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The Remuneration Committee aims to align the interests of management with those of shareholders in order to support the Group's strategy to deliver sustainable above-average returns to shareholders. It has established a framework of policies, within which it sets the remuneration package for the Group's executive directors and senior executives.
The underlying philosophy of the Remuneration Committee is to set remuneration levels as necessary to attract and retain the best international talent and to provide the potential for upper-quartile earnings when corporate and individual performance justify this.
Key principles of the Remuneration Policy are to:
- Ensure that executive directors and senior managers are suitably rewarded for their contribution to the Group's operating and financial performance;
- Promote a common interest with shareholders;
- Consider the international IT industry, market and country benchmarks;
- Provide performance-linked variable pay and share-based awards aligned with the executive incentive policy;
- Ensure the Group's remuneration is competitive in regions in which the Group operates, particularly the US, Brazil and the UK; and
- Balance long-term and short-term
objectives through three main
elements of remuneration:
- Base salary (executive directors and senior executives also receive retirement and other benefits)
- Short-term incentive - annual bonus plan with performance targets
- Long-term incentive share-based remuneration plan with performance targets.
The base salary provides individuals with a fixed income to reward the job they do. The base salary of executive directors and senior management is subject to annual review by the Remuneration Committee. The committee makes use of external market data relating to comparable international ICT companies, including those based in the US and the UK, and to benchmarking exercises carried out by third-party advisers in determining appropriate levels of base salary. Executive directors and senior executives are entitled to employment benefits determined by the level of base salary including: defined contribution pensions; medical insurance; and death and disability insurance. The Remuneration Committee has determined base salary for executive directors above the median of comparative groups for retention of key, high-calibre personnel.
Short-term incentives: annual bonus plan. All executive directors and senior executives participate in an annual bonus plan based on the achievement of short-term (annual) performance targets. These targets are determined by the Remuneration Committee and primarily comprise measures of corporate performance with a small element of individual objectives congruent with the Group's business strategy. At the end of each financial year, the achievement of the corporate financial targets is measured and the achievement of the personal targets is assessed by the Remuneration Committee.
Long-term incentives: equity-settled share-based incentive schemes for Group employees are in place to encourage and reward superior performance and to align the interests of participants as closely as possible with those of shareholders. The current share-based incentive schemes have been in operation since 2005 and the Remuneration Committee is proposing replacing them with new schemes in FY18 as detailed later in this report. The committee's aim is to refresh the schemes and bring them up to date in terms of best practice without any change to the principles set out in this remuneration policy in terms of alignment of management and shareholder interests.
The metrics by which the long-term incentives are determined are aligned directly with the creation of shareholder value. While long-term incentives are inherently retentive, there are no schemes specifically in place for the sole purpose of retaining key employees.
The Board has set out shareholding guidelines for executive directors whereby a shareholding with market value of twice annual base salary should be built up over the three years from appointment. The share-based remuneration schemes are intended to enable new executive directors to achieve this shareholding guideline and executive directors are not expected to purchase shares in the market if the share-based remuneration schemes do not deliver sufficient shares to meet the guideline shareholdings in the timescale.
The operation of the Group's Remuneration Policy in FY17 is described in the implementation report later in this Remuneration Report together with the Remuneration Committee's changes to be implemented in FY18.
This remuneration policy was put before shareholders for an advisory vote at the Annual General Meeting on 9 September 2016 and received support from 70.7% of shares voted. The remuneration policy will again be put before shareholders for an advisory vote at the 2017 Annual General Meeting.
Remuneration implementation report FY17
Datatec Group base salary and benefits
For FY17, the Remuneration Committee determined that the base salary of the CEO would increase by 6% from the previous year. A new CFO joined in May 2016 with a base salary set in accordance with international benchmarks and approved by the Remuneration Committee.
During the year, the Group contributed an amount of 15% of the executive directors base salaries to their private pension schemes, with the individuals contributing 5% of their salary. The total base salary and value of benefits received by each director is shown in Note 23 to the consolidated annual financial statements.
Datatec Group short-term incentives
The targets set by the Remuneration Committee for the corporate performance element of the annual bonus, constituting 80% of the potential total for the CEO and 60% of the total for the CFO, in FY17 were as follows:
- Underlying EPS – in the Groups budget approved by the Board in March 2016. The budget is aligned with the Groups strategy and therefore achievement of the budget is a critical measure of delivery on the strategy; and
- EBITDA – the target similarly being the budget, but in this case the measure is an absolute indicator of operational achievement rather than a per share earnings figure.
The personal performance element, constituting 20% of the potential bonus for the CEO and 40% for the new CFO in his first year, includes several key performance indicators ("KPIs") for each executive director which are also aligned to the Group's overall strategy. For FY17, the personal KPIs for the CEO, Jens Montanana, were aligned with strategic assessment and business review; Group and subsidiary leadership evolution; and organisational integrity and ethics including promotion of compliance and anti-bribery and corruption policies throughout the Group. For FY17, the personal KPIs for the CFO, Ivan Dittrich, included creating a framework for targeted ROIC reporting and analysis; developing and executing an investor relations plan; reducing liquidity risk and improving liquidity monitoring; and active cost management oversight and intervention.
The on-target bonus level for FY17 remained the same as for FY16, being set at 125% of base salary for the CEO and capped at 200%; and 75% of base salary for the CFO and capped at 120%. The composition of the annual bonuses of the executive directors for the year under review, shown as a percentage of base salary and split by the bonus elements, is shown below.
As none of the corporate performance goals were achieved, the corporate element of the bonus was not earned. The comparative tables showing the composition of the annual bonuses of the executive directors for the previous year are shown below.
The total base salary, bonus and value of benefits received by each director is shown in Note 23 to the consolidated annual financial statements.
Datatec Group long-term incentives
The operation of Datatec's share-based remuneration plans during FY17 is detailed on the following pages. The share plans were originally established in 2005 and were extensively updated and refreshed in 2010 and 2011. The latest version of the plan rules was approved by shareholders at the AGM on 14 September 2011. The schemes are all equity-settled and their earnings dilution effect is included in the diluted EPS figure. The Board has appointed Simon Morris as the Compliance Officer (as defined by section 97 of the Companies Act) for the Datatec share-based remuneration schemes, to be responsible for their administration.
Datatec's subsidiaries also operate a number of cash-settled share-based incentive schemes for their senior employees based on the subsidiary's equity value as determined by annual valuations by independent valuers. These schemes are cash-settled, meaning no Datatec shares or subsidiary shares are transferred to participants on vesting (with the small exception of the Analysys Mason Performance Share Scheme which is partly settled in Analysys Mason shares). None of these subsidiary share schemes has any dilutive effect on EPS as Datatec shares are not involved in their settlement.
All the share-based remuneration schemes operating in the Group generate a charge or credit to the income statement.
The Datatec Limited Share Appreciation Rights Scheme 2005 ("SARs Scheme")
Eligible employees may receive annual grants of Share Appreciation Rights ("SARs"), which are rights to receive shares equal to the value of the difference between the exercise price and the grant price. Eligible employees are executive directors and managers employed in Datatec head office functions. The number of SARs granted is proportional to the base salary of the recipient and awards are approved by the Remuneration Committee. The grant price is the "face value" of a SAR that is taken to be the 30-day volume weighted average Datatec share price on the grant date. In May 2016, participants were granted SARs with a face value in the range 100% to 150% of their annual base salary.
Vesting of the SARs is subject to performance conditions. The duration and specific nature of the performance conditions and performance period are stated in the letter of grant. The condition that was imposed for the grants of SARs in 2016 was that the Datatec share price must increase by 2% per annum above South African inflation (ZAR CPIX) over a three-year performance period in order for the SARs to vest. The SARs will only have any value for participants if Datatec's share price increases over the grant price and the performance condition will ensure the effect of inflation is eliminated.
The condition that was imposed for the grants of SARs in 2016 was that the Datatec share price must increase by 2% per annum above South African consumer price index ("CPI") inflation over a three-year performance period in order for the SARs to vest. For the other 50% of the SARs to vest, underlying EPS (in US cents) must increase by 4% per annum above US CPI inflation over a three-year performance period. Between these two limits, a sliding scale of vesting between 50% and 100% will operate.
During FY17, no SARs awards vested: the May 2011 grant (the last subject to retesting) and May 2013 grants both lapsed having failed the performance condition test in May 2016.
The May 2014 SARs awards lapsed in May 2017 having failed the performance condition based on underlying EPS growth and, accordingly, the 2014 SARs did not vest in May 2017.
After vesting, the SARs become exercisable. Upon exercise by a participant, the Company will settle the value of the difference between the exercise price and the grant price by delivering shares. SARs not exercised within the period specified in the letter of grant, to date seven years from grant in all cases, will lapse. SARs are not entitled to receive any dividends or capital distributions.
The SARs in issue at 28 February 2017 constitute a potential 0.02% (FY16: 0.08%) dilution of the Company's weighted average shares for the year, based on the assumption that new shares will be issued to settle them. The settlement of exercises during the year was made by transferring shares from the Share Incentive Trust. No grants of SARs have vested since the May 2010 grant and at the date of this report there are no vested SARs held by participants available for exercise.
The Datatec Limited Long-Term Incentive Plan 2005 ("LTIP")
Eligible employees, being executive directors and managers employed in Datatec head office functions, receive annual grants of conditional awards. The number of conditional awards granted is proportional to the base salary of the recipient and awards are approved by the Remuneration Committee. The face value of a conditional award is taken to be the 30-day volume weighted Datatec share price on the grant date. In May 2016, recipients were granted conditional awards with a face value in the range 67% to 150% of their base salary. The conditional awards will vest after the performance period if and to the extent that the performance conditions have been satisfied.
The duration and specifics of the performance conditions and performance period are stated in the letter of grant. For all grants made to date, the performance period has been three years. For grants up to May 2015 the performance condition for the LTIP awards related to the Company's total shareholder return ("TSR") over a three-year period, relative to the TSR of an international peer group using a common currency basis. The Remuneration Committee instituted a new performance condition for the May 2016 grant to better align the LTIP with shareholders interests.
For the May 2016 LTIP grant, the Remuneration Committee set performance conditions as follows:
- For half of the grant: the performance condition will be that underlying EPS (in US cents) must increase by 2% per annum above US CPI inflation over a three-year performance period in order for 50% of the grant to vest. For the other 50% of the LTIP conditional awards to vest, underlying EPS (in US cents) must increase by 4% per annum above US CPI inflation over a three-year performance period. Between these two limits, a sliding scale of vesting between 50% and 100% will operate.
- For half of the grant: the performance condition will be that return on invested capital ("ROIC") must be 8% per annum over a three-year performance period in order for 50% of the grant to vest. For the other 50% of the LTIP conditional awards to vest, ROIC must be 12% per annum over a three-year performance period. Between these two limits, a sliding scale of vesting between 50% and 100% will operate.
The performance condition will determine if, and to what extent, the conditional award will vest. Upon vesting of the conditional award, the Company will procure the delivery of shares to settle the vested portion of the award. The conditional awards which do not vest at the end of the three-year performance period will lapse.
The commitment to issue shares under the LTIP for the conditional awards in existence at 28 February 2017 constitutes a potential 0.36% (FY16: 0.00%) dilution of the Company's weighted average shares for the year, based on the assumption that new shares will be issued to settle them.
Vesting of the LTIP conditional awards is also subject to the participant remaining in the employ of the Group for the LTIP minimum employment period. Conditional award holders under the LTIP are not entitled to receive any dividends or capital distributions during the vesting period.
In May 2016, the TSR performance condition for the conditional awards granted under the LTIP in May 2013 (three years previously) was computed by an independent third party and Datatec was found to rank below the median of the TSR of the international peer group. This meant that 0% of the conditional awards vested and accordingly they lapsed. Similarly, in May 2017, the TSR performance condition for the conditional awards granted under the LTIP in May 2014 (three years previously) was computed by an independent third party and Datatec was found to rank below the median of the TSR of the international peer group. This meant that 0% of the conditional awards vested and accordingly they lapsed.
The LTIP rules include a requirement for participants to hold some of the Datatec shares they receive on vesting for a period beyond the
vesting date. Participants will be able to sell sufficient shares immediately to meet the total tax liability on vesting but will then have to retain the remaining shares, 50% for one year and 50% for two years, prior to being able to sell them.
The Datatec Limited Deferred Bonus Plan 2005 ("DBP")
Eligible employees, being the executive directors and Company Secretary, are permitted to use a portion of the after-tax component of their annual bonus to acquire shares (pledged shares). A matching award will be made to the participant after a three-year pledge period, on the condition that the participant remains in the employ of the Company and retains the pledged shares over the period and subject to certain performance conditions. In this context, a matching award means a conditional right to receive shares at no cost to the employee at the end of the three-year pledge period, subject to the employment condition and the performance condition being satisfied. The performance condition in place for the DBP pledged shares purchased in 2014 is such that the number of shares that can be acquired under the matching award is as follows:
- 50% without performance conditions (but with the employment condition)
- A further 50% if EPS increases over the three-year matching period by US CPI +4% per annum giving 100% matching in total
- A further 50% if underlying EPS increases over the three-year matching period by US CPI +8% per annum, giving 150% matching in total.
From the 2015 DBP pledged share purchase onward, the Remuneration Committee has set the performance conditions such that the number of shares that can be acquired under the matching award is as follows:
- 100% without performance conditions (but with the employment condition)
- An additional 50% if underlying EPS increases over the three-year matching period by US CPI +8% per annum, giving 150% matching in total.
The participants must use 20% of their annual bonus for a mandatory purchase of pledged shares and may voluntarily use a further 40% of their annual bonus to purchase additional pledged shares. Awards are approved by the Remuneration Committee.
The participants must use 20% of their annual bonus for a mandatory purchase of pledged shares and may voluntarily use a further 40% of their annual bonus to purchase additional pledged shares. Awards are approved by the Remuneration Committee.
A participant remains the full owner of the pledged shares for the duration of the pledge period and will enjoy all shareholder rights in respect of the pledged shares. Pledged shares can be withdrawn from the pledge at any stage, but the matching award is then forfeited. The shares subject to the matching award are only acquired by the eligible employee at the end of the pledge period and he/she has no shareholder rights in respect of those shares before then.
From the 2012 grant onwards, participants become entitled to receive additional shares on matching, equal in value to the notional accrued dividends or capital distributions arising on the matched shares during the pledge period. The matching shares will not hold any voting rights until vesting.
The main purpose of the matching award is to encourage the employees concerned to acquire and retain shares in the Company through the pledged shares and to retain their services throughout the pledge period. By holding shares in the Company, the interests of participants are also directly aligned with those of shareholders.
The commitment to issue matching shares for the pledged shares held at 28 February 2017 constitutes a potential 0.18% (FY16: 0.10%) dilution of the Company's weighted average shares for the year, based on the assumption that new shares will be issued to settle them.
Limits applicable to the SARs Scheme, LTIP and DBP
The aggregate number of shares that may be issued under the SARs Scheme, the LTIP and the DBP is limited to 9 250 000 (approximately 5% of Datatec's ordinary shares in issue at 10 August 2010). This limit applies to the issue of new shares and not to shares purchased in the market for the purposes of share scheme settlements.
From the inception of the schemes up to 29 February 2016, 2 029 167 shares have been issued in settlement of the schemes. No shares were issued during FY17 so the number of shares which could still be issued before reaching the above limit is 7 220 833.
The maximum number of shares that can be allocated to any single participant under the SARs Scheme, the LTIP and the DBP is 4 625 000 (approximately 2.5% of Datatec's ordinary shares in issue at 10 August 2010).
The face value of the grants made to an employee in any financial year under the SARs Scheme cannot exceed 150% of his/her base salary at the date of the offer. The face value of the grants made to an employee in any financial year under the LTIP cannot exceed 150% of his/her base salary at the date of the offer. The face value of the matching shares in any financial year made under an award to an employee under the DBP cannot exceed 75% of his/her base salary at the date of the offer. The expected value of the annual awards under the schemes to any individual cannot exceed two times his/her base salary.
New share schemes proposal
The Remuneration Committee intends to replace the current SAR Schemes and LTIP with a single new conditional share scheme ("CSP"). The proposed CSP would provide for the grant of conditional awards to participants which would, subject to performance conditions, vest after three years and be settled with the Company's shares. The committee plans to base the performance conditions on the same metrics as currently used for the LTIP, namely EPS growth and ROIC.
In addition, the Remuneration Committee intends to replace the current DBP with a new DBP with a different method of operation. Under the proposed new DBP participants would make a pre-tax deferral (at the election of the employee) of up to 100% of the bonus. Should the employee elect to defer the bonus, there will be an uplift of up to 100% of the deferred element. Both the deferred bonus and uplift element will be in the form of forfeitable shares which will accumulate dividends and will be released to the participant after three years provided the participant is still in employment.
Shareholder approval is required for these new share schemes and accordingly resolutions to approve them are to be submitted to the 2017 AGM.
The AGM notice on pages 146 to 156 of this Integrated Report explains the salient features of the proposed new schemes and the proposed new scheme rules, compliant with the JSE Listings Requirements, are available for inspection at the Company's registered office.
Other remuneration matters
Subsidiary share-based remuneration schemes
Share-based remuneration plans are in operation within Westcon-Comstor, Logicalis and Consulting. These schemes are based on the subsidiaries share price, determined by an annual valuation of the subsidiary by an independent third-party adviser (rather than on Datatec's share price) and are cash-settled (except in the case of Analysys Mason – see below). The annual valuation of the subsidiary is used to mark the liability to the valuation share price and to establish both a grant price for new awards and the exercise price for vested awards.
Westcon Group, Inc. SAR Scheme
The Westcon Group, Inc. Share Incentive Plan ("the Westcon SAR Scheme") provides for grants of SARs based on Westcon Group, Inc. common shares to employees, directors (including non-executive directors), consultants and other advisers to Westcon Group, Inc. There are no performance conditions for vesting of the SARs.
The Westcon Group, Inc. SARs vest in three equal instalments on the first, second and third anniversary of the date of grant subject to participants remaining in employment. Once vested, SARs are voluntarily redeemable for cash in equal instalments over three years beginning on the date of vesting, and expire on the last redemption date, which is five years from the date of grant.
Details of the operation of the Westcon Group, Inc. SAR Scheme, including grants, exercises and lapses of SARs during FY17 and the prior year, are included in Note 2 to the consolidated annual financial statements.
Logicalis and PLLAL SAR Schemes
Under the terms of the Logicalis Share Appreciation Rights Scheme 2005 ("the Logicalis SARs Scheme"), SARs are granted annually to senior managers. Vesting of the SARs is subject to certain earnings performance conditions. Provided that the performance conditions are met, 50% of the SARs vest after 24 months and the remainder after 36 months. All rights lapse if not exercised by the end of the seventh year after grant.
Logicalis also operates the PLLAL SARs Scheme, for its 65% subsidiary PromonLogicalis Latin America Limited. The terms of this scheme are the same as those of the Logicalis SARs Scheme, but the grants are made to key employees of PLLAL and the annual valuations and appreciation rights are based on the equity value of PLLAL.
Details of the operation of the Logicalis and PLLAL SARs Schemes, including grants, exercises and lapses during FY17 and the prior year, are included in Note 2 to the consolidated annual financial statements.
Consulting division share-based remuneration
Analysys Mason Performance Share Scheme
Analysys Mason operates a performance share plan, approved by its board of directors and shareholders, under the terms of which conditional shares are granted to participants. One-third of the conditional shares vest unconditionally after three years if the participant is still an employee and is settled with the same number of Analysys Mason ordinary shares. The vesting of the remaining two-thirds is conditional on an earnings-based performance condition and may be settled in cash or shares.
Analysys Mason Growth Share Plan
In FY12, 17 senior managers of the business subscribed for 200 000 "D" shares (constituting 8.1% of Analysys Mason's share capital) which vested with effect from 28 February 2014 allowing the participants to participate in the growth of the Company's valuation by realising the value of their "D" shares over the following four years.
Details of the operation of the Consulting division schemes, including grants, exercises and lapses during FY17 and the prior year, are included in Note 2 to the consolidated annual financial statements.
Non-executive directors' remuneration
During FY17, non-executive directors received fees, as approved by shareholders at the AGM on 9 September 2016, as follows:
- Chairman of the Board: US$197 600 total fee inclusive of all committee and subsidiary board work
- Senior non-executive director's fee: US$72 800
- Non-executive director's fee: US$62 400
- Chairman of the Audit, Risk and Compliance Committee: US$31 200
- Member of the Audit, Risk and Compliance Committee: US$15 600
- Chairman of the Social and Ethics Committee: US$10 400
- Chairman of the Remuneration Committee: US$15 600
- Member of the Remuneration Committee: US$7 800
- Member of the Nominations Committee: US$5 200
- Trustee of Datatec trusts: US$7 280.
These fees were maintained at the same level as the prior year. Nonexecutive directors are reimbursed for travel costs necessary for attending Board meetings and do not receive any employment benefits.
The Remuneration Committee determines the fee structure for non-executive directors, including the Chairman, based on benchmarking studies prepared by external advisers using data from comparable companies. The committee does not consider it necessary to split directors fees into a base fee and attendance fee components, as recommended by King III, because of the near 100% attendance record of directors at Board meetings.
For the year ending 28 February 2018, the Remuneration Committee proposes that fees for non-executive directors will increase by 2% and these fees will be presented for approval by shareholders at the AGM on 14 September 2017.
The terms and conditions of appointment of non-executive directors are available on request from the Company Secretary. Non-executive directors are not eligible to participate in the annual bonus plan or any of the Datatec share incentive schemes. However, John McCartney, as a non-executive director of Westcon-Comstor, does participate in the Westcon Group, Inc. SARs Scheme as described above. The Nominations Committee is satisfied that this does not compromise his independence as a director of Datatec.
Subject to the approval of the Board, executive directors are permitted to hold a directorship in one non-Group listed company and to retain the fees payable from this appointment.
Jens Montanana is non-executive Chairman of Corero plc, an AIM-listed software development business.
Directors' service contracts
In order to properly reflect their spread of responsibilities, executive directors have employment contracts as follows: Jens Montanana has a contract with Datatec International Holdings Limited and Ivan Dittrich has contracts with Datatec Limited and Datatec International Holdings Limited. The employment contracts of executive directors are terminable at six months notice by either party and contain contractual provisions for payment on termination.
All non-executive directors have letters of appointment with Datatec Limited. Under these contracts, non-executive directors retire in accordance with the Memorandum of Incorporation of the Company, which is at least every three years. Retiring directors may offer themselves for re-election.
The remuneration, including bonuses and share-based incentive awards, for individual directors who held office during FY17 and FY16 is set out in Note 23 to the consolidated annual financial statements. The Remuneration Committee has approved the executive directors emoluments.
Senior management emoluments
The aggregate remuneration of the 16 most senior executives employed by the Group subsidiaries during FY17 and FY16 is set out in Note 23 to the consolidated annual financial statements.
The King III Code recommends that the individual remuneration paid to the three most highly paid executives (other than the executive directors) of the Group be disclosed in the Integrated Report. However, the Remuneration Committee has decided not to apply this recommendation as it is not in the interests of the Company to do so, since there could potentially be a negative impact from a competition perspective.
Other than the executive directors whose remuneration is disclosed in Note 23 to the consolidated annual financial statements, Datatec does not have any prescribed officers as defined by the Companies Act and hence no other prescribed officers remuneration is disclosed.
Directors' share interests
Directors' interests in the ordinary shares of the Company at 28 February 2017:
|28 February 2017||Direct
|JP Montanana||–||15 169 941||–||15 169 941|
|IP Dittrich||–||46 329||–||46 329|
|SJ Davidson||–||–||6 664||6 664|
|JF McCartney||790 054||–||–||790 054|
|790 054||15 216 270||6 664||16 012 988|
Directors' interests in ordinary shares of the Company shown above are unchanged as at the date of this report.
Directors' interests in the ordinary shares of the Company at 29 February 2016 were as follows:
|29 February 2017||Direct
|JP Montanana||–||15 006 592||–||15 006 592|
|PJ Myburgh||75 419||–||–||75 419|
|RP Evans||51 276||–||–||51 276|
|SJ Davidson||–||–||6 384||6 384|
|JF McCartney||756 757||–||–||756 757|
|CS Seabrooke||–||–||500 000||500 000|
|883 767||15 006 592||506 384||16 396 743|
Directors' holdings of SARs, LTIP conditional awards and DBP matching shares are shown in Note 23 to the consolidated annual financial statements.
The executive directors' holdings of Datatec shares pledged in terms of the DBP are included in the tables on page 127.
John McCartney's holding of Westcon Group, Inc. SARs, which he was awarded as a non-executive director of Westcon-Comstor in line with US practice for directors' fees and awards, is shown in Note 23 to the consolidated annual financial statements. These awards have been ratified by the Datatec Remuneration Committee.