Remuneration Committee Report

Remuneration policy

Remuneration philosophy and principles

The remuneration philosophy is fully aligned with the Group’s Business Philosophy and aimed at driving a high-performance culture that delivers the Group’s long-term strategic objectives as well as sustainable shareholder returns within the Group’s risk appetite. This ‘total remuneration’ philosophy underpins the Group’s equitable reward mechanisms which are applied across all employee levels in a fair, responsible and transparent manner.

The remuneration objectives are achieved by utilising a total remuneration approach which comprises all elements of financial reward, including guaranteed earnings, 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. For further details on the employee value proposition, refer to the Truworths Human Capital report, the Office Human Capital report and the Social and Environmental Report 2021 on the website at www.truworthsinternational.com.

Remuneration practices are closely linked to the achievement of Group, subsidiary companies, 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 designed to achieve the following objectives:

• Internal equity, which ensures employees are rewarded appropriately in relation to peers as well as an adherence with the principle of equal pay for work of equal value.
• External equity, to ensure employees are rewarded competitively in relation to the employment market.
• Fair and responsible reward management, which ensures that:
• –there is equal opportunity across the Group for growth and development of high-performing individuals who are aligned to the Group’s values and philosophies;
• –performance measurement practices are regularly and consistently applied;
• –remuneration and benefits at all levels are equitable and applied consistently;
• –employees across all levels of the Group are rewarded appropriately based on their performance and contribution; and
• –reward practices promote an ethical culture and responsible corporate citizenship.
• A balanced and appropriate mix of short and long-term incentives to promote sustained high levels of performance and align employee and shareholder interests within the Group’s financial constraints as well as risk appetite. These incentives are regularly reviewed to ensure appropriateness for the current life cycle of the business, the retail industry as well as the breadth and size of the Group.
• Alignment of risk and reward, 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.

Fair and responsible remuneration

Fair and responsible reward management ensures that there is equal opportunity across the Group for growth and development of high-performing individuals aligned to the Group’s values and philosophies. Our well-established performance measurement practices also ensure consistent application to ensure appropriate reward is applied.

Fair and responsibly reward continues to be a key focus area for us. In the prior year we have continued to focus on ensuring that pay aligns to the role, experience and performance levels for all employees across the Group.

In addition to the above, consideration is always given to closing the earnings gap when annual salary reviews are agreed. Although, due to the circumstances of the pandemic and expense management requirements, the annual increases were not as high as they would normally be, we have continued to maintain increases for junior employees at a higher level than that of senior management.

Pay for performance

The below graphic depicts the pay outcomes under the different performance scenarios for both CEO and executive directors.

Linking our variable pay to strategy

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 and individual targets. Rewarding executives through guaranteed and performance-related remuneration is aimed at achieving the following:

• Alignment of executive and shareholder interests
• Promotion of a culture of executive share ownership
• Promotion of excellence in individual executive performance
• Retention of high-performing executives

The core principle of the Group’s performance management process is the effective alignment of Group strategic objectives, which are driven by its Business Philosophy (refer to the Group Strategy report), with individual outputs.

Elements of remuneration

The total remuneration mix is determined as follows:

Benchmarking

The Group utilises external professional service providers, external market surveys and best practices for continued remuneration benchmarking and for job evaluation purposes. Remuneration is further benchmarked against other JSE-listed retailers and comparable JSE-listed companies. All data is appropriately aged, and weighted averages, medians and ranges are applied to establish the most appropriate remuneration levels.

The Group conducts annual remuneration benchmarking of guaranteed and variable pay against comparable JSE-listed companies and also utilises the services of professional advisers to conduct external surveys with the aim of maintaining average guaranteed remuneration at the median market level.

The current JSE-listed retail peers utilised as comparators are:

• Woolworths Holdings
• The Foschini Group
• Mr Price Group
• Pepkor Holdings
• Shoprite Holdings
• Pick n Pay Stores
• The Spar Group
• Massmart Holdings
• Clicks Group
• Cashbuild
• Dis-Chem Pharmacies
• Italtile
• Lewis Group

The selection methodology takes account of both size and performance metrics which include the number of employees, turnover, total assets and earnings before interest paid and tax (EBIT). This methodology supports an objective determination of the comparator group that eliminates bias and the selection of a comparator group that is not disproportionately weak or strong.

Guaranteed remuneration

Guaranteed remuneration is determined in relation to employment market norms. It includes salary, healthcare benefits, retirement benefits, travel allowance, and group life and disability insurance benefits.

To ensure consistency in the evaluation and sizing of employment roles, the Group conducts job profiling and evaluation to ensure the correct match to comparable roles and benchmarking of guaranteed remuneration levels. This is achieved by utilising REMeasure and the REMChannel and Willis Towers Watson databases.

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 made on an exception basis and linked to changes in responsibility level.

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.

Guaranteed remuneration is reviewed annually with effect from 1 March. When agreeing annual salary review levels, consideration is given to expected market movements in terms of salary reviews, Group performance, retail market data, internal comparatives, individual performance as well as the prevailing inflation levels within the economy. Annual salary reviews are merit based and a range of increases are approved based on the employee level of seniority, the market positioning in terms of their compa ratio (which is aimed at the median level), as well as the individual’s performance rating for the prior period. The committee is cognisant of the disparity in levels of executive pay in relation to those of lower-paid employees within the retail industry and therefore due consideration is given to ensuring an appropriate salary increase range is approved to ensure this is addressed over time.

Variable remuneration

The performance of executive directors is reviewed annually by the committee against predetermined financial and non-financial targets to ensure alignment with shareholder interests. Incentive targets for both short and long-term variable pay schemes are selected to discourage behaviour which would be contrary to the Group’s risk appetite. Instead, targets are set with the objective of being challenging, yet realistic within the context of the economic realities of the countries in which we are operating and stage in the business life cycle.

The targets and measures are verifiable and a robust process is applied to both obtaining approval for the determination, as well as when making payment, of short and long-term incentives. The committee has discretion regarding incentive payments to mitigate unintended consequences that may arise from a purely formulaic approach. Discretion will not be used to compensate for unfavourable outcomes.

Short-term incentives

The STI scheme aims to drive performance through appropriate incentivisation in a measurable and sustainable way, thereby rewarding and retaining key talent.

The Group follows a formulaic hybrid approach with regard to structuring the STI, which is a combination of both top-down and bottom-up considerations. This hybrid approach ensures bonuses are firstly linked to the key performance metrics of the business which determine the incentive pool size and, secondly, individual performance metrics which determine the individual’s relative share of the pool. A formulaic approach is used to quantify the incentive pool that is self-funded through the achievement of both financial and non-financial key performance metrics.

The following qualifying criteria apply to participation in the STI scheme:

• Employees must have contributed to the attainment of company targets for at least one quarter of the financial year measured.
• Employees must be performing at the required level at the time of the award in order to qualify.
• Employees must be in service (and not in their resignation notice period or have signalled an intention to give notice of their resignation) on the date of payment.
• Only employees within qualifying roles at the approved Patterson grading level that do not participate in other short-term performance incentive schemes qualify for the STI.

Incentives are based on Group, company and individual performance levels and no short-term incentive is paid to executive directors if the Group’s threshold performance measures for the period are not achieved. The Group metrics as well as threshold, target and stretch levels are determined by the committee prior to the commencement of the financial year. STI targets are shared retrospectively due to their commercially sensitive nature.

Individual performance is measured with reference to a scorecard of metrics to encourage all participants to focus on both the financial and non-financial performance targets that are directly aligned to the participant’s responsibilities.

The quantum of the STI earning potential is based on the guaranteed pay of the relevant employee multiplied by a market-related on-target percentage based on her/his Patterson grade.

No portion of any STI is guaranteed. STI payments are at the discretion of the committee, which must be satisfied that such payments are fair and reasonable. All executive directors’ STI payments are approved by the committee. The achievement of targets is reviewed by the committee before any STI payments are made to executive directors. STIs are in the form of cash and the committee may consider deferral of a portion of the cash incentive paid.

As a result of the review undertaken to ensure alignment of incentive allocation percentages with market best practice, the STI payment level for executive directors was amended. This policy amendment takes effect from the 2022 financial year. The CEO STI payment level was found to be in line with market practice and therefore remains unchanged. The table below indicates the threshold, on-target and stretch STI payments as a percentage of guaranteed pay. These may be further adjusted based on the individual performance score achieved, and STIs are capped at 150% of guaranteed pay.

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 to longer term. The LTI schemes are reviewed regularly to ensure alignment with relevant legislation, other governing rules and standards, appropriate market benchmarks and best practice.

The Group operates five share-based LTI schemes, four in terms of the 2012 share plan and one further LTI scheme in terms of the Office performance equity plan:

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

• The maximum aggregate allocation in terms of all the schemes is limited to 5% of the company’s issued shares at June 2012 over the life of the schemes in terms of the policy, being 23 090 501 shares.
• 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 maximum aggregate allocation for any one employee across all schemes is limited to 1% of issued shares at June 2012 over the life of the schemes in terms of the policy, being 4 618 100 shares.
• Annual awards are allocated based on face value of the awards granted. As a result of the variable pay allocation percentages review undertaken to ensure alignment with market best practice, the maximum annual allocations were adjusted and are limited to a maximum of 150% of guaranteed pay for the CEO (previously 130%) and 130% (previously 110%) of guaranteed pay for other executive directors.
• 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 multiple performance targets, and are utilised to support and reward good long-term decision-making and both financial and non-financial performance. Threshold, target and stretch measures are applied to all long-term incentive targets.
• The Office performance equity plan takes the form of options with performance targets and these are utilised to reward and support the retention of key executives and employees of Office only.
• Awards can be made across all five schemes and can vest over a period of up to six years.
• Where awards lapse, there is no replacement compensation.
• No long-term incentive allocation is guaranteed.
• The committee assesses and approves all Group performance targets to ensure that the interests of all stakeholders are appropriately considered, and financial and non-financial targets are set as an incentive for employees to perform, and simultaneously for the business to achieve stretch goals.
• All unvested shares, as well as unvested and unexercised options and vested rights are forfeited upon an employee’s resignation or dismissal in terms of the scheme rules.
• All annual awards made to executive directors are linked to performance conditions as a standard. The long-term incentive plans do make provision for ad-hoc awards to executive directors of retention-focused awards where necessary in exceptional circumstances and these awards cannot exceed 50% of the total annual allocation. Performance-focused long-term incentives issued to executive directors will be subject to corporate performance targets.
• The committee approves the release of dividends to holders of both restricted and performance shares. Dividends paid on performance shares held where performance targets are not yet finalised, are clawed back from participants should performance targets not be met and, therefore, 100% vesting not be achieved.
• The committee regularly monitors the overall actual and forecast impact and costs of these schemes on Group earnings.

In line with the Group’s value of rewarding excellence as well as maintaining a long-term perspective on both the business and employees’ careers, management aims to include all high-performing employees at senior level as well as those key to future succession or with scarce skills in the LTI share plan.

Targets agreed for shares to be awarded in the 2022 financial year with the measurement period being the 2024 financial year are as follows:

Legacy share scheme

The legacy long-term incentive scheme (1998 share option scheme) remains in operation but no further awards have been made in terms of this scheme since 2012 nor are currently planned to be made. The last share options issued under this scheme expire in the 2023 financial year. Potential gains relating to restricted 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 under the 2012 share plan and the Office performance equity plan.

Malus and clawback

The malus and clawback policy is applicable to all variable remuneration awarded to executives and senior managers. The duration of malus provisions is aligned with the duration of the relevant incentive, up to the point of settlement. The duration of clawback provisions is limited to a period of two years from settlement. Any variable remuneration (both STI and LTI) may be reduced or recovered in whole or in part after the occurrence of a trigger event.

The following are determined to constitute trigger events which will result in the malus or clawback provisions being applied:

• An intentional and material misstatement by the employee concerned of the financial results relating to the performance period or employment period in respect of an award, resulting in an adjustment in the audited accounts of a company in the Group.
• The assessment of any performance metric or condition in respect of an award which is based on a material error, or materially inaccurate information.
• The assessment of any performance metric or condition in respect of an award which is based on intentionally misleading information.
• Events or behaviour of the employee or events attributable to an employee which lead to the censure of a company in the Group and as a direct result thereof cause material and ongoing reputational damage to a company in the Group.
• Reasonable evidence of employee action or conduct which amount to employee dishonesty, fraud or gross misconduct.

Employment contracts

There are no contractual obligations at any level to pay special severance amounts or compensation on termination of employment contracts arising from failure or incapacity to perform, or from under-performance against contracted objectives.

There are no contractual obligations at any level to allocate any short or long-term incentives, the only exception being the allocation of restricted shares in lieu of a restraint payment when employees join the Group.

No employment contract terms are affected by, or are linked in any way to, the automatic severing of such contracts as a result of a change in control of the Group. Furthermore, no payments of unvested short or long-term incentives are guaranteed on, or linked to, such a change in control, save that the rights of participants in the 2012 share plan must be accommodated by the board on a fair and reasonable basis on a change of control, and vesting of such rights will, unless the committee decides otherwise, be accelerated if such change of control leads to retrenchment within 24 months of the change in control.

The executive directors’ service agreements are subject to notice periods as follows:

• Michael Mark – six months
• Sarah Proudfoot – six months
• Emanuel Cristaudo – six months

Non-executive directors’ remuneration

Non-executive directors receive fixed fees for services rendered as directors and as members of board committees. 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 do not participate in incentive schemes and do not receive any benefits (other than the discounts applicable to employees in respect of purchases charged to store card accounts) 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 fee structure of non-executive directors is reviewed annually by the committee with due consideration of internal, economic and market factors utilising benchmarks from similar businesses. In line with best practice and to avoid a conflict of interests, the peer group comparators utilised are the same as those utilised for executive director guaranteed remuneration considerations and are aimed at the median (refer to Elements of remuneration). Recommendations for increases are researched and presented by executive management to the committee for consideration, and presented to the shareholders at the AGM for consideration and approval by way of special resolution. Fees are determined in advance for an ensuing calendar year.

The proposed fees for non-executive directors for the 2022 calendar year were benchmarked against fees payable by the peer group companies. Our fees were again found to be substantially below the median for certain committees and adjustments have therefore been recommended to close this gap and move closer to the median and are detailed below.

Short-term incentive outcomes for the 2021 financial period

As detailed in the remuneration policy, the Group follows a formulaic approach which includes company and individual scorecards. This combined approach mitigates against unjustified outcomes, while it ensures that at the same time employees are rewarded for the performance conditions which were met over the financial period.

The STIs in respect of the 2021 reporting period, determined with reference to the Group headline earnings per share (HEPS) threshold, target and stretch levels as well as the successful implementation of strategic projects defined for the period, were pre-agreed. The Group targets were set as follows:

Note: The ‘Exceeded target’ falls between ‘Very Good Performance’ and ‘Excellent Performance’. Based on the outcomes of the individual strategic targets set, a final rating of 135% was achieved overall for strategic targets.

As targets were achieved by the Group, a resultant incentive pool of R82 million was agreed (being 3% of profit before tax) and incentives were approved for payment to all qualifying employees. Executive directors’ STIs were agreed as follows:

~The CEO’s STI is limited to a maximum of 150% of guaranteed pay and was reduced accordingly.

Long-term incentives with a performance period ending during the 2021 financial period

Group financial performance conditions and targets for LTI purposes are determined by the committee. Measuring performance over a longer period ensures a focus on longer-term, sustainable growth in shareholder value.

The committee debated the amendment of the targets for existing in-flight share awards due to the impact of the COVID-19 pandemic on performance. It was, however, agreed that targets would not be amended to take into account any impact of the pandemic on the results.

The committee did, however, review and agreed changes to targets for in-flight shares due to the impact of the adoption of IFRS 16: Leases on the Group’s results, specifically in relation to return on assets (ROA). These amendments per share offer are detailed as follows.

Actual performance against targets was assessed for the performance period ended during the year under review and applied to performance shares allocated in March 2018 (which resulted in a total vesting level of 90%), those allocated in September 2018 (which resulted in a total vesting level of 113.2%) and those allocated in March and June 2019 (which resulted in a total vesting level of 114.9%). Details of the targets for awards made during the 2018 financial year with a performance period that ended at the end of the 2021 financial year as well as vesting achieved are as follows:

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 2021 reporting period.

The performance measures for awards made to executive directors were based on return on assets (ROA), total shareholder return (TSR), HEPS growth, gross profit margin, inventory turn and strategic targets with a variable vesting scale from 0% to 150% with the application of linear vesting between performance measures. These awards were all performance based with a vesting period of between three and five years.

The targets applicable to the performance shares awarded during the 2021 financial year are as follows:

*Medium-term Group targets as published in the 2020 Integrated Report.

Note 1:CPI means the Consumer Price Index as published by Statistics SA.

Note 2:The awards have a vesting period of between three and five years.

Note 3:The vesting period for executive directors’ shares awarded in September 2020 is as follows – for the CEO vesting is four years, with 40% vesting in year three and 60% vesting in year four. For other executive directors, vesting is five years with 30% vesting in year three, 30% vesting in year four and 40% vesting in year five.

Note 4:The vesting period for executive directors’ shares awarded in March 2021 is five years, with 30% vesting in year three, 30% vesting in year four and 40% vesting in year five.

Note 5:The performance measurement takes place at the end of financial year three, being June 2023.

Note 6:No shares vest if performance falls below the 50% vesting target, whilst performance above the maximum 150% vesting target does not increase the vesting percentage above 150%.

These targets were set taking into account the economic environments in which the operating segments of the Group operate and are intended to focus management’s attention on growing revenue, containing the fixed cost base, making well-reasoned and profitable capital expenditure decisions, maintaining a healthy and efficient balance sheet structure, and achieving the deliverables on the non-financial performance measures relating to strategic projects.

The committee applied a 40% weighting to strategic project performance in respect of share awards made this year as an exception, due to the COVID-19 pandemic requiring a number of crucial strategic projects to be delivered to ensure the sustainability of the financial results.

The committee reviewed and resolved to amend the policy relating to the maximum individual allocation of share-based awards and applied this amended policy in respect of the reporting period. The amendment was motivated by a reconsideration of the material reduction in this allocation from 2.4% to 0.5% of the shares in issue at June 2012, brought about the change in the policy in the prior reporting period, and was based on professional advice received and a benchmark study undertaken on comparator JSE-listed companies in the retail sector. In terms of this policy amendment the maximum individual allocation of share-based awards across all schemes has been increased from 0.5% to 1.0% of the shares in issue at June 2012. In resolving to make this policy amendment, the committee noted that the company’s practice, that has been applied since the 2018 reporting period, is to acquire shares for allocations made in terms of the 2012 share plan through the market rather than through a fresh issue of shares, such that allocations do not result in the dilution of shareholders’ existing interests.

Restricted and performance shares were allocated during the period and all shares allocated to executive directors were performance shares (all shares allocated to executive directors since 2017 have had performance conditions attached). No share appreciation rights were allocated during the period.

Long-term incentives awarded during the 2021 financial period

Executive director share scheme allocations in the 2021 financial period:

* David Pfaff was awarded 205 212 PSPs as part of the annual share award, being 108% of guaranteed pay at the time of the award and within the policy limit of 110%. As a result of Mr Pfaff’s resignation the face value of his LTI awards are 155% of his earnings for the eight-month period to the date of his resignation.

# Sarah Proudfoot was awarded 130 294 PSPs as part of the annual share award, being 108% of guaranteed pay at the time of the award and within the policy limit of 110% for executive directors. In addition, and due to her promotion to Deputy Managing Director: Truworths Ltd as well as the additional areas added to her portfolio, she was awarded a further 41 920 PSPs in March 2021.

Total share scheme allocations in the 2021 financial period:

Share instruments awarded to employees and executives, including the above share scheme allocations in the 2021 financial period, (i.e. total share scheme utilisation) constitute 20 540 000 shares, being 4.4% (2020: 3.9%) of total issued shares at June 2012 which is below the policy’s aggregate allocation of 5%. The annual allocation as detailed above is 0.89% of issued shares at June 2012 which is below the committee guideline of 1% in any one year (1.25% in terms of the policy). The maximum aggregate allocation for any one participant is 0.56% of shares in issue at June 2012 (1.0% in terms of the policy).

Executive directors’ remuneration

Please refer to the Group Audited Annual Financial Statements 2021 on the company’s website for further details relating to executive directors’ remuneration and share-based awards. The total annual guaranteed pay, benefits, short-term cash incentives and loans pursuant to the 1998 share scheme in the single-figure remuneration table below have been extracted from note 30.1 of the Group Audited Annual Financial Statements 2021, while the value of long-term incentives and qualifying dividends have been calculated in terms of the requirements of King IV.

Single–figure remuneration table

* Benefits comprise subsistence allowances for local and overseas travel, long-service awards and fringe benefits on life insurance premiums paid.

^ The long-term incentive value is calculated as the sum of:

• Performance share plan shares: For all awards where performance against the company performance targets (CPTs) was measured in the financial period, the five-day volume weighted average price (VWAP) of the company’s share at period-end multiplied by the CPT vesting percentage and the number of awards.

• Performance appreciation rights: For all awards where performance against the CPTs was measured in the financial period, the difference between the five-day VWAP of the share at period-end and the strike price multiplied by the CPT vesting percentage and the number of awards.

# Portion of the dividends received relate to performance shares which have not yet vested and for which performance has still to be measured against agreed targets. Security, in the form of a pledge of the shares in question, for the possibility that a portion of such dividends may have to be repaid if such targets are not achieved, has been provided by the directors to the company.

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

Total awards and cash flow

Notes

• The fair value of restricted shares and performance shares is based on the relevant year-end share price.
• The fair value of appreciation rights is based on the binomial actuarial option pricing model at the relevant year-end.
• All options granted under the legacy 1998 scheme have vested. The fair value of such options is based on the difference between the year-end share price and the option strike price.
• The cash flow on settlement includes share gains made and dividends received during the period.
• All shares allocated to executive directors since 2017 have had performance conditions attached.

Non-executive directors’ remuneration

The total fees paid to non-executive directors in respect of the 2021 and 2020 financial periods are detailed below.

^Appointed as a non-executive director with effect from January 2021 and an executive director and Chief Financial Officer with effect from July 2021.

*Appointed with effect from May 2021.

#Dr Thandi Ndlovu, one of our longest-serving non-executive directors, sadly and tragically passed away on 24 August 2019.