Remuneration report 2012

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 growth and shareholder returns. For this purpose financial performance measures and Executives’ scorecards determine the extent of rewards provided to Executives and Managers.

AECI has taken a balanced approach with regard to remuneration ensuring that employees are incentivised to achieve both the short- and long-term strategic objectives of the Company. Short-term performance is measured against net operating profit before tax and headline earnings per share (“HEPS”) and the achievement of key financial and non-financial indicators. Long-term incentives are linked to HEPS and total shareholder returns against a comparator group.

In alignment with the remuneration guidelines of King III, and in compliance with the Companies Act, the issues covered by this remuneration report are:

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 the Company’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 its reward strategy, encompassing a balanced design in which all components are aligned to the strategic direction and business-specific value drivers of the Company 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 the Company, 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 aid 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.

Composition

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

The Committee adheres to King III and the Board considers its composition to be appropriate in terms of the necessary blend of knowledge, skills 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:

Key remuneration decisions taken in respect of the 2012 financial year

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

Attendance

The Committee met five times during the year. Details of meeting dates and attendance are set out in the corporate governance report.

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:

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 such as 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 2012 are set out on in note 31.

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 Companies Act with the Prescribed Officers’ disclosure. The latter has been included in note 31. For this reason no further disclosure has been necessary.

ON-TARGET REWARD: CHIEF EXECUTIVE VS SENIOR EXECUTIVE

The increases in the guaranteed packages, which will be applicable with effect from 1 January 2013, were in the range of 3% to 8% for Executives, except where there had been changes in responsibilities. The remainder of 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 has moved 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 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 differentiated approach between them and other subsidiary companies.

The pay mix proportionality of the Chief Executive and of a Senior Executive is shown in the schematic on the left. 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.

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 a result of individual and Company performance and the impact of external factors.

STIs

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.

Financial component (profit performance-based element)

For Executive Committee members and Senior Managers, the profit element accounts for 75% of the on-target bonus and is determined by actual Company/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 Managers 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 Company/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 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 current STI cycle is 2009. The “base year” for the new three year cycle commencing in 2013 will be 2012.

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.

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.

Personal KPI/company non-financial component (formulaic element)

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 is not dependent on the Group/business entity financial performance.

Bonus parameters

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

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. In exceptional cases, the 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 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.

The Committee has the full discretion to adjust bonuses and/or amend the rules of the scheme as it deems fit, 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, over the past three years, to 31 December 2012:

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

Long-term (share-based) incentives

Executives and Senior Managers 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 or they will lapse.

The AECI 2012 Long-term Incentive Plan (“LTIP”) was approved by shareholders at the Annual General Meeting in May and allocations of earnings growth units and awards of performance shares were approved in November 2012. Awards were offered to Executives and Senior Managers in February 2013 in respect of the 2012 allocation.

AECI 2012 LTIP

The purpose of the 2012 LTIP is to attract, retain, motivate and reward Executives and Senior 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 Senior Managers of the Company and its subsidiaries will be offered annually a weighted combination of:

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 have participated in the LTI. Approximately 342 784 performance shares have been allocated at 7 918 cents and 15 067 761 number of earnings’ growth units have been allocated at 721 cents.

Earnings growth unit element

The earnings growth unit element is similar in architecture to AECI’s previous earnings per share-based incentive scheme but is 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.

Performance share element

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 2012 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:

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

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

The performance curve (below) 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 in the Group.

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.

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 remuneration paid to Non-executive Directors in 2012 are given in note 31.

Proposed increase in Non-executive Directors’ fees

At the Annual General Meeting of shareholders scheduled for 27 May 2013, shareholders will be asked to pass special resolutions to take effect from 1 June 2013, approving the proposed changes in Non-executive Directors’ fees as set out in the Notice of Annual General Meeting.