Remuneration Report

The AECI Board and its Remuneration Committee (“the Committee”) present herewith their Remuneration Report setting out information applicable to the Company’s remuneration Policy, Executive remuneration – both fixed and variable – and Directors’ fees. The information provided in this Report has been approved by the Board on the recommendation of the Committee.

AECI’s Executive Remuneration Policy continues to be driven by performance and it rewards Executives for value-add that results in targeted shareholder returns. For this purpose financial performance measures and Executives’ scorecards determine the extent of rewards provided to Executives and Management.

AECI has taken a balanced approach with regard to remuneration ensuring that both the short- and long-term strategic objectives of the Company are incentivised. Short-term performance is measured against net operating profit before tax and headline earnings per share (“HEPS”) and scorecards of key financial and non-financial indicators. Long-term incentives are currently linked to HEPS and share price performances but are proposed to be enhanced by the addition of an element addressing total shareholder return against a comparator group.

With King III applying to financial years commencing after 1 March 2010, the Committee performed a detailed analysis of the extent to which the Company’s Remuneration Report complies with these principles. Following this review, the level of disclosure included in the Remuneration Report has been enhanced and the requirements of the Companies Act have also been incorporated.

The issues covered by this Remuneration Report are:

• a summary of the Company’s remuneration policy, philosophy and strategy;
• the Remuneration Committee and its role;
• key remuneration decisions taken during the 2011 financial year;
• guaranteed remuneration;
• reward strategy – pay mix;
• short-term incentives (“STIs”);
• long-term (share-based) incentives (“LTIs”);
• Executive Committee members’ service contracts; and
• Non-Executive Directors’ compensation.

REMUNERATION POLICY, PHILOSOPHY AND STRATEGY

The AECI remuneration philosophy is to establish fair and equitable reward levels that will attract and retain high calibre Executive Directors, Executive Committee members, Senior Managers and key talent and which will motivate them to develop and implement AECI’s business strategy.

The primary intention of the reward strategy is to enhance shareholder value through focus on, and support of, AECI’s overall strategic goals. Its objectives are to enable the business to recruit highly competent and qualified individuals and to retain high performers.

AECI has an integrated approach to reward strategy, encompassing a balanced design in which all components are aligned to the strategic direction and business-specific value drivers of AECI and fully integrated into other management processes. In this context, AECI is committed to maintaining pay levels on a total cost to employer basis that reflect an individual’s worth to AECI, a Performance Management system that serves both to differentiate individual and/or team performance and incentives that recognise and reward where appropriate both operational performance and strategic performance in a volatile business environment.

The guaranteed package comprises base pay, allowances, retirement and medical aid benefits and is managed in relation to market median, having regard to individual performance against defined objectives. Benefits such as travel allowances and contributions to retirement and medical funds are maintained at market-competitive levels.

STIs are designed to motivate and reward the attainment of short-term objectives for Executive Directors, Executive Committee members and Senior Managers, while LTIs are designed to incentivise the generation of long-term shareholder value.

The current LTI schemes were reviewed in 2011 and a revised scheme will be proposed for approval by shareholders at the Annual General Meeting on 28 May 2012.

THE REMUNERATION COMMITTEE AND ITS ROLE

COMPOSITION

The Committee comprises at least three Non-Executive Directors the majority of whom, including the Chairman, are Independent. Meetings of the Committee are held at least twice a year and additional meetings are held when deemed necessary. The Company Secretary attends all meetings as secretary. The Chief Executive and Chief Financial Officer are invited to attend, when necessary, to discuss the remuneration of Executive Directors and Senior Management. No attendee may participate in any discussion or decision regarding his or her own remuneration. Current members of the Committee, all of whom are Independent Non-Executive Directors, are:

• RMW Dunne (Chairman)
• S Engelbrecht
• F Titi

The Committee complies with the King III Code of Corporate Practice and Conduct and the Board considers its composition to be appropriate in terms of the necessary blend of knowledge, skill and experience of its members.

RESPONSIBILITIES

The responsibilities of the Committee are in accordance with its charter/terms of reference set by the Board and include:

• recommending appropriate levels of remuneration to be paid to the members of the Board of Directors;
• upholding, reviewing and amending if appropriate the Company’s remuneration philosophy and policy with particular reference to the remuneration of Executive Directors and Senior Management;
• ensuring that Executive Directors and Senior Management are fairly rewarded for their individual contributions to the Company’s overall performance, having regard to the interests of stakeholders and the financial condition of the Group;
• approving remuneration packages designed to attract, retain and motivate high-performing Executive Directors and Senior Managers, including but not limited to basic salary, performance-based short- and long-term (and share-based) incentives, pensions and other benefits;
• establishing appropriate criteria to measure the performance of Executive Directors and Senior Managers; and
• reviewing the effectiveness and approving the operation of the Company’s share-based and other incentive schemes.

KEY REMUNERATION DECISIONS TAKEN IN RESPECT OF THE 2011 FINANCIAL YEAR

The Committee discussed the following matters in 2011 and took some key decisions:

• approval of awards under the earnings-per-share-based scheme and the benefit unit scheme;
• review of existing LTIs and motivation to the Board for approval of a revised LTI plan;
• approval of the targets and weighting of the performance measures of the STI plan;
• approval of Executive salary increases;
• approval of the STI payments;
• review and approval of the Company’s Remuneration Report and Policy;
• review and recommendation of Non-Executive Directors’ fees; and
• review of King III principles and alignment of the remuneration approach to best practice guidelines.

ATTENDANCE

The Committee met three times during the year. Attendance at meetings is set out elsewhere.

REMUNERATION REVIEW

In 2010 AECI commissioned PwC South Africa (“PwC”) to review its current schemes for long-term (share-based) incentivisation for comparative purposes. Resulting from this review and its recommendations, Deloitte was requested to assist AECI in the design of an appropriate long-term (share-based) incentive plan which is in line with emerging best practice in South Africa, addresses some of the deficiencies highlighted in PwC’s report, and serves to reward the required attributes of shareholder alignment, retention of key talent and long-term, sustained performance.

GUARANTEED REMUNERATION

AECI is committed to establishing an integrated pay line with pay levels throughout the Group that ensure that it is able to remain competitive, while managing costs.

AECI currently compares itself to the general market as represented in surveys published annually, but also looks to compare itself to appropriate sectoral surveys where such exist. Market surveys are used as a basis for establishing market remuneration information for most positions, including Executives and Senior Managers. Benefits such as travel allowances and contributions to retirement and medical funds are maintained at market-competitive levels.

The guaranteed remuneration packages for Executive Directors, Executive Committee members and Senior Managers are benchmarked against the market median of similar sized companies and industry.

Each role has been evaluated using Deloitte’s Executive Evaluation System (Execeval™). Over and above the role size and complexity, Execeval™ takes the following into consideration:

• skills and knowledge;
• conceptual abilities;
• interpersonal skills;
• job impact;
• problem-solving abilities; and
• decisions and resource control.

The Committee reviewed guaranteed packages for Executive Directors, Executive Committee members and Senior Managers, as recommended by the Chief Executive, taking into consideration market data as provided by the results of Execeval™, individuals’ experience and current levels of performance.

The Committee approved that the target range of the guaranteed package should be between 95% and 105% of the market median. Progressive annual adjustments will be made for incumbents below this target range over the next two years, taking into consideration their performance levels.

To ensure that the component elements of guaranteed packages are aligned across the Group, fringe benefits and allowances like medical aid subsidies and car allowance structures have been standardised for the Executive Committee and for Senior Managers.

Details of the basic salary and guaranteed packages (basic salary plus benefits) paid to each of the Executive Directors and Prescribed Officers in 2011 are set out on in note 31 of the Integrated Report.

King III recommends that the remuneration of the top three earners who are not Directors should be disclosed. This recommendation has in effect been incorporated into the Act with the Prescribed Officers’ disclosure. The latter has been included in note 31. For this reason no further disclosure has been made in addition to that prescribed in the Act.

The increases applicable to the guaranteed packages which will be applicable with effect from 1 January 2012 were in the range of 6% to 7,5% for Executives, except where there had been changes in responsibilities. The remainder of the employees in South Africa generally received average increases in line with this, but slightly higher increases on average were awarded at the lower levels.

REWARD STRATEGY – PAY MIX

AECI is moving towards a pay mix Policy that supports the philosophy that the performance-based pay of Senior Executives should form a greater portion of their expected total compensation than guaranteed pay and furthermore, that within the performance-based pay of the most Senior Executives the orientation should be towards rewarding long-term sustainable performance (through long-term and/or share-based incentives), more so than operational performance (through annual cash incentives).

The mix of fixed and variable pay is thus designed to meet AECI’s operational needs and strategic objectives, based on targets that are stretching, verifiable and relevant. An AECI Standard has been adopted for the Group, while recognising that the different nature of its major businesses requires a differential approach between them and other subsidiary companies.

The pay mix proportionality of the Chief Executive and of a Senior Executive is shown in the schematics below. The term “target reward” used in the schematic is defined as the present value of the future reward outcome of an offer, given the targeted future performance of the Company and/or its share price. It should not be confused with the term “fair value” which is used when establishing the accounting cost for reflection in a company’s financial statements. Neither should it be confused with the term “face value” which is used to define the current value of the underlying unit or share at the time of an allocation/award.

ON-TARGET CE REMUNERATION (%)		CE vs SENIOR EXECUTIVE – ACTUAL 2011

It should be borne in mind however, that both on-target reward from annual cash incentives and the target reward from long-term (share-based) incentives will vary in practice from the norms depicted as the result of individual and Company performance and the impact of external factors.

This is illustrated in the schematic (above) which shows the actual proportionality of the Chief Executive and of a Senior Executive in 2011.

The STI scheme is offered to all Executives (including Executive Directors) and all levels of Management. It has two separate components which are measured independently. There are various incentive schemes in place in AECI, tailor-made to specific parts of the Group and its businesses. They incentivise various categories of staff and are reviewed regularly to ensure they remain appropriate.

For Executive Committee members and Senior Managers, the profit element accounts for 75% of the on-target bonus and is determined by actual Group/business entity financial performance relative to predetermined targets. This element is a structured incentive where an incentive pool is created, having both a funding methodology and an allocation methodology.

The predominant scheme for Executives and Senior Management, operating at Group level and, with minor variations in AEL and Heartland, consists of a weighted scorecard of Group and/or business and personal components.

The Group/business financial rating is determined by actual financial performance relative to predetermined targets for trading profit or net profit before tax or HEPS. In Heartland, due to the nature of its business model and the longer-term nature of the property development and realisation cycle, the financial measure is replaced to some extent by an assessment of project progress.

For HEPS, a three year “crawling peg” methodology is used, in which thresholds, targets and doubling points are set from the “base year” for three years ahead, based on targeted growth in relation to inflation plus Gross Domestic Product (“GDP”) applied to the preceding “base year” performance. The doubling point is set at a growth of inflation plus GDP plus 9%. After the third year, the “base year” performance is reset prior to the next three year cycle. The “base year” for the STI cycle is 2010.

The base year uses the previous year’s performance as a starting point and is adjusted for windfall profits or unusual losses and any other adjustments that the Committee may deem necessary to arrive at a fair starting point.

Individual bonuses are capped at 1,5 times guaranteed package. However, under certain circumstances where the profitability targets as well as the growth targets have been significantly exceeded, the Committee may, at its discretion, increase the bonus cap to 2,5 times guaranteed package.

The formulaic element will account for 25% of the on-target bonus and will be based solely on the results of individuals’ scorecards. It is measured on the achievement of personal targets and has no correlation with Group/business entity financial performance.

Three year bonus parameters are set by the Executive Committee for approval by the Remuneration Committee, taking into account growth factors based on South Africa’s Consumer Price Index (“CPI”) and growth in the country’s GDP.

The Group has developed a bonus model for each business entity based on the above principles.

BONUS PARAMETERS

Businesses which grow their earnings substantially above CPI and GDP rates could earn multiple bonus factors. The bonus curve is designed so that significant bonus payments are made only to businesses that exceed their EVA targets.

STIs are calculated as a percentage of annual basic salary and capped at 150% of guaranteed package.

The on-target bonus percentage for the Chief Executive and Executive Committee members is 50% of basic salary and is between 33% and 50% of basic salary for Senior Managers.

In exceptional cases, the Remuneration Committee has the authority to extend the bonus cap to 250% of guaranteed package. This will only occur if there has been exceptional growth in profits and if the EVA and trading profit-sharing targets have been met by the business entity concerned.

The Committee has the full authority to adjust bonuses and/or amend the rules of the scheme at its discretion, taking into account the balance between fair reward for the individual and stakeholders’ interests.

Annual bonus payments made to Executive Directors and Prescribed Officers are disclosed in note 31.

In this context, in the financial year to 31 December 2011:

• Group operating profit increased by 24% to R1 316 million;
• HEPS increased by 25% to 720 cents;
• this represents a total shareholder return of 16,6% for the 2011 year.

Other milestones were completion of the capital phase of a R2 billion strategic investment programme and in January 2012 final approval of two B-BBEE transactions.

The Group’s performance, analysed by segments, is disclosed in note 32.

LONG-TERM (SHARE-BASED) INCENTIVES

Executives and Senior Management in the past participated in a vanilla “share option scheme” approved by shareholders in 2001. An “earnings-per-share-based scheme” was introduced in 2003.

This scheme supplemented the option scheme and linked long-term Executive reward more directly to the actual financial performance of the Company.

In 2005 a cash-settled “benefit unit scheme”, which emulated the performance of share options was adopted essentially to replace the “share option scheme” and to run in parallel with the “earnings-per-share-based scheme”.

Equal offers have been made in both schemes and participants are able to exercise 33% of the units in both schemes on the third, fourth and fifth anniversaries of their offer. All units need to be exercised within a 10 year period from the date of offer.

Offers made to Executive Directors during the 2011 financial year, details of vesting/exercise and a summary of holdings are disclosed in note 31.

These offers will run their course in terms of vesting and exercise but no further offers will be made in either scheme as AECI now intends to replace these two schemes with the AECI 2012 Long-term Incentive Plan (“LTIP”), should shareholder approval be gained.

EXECUTIVE COMMITTEE MEMBERS’ SERVICE CONTRACTS

None of the Executive Directors have extended employment contracts or special termination benefits and there are no restraints of trade in place. Service contracts of Executive Directors and members of the Executive Committee are in accordance with AECI’s standard terms and conditions of employment and their notice period is 30 days.

NON-EXECUTIVE DIRECTORS’ COMPENSATION

TERMS OF APPOINTMENT

Non-Executive Directors’ remuneration is arrived at after an annual benchmarking exercise performed by the Chief Executive and the approval by shareholders at the Annual General Meeting of the proposed compensation. In arriving at the proposed compensation, cognizance is taken of market norms and practices, as well as the additional responsibilities placed on Board members by new legislation and corporate governance principles.

Non-Executive Directors do not have service contracts. The Company does not grant options or shares to Non-Executive Directors. Non-Executive Directors receive an annual fee for their contribution. The annual fee comprises a base retainer fee and where applicable a Committee membership fee plus meeting attendance fees. Hourly fees are also paid to Non-Executive Directors for any ad hoc work that may be required of them.

The Group pays for all travel and accommodation expenses incurred by Directors to attend Board and Committee meetings and visits to Company businesses. No Non-Executive Director has an employment contract with the Company.

Details of the emoluments paid to Non-Executive Directors in 2011 are given in note 31 in the Annual Financial Statements.

PROPOSED INCREASE IN NON-EXECUTIVE DIRECTORS’ FEES

At the Annual General Meeting of shareholders scheduled for 28 May 2012, shareholders will be asked to pass Special Resolutions to take effect from 1 June 2012, approving the proposed changes in Non-Executive Directors’ fees as set out in the Notice of Annual General Meeting.

PROPOSED AECI 2012 LTIP

The purpose of the LTIP is to attract, retain, motivate and reward Executives and Managers who are able to influence the performance of AECI and its subsidiaries on a basis which aligns their interests with those of the Company’s stakeholders. Executives and selected Managers of the Company and its subsidiaries will be offered annually a weighted combination of:

• allocations of earnings growth units; and
• awards of performance shares.

Offers will be governed by AECI’s reward strategy (pay mix) in which, inter alia, the “target reward” of long-term incentivisation is set for defined categories of Executives and Senior Managers.

It is envisaged that the combined, weighted implementation of the two long-term incentive elements will allow AECI to remain competitive in long-term incentives, reward long-term sustainable Company performance, act as a retention tool and ensure that Executives share a significant level of personal risk with the Company’s stakeholders. As previously, some 280 Executives and Managers will participate with a targeted economic cost of some R90 million per annum (2012 money), split 40% earnings growth units, 60% performance shares.

The earnings growth unit element is similar in architecture to AECI’s existing earnings-per-share-based incentive scheme but will be documented more thoroughly to address the provisions of the scheme under conditions of termination, adjustment, change of control and the like, on which the previous scheme documentation was silent.

Annual allocations of earnings growth units will be made to Executives and selected Managers. They will be available to be settled in equal thirds on no earlier than the third, fourth and fifth anniversaries but need not be exercised until the seventh anniversary, at which time they must be exercised or they will lapse.

On settlement, the value accruing to participants will be their share of the full appreciation in AECI’s HEPS, adjusted as deemed appropriate by the Committee.

A performance underpin may, at the discretion of the Board, be stipulated which will take the form of a minimum Company financial performance that must be achieved prior to vesting, notwithstanding the passage of time, and which must be met by at least the seventh anniversary, or all units will lapse.

Earnings growth units will continue to offer a form of earnings growth/appreciation-linked long-term incentive, as in the past, but now at a reduced level in terms of targeted reward, the balance being made by the performance share element described below.

Annual conditional awards of performance shares will be made to Executives. Performance shares will vest on the third anniversary of their award, to the extent that the Company has met specified performance criteria over the intervening period. Essentially the value per share that vests is the full value of the share (there is no strike price), but the number of shares that will vest will depend on whether the Company’s performance over the intervening three year period has been on target, or an under- or an over-performance against the target/s set at the award date.

The Board will dictate the performance criteria for each award. However, for the first award and until further notice for subsequent awards, the methodology of vesting will target the Company’s comparative Total Shareholder Return (“TSR”) in relation to a peer group of 18 companies.

As such, the Company’s TSR is compared to a peer group of companies, selected not because they are direct competitors of AECI, but because they represent a portfolio of companies:

• of similar size to AECI in terms of market capitalisation;
• they are similarly impacted, both negatively and positively, by external factors; and
• they represent essentially a balanced portfolio of alternative investments to an investment in AECI.

Constituents of the comparator group (below left) are ranked by market capitalisation at the time the research was conducted.

If AECI’s TSR over the three year period places it in:

• fourteenth position or worse, then all performance shares awarded will lapse;
• ninth position, the targeted number (one third of the maximum number) of performance shares awarded will vest;
• fourth position or better, then the full maximum number (three times the targeted number) of performance shares awarded will vest; and
• between any of the above points, then a pro rated number of performance shares will vest.

The performance curve (below right) illustrates the above relationships.

The performance share element aligns the interests of stakeholders and Executives closely by rewarding superior shareholder returns and financial performance in the future. Because annual awards are made, each award requiring the resetting of the performance criteria, it is only with the continued and sustained outperformance by the Company that significant reward accrues to participants.

As such, it is envisaged that the awards of performance shares will feature at all Executive and Senior Management levels, but will feature more strongly the higher the participants’ grade within the Group.

COMPARATOR GROUP 1 Barloworld 2 Nampak 3 Aveng 4 Sappi 5 Reunert 6 Illovo 7 Pioneer 8 JD Group 9 Tongaat Hulett 10 Grindrod 11 Altech 12 Omnia 13 Rainbow 14 Astral 15 PPC 16 Northam Platinum 17 Metorex 18 Afrox

VESTING vs POSITIONING wrt COMPARATOR GROUP