REMUNERATION REPORT 2014

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 Non-executive 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 is driven by individuals’ performance and comparisons to market benchmarks. Included are compensation, benefits, variable pay and the retention elements of reward. The policy seeks to reward Executives Committee members and Senior Managers who contribute to the achievement of targets for growth and shareholder returns. Accordingly, financial performance measures and KPI scorecards determine the levels of rewards for Executives and Senior Managers.

AECI has taken a balanced approach 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 trading profit 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 return (“TSR”) against a comparator group.

In alignment with the Remuneration Guidelines of King III, and in compliance with the Companies Act, this report is presented in two parts:

Disclosure of AECI’s remuneration philosophy, strategy and policy, including:

governance and the Committee;

key remuneration decisions taken in 2014;

remuneration overview;

reward strategy – pay mix;

guaranteed remuneration;

short-term incentives (“STIs”);

long-term (share-based) incentives (“LTIs”);

Executive Committee members’ service contracts; and

Non-executive Directors’ fees.

Implementation of the remuneration policy in the period under review.

REWARD STRATEGY
REWARD STRATEGY

REMUNERATION PHILOSOPHY, STRATEGY AND POLICY

AECI’s remuneration philosophy is to establish fair and equitable reward levels that will attract and retain high calibre Executive Committee members, Senior Managers and key talent, and will motivate them to develop and implement the Group’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 Group to recruit highly competent and qualified individuals and to retain high performers.

AECI’s reward strategy is balanced so that all components are aligned with the strategic direction and business-specific value drivers of the Company and it is 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 employee’s worth to the Group; a performance management system that serves 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. Growth and development opportunities for employees are identified informally on a day-to-day basis and more formally through the Talent Board process.

The guaranteed package comprises base pay, allowances, retirement and medical aid benefits and is managed in relation to the market median, taking into account individuals’ 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 achievement of short-term objectives for Executive Committee members and Senior Managers, while LTIs are designed to incentivise and reward them through the achievement of long-term shareholder value.

The tables that follow summarise the composition of total remuneration packages in 2014. No material changes to the remuneration philosophy and practices were made during the year, although a number of changes to the variable elements of pay are envisaged for 2015.

THE REMUNERATION COMMITTEE AND ITS ROLE

Composition

The Committee is comprised of 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 Chief Executive, Chief Financial Officer and the Group’s Compensation and Benefits Manager are invited to attend to discuss the remuneration of Executive Committee members and Senior Managers, when required. No attendee may participate in or be present at any discussion or decision regarding his/her own remuneration. Current members of the Committee are:

RMW Dunne (Chairman)

S Engelbrecht

LM Nyhonyha

The Committee operates under terms of reference approved by the Board, complies with King III and the Board considers its composition to be appropriate in terms of the necessary balance of knowledge, skills and experience of its members. The Committee met six times in the year. Details of the meetings and attendance can be found on www.aeci.co.za/gov_directorate_2014.php.

Responsibilities

The responsibilities of the Committee are in accordance with its Board-approved terms of reference and include:

recommending, and submitting to shareholders for approval, appropriate levels of remuneration to be paid to Non-executive Directors;

upholding, reviewing and amending, if appropriate, the Company’s remuneration philosophy and policy with particular reference to the remuneration of Executive Committee members and Senior Managers;

ensuring that Executive Committee members and Senior Managers are rewarded fairly for their individual contributions to the Group’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 Committee members and Senior Managers, including but not limited to basic salary, performance-based short- and long-term (and share-based) incentives, retirement fund contributions and other benefits;

establishing appropriate criteria to measure the performance of Executive Committee members 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 2014 financial year

The Committee considered the following matters and took key decisions as appropriate:

approval of allocation principles, under the 2012 Long-term Incentive Plan (“LTIP”), of earnings-growth units and awards of performance shares, in line with policy;

review of the recommendations regarding the restructuring and conversion of the AECI Pension Fund’s defined-benefit liabilities (see also the Chief Financial Officer’s report;

approval of the targets and weighting of performance measures for the STI plan;

approval of a special recognition bonus for the Modderfontein bulk land sale transaction;

approval of salary increases for Executive Committee members and Senior Managers;

approval of STI payment pools for the Group and individual businesses;

review and approval of the Company’s remuneration policy report; and

review of Non-executive Directors’ fees and the formulation of a recommendation to shareholders for the approval of increases.

EXECUTIVE COMMITTEE MEMBERS’ SERVICE CONTRACTS

Neither of the Executive Directors has special termination benefits and there are no restraints of trade in place. The service contracts of these Directors and other members of the Executive Committee are in accordance with AECI’s standard terms and conditions of employment and their notice period is one month.

NON-EXECUTIVE DIRECTORS’ COMPENSATION

Terms of appointment

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 by the Board. No hourly fees were paid in 2014. An ad hoc Committee was established by the Board in 2013 to oversee the processes and proposals pertaining to the proposed de-risking of AECI’s defined-benefit liabilities. Non-executive Directors Mr RMW Dunne and Mr LM Nyhonyha were appointed to this Committee, which met once in 2014. Both received normal meeting attendance fees for their services in this regard.

Non-executive Directors’ remuneration is arrived at after an annual benchmarking exercise performed by the Chief Executive and the approval by shareholders at the AGM of the proposed compensation, on the Committee’s recommendation. 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.

The Group pays for all travel and accommodation expenses incurred by Directors to attend Board and Committee meetings and visits to Company businesses.

Details of the emoluments paid to Non-executive Directors in 2014 are in note 31.

Proposed increase in Non-executive Directors’ fees

At the AGM scheduled for 1 June 2015 shareholders will be asked to pass special resolutions, to take effect from 1 June 2015, approving the proposed increases in Non-executive Directors’ fees. These increases are 6% on average, except for the Chairman. The higher increase proposed for him was arrived at after a benchmarking exercise, by the Chief Executive, indicated that the Chairman’s fees were not aligned with those of his peers. See the Notice of AGM.

REMUNERATION REVIEW

Guaranteed package

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

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

skills and knowledge;

conceptual abilities;

interpersonal skills;

job impact;

problem-solving abilities;

decision making; and

resource control.

The Committee reviewed guaranteed packages for Executive Committee members and Senior Managers, as recommended by the Chief Executive, taking into consideration market data as provided by the Deloitte Top Executive Remuneration Survey 2014 and 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 70% and 130% of the market median. Progressive annual adjustments will be made for incumbents below this target range over time, 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 Executive Committee members and for Senior Managers.

Details of the basic salary and guaranteed packages (basic salary plus benefits) paid to each of the Executive Directors and other Executive Committee members (the Company’s Prescribed Officers) in 2014 are set out 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.

ON-TARGET PAY MIX (%)   ACTUAL PAY MIX 2013 (%)
ON-TARGET PAY MIX (%)   ACTUAL PAY MIX 2013 (%)

The increases applicable to the guaranteed packages which became effective from 1 January 2015 were in the range of 4% to 8% for Executive Committee members, except where there had been changes in responsibilities. The other 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 Executive Committee members and Senior Managers 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 employees 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 through to that of a Senior Manager is shown in the schematics above and below.

The term “on-target reward” used in the schematic is defined as the present value of the future reward outcome of an offer, given the targeted future financial 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 reward” 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 that both the actual reward from annual cash incentives and the actual reward from long-term (share-based) incentives will vary in practice from the on-target norms depicted as a result of individual and Company performance, and the impact of external factors.

STIs

The STI scheme is offered to members of the Executive Committee and all levels of management. It comprises two separate components which are measured independently. For Executive Committee members and Senior Managers the split is as follows:

a profit element, which accounts for 75% of the on-target reward and is determined by actual Company and or/business entity financial performance relative to predetermined targets;

a formulaic element, which accounts for 25% of the on-target bonus and will be based solely on the results of individuals’ scorecards.

ACTUAL PAY MIX 2014 (%)
ACTUAL PAY MIX 2014 (%)

Financial component (profit performance-based element)

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 Executive Committee members and Senior Managers Group-wide, and with minor variations in AEL, comprises a weighted scorecard of Company and/or business entity performance as well as personal components.

The Company/business financial rating is determined by actual financial performance relative to predetermined targets for HEPS for the Group or trading profit for the individual businesses.

The financial component is based on a three-year “crawling peg” methodology 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 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 was 2012, thus 2014 was the second year of the crawling peg.

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.

The Company’s HEPS base for 2012 was calculated at R6,27 after adjusting for the IFRS 2 accounting treatment in respect of the AECI Community Education and Development Trust established as part of the B-BBEE transactions concluded in 2012.

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 CPI and growth in the country’s GDP.

Bonus parameters

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

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 economic value added (“EVA”) targets.

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

This element is measured on the achievement of personal targets and is not dependent on the financial performance of the Company/Group business.

Personal KPIs typically include aspects such as:

safety and health performance – measured against fatal accidents and the Total Reportable Injury Rate on a linear scale;

cash flow management – measured against improvements in working capital management;

B-BBEE/transformation – measured against specific acquisition, retention, development and governance targets;

implementation of strategic projects – measured against specific projects agreed to by the Board; and

acquisitions and disposals – measured against specific acquisition 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 Group business 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 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, Executive Committee members/Prescribed Officers are disclosed in note 31.

Long-term (share-based) incentives

In the past, Executive Committee members and Senior Managers participated in a vanilla “share option scheme” approved by shareholders in 2001. An earnings per share-based scheme was introduced in 2003.

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.

The AECI 2012 LTIP was approved by shareholders in 2012. In July 2014, awards in terms of the LTIP were made to Executive Committee members and Senior Managers after approval thereof by the Remuneration Committee.

The purpose of the 2012 LTIP is to attract, retain, motivate and reward Executive Committee members 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 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 Executive Committee members share a significant level of personal risk with the Company’s stakeholders. As previously, some 280 senior individuals participated in the LTI scheme in the year. 260 702 performance shares were allocated at R123,55 and 13 833 744 earnings-growth units were allocated at R7,91.

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 Executive Committee members and 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 from the performance share element described below.

Performance share element

Annual conditional awards of performance shares will be made to Executive Committee members and Senior Managers. 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 determine the performance criteria for each award. However, from 2012’s award and until further notice for subsequent awards, the methodology for vesting will target the Company’s comparative TSR in relation to a peer group of 16 companies (see diagram below).

This peer group was selected not because the companies are direct competitors of AECI but because they represent a portfolio of companies that:

are of similar size to AECI in terms of market capitalisation, at the time the peer group was constituted;

are similarly impacted, both negatively and positively, by external factors; and

represent essentially a balanced portfolio of alternative investments to an investment in AECI.

The comparator group companies have significant overlap with the AECI Group in that they operate in the mining, manufacturing, chemicals, food production, logistics and construction sectors.

With regard to the 2012 and 2013 LTI allocations, 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.

AECI PEER GROUP
AECI PEER GROUP

With regard to the 2014 LTI allocation, there are fewer companies in the comparator group as a result of certain of them delisting from the JSE. Therefore the methodology for vesting has been amended and approved by the Remuneration Committee. If AECI’s TSR over the three-year period places it in:

fourteenth position or worse, then all performance shares awarded will lapse;

eighth position, the targeted number (one third of the maximum number) of performance shares awarded will vest;

third 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 share element aligns the interests of stakeholders and AECI’s senior employees closely by rewarding superior shareholder returns and financial performance in the future. Because annual awards are made, and each award requires the resetting of the performance criteria, it is only with the Company’s sustained outperformance that significant reward accrues to participants.

As such it is envisaged that the awards of performance shares will continue to feature for Executive Committee members and Senior Managers, but will feature more strongly the higher a participant’s level in the Group.

The Remuneration Committee believes that these remuneration philosophies, policies and practices will deliver the desired benefits for the AECI Group, its employees and all its stakeholders.

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