nomination Committee.

The RNC consists of three Independent Non-Executive Directors, namely Messrs GD Harlow (Chairman of the RNC), LM Nestadt (Chairman of the Nomination Agenda of the RNC), and JS Mthimunye. The chairpersons respectively report to the Board on deliberations and decisions. The Joint CEOs and the Financial Director may attend meetings of the RNC by invitation, but do not vote on decisions.

With regard to the annual salary review of staff, the Group Head of Human Resources presents recommendations for consideration by the RNC. The RNC formulates its own proposals regarding the fee structure for Non-Executive Directors and the fees payable to members of Board Committees for consideration by the Board and ultimately, for approval by shareholders.

Key duties of the RNC include:

  • ensuring that the Group upholds its entrenched remuneration philosophy;
  • ensuring that the combination of fixed and variable pay is appropriate when benchmarking remuneration levels;
  • reviewing incentive schemes aligned to growth in shareholder value;
  • reviewing incentive schemes to ensure that they are administered and implemented in terms of their rules and performance targets;
  • reviewing remuneration of Executive Directors and Senior Management;
  • submitting recommendations to the Board with regard to non-executive remuneration for ultimate approval by shareholders;
  • managing stakeholder relations and expectations, as deemed appropriate on remuneration matters;
  • ensuring that the Group continues to progress with race and gender diversity on the Board and committees; and
  • ensuring that the Group has implemented succession planning at both top level management and subsidiary management level.

In the course of deliberations, the RNC considers the views of the Joint CEOs on the remuneration and performance of other Executive Directors and Senior Management.

From time to time, independent advice on market information and remuneration trends is provided to the RNC by external remuneration consultants. Blue Label's Human Resources Department also assists the committee by providing supporting information and documentation relating to matters for its consideration, including the assessment of proposed changes to legislation, such as determining the employer's responsibility to provide retirement funding for staff. Ad hoc consultations are held with key institutional shareholders for their comment and input.

Additional governance principles applicable to the composition and principal activities of the RNC are fully set out here (Governance Framework – Board Committees).

The Remuneration and Nomination Committee concluded that the remuneration policy has achieved its desired objectives and addresses fair and reasonable remuneration for executive management in the context of employee remuneration.

The Remuneration Committee has the right to exercise its discretion from time to time in the awarding of all incentive bonuses as well as the awarding and vesting of shares pertaining to the forfeitable share scheme. The exercising of this right only occurs in exceptional circumstances in which the committee believes that a change in policy is merited.

REWARD EMPLOYEES IN FAIR AND EQUITABLE WAY

Policy

The remuneration of employees is determined on a total cost-to-company basis, comprising four components:

The table below summarises the remuneration policy and composition for all employees and non-executives

      Fixed remuneration
Base salaries   Non-Executive Directors' fees   Retirement benefits   Other benefits
  Purpose Provides a fixed level of earnings appropriate to the requirements of the role   Remunerates non-executive directors for their Board and Board committees' responsibilities and time commitments   Provides for retirement savings   Provides benefits appropriate to the market and the role
  Application dependent on employee type and level All employees   Non-Executive Directors   All new employees since October 2016 are required to join the Group Provident Fund. This is Employee funded. All existing staff are eligible to contribute towards the provident fund   Employees earning in excess of R6 500 per month are required to belong to the approved medical aid, alternatively they may be a dependant on their spouse's medical aid
  Operational and performance measures

Fixed remuneration is reviewed annually in order to ensure that Executive Directors and Senior Management, who contribute to the success of the Group, remain remunerated at appropriate levels in accordance with the remuneration philosophy

Blue Label applies a discretionary approach in all remuneration reviews and there is no minimum across-the-board increase to all employees. Salary increases for the 2017 financial year ranged from 0% to 6.5% (2016: 0% to 6%). Management of each operating company were granted discretion to apply an appropriate increase, within the stipulated range, to each staff member under their control

  

Non-Executive Directors receive fees for their services on the Board and Board Committees, dependent on their attendance at meetings. Non-Executive Directors do not receive short-term incentives, nor do they participate in the forfeitable share plan or outperformance bonus of the Company.

Historically, increases in Non-Executive Directors' fees were in line with inflation. On assessing comparative fees payable to non-executive directors of listed companies of a similar size as well as the sector in which they are quoted, adjustments have been proposed to ensure that the fees are benchmarked in the upper quartile of the peer review group, in order to ensure retention of our Non-Executive Directors and enable attraction of future directors with the necessary experience and expertise to guide the group in achievement of its strategic goals.

The fees payable to the Chairman and Non-Executive Directors are recommended by the RNC to the Board which, in turn, proposes the fees for approval by the shareholders at the AGM

Non-Executive Directors may be contracted to render services to the Group in addition to the foregoing services from time to time. There were no services contracted with Non-Executive Directors during the year

The proposed annual capped Non-Executive Directors' remuneration for the 2018 financial year is illustrated here and will be adjusted for any non-attendance of meetings.

   The Group Provident Fund is compulsory for all new staff and elective for all existing staff (employed prior to October 2016). The fund is employee funded. The minimum contribution is 5% of pensionable income increasing in increments of 2.5% to a maximum of 27.5%   The Group offers an employer funded Group Life benefit which includes a death benefit, disability benefit, severe illness benefit and a funeral benefit. The Group also acknowledges long service for 5, 10, 15 and more recently 20 years' performance

      Short-term incentives   Long-term incentives
Incentive bonus   Forfeitable share scheme   Outperformance bonus
  Purpose Reward and motivate the achievement of Group and subsidiary financial targets, as well as strategic and personal performance   Reward sustained long-term performance and to align the interests of the Executive Directors and senior managers with those of shareholders   Linked to the annual growth in the share price, with the intention of recognising and rewarding their contribution to the overall performance of the Group
  Application dependent on employee type and level All Executives and senior managers – Performance based

All other employee levels receive a 13th cheque		   All Executives and senior managers   Executives and identified Key Senior Management
  Operational and performance measures

Executives and senior managers:
An annual incentive bonus structure which is based on the achievement of short-term performance targets and is measured against the achievement of financial (80% weighting) and non-financial (20% weighting) metrics

The Joint CEOs may earn a maximum annual incentive bonus of up to 120% and the Financial Director of up to 70% of annualised fixed remuneration. Senior Management may earn up to 50% of their annualised fixed remuneration

For senior managers the financial (80%) metrics are further split between the performance of the subsidiary (60% of the 80%) and on Group performance (20% of the 80%)

The following criteria will be taken into account in determining qualification for the non-financial metrics (20%):

  • the achievement of agreed transformation targets;
  • progress in delivering the Group’s growth strategy;
  • the roll-out of the Group’s transactional footprint; and
  • the rate and level of progress made in respect of organisational development and succession planning, together with the application of leadership qualities, corporate governance best practices and risk mitigation.
   Targets comprise retention and financial measures with the financial measures split between core headline earnings growth and shareholder returns. Allocations have been made for the 2014, 2015 and 2016 share scheme in those relative years. The 2017 share scheme was allocated in September 2017.

The quantum of shares to be awarded is calculated on an annual basis, based on a percentage of the recipient’s annual cost to company, on the following basis:
  • Executive Directors    35%
  • Senior managers       18% or 25%
The financial performance criteria for the forfeitable shares allocated in 2017 to senior managers will be measured on vesting at subsidiary level as opposed to group level that was the case in 2016.

The vesting criteria comprise:
  • retention;
  • growth in core headline earnings per share; and
  • growth in shareholder returns over the three-year vesting period measured with reference to the compounded growth in the weighted average price per share during the month of the commencement of the allocation plus dividends over the three-year period against the weighted average share price for the month during which the vesting takes place.
   This bonus, awarded in shares, is earmarked for Executives and identified Senior Management and will be based on the growth in the share price

The quantum of shares to be awarded will be calculated on an annual basis at the end of each financial year and at the ruling share price at that date. 50% of the award will vest one year later and a further 50% one year thereafter, on the proviso that the recipients remain in the employ of the Company throughout the relative vesting periods
  Vesting Criteria The 80% financial component is based on the achievement of core headline earnings growth in comparison to CPI. This financial element will be earned in the following percentages if core headline earnings per share is:
  Executive
Directors		   Senior
managers		  
  • Less than CPI
 0%   0%  
  • Equal to CPI plus 10% (or Pro-rated as the case may be)
 70% of the 80% at
Group level		   70% of the 60% at subsidiary level; and 70% of the 20% at Group level  
  • Greater than CPI plus 10%
 100% of the 80% at Group level   100% of the 60% at subsidiary level; and 100% of the 20% at Group level  

The 20% non-financial component is based on the achievement of criteria, as mentioned above.		   The vesting criteria for the 2017 share scheme allocation, the measurement period being 1 June 2017 to 31 May 2020 are as follows:
  Executive
Directors		   Senior
managers		  
Retention (3 years from date of award) 33.33%   40%  
Growth in core headline earnings per share:        
  • is 5% above CPI compounded annually over three years, then 20% of the 33.33% / 30% will vest
 6.7%   6.0%  
  • between 5% and 10% above CPI compounded annually over three years, then 70% of the 33.33% / 30% will vest; and
 6.7% to
23.3%		   6% to
21%		  
  • between 10% and 25% above CPI compounded annually over three years, then 100% of the 33.33% / 30% will vest.
 23.3% to
33.33%		   21% to
30%		  
Growth in shareholder return 33.33%   30%  

Refer to note 5.1 in the Group annual financial statements for the vesting criteria on the 2014, 2015 and 2016 schemes.		   The percentage of annual cost to company that can be earned based on the growth in the share price is within the following ranges of share price growth:
  • Below 15% growth
 0%
  • Between 15% and 20% growth
 Pro rata
to 50%
  • 20% or more growth
 50%

Executive Directors' service contracts

The three-year service contracts of the following Executive Directors, which expired on 14 November 2017, have been renegotiated and extended for a further three years:

  • BM Levy
  • MS Levy
  • DA Suntup

BM Levy and MS Levy have agreed to the tenure of their restraint of trade undertakings to endure for a period of 36 months as opposed to 12 months that was conditional in the expired contract. In return for this extension of restraint they will receive a restraint payment of R10 million each, payable in 36 equal monthly instalments commencing on 1 November 2017. These terms have been incorporated in their renewed employment contract.

Executive Directors' composition of total remuneration

The graphs below provide an indication of remuneration outcomes for the executive directors illustrating actual value of package excluding long-term incentives compared to the potential maximum value of package.

Chief Executive Officers – actual value (R’000)   Chief Executive Officers – maximum value (R’000)
Chief Executive Ocers – actual value (R’000)   Chief Executive Ocers – maximum value (R’000)
Financial Director – actual value (R’000)   Financial Director – maximum value (R’000)
Financial Director – actual value (R’000)   Financial Director – maximum value (R’000)

The scenario charts assume:

Guaranteed package – fixed pay and benefits for the year ended 31 May 2017

Short-term incentives – short-term performance-related bonus payments

Outperformance bonus – a bonus in the form of additional share allocations linked to the current growth in the share price

Implementation report

Executive directors’ remuneration for the year ended 31 May 2017:

  Fixed
Remuneration
(salary,
allowances,
retirement
and
other benefits)
R’000		 Short-term
bonus
R’000		 Other
benefits
R’000		 Fair
value of
forfeitable
shares vested
during the
year
R’000		 Total
R’000
For the year ended 31 May 2017
Executive directors
BM Levy 7 973   7 808   160   5 642   21 583  
MS Levy 7 985   7 808   149   5 642   21 584  
DA Suntup 4 159   2 412   149   2 460   9 180  
  20 117   18 028   458   13 744   52 347  

Forfeitable share scheme – granted and unvested

Employees

Directors’ emoluments

  Issue
date		   Issue
price
R		   Vesting
date		   Awards
outstanding
as at the
beginning
of the year		   Number
of shares
awarded		  
Forfeitable share scheme per Director
For the year ended 31 May 2017
BM Levy 2 September 2013   8.75   18 October 2016   271 883   –  
BM Levy 3 September 2014   8.90   31 August 2017   283 339   –  
BM Levy 1 September 2015   10.17   31 August 2018   262 834  
BM Levy 18 October 2016   20.75   31 August 2019   –   137 194  
              818 056   137 194  
MS Levy 2 September 2013   8.75   18 October 2016   271 883   –  
MS Levy 3 September 2014   8.90   31 August 2017   283 339   –  
MS Levy 1 September 2015   10.17   31 August 2018   262 834  
MS Levy 18 October 2016   20.75   31 August 2019   –   137 194  
              818 056   137 194  
DA Suntup 2 September 2013   8.75   18 October 2016   118 540   –  
DA Suntup 3 September 2014   8.90   31 August 2017   150 067   –  
DA Suntup 1 September 2015   10.17   31 August 2018   139 207  
DA Suntup 18 October 2016   20.75   31 August 2019   –   72 663  
              407 814   72 663  

  Awards
forfeited
during
the year		   Awards
vested
during
the year		   Balance
as at the end
of the year		   Fair value at
grant date
R’000		   Fair value at
31 May 2017
R’000		  
*
Forfeitable share scheme per Director
For the year ended 31 May 2017
BM Levy –   -271 883   –   –   –  
BM Levy –   –   283 339   2 522   4 448  
BM Levy –   –   262 834   2 673   4 126  
BM Levy –   –   137 194   2 847   2 154  
  –   -271 883   683 367   8 042   10 728  
MS Levy –   -271 883   –   –   –  
MS Levy –   –   283 339   2 522   4 448  
MS Levy –   –   262 834   2 673   4 126  
MS Levy 137 194   2 847   2 154  
  –   -271 883   683 367   8 042   10 728  
DA Suntup –   -118 540   –   –   –  
DA Suntup –   –   150 067   1 336   2 356  
DA Suntup –   –   139 207   1 416   2 186  
DA Suntup –   –   72 663   1 508   1 141  
  –   -118 540   361 937   4 260   5 683  

* The fair value is based on the closing price of R15.70 at 31 May 2017 and excludes performance criteria.

Short term incentive bonus

For the 2017 financial year, the Group achieved the levels required in terms of its predetermined targets for growth in core headline earnings per share. In addition, the non-financial targets set for the Executive Directors were also achieved. As a result, the Joint CEOs and Financial Director qualified to be paid their short term incentive bonuses. This equated to 120% of the annual salaries for the CEOs and 70% of the annual salary for the Financial Director. In spite of qualifying for these bonuses, as demonstrated in the table below, the remuneration committee, at their mandated discretion, determined that the above bonuses should be limited to 96% of the annual salary in the case of the joint CEOs and 56% of the annual salary in the case of the Financial Director.

Long term incentive plan

The long term incentive plan related to the allocation of shares in 2013, which vested on 18 October 2016. The financial measurement was for the period 1 June 2013 to 31 May 2016.

The retention criteria of 40% was met.

Growth in core headline earnings per share over the three year period equated to 48.46%. Growth in CPI over the three year period accumulated to 17.15%, which after inclusion of the maximum growth target of 25%, equated to 42.15%. As the actual growth amounted to 48.46%, the resultant allocation of 50% was met.

In respect of growth in shareholder returns, the weighted average price per share at commencement of the allocation in September 2013 was R8.75. The required compounded growth of 10% per annum over the vesting period as at 18 October 2016 equated to a targeted share price of R11.65 inclusive of dividends paid totalling R0.83. The qualifying target equated to R10.82 net of dividends. The market price at vesting date was R20.75, thereby exceeding the minimum target requirement.

In line with the criteria being met in all respects, vesting of the 2013 share scheme allocations fell due on 18 October 2016.

Outperformance bonus

For the year ended 31 May 2017, the members of the executive committee did not qualify for an outperformance bonus due to static movement in the share price. The share price as at 31 May 2016 was R15.70 and at 31 May 2017 R15.70.

                 
Performance metric Target   Actual
performance		   Weighting   Executive
Directors		  
Short term incentive bonus
Financial target
Group core headline earnings per share growth greater/equal to CPI + 10%   17%   80%   14 422 000  
Non-financial targets Varies across the Group   Varies across the Group   20%   3 606 000  
Total             18 028 000  
Long term incentive plan (2013 Forfeitable share scheme vested in 2016)
Retention 3 years          
Growth in core HEPS 25% + (cumulative CPI over 3 years) = 42.15%   48.46%   40%
50%		   5 497 200
6 871 500		  
Shareholder returns R10.82 market price per share   R20.75 market price per share   10%   1 375 300  
Total             13 744 000  
Outperformance bonus
Annual growth in the share price R18.84 market price per share   R15.70 market price per share   0%      

Non-executive remuneration

  Directors’
fees
R’000		   Consulting
fees
R’000		   Total
R’000		  
Non-executive directors
LM Nestadt 1 214   –   1 214  
K Ellerine 439   –   439  
G Harlow 1 363   –   1 363  
J Mthimunye 820   –   820  
JS Vilakazi 564   –   564  
P Mahanyele 339   –   339  
Y Mahomed# 303   –   303  
  5 042   –   5 042  

# Resigned 11 January 2017.

The proposed fees payable to Non-Executive Directors are set out below:

  Current fee
2017
R		 Proposed fee
2018
R
Services as Directors        
- Chairman of the Board (per annum) 1 008 404   1 700 000  
- Board members (per meeting) 46 171   –  
- Board members (per annum) –   375 000  
Audit, Risk and Compliance Committee
- Chairman (per meeting) 64 126   –  
- Chairman (per annum) –   340 000  
- Member (per meeting) 38 476   –  
- Member (per annum) 210 000  
Remuneration and Nomination Committee
- Chairman (per meeting) 51 301   –  
- Chairman remuneration (per annum) –   200 000  
- Chairman nomination (per annum) –   140 000  
- Member (per meeting) 30 782   –  
- Member (per annum) –   120 000  
Investment Committee
- Chairman (per meeting) 38 476   –  
- Chairman (per annum) –   200 000  
- Member (per meeting) 23 086   –  
- Member (per annum) –   120 000  
Transformation, Social and Ethics Committee
- Chairman (per meeting) 38 476   -  
- Chairman (per annum) –   120 000  
- Member (per meeting) 23 086   –  
- Member (per annum) –   75 000  
Ad hoc Committee
- Chairman (per meeting) 38 476   45 000  
- Member (per meeting) 23 086   27 000  

The Remuneration and Nomination Committee is satisfied that the remuneration policy has been complied with for the year under review.

GD Harlow
Chairman

23 November 2017