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:
||a summary of the Company’s remuneration policy,
philosophy and strategy;
||the Remuneration Committee and its role;
||key remuneration decisions taken during the
2012 financial year;
||reward strategy – pay mix;
||short-term incentives (“STIs”);
||long-term (share-based) incentives (“LTIs”);
||Executive Committee members’ service
||Non-executive Directors’ compensation.
REMUNERATION POLICY, PHILOSOPHY
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
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
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.
THE COMMITTEE AND ITS ROLE
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:
||RMW Dunne (Chairman)
||LM Nyhonyha (appointed to the Committee
on 1 June)
||F Titi (retired on 28 May)
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.
The responsibilities of the Committee are in
accordance with its charter/terms of reference
set by the Board and include:
||upholding, reviewing and amending, if
appropriate, the Company’s remuneration
philosophy and policy with particular reference
to the remuneration of Executive Directors and
||ensuring that Executive Directors and
Senior Managers 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
||establishing appropriate criteria to measure
the performance of Executive Directors and
||recommending appropriate levels of remuneration
to be paid to the members of the Board of
||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 2012 financial year
The Committee discussed the following matters
and took some key decisions:
||the finalisation of the design of a new long-term
incentive plan (“LTIP”), containing an earnings
growth unit element and a performance share
element, and its successful motivation to, and
approval by, shareholders at the May 2012
Annual General Meeting;
||approval of allocation principles under the LTIP
and, in accordance with policy, of earnings growth
units and awards of performance shares;
||initiated a review of the current pension schemes’
defined-benefit liabilities with a view to converting
to defined-contribution schemes;
||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; and
||review and recommendation to shareholders of
Non-executive Directors’ fees.
The Committee met five times during the year.
Details of meeting dates and attendance are set
out in the corporate governance report.
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
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
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;
||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 such as medical aid
subsidies and car allowance structures have been
standardised for the Executive Committee and for
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
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.
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
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
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
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
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
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.
||Group operating profit increased by 20,5% to
R1 341 million;
||For the purposes of bonus awards, the Committee
makes adjustments to the published HEPS number
to ensure that bonuses are paid on the Group’s
underlying performance. In 2012 the Committee
reversed the effects of the IFRS 2 charges relating
to the B-BBEE transactions and made other minor
adjustments, resulting in the HEPS value for bonus
calculation purposes being determined as 696 cents
This is an increase of 46% compared to the
equivalent HEPS value for 2009, being the base
year for the three-year bonus cycle. This compares
favourably with CPI and GDP over the period.
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:
||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
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:
||of similar size to AECI in terms of market
||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)
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) 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.
|VESTING VS POSITIONING WITH REGARD TO COMPARATOR GROUP
EXECUTIVE COMMITTEE MEMBERS’
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
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.