5.
EMPLOYEES
5.1 Equity compensation benefit
 

During the year, 17 636 695 (2019: 5 947 453) forfeitable shares were granted to Executive Directors and qualifying employees (participant). The participant will forfeit the forfeitable shares if he/she ceases to be an employee of an employer company before the vesting date or if the specified performance conditions have not been met, unless otherwise specified by the rules or determined by the Board. In the event that the participant is not in the employ of the Group, or the performance conditions are not met, the shares allocated to the participant will be forfeited and will either be sold on the open market by the escrow agent and the proceeds will be returned to the participating employer, or may be retained by the Group for future awards.

Dividends declared in respect of these forfeitable shares are held in escrow until such time as the performance conditions are met and the shares have vested. Shares forfeited during the vesting period will forfeit any dividends pertaining to such shares. No dividend was declared on 26 September 2019. (No dividend was declared on 21 August 2018.)

The performance condition of Executive Directors/senior managers respectively for the ninth award which vested on 18 November 2019 were as follows:

  • 33.33%/40% for retention (three years from date of award); and
  • 66.67%/60% financial (33.34%/30% for growth in core headline earnings per share and 33.33%/30% based on shareholder returns).

The 33.34% for growth in core headline earnings per share is based on the following achievements:

  • if growth is 5% above CPI compounded annually over three years, then 20% of the 33.33%/30% will vest;
  • if growth is 10% above CPI compounded annually over three years, then an additional 50% (i.e. a total of 70%) of the 33.33%/30% would vest. If growth is between 5% and 10% above CPI over the three years, then the additional 50% will be reduced on a pro-rata basis; and
  • if growth is 25% above CPI compounded annually over three years, then a further 30% (i.e. a total of 100%) of the 33.33%/30% will vest. If growth is between 10% and 25% above CPI over the three years, then the additional 30% will be reduced on a pro-rata basis.

The 33.33%/30% for shareholder return is based on a 10% compounded growth in the share price over the three-year vesting period, measured with reference to 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.

The performance criteria for senior managers will be measured at subsidiary level.

The performance condition for Executive Directors/senior managers respectively for the 10th and 11th award grant vesting on 31 August 2020 and 31 August 2021 respectively are as follows:

  • 33.33%/40% for retention (three years from date of award); and
  • 66.67%/60% financial (33.34%/30% for growth in core headline earnings per share and 33.33%/30% based on shareholder returns).

The 33.34%/30% for growth in core headline earnings per share is based on the following achievements:

  • if growth is 5% above CPI compounded annually over three years, then 20% of the 33.33%/30% will vest;
  • if growth is 10% above CPI compounded annually over three years, then an additional 50% (i.e. a total of 70%) of the 33.33%/30% would vest. If growth is between 5% and 10% above CPI over the three years, then the additional 50% will be reduced on a pro-rata basis; and
  • if growth is 25% above CPI compounded annually over three years, then a further 30% (i.e. a total of 100%) of the 33.33%/30% will vest. If growth is between 10% and 25% above CPI over the three years, then the additional 30% will be reduced on a pro-rata basis.

The 33.33%/30% for shareholder return is based on a 10% compounded growth in the share price over the three-year vesting period, measured with reference to 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.

The performance criteria for senior managers will be measured at subsidiary level.

The performance conditions for the 12th award grant vesting on 31 August 2022 are as follows:

    Group long-term incentive (LTI) financial metrics*
    Threshold   Target   Stretch  
Core HEPS (30%) (compounded cumulatively over three years) Group   CPI + 5%   CPI + 10%   CPI + 15%  
  Payout %   1/3 of 30%   3/3 of 30%   38% of max
Total shareholder return (30%) Group   Greater than or equal to JSE Capped All Share Index   JSE Capped All Share Index Return + CPI + 5% (average not compounded over three years)   JSE Capped All Share Index Return + CPI + 15% (average not compounded over three years)  
  Payout %   1/3 of 30%   3/3 of 30%   38% of max  
Return on capital employed (ROCE)** (20%) Group   ROCE greater than or equal to WACC compounded over three years   ROCE greater than or equal to WACC + 2.5% compounded over three years   ROCE greater than or equal to WACC + 5% compounded over three years  
  Payout %   1/3 of 20%   3/3 of 20%   24% of max  
Environmental, social and governance (ESG)*** (20%) Group   Succession plans for key roles   B-BBEE performance + succession plans for key roles   N/A  
  Payout %   1/3 of 20%   3/3 of 20%   N/A
* The Remuneration Committee may review targets post-FY20. The LTI is calculated per objective. Values awarded will be a weighted average of scores attained versus target and pro-rated as the case may be.
** ROCE is calculated using the following formula:
ROCE = net operating profit (EBIT)/(total equity + net debt). Net debt = total liabilities minus cash.
*** ESG targets may be replaced for Executive Directors with personal strategic objectives.

Critical accounting estimates and assumptions

In determining the number of forfeitable shares that will vest due to performance conditions being met, management assesses the attrition rates of staff based on the grades of staff that have been granted awards as well as the historic staff turnover.

Movements in the number of forfeitable shares outstanding during the year are as follows:

Grant date    Vesting date    Number of 
shares 
  Fair value 
of grant 
R'000 
 
At 31 May 2018    5 262 079    81 342   
8th award    2 245 446    22 836   
9th award    1 206 922    25 044   
10th award    1 809 711    33 462   
Granted during the year    5 947 453    42 584   
11th award    1 September 2018    31 August 2021    5 947 453    42 584   
Shares forfeited during the year    (473 121)   (7 080)  
8th award    (224 545)   (2 284)  
9th award    (88 243)   (1 831)  
10th award    (160 333)   (2 965)  
Shares vested during the year    (2 020 901)   (20 552)  
8th award    31 August 2018    (2 020 901)   (20 552)  
At 31 May 2019    8 715 510    96 294   
9th award    1 118 679    23 213   
10th award    1 649 378    30 497   
11th award    5 947 453    42 584   
                   
Granted during the year    17 636 695    44 974   
12th award    18 November 2019    31 August 2022    17 636 695    44 974   
Shares forfeited during the year    (1 227 578)   (18 435)  
9th award    (628 029)   (13 032)  
10th award    (98 004)   (1 812)  
11th award    (501 545)   (3 591)  
Shares vested during the year    (490 650)   (10 181)  
9th award    18 November 2019    (490 650)   (10 181)  
Shares vested during the year - discontinued operations    (1 263 224)   (10 741)  
10th award    30 April 2020    (149 719)   (2 768)  
11th award    14 February 2020    (455 409)   (3 261)  
11th award    30 April 2020    (658 096)   (4 712)  
At 31 May 2020    23 370 753    101 911   
10th award    1 401 655    25 917   
11th award    4 332 403    31 020   
12th award    17 636 695    44 974   
                   

Refer to note 5.2 for the expense recognised in the income statement relating to the equity compensation benefits.

The fair value of the shares is based on the open market closing price at grant date.

The total number of forfeitable shares issued to Executive Directors during the period is 4 827 626 (2019: 1 135 411).

The share-based payment expense in relation to these Executive Directors is -R0.5 million (2019: -R0.9 million). Refer to note 5.3 for details of awards per Director.