Governance, risk and compliance, and remuneration reports
Report on Remuneration
Clover’s Group remuneration Policy (the ”Remuneration Policy”) is aimed at attracting and retaining key, specialist skills in order to generate a return on investment for shareholders that is sustainable in the long term.
Clover’s dynamic remuneration policy is designed to ensure Clover’s ongoing sustainability by balancing the attraction and retention of key or specialist skills with optimised investor returns.
This Report on Remuneration covers the period 1 July 2015 to 30 June 2016 and complies with the recommendations on remuneration contained in the King Report on Governance for South Africa 2009 (King III). This report should be read in conjunction with note 32 to the Annual Financial Statements included in this Integrated Annual Report, which contains various statutory disclosures regarding Clover’s remuneration.
Additional information is available in Clover’s letter of appointment, disciplinary code, ethics policy, employment legislation such as the Labour Relations Act and the Basic Conditions of Employment Act, as well as Clover’s amended short- and long-term incentive scheme rules.
LETTER TO SHAREHOLDERS
Introduction
Finding an optimal balance between retaining and appropriately remunerating key strategic management skills, remains a challenge for corporates.
In the case of Clover, this challenge was further compounded by a number of prevailing issues since listing:
- Perceptions created by legacy share appreciation rights (SARs) that vested following Clover’s capital restructuring as approved by shareholders on 31 May 2010
- Clover’s natural evolution as a publicly listed company and alignment of its traditional performance measures with those applied by the market to value constituents of the sector
- The lack of listed competitors against which to benchmark like-for-like performance
- A short-term approach to value creation by opportunistic market participants.
Despite regulations, industry benchmarking and engaging with our stakeholders, finding the balance between attracting the right calibre leadership to evolve the business and appropriately incentivising them is a stiff challenge.
As discussed in my previous letter to shareholders, Clover’s remuneration policy is ultimately aimed at supporting a strong alignment of management and shareholder interests to generate sustainable and healthy returns on investment, yet without deviating from our focus on maintaining long-term growth objectives.
Managing for long-term growth
Following extensive shareholder engagement on remuneration in 2012, Clover appointed PricewaterhouseCoopers (PWC) to review and benchmark executive emoluments over a 24-month period.
In 2014, subsequent to further shareholder engagement and following the outcome of a PWC benchmarking exercise, Clover introduced new financial performance measures for the long-term incentive plan. These were applicable to executives for the 2015 reporting year.
The substandard outcome of the non-binding approval of Clover’s remuneration policy at the Annual General Meeting (AGM) of shareholders held on 27 November 2015 prompted the Remuneration Committee to re-engage with our shareholders. At this AGM, 58,31% of shareholders approved the remuneration policy, while 41,69% voted it down.
We had robust and candid conversations with Allan Gray, Kagiso, PIC and Clover Milk Producers Trust in an attempt to address their concerns. It should be noted that these shareholders had irreconcilable views.
Bearing these concerns in mind, the Remuneration Committee recommended to the Board that specific targets and measurements should be amended. The salient features of these proposed amendments follows as Annexure A to this letter.
Shareholders should take note that ongoing engagement with key investors will continue subsequent to the publication of this Integrated Annual Report.
The key targets and measurements applied in the year under review are contained here in the remuneration report.
Salary review
In light of the ongoing economic headwinds, increased consumer indebtedness and forecasts of little to no economic growth, Clover has no choice but to pass certain price increases on to consumers. As part of mitigating the resulting impact on volumes, Clover implemented an interim measure with regards to salary increases to support other cost saving initiatives.
Clover’s executive management volunteered for a pay-freeze, considering the weak economy.
As an interim measure, the following salary increases will be applicable for the current financial year:
- F band – voluntary 0% increase
- E band – 0% increase
- D4 and D5 – 3% increase
- D1 to D3 – 4% increase
- C band – 6% increase
- A to B band – 7,5% increase.
Short-term incentive bonuses
Short-term incentive (STI) bonuses were achieved in accordance with applicable individual performance targets and profit targets during the review period.
STI bonuses are self-funded, as all bonuses are budgeted for in full before the Remuneration Committee sets annual profit targets.
Legacy SARs issues and loans to executives
With regard to the challenges around remuneration mentioned above, we can report that all legacy SARs issued have vested and the majority thereof have been settled. Loans to executives, with the exception to one individual, have been repaid. These were linked to Clover’s management participated capital restructuring exercise (MPCRE) as approved by shareholders on 31 May 2010. All aspects of this scheme have vested in full and the major portion thereof have also been settled.
Conclusion
Consumers and producers remain under pressure as a result of downward economic growth forecasts, currency weakness and over-indebtedness. This Remuneration Committee and the Board are of the opinion that Clover’s remuneration policy should continue to incentivise innovative thinking and initiatives that benefit shareholders and provide for Clover’s sustainability. We will continue engaging Clover’s shareholders and management in this regard.
Dr Steve Booysen
Chairman Remuneration Committee
Annexure A – salient highlights of proposed changes to executive remuneration and performance targets, applicable for the financial year ending 30 June 2017
The Remuneration Committee engaged with key shareholders on executive remuneration and performance targets in quarter two of this reporting period.
Following these discussions, the Remuneration Committee recommended to the Board that certain targets and measurements should be amended. The Board duly accepted these recommendations for implementation during the financial year ending 30 June 2017.
The amendments are as follows:
STI workings
Proposed amendments to the Short Term Incentive (STI) placed greater emphasis on group financial performance targets, with a reduced focus on personal performance targets.
STIs are designed to drive annual improvements to Clover's results. These proposed STI workings are to be implemented in the 2017 financial year as listed in the table at the top.
AMENDED STI WORKINGS
| Paterson Band | Group profit % | Individual performance % |
Group profit cap % |
Individual performance cap % |
Max annual entitlement (months base salary) |
||||
| 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016/17 | 2016 | 2017 | |
| Chief Executive | 70 | 70 | 30 | 30 | 171 | 171 | 100 | 18 | 18 |
| Other Executives | 60 | 70 | 40 | 30 | 183 | 171 | 100 | 15 | 15 |
|---|---|---|---|---|---|---|---|---|---|
| E | 50 | 70 | 50 | 30 | 200 | 171 | 100 | 7,5 | 7,5 |
| D3 – D5 | 50 | 66,7 | 50 | 33,3 | 200 | 175 | 100 | 4,5 | 4,5 |
| D1 – D2 | 25 | 50 | 75 | 50 | 200 | 150 | 100 | 2,5 | 2,5 |
| C5 | 33,3 | 33,3 | 66,7 | 66,7 | 200 | 200 | 100 | 2 | 2 |
| Shaded area indicates areas which were reviewed. | |||||||||
For further detail regarding the STI please see here.
LTI workings
The Remuneration Committee proposed the following amendments to the financial component of the Long Term Incentive (LTI) performance conditions:
AMENDED LTI FINANCIAL PERFORMANCE CONDITIONS
| 2015 | 2016 | ||||
|---|---|---|---|---|---|
| Measurement | Weight | Targets | Measurement | Weight | Targets |
| HEPS | 50% | Threshold (30%) = CPI | HEPS | 35% | Threshold (30%) = CPI +4%* |
| Target (65%) = CPI + 2% | Target (65%) = CPI + 6%* | ||||
| Stretch (100%) = CPI +4% | Stretch (100%) = CPI +8%* | ||||
| ROE | 20% | Threshold (30%) = base year | ROE | 35% | Threshold (30%) = base year** |
| Target (65%) = base year + 0,4% | Target (65%) = base year** + 0,4% | ||||
| Stretch (100%) = base year + 0,9% | Stretch (100%) = base year** + 0,9% | ||||
| * Base year – the year in which allocations are made. ** Base year – will be calculated by taking the actual ROE, excluding exceptional items, as at 30 June 2015 (13,5%) and applying a 0,3% annual incremental increase. |
|||||
For further detail regarding the LTI please see here.
The personal performance conditions to remain the same.
SARs allocations
The Committee proposed that the number of SARs allocations per annum may not exceed 1,5% of the issued share capital (previously 2%).
Furthermore, the Committee proposed that allocations must be exercised within five years from the date of allocation (previously seven years). The Share Appreciation Rights Plan has been amended accordingly.
