Remuneration Committee Report

Section A: Report from the Chairman of the Remuneration Committee

Remuneration is an increasingly complex issue, and practices and policies continue to be enhanced. Such practices and policies aim to entrench a high-performance culture across the Group, ensure sustained value creation and align performance and reward with our business philosophies. The achievement of Group, team and individual performance remains central to driving remuneration strategies.

The Remuneration Committee (the committee) has oversight of the Group’s remuneration practices and policies, and is responsible for reviewing, recommending and approving the remuneration for non-executive directors and executive directors of Truworths International, and directors, divisional directors and key executives of principal subsidiaries. The committee periodically reviews the Group’s remuneration strategy to ensure it remains aligned with the objective of enhancing shareholder value and is focused on achieving the following:

• Attracting, engaging, motivating and retaining a high-performing executive team.
• Ensuring that the Chief Executive Officer (CEO) and executive team pursue the long-term sustainable growth and success of the Group.
• Demonstrating a clear relationship between performance and remuneration.
• Ensuring an appropriate balance between guaranteed and variable remuneration, taking into account both the short and long-term objectives of the Group.
• Differentiating pay between higher and average performers through effective performance management and assessment.

The committee comprises independent non-executive directors Rob Dow (Remuneration Committee chairman) and Hilton Saven. The CEO is an invitee to committee meetings and is excused from discussions that relate to his performance and remuneration.

The following activities were undertaken by the committee during the period:

• Reviewed and approved the remuneration of the executive directors of Truworths International, and directors, divisional directors and key executives of principal subsidiaries (collectively referred to as ‘executives’).
• Reviewed and approved the short-term incentive payments to executives for the 2016 financial period.
• Reviewed and approved the short-term incentive targets for the 2017 financial period.
• Based on a benchmarking exercise, reviewed and recommended for approval by shareholders the non-executive directors’ remuneration for the 2017 calendar year.
• Approved the issue of share-based awards in terms of the 2012 share scheme.
• Confirmed that all long-term remuneration allocations and payments were made in accordance with the rules of the long-term incentive schemes.
• Agreed and recommended for approval by the board the performance targets for the relevant share schemes in respect of awards being made in the current reporting period.
• Reviewed and amended the employment contract of the CEO prior to the announcement of his contract extension in 2016.
• Reviewed and recommended for approval to the Office Remuneration Committee the new Office share scheme rules.

The committee ensures that the Group takes cognisance of evolving legislation and remuneration practices through continuous research. In this regard, remuneration governance will continue to evolve and improve as the Group responds to feedback from shareholders and takes account of evolving international best practice and King IV recommendations. The chairman of the committee reports back to the board on all aspects of its work as a standing agenda item at each board meeting.

This report of the committee focuses primarily on the remuneration of the Truworths International executive and non-executive directors.

Rob Dow
Chairman: Remuneration Committee

APPROVAL OF REMUNERATION POLICY AND IMPLEMENTATION REPORT

In terms of the King IV principles and the JSE Listings Requirements, the Group's remuneration policy and implementation report as set out in sections B and C which follow are required to be approved by way of separate advisory non-binding votes at the annual general meeting of the company.

Should 25% of the votes cast be against each or both of such non-binding ordinary resolutions, the company undertakes to engage with shareholders as to the reasons therefor.

Section B: Remuneration policy

Remuneration philosophy and principles

The Group’s remuneration philosophy is aimed at driving a high-performance culture that delivers the Group’s long-term strategy as well as sustainable shareholder returns. This ‘total remuneration’ philosophy underpins the Group’s equitable reward mechanisms. Total remuneration comprises all elements of financial reward, including guaranteed remuneration, short-term incentives and long-term incentives. The combination of financial and non-financial reward elements constitutes ‘total reward’ and supports the holistic employee value proposition.

Remuneration practices are closely linked to the achievement of Group, team and individual performance objectives. The composition of total remuneration is based on the employee’s role and level in the Group and there is a strong and sustainable link between performance, contribution and potential on the one hand, and the rewards received by the employee on the other.

The Group’s reward policy is based on the following:

• Internal equity, which ensures employees are rewarded appropriately in relation to peers.
• External equity, to ensure employees are competitively rewarded in relation to the employment market.
• An appropriate mix of short and long-term incentives to promote sustained high levels of performance and achieve alignment of employee and shareholder interests.
• Alignment of risk and rewards, with remuneration practices and schemes designed to encourage superior medium to long-term performance relative to competitors, while operating within prudent risk parameters to ensure sustainability.

Executive directors’ remuneration structure

Executive directors’ remuneration is determined according to the nature and responsibilities of the executive’s role in relation to market benchmarks and the performance of the individual in relation to Group performance and individual performance targets. Rewarding executive performance through guaranteed and performance-related remuneration is aimed at achieving the following:

• Alignment of the executives’ and shareholders’ interests.
• Promotion of a culture of executive share ownership.
• Promotion of excellence in individual executive performance.
• Retention of executives.

The core principle of the Group’s performance management process is the effective alignment of Group strategic objectives (refer to Group strategy) with individual outputs. Internal and external surveys as well as professional advisers are consulted in determining comparable remuneration practices. The Group utilises external service providers and best practices for continued remuneration benchmarking and for job evaluation. Remuneration is further benchmarked against other JSE-listed retailers and comparable top 40 JSE-listed companies. All data is appropriately aged, and weighted averages, medians and ranges are applied to establish the most appropriate remuneration levels.

The total remuneration mix is determined as follows:

Guaranteed remuneration	Variable and performance-related remuneration
Annual guaranteed remuneration	Short-term performance	Long-term performance
		Retention awards	Performance awards
Total guaranteed package, which can include the following benefits: Travel allowance Retirement benefits Healthcare benefits Group life and disability insurance benefits	Short-term cash-based incentive scheme	Restricted share plan shares Share appreciation rights	Performance share plan shares Performance appreciation rights Office performance equity plan options Office cash-settled phantom option scheme
Total guaranteed package is based on performance, contribution, experience and market value relative to responsibilities within the Group. Benefits are of a compulsory nature but offer flexibility in option choices.	Incentives are based on Group and individual performance criteria, and are only paid if the Group achieves its threshold performance levels.	Long-term share-based incentives are aimed at retention as well as encouraging sustainable shareholder wealth creation.

Guaranteed remuneration

Guaranteed remuneration is determined in relation to employment market norms. The Group conducts annual benchmarking against comparable JSE-listed companies and also utilises the services of professional advisers to conduct external surveys with the aim of maintaining guaranteed remuneration at the median market level. The Group further deploys a process of job profiling and evaluation to ensure consistency in the evaluation and sizing of roles, thereby ensuring the correct benchmarking of guaranteed remuneration levels.

A combination of performance and market remuneration positioning is utilised to adjust guaranteed remuneration levels annually. Adjustments to guaranteed remuneration outside of the annual review process are done on an exceptional basis and linked to changes in responsibility level.

Incentives

The performance of executive directors is reviewed annually by the committee against predetermined financial and non-financial targets to ensure alignment with shareholder interests.

The primary performance indicators on which executive directors are measured include:

• Return on assets (ROA)
• Growth in earnings before interest paid and tax (EBIT)
• Strategic goals

For incentive purposes, Group targets for ROA, EBIT growth and strategic goals are determined by the committee and approved by the board. The ROA target range is disclosed in the Group’s Integrated Report each year, however the EBIT growth target is not disclosed as this is considered by the board to be market and price-sensitive information. However, target ranges for gross profit margin and operating profit margin, two of the key drivers of EBIT growth, are disclosed to shareholders.

Non-financial strategic goals include:

• Response to the affordability regulations in South Africa
• Introduction of Office London into South Africa
• Integration of Office into the Group
• Implementation of a new brand vision for each buying division

The CEO’s performance is further measured with reference to headline earnings growth and maintaining the quality of such earnings, the achievement of long-term strategic goals, including succession planning, and the determination of the overall direction of the business.

Short-term incentives (STIs)

The short-term cash incentive scheme aims to drive performance and retain key talent. Individual performance is measured with reference to a scorecard of metrics to encourage executives to focus on both the financial and non-financial performance targets of the Group.

Financial targets are based primarily on earnings and earnings growth and no short- term incentive is paid to executive directors if the threshold performance measures and the Group’s published financial targets for the year are not achieved (refer to the Chief Financial Officer’s report).

Non-financial targets are based on the long-term strategic goals of the business. The scheme is self-funded and the short-term incentives are only paid if the Group exceeds the financial performance targets after the cost of the incentives is taken into account.

Participation in the scheme is at the discretion of the committee and generally limited to employees whose role and contribution could directly influence the performance of the Group. No portion of any executive director’s short-term incentive is guaranteed. STIs are in the form of cash and the employees must be in service (and not in their notice period) on the date of payment.

There are no deferred STI arrangements as STIs are only paid up to the capped amount. All executive director STIs are approved by the committee.

A short-term incentive of 70% of annual guaranteed earnings in the case of the CEO (45% in the case of other executive directors) is paid on the achievement of an on-target performance level. Short-term incentive payments are capped at a maximum of 130% of guaranteed annual remuneration in the case of the CEO and 80% in the case of other executive directors with a sliding scale between the threshold and the maximum.

Multiple of annual guaranteed earnings for STI purposes	Below threshold	Threshold	On-target	Maximum
CEO	0%	0%	70%	130%
Executive directors	0%	12%	45%	80%

The STI in respect of the 2017 reporting period, determined with reference to Group earnings before interest and tax (EBIT) with the performance hurdles set at 100% of the targeted Group EBIT, only became payable if the threshold EBIT level was achieved after the cost of the incentive was taken into account. Threshold, target and stretch levels were pre-agreed in line with budgeted Group performance. The CEO, CFO and Merchandise director, all of whom are executive members of the board, did not qualify to receive a STI as the threshold targets were not met.

Long-term incentives

Long-term incentive (LTI) schemes are aimed at aligning executive remuneration with shareholder interests by rewarding executives for the creation of shareholder value over the medium-term. The LTI schemes are reviewed regularly to ensure alignment with overall reward as well as with best practice.

The Group operates four share-based LTI schemes in terms of the 2012 share plan and has introduced an additional Office performance equity plan and an Office cash-settled phantom option scheme.

Retention awards	Performance awards
Restricted share plan shares Share appreciation rights	Performance share plan shares Performance appreciation rights Office performance equity plan options Office cash-settled phantom option scheme

The following core principles apply to the Group’s share-based schemes:

• The maximum aggregate allocation resulting from all the schemes is limited to 10% of issued shares at June 2012 over the life of the schemes in terms of the policy, but the committee’s guideline is to keep this below 7.5%.
• Annual allocations are capped at 1.25% of issued shares at June 2012 in any one year and no more than 5% in any five-year period in terms of the policy, but committee guidelines are to limit annual allocations to below 1% in any one year.
• The restricted share plan scheme and share appreciation rights scheme have no performance conditions, and are utilised to support the retention of key executives and employees.
• The performance share plan scheme and performance appreciation rights scheme have performance targets, and are utilised to support and reward good long-term decision-making and financial performance.
• The Office performance equity plan takes the form of options with performance targets and these are utilised to support the retention of and reward key executives and employees involved in Office.
• Office cash-settled phantom options are awarded to support the retention of and reward key executives and employees directly contributing to the achievement of Office’s short, medium and long-term strategic goals.
• Awards can be made across all six schemes and can vest over a period of up to six years.
• Where awards lapse, there is no replacement compensation.
• The committee assesses and approves all Group performance targets to ensure that the interests of all stakeholders are appropriately considered, and financial targets are set as an incentive for employees to perform, and simultaneously for the business to achieve stretch goals.
• All unvested shares and options, as well as unvested and unexercised vested rights are forfeited upon an employee’s resignation or dismissal in terms of the scheme rules.
• Retention-focused long-term incentives awarded to existing executive directors may not make up more than 50% of the total long-term incentive allocations in any particular year. These will only be issued in exceptional circumstances as the intention is for all awards to executive directors to be performance linked.
• Performance-focused long-term incentives issued to executive directors will be subject to corporate performance targets.
• Based on shareholder engagement, financial performance hurdles for long-term incentives have been amended to include ROA, EBIT and non-financial strategic goals. Financial targets make up 70% of the weighting.
• The committee regularly monitors the overall actual and forecast impact of these schemes on Group earnings.
• Loans to employees pursuant to the legacy 1998 share option scheme have been discontinued (historical loans will remain in place until they are repaid in 2020).

Legacy share schemes

The legacy long-term incentive scheme (1998 share option scheme) remains in operation but no further awards are currently planned to be made under this scheme. Potential payments relating to unvested instruments under the 1998 share option scheme as well as the number of instruments issued in terms of this scheme are taken into account in the allocation of shares and options under the
2012 share plan and Office performance equity plan.

Non-executive directors’ remuneration

Non-executive directors receive fixed fees for services rendered as directors and as members of board committees. These fees are based on an assessment of the non-executive directors’ time commitment, responsibilities, skills and experience. All non-executive directors receive the same base board fees, regardless of their length of service. In line with best governance and remuneration practice, non-executive directors may not participate in Group incentive schemes and do not receive any other benefits or performance-related remuneration from the Group. None of the non-executive directors have service contracts with the Group and no consultancy fees were paid to non-executive directors during the period. The remuneration of non-executive directors is reviewed annually by the committee using benchmarks from similar businesses and, in line with best practice, recommendations for increases are made to the shareholders at the AGM for consideration and approval. Fees are determined in advance for a calendar year.

Section C: Application of the remuneration policy of 2017

Guaranteed remuneration

Guaranteed remuneration is reviewed annually with effect from 1 March and is based on a combination of prevailing inflation levels, Group performance, retail market data, internal comparatives, as well as individual performance.

All store employees’ compensation complies with the sectoral determination or statutory requirements and the minimum rates of pay as determined for the retail industry are either met or exceeded.

Short-term incentives

Executives and management participate in the annual short-term incentive scheme. The committee annually reviews and approves any payment allocation made. While the Group’s performance did not meet all the STI targets for the reporting period, the committee decided to pay reduced awards to certain high-performing employees and where individual performance targets were achieved. An amount of R28 million was paid in terms of these short-term incentive payments.

Long-term incentives

Financial performance conditions and targets are determined by the committee. Measuring performance over a longer period ensures a focus on long-term, sustainable growth in shareholder value.

These targets are intended to focus management’s attention on growing revenue, constraining the fixed cost base, making well-reasoned and profitable capital expenditure decisions, and maintaining a healthy and efficient balance sheet structure.

During the period the committee agreed and recommended for approval by the board the performance targets for the relevant share schemes in relation to awards being made in the 2017 reporting period.

The performance measures for awards made to executive directors in November 2016 were based on ROA and EBIT growth with a variable vesting scale from 0% to 150%. These awards were all performance-based with a vesting period of between three and five years.

The rules for the Office equity performance plan and the Office cash-settled phantom option scheme were reviewed and recommended by the committee for approval by the Office Remuneration Committee.

Share scheme allocations in the 2017 financial period

Scheme	Number of participants	Value of awards
Restricted share plan (with no performance targets)	298	R36m
Performance share plan (with performance targets)	27	R17m
Performance appreciation rights plan (with performance targets)	8	R2m
Office performance equity plan and Office cash-settled phantom option scheme	20	£2.5m

Executive directors’ remuneration

	Post-retirement benefits					Long-term benefits
Months paid		Salaries R’000	Performance bonus R’000	Allowances R’000	Pension contributions R’000	Interest benefit on share scheme loans R’000	Total remuneration R’000	Fair value of equity-based awards granted R’000	Loans pursuant to the 1998 share option scheme R’000*
2017
Michael Mark	12	9 100	–	76	–	3 460	12 636	9 658	43 254
David Pfaff	12	4 393	–	8	–	–	4 401	2 430	–
Doug Dare	10	2 986	–	20	–	96	3 102	2 358	1 443
Total		16 479	–	104	–	3 556	20 139	14 446	44 697
2016
Michael Mark	12	8 145	7 963	12	348	3 199	19 667	6 908	43 254
David Pfaff	12	3 814	2 097	18	228	–	6 157	1 982	–
Total		11 959	10 060	30	576	3 199	25 824	8 890	43 254
* No further loans pursuant to the 1998 share option scheme are being granted. Prior loans will remain in place until they are repaid in 2020.

The company does not have any prescribed officers as defined in the Companies Act (71 of 2008, as amended) of South Africa.

Non-executive directors’ remuneration

The total fees paid to non-executive directors in respect of the 2017 financial period are detailed below.

	Total directors’ fees
Months paid		2017 R’000	2016 R’000
Hilton Saven	12	995	878
Rob Dow	12	610	565
Thandi Ndlovu	12	368	337
Michael Thompson	12	723	653
Tony Taylor	12	340	315
Roddy Sparks	12	470	435
Khutso Mampeule	9	253	305
Total		3 759	3 488

The proposed fees of non-executive directors for the 2018 calendar year were benchmarked against fees payable by other JSE-listed companies with a similar profile and are detailed below.

Proposed fees for 12 months to December 2018 R’000		Proposed % increase
Non-executive chairman	925	9
Non-executive director	300	3
Audit Committee chairman	270	6
Audit Committee member	145	7
Remuneration Committee chairman	140	–
Remuneration Committee member	90	6
Risk Committee member (non-executive only)	90	6
Non-executive and Nomination Committee chairman	110	5
Non-executive and Nomination Committee member	65	8
Social and Ethics Committee chairman	65	8
Social and Ethics Committee member (non-executive only)	35	17