Remuneration report

Part 1 – background statement

John McCartney

Datatec's strategy is to improve shareholder returns over the medium term through a combination of corporate and business development actions aimed at enhancing the competitiveness and profitability of its subsidiaries and operating divisions. The Group's remuneration policy seeks to align remuneration to the achievement of the Group's strategic objectives.

John McCartney

Remuneration Committee Chairman

1.1 Introduction

The Remuneration Committee aims to ensure that Datatec remunerates fairly, responsibly and transparently so as to promote the achievement of strategic objectives and positive outcomes in the short, medium and long terms (King IVTM Principle 14). It also seeks to ensure that the remuneration strategy facilitates the attraction and retention of key talent required to deliver on the Group's business objectives. Another important aspect of the committee's role is the balancing of stakeholder interests to ensurefair reward to employees in alignment with shareholders' expectations.


During FY19, the Remuneration Committee undertook a fundamental review of its role and of the remuneration policy and how remuneration decisions are implemented. A programme of shareholder consultation was undertaken to ensure shareholders' views on remuneration are properly and accurately addressed by the committee and taken into account in the Group's remuneration policy and implementation practices. This consultation process involved meeting investment managers accounting for approximately 75% of our shareholder base, as well as a teleconference call open to any other shareholders.

Aligning remuneration to our strategic objectives

Aligning remuneration to our strategic objectives

The key matters raised during the consultation and the outcomes for our remuneration policy and implementation report are summarised in section 1.3.

One of the most important changes made in response to shareholder consultations is the change to the mix of executive directors' remuneration, thereby reducing basic pay with a potential for a higher performance-related short-term incentive ("STI"). Engagement between the committee and shareholders is a valuable process and will continue in future years.

The context in which the committee has set STI and long-term incentives ("LTI") targets for FY19 and FY20 flows from the strategic imperatives of the Group in the Strategic roadmap.

Motivating a return to profitability is of primary importance for which the UEPS and EBITDA growth targets are key. The ROIC measure of return on investment is seen by the committee as a fundamental part of aligning management and shareholder goals. The specific circumstances of the Westcon International business required further attention from the committee as explained below and for this specific quantifiable key performance indicators for STI were established.

Following the sale of Westcon Americas in September 2017, Group management and the Remuneration Committee believed it was critical to incentivise the management of Westcon International (which remained in the Datatec Group) to drive the restructuring of the business in order to realise its strategy, which is to be the leading go-to-market distribution partner for vendors in the networking and cyber security market serving international markets in Europe, the Middle East, Africa and across the Asia-Pacific region. Achieving this strategic objective required an incentive programme sufficient to retain key line executives and attract new talent to the organisation.

The restructuring of Westcon International included, at an early stage, the replacement of the Westcon CEO and CFO with the Datatec CEO and CFO, to manage Westcon International directly in those leadership roles.

In FY19 the personal STI goals of the Datatec executives (comprising 20% of the on-target bonus) were set as quantitative metrics to measure the turnaround of Westcon International. In addition, a new LTI programme was established for Westcon International: an Equity Appreciation Plan ("EAP") for the most senior tier of Westcon International management and a Share Appreciation Rights Scheme ("SARS") for the second tier of Westcon International management (participation in the schemes is mutually exclusive). The Datatec shared executives were granted awards in the Westcon International EAP during FY19 and their grants of Datatec LTI in the form of the Datatec CSP will be reduced in future years proportionately to their participation in the EAP.

The Remuneration Committee is satisfied that the remuneration policy has achieved its objectives in FY19, and that the amendments to the policy and implementation introduced after thorough consultation with shareholders have enhanced the equitable alignment of shareholder and management interests.

The committee intends to continue the consultation process with shareholders and discuss further enhancements to the remuneration policy. In this light, the committee intends to address the following matters in the upcoming financial year: a fair pay charter; malus and claw-back provisions; and non-financial metrics for STI.

1.2 Remuneration Committee constitution and operation

The Remuneration Committee operates under terms defined in its charter, which has been approved by the Board.

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The Remuneration Committee charter is available on the Group’s website: www.datatec.com.

The Remuneration Committee comprises the following independent non-executive directors:

  • John McCartney (Chairman)
  • Stephen Davidson
  • Johnson Njeke
  • Maya Makanjee (appointed 1 November 2018)

Chris Seabrooke and Nick Temple retired from the Board and the committee on 20 September 2018.

The Remuneration Committee's meetings during FY19 and subsequently to the date of this report (all meetings were scheduled), together with the attendance of the committee members, are as follows:

  7 March
2018
15 May
2018
18 July
2018
16 Oct
2018
14 March
2019
14 May
2019
JF McCartney P P P P P P
SJ Davidson P P P P P P
CS Seabrooke P P P      
NJ Temple P P P      
MJN Njeke P P P P P A
M Makanjee         P P

P = present; A = absent

= not a member of the committee at the time


The Chief Executive Officer and the Chief Financial Officer may be invited to attend portions of meetings of the Remuneration Committee but neither may take part in any discussions regarding their own remuneration.

The role of the committee is to assist the Board in ensuring that the Company remunerates directors and executives fairly and responsibly in alignment with the creation of long-term shareholder value and to ensure that the disclosure of director and senior management remuneration is accurate, complete and transparent.

The main functions of the committee include:

  • Determining, agreeing and developing the Company's general strategy and policy on executive and senior management remuneration so that it will promote the achievement of strategic objectives and encourage individual performance;
  • Ensuring the remuneration strategy facilitates the attraction of key talent;
  • Ensuring that the remuneration policy and implementation report are put to a non-binding advisory vote at the general meeting of shareholders once every year;
  • Consulting with shareholders in the light of the AGM votes;
  • Selecting an appropriate comparator group when benchmarking remuneration levels;
  • Determining specific remuneration packages for executive directors of the Company, including basic salary, benefits, annual performance-based bonuses, share incentives and pensions;
  • Determining any grants to executive directors and other senior employees made pursuant to the Company's share schemes, and satisfying itself as to the accuracy of recorded performance measures that govern the vesting of incentives;
  • Ensuring share incentive schemes achieve the aim of retention of key executives;
  • Regularly reviewing incentive schemes to ensure continued contribution to shareholder value creation and that these are administered in terms of the rules;
  • Advising on the remuneration of non-executive directors; and
  • Overseeing the preparation of, and recommending to the Board, the annual remuneration report for inclusion in the Company's Integrated Report.

The Remuneration Committee employs the services of specialist consultants in the field of executive remuneration to assist it when necessary. The consultants which have been retained in this role during FY19 and to date are PricewaterhouseCoopers and the committee is satisfied that they have been independent and objective in their advice.

The committee reviews its performance annually by means of questionnaires completed by individual committee members and attendees which are then discussed at Board and committee meetings. These appraisals enable the committee to evaluate its effectiveness objectively and to conclude whether it is operating effectively under the terms of reference set down in its charter.

The Chairman of the committee reports on the committee's activities at each Board meeting and committee members will be available at the AGM to answer questions about the committee's work.

On behalf of the Board, the Remuneration Committee undertakes to consult with shareholders in the event that either the remuneration policy or the implementation report, are voted against by shareholders exercising 25% or more of the votes exercised in order to give effect to the minimum measures referred to in the King IVTM Code. In such circumstances the AGM results announcement will provide for the following: (a) an invitation to dissenting shareholders to engage with the issuer; and (b) the manner and timing of such engagement. In relation to the 2018 AGM voting, the consultation with shareholders is explained in section 1.3 below. The committee intends to follow the same consultation procedures following the 2019 AGM.

1.3 Shareholder engagement

John McCartney, the Remuneration Committee Chairman, accompanied Stephen Davidson, the Chairman of the Board, on a shareholder engagement "road show" in November 2018 to address remuneration-related concerns directly with investment managers, following the non-binding advisory votes on remuneration at the September 2018 AGM.

The key matters discussed with shareholders and actions taken as a result are summarised in the following table. The shareholders' views reported below are matters raised by more than one shareholder, which we have taken to be indicative of the concerns of shareholders:

Committee’s rationale

Shareholders’ views

Actions taken


Remuneration policy

Committee’s rationale

The committee felt that the policy itself was fit for purpose with its emphasis on aligning remuneration with shareholders’ interests. It was proposed, however, to discontinue the policy of benchmarking remuneration above median. It was also suggested that the policy should indicate the maximum and minimum amounts of the different types of remuneration which executives could earn.

Committee’s rationale

Shareholders generally agreed that the policy aligned with their interests and agreed with the changes proposed by the committee.

In addition the policy should give more guidance on the metrics to be used for STI evaluation and the performance conditions to be applied to LTI share awards.

Some shareholders felt the policy should not contain a provision to provide additional deal incentive awards in exceptional circumstances.

Committee’s rationale

The remuneration policy has been modified: remuneration will be reviewed on an ongoing basis and will take into account size of company, structure and scope of roles. We will no longer have a policy aimed at above median benchmarking.

The revised policy is set out in the next section of this report. It incorporates all the feedback from shareholders except for the exceptional deal incentives which is explained below.


 
Exceptional deal incentives

Committee’s rationale

In FY18 the Company paid a deal completion bonus to executives in relation to the SYNNEX transaction completed in September 2017. The committee’s rationale for this payment was set out in the FY18 remuneration report which explained that successful completion of the SYNNEX transaction was seen by the Board as a critical step in executing its strategy. In the consultation exercise the Board’s view was reiterated and the Remuneration Committee chair explained how the quantum of the award was arrived at. It was emphasised that the award was a truly exceptional event; the last instance of a similar deal bonus being awarded was over 17 years ago. The possibility of the deal bonus was disclosed in the transaction circular.

Shareholders’ views

Some shareholders consulted had concerns about the deal bonus. While some accepted the principle but thought the quantum too high, others felt the principle of deal bonuses was not acceptable. In their view all disposals however exceptional are part of the management’s ordinary job and accordingly should be reflected in the normal annual remuneration STI and LTI payments.

Actions taken

The issue does not arise in FY19.

The committee does, however, consider it is appropriate to retain the discretionary power to make such awards in future and accordingly has retained the provision in the policy.

Nevertheless, the committee did undertake with shareholders to consult them in advance if circumstances arise where it considers a deal-based bonus to be appropriate.


 
Variations to STI metrics in FY18

Committee’s rationale

The committee had decided not to use Group UEPS as a metric for the FY18 bonus because the year was a transitional situation for Westcon International and separate metrics motivating the turnaround of Westcon International were deployed. It was felt that the metrics used were most appropriate to drive the required strategic outcomes for the year.

Shareholders’ views

Some shareholders felt that a Group earnings-related metric should always be the primary component of STI.

Shareholders’ views on other STI metrics and the mix of financial and non-financial metrics were discussed and the committee appreciated the range of views expressed.

Actions taken

This issue will not arise again because the committee had reverted to using Group UEPS as one of the main STI metrics at the start of FY19 (before the consultation).

The STI metrics used in FY19 are explained in detail in the implementation report and the metrics to be used in the following financial year (FY20) are also disclosed.


 
Forward-looking disclosure of STI metrics and LTI grants

Committee’s rationale

Annual remuneration reports to date have included full disclosure of STI metrics and outcomes for the financial year under review, which is the year being reported in the financial accounts contained in the Integrated Report. The committee proposed to change this and disclose the STI metrics and details of the LTI grants for the forthcoming financial year.

Shareholders’ views

Shareholders in general welcomed this additional disclosure.

Actions taken

The implementation report now shows the metrics to be used in evaluating STI In FY20 together with the grants and performance conditions of LTI (CSP conditional awards to be granted in June 2019).


 
Executive directors’ remuneration

Committee’s rationale

Having made the changes in policy outlined above the committee reviewed the pay structure of the executive directors.

Shareholders’ views

Shareholders’ input during the consultation was given due consideration during the review of executive directors’ remuneration. In particular the view that remuneration should be more weighted towards performance-based STI.

Actions taken

For FY20 the basic salary of the CEO will reduce by 20% and of the CFO by 10%. The potential to earn performance-related bonuses (STI) has been increased.

The changes are reflected in the policy in Part 2.


 
Westcon International Equity Appreciation Plan

Committee’s rationale

In FY18, the CEO and CFO of Datatec took on the CEO and CFO roles of Westcon International. During FY19 an EAP was implemented for Westcon International as an incentive for the management team to drive growth in the value of the business. The committee decided the executives of Datatec could participate in the Westcon International EAP by virtue of their executive roles in Westcon International.

Shareholders’ views

Shareholders were consulted about the participation of the Datatec executives in the Westcon International EAP. Some shareholders raised concerns that:

  • The executives would be “double dipping” in that they continue to participate in the Datatec LTI (the CSP);
  • The valuation threshold for gains under the Westcon International EP was considered too low.

Actions taken

Shareholders’ concerns have been addressed as follows:

  • The shared executives participation in the CSP will from FY20 be reduced in proportion to the valuation of their holding in the Westcon International EAP;
  • The valuation threshold for gains under the Westcon International EAP will be escalated each year by a 10% CAGR.
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These changes are explained in detail in the implementation report.


 
Conditional Share Plan (“CSP”)

Committee’s rationale

The first grants under the CSP were made in FY19 (see the implementation report for details)

Shareholders’ views

Consultation with shareholders considered the performance conditions being used for the CSP. Two performance conditions are being applied, one based on UEPS growth and the other on ROIC and shareholders supported the use of these metrics.

Actions taken

The ROIC performance condition for future grants of conditional awards under the CSP will change to annual weighted average cost of capital-related targets throughout the three-year performance condition.

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This change is explained in detail in the implementation report.


 
Deferred Bonus Plan (“DBP”)

Committee’s rationale

The new Datatec DBP came into operation in FY19. Initially it did not have any minimum mandatory participation level for participants.

Shareholders’ views

Shareholders’ views on LTI in the form of share-based payments were explored during the consultation. The committee’s view on promoting share ownership among executives was explained. The aim being to establish alignment with shareholders’ interests through “skin in the game”.

Actions taken

A minimum participation level for executives in the DBP has been established to ensure a minimum proportion of annual bonus is invested in Datatec shares by participants.

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This is explained in more detail in the remuneration policy.


 

PART 2 – REMUNERATION POLICY

Objectives of the policy

The objectives of the remuneration policy are to:

  • Set remuneration levels as necessary to attract and retain the best local and international talent who will enhance business performance;
  • Recognise and reward superior performance when it occurs;
  • Direct employees’ energies and activities towards key business goals and strategic outcomes; and
  • Align employees’ and shareholders’ interests.

To achieve this, Datatec rewards its executives and managers in a way that reflects market dynamics and the context in which it operates. Datatec is structured as a group which actively manages its two principal divisions, Logicalis and Westcon International. The remuneration policy applies throughout the Group but the details provided herein are applicable to the Datatec executives. All elements of the remuneration policy are aligned to the strategic goals of the Group. For purposes of this report, a high level overview of the remuneration elements and design principles informing remuneration arrangements for all employees are provided, with in-depth focus on Datatec executives.

Key principles

Key principles of the remuneration policy are to:

Reward all employees for their contribution to the Group’s operating and financial performance
Apply fair and responsible pay principles to all employees across the Group.

The committee intends to further develop implementation practices and monitoring procedures in this area in the future

Promote a common interest with shareholders
Make a significant proportion of the remuneration of executive directors and senior managers performance-based
Consider the international ICT industry, market and country benchmarks to ensure the Group’s remuneration is competitive in regions in which the Group operates, particularly the US, Brazil and the UK
Balance the performance-based element of remuneration between the achievement of short-term and long-term objectives

The base salary provides individuals with a fixed income to reward them for 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. Benchmarking exercises are also 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.

Short-term incentives are the 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 an element of individual objectives (which may include non-financial metrics), 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.


The STI is calculated in relation to base salary as follows:

Base salary x on-target STI percentage x [(personal score x personal weighting) + (corporate score x corporate weighting)]

For executive directors:

80% corporate;

20% personal

For other senior management:

50% corporate;

50% personal

(with exceptions as agreed by the Remuneration Committee)

The majority of the corporate element of the bonus will always comprise profit metrics (eg earnings per share and/or EBITDA). Each element of the bonus is based on the achievement of a target: if that target is reached the bonus element is described as "on-target". The Remuneration Committee establishes the target and a range around the target demarcated by "guard-rails" such that the bonus for each element is capped at 160% of the on-target bonus if the upper guard-rail is reached. The maximum bonus achievable, referred to as the cap, is therefore 160% of the on-target bonus. Below the lower guard-rail, zero bonus is earned and at the lower guard-rail 40% of on-target bonus is earned. Between the guard-rails and the on-target position the bonus outcome is obtained by linear interpolation.

As a result of the restructuring of executive directors' remuneration noted, from FY20 the on-target bonus levels for the CEO and CFO have changed. Consequently, the maximum bonus achievable, referred to as the cap, has reduced from 160% of the on-target bonus to 143% for the CEO and 153% for the CFO. The on-target bonus levels for FY19 remained the same as for FY18, being 125% of base salary for the CEO capped at 200%; and 75% of base salary for the CFO capped at 120%. As a result of the restructuring of executive directors' remuneration noted above, the on-target bonus levels for FY20 have changed to: 175% of base salary for the CEO capped at 250%; and 95% of base salary for the CFO capped at 145%.

    FY19 on-target STI
as a % of base salary
FY19 maximum STI FY20 on-target STI
as a % of base salary
FY20 maximum STI
CEO   125% 125% x 160% = 200% 175% 175% x 143% = 250%
CFO   75% 75% x 160% = 120% 95% 95% x 153% = 145%

Potential outcomes for STI in relation to base salary are illustrated in the scenario analysis. The metrics used and bonus outcomes for FY19 are shown in the implementation report. The metrics to be used for STI in FY20 are set out below.

FY20 Bonus structure

1) UEPS               FY20
        US cents   Bonus      
  Lower guard-rail –10%       40%     50%
  On-target Target       100%      
  Upper guard-rail 10%       160%      
2) EBITDA                
      US$m   Bonus      
  Lower guard-rail –10%       40%     30%
  On-target Target       100%      
  Upper guard-rail 10%       160%      
3) Personal KPIs                
                 
  The personal KPIs for the CEO and CFO are explained below.               20%
                   
        TOTAL ON-TARGET BONUS     100%

The table above shows the structure of the STI for FY20 but the targets relating to the FY20 budget are not disclosed. The personal KPIs agreed by the committee for the executive directors for FY20 are as follows:

For the CEO:

  • Westcon International EBITDA – quantitative measure based on achievement of budget. It is considered important to establish Westcon International's profitability within the overall Group profitability measured by the Group EBITDA metric;
  • Westcon International central costs reduction – target US$33 million for FY20 as previously published;
  • Culture/leadership – qualitative measure assessed by the Remuneration Committee considering how the executive director has led the Group while promoting its values and Code of Conduct; and
  • Environmental, social and corporate governance – qualitative measure assessed by the Remuneration Committee considering how the executive director has driven environmental considerations in the business, enhanced sustainability and promoted good governance.

Each of the above KPIs will have an equal weighting within the 20% personal goals for the FY20 STI assessment (ie 5% each).

For the CFO:

  • Westcon International EBITDA – quantitative measure based on achievement of budget as per the CEO above – 5% weighting;
  • Westcon International central costs reduction – target US$33 million for FY20 as previously published, also the same as the CEO above – 5% weighting; and
  • Westcon International refinancing – to be assessed in relation to debt refinancing advisers advice as to what a successful outcome is – 10% weighting.

The executive directors and senior Group executives may elect to defer a portion of their cash bonus into the Company's DBP. The amount of the bonus deferred is doubled (ie a multiplier of x2 is applied) and Datatec shares are purchased at the prevailing market price. The Datatec shares acquired by participants under the terms of the DBP must be held for a three-year retention period. If the participant resigns from the Company during the three-year retention period all the DBP shares are forfeited to the Company.

A minimum participation level for executives in the DBP has been established to ensure a minimum proportion of annual bonus is invested in Datatec shares by participants. The proportion of bonus for mandatory investment in the DBP is on a sliding scale with a 20% mandatory investment between 50% of target and on-target bonus and 33% for above on-target bonus.

The Remuneration Committee has also set at 75% the maximum proportion of annual bonus which participants may defer into the DBP.

The maximum number of shares which can be delivered to any individual participant in the DBP is 1.6 million shares. The maximum number of new shares which can be issued to participants to settle obligations under the DBP is 3.2 million shares.

Long-term incentives: 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 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. At the AGM on 14 September 2017, two new schemes were approved which superseded the previous schemes: the Conditional Share Plan and the Deferred Bonus Plan.

The equity-settled share-based incentive scheme for Datatec Group executives is the Datatec CSP which was approved by shareholders at the 2017 AGM. The CSP operates by granting conditional awards of Datatec shares to participants annually. The quantum of awards is based on annual base salary and the face value of awards which is the current Datatec share price (using a 30-day volume weighted average price). The face value of awards granted is as follows:

CEO – 150% x base salary   CFO – 120% x base salary
Datatec Group executives and staff in the range 100% to 50% of base salary

Performance conditions apply to the grants and the conditional awards are held for a performance period of three years. At the end of the three-year performance period the performance conditions are tested and if met, awards vest on a sliding scale between 50% at a threshold and 100% at the upper target. The performance conditions are based on UEPS growth for 50% of the award and ROIC for 50%.

  • The UEPS growth performance condition will be a target for UEPS in the third year after grant based on a significant growth rate applied to the budget for the first year of the performance period.
  • The ROIC performance condition for average ROIC over the three-year vesting period will be based on the Group's weighted average cost of capital.

The maximum number of shares which can be delivered to any individual participant in the CSP is 3.7 million shares. The maximum number of new shares which can be issued to participants to settle obligations under the CSP is 7.4 million shares.

Potential outcomes for LTI in relation to base salary are illustrated in the scenario analysis.

Divisional long-term incentives

Share-based incentive schemes operate in the Group's divisions to incentivise management to generate value in the divisional entity. These are all cash-settled schemes based on the divisional entity's valuation/notional share price. The divisional LTI share-based remuneration plans are listed in more detail on page 82. Datatec's subsidiaries 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 exception of the Analysys Mason Performance Share Scheme which is partly settled in Analysys Mason shares). Datatec shares are not involved in the settlement of the subsidiary share schemes but all the share-based remuneration schemes operating in the Group are accounted for under IFRS 2.

Because the executive directors of Datatec Group are also executives of Westcon International, they participate in the Westcon International EAP in addition to their participation in the Datatec CSP. The annual grant of Datatec CSP conditional shares for the Datatec executives who participate in the Westcon International EAP will from FY20 be reduced by an "equivalence" factor to avoid double participation in relation to reward opportunities.

In addition, for the Datatec executives who participate in the Westcon International EAP an adjustment of 10% carried interest will be added to the equity base of US$125 million. This annually increasing threshold will be used for the equivalence factor calculation above.

Logicalis and PromonLogicalis Latin America ("PLLAL") CSP schemes

During FY19 Logicalis and PLLAL introduced CSPs for the most senior tier of management with similar terms to the Datatec CSP but cash-settled and based on the Logicalis and PLLAL share price as determined by annual independent valuations.

Awards of conditional shares are granted annually to participants starting with the first grant in December 2018 during FY19. After a three-year performance period the CSP awards will vest as follows:

  • 25% of each participant's award is subject only to an employment condition and will vest provided the participant remains in the employment of Logicalis or PLLAL at the end of the three-year period since grant.
  • The remaining 75% of each participant's award is subject to performance conditions:
    • One third (ie 25% of the total award) based on Logicalis or PLLAL share price growth;
    • One third (ie 25% of the total award) based on net income per share growth;
    • One third (ie 25% of the total award) based on ROIC.

Each performance condition has a threshold level at which 50% vesting will occur and a target level for 100% vesting. Between the threshold and target vesting will be calculated by linear interpolation.

Logicalis and PLLAL Share Appreciation Rights schemes

Under the terms of the Logicalis Share Appreciation Rights Scheme 2005 ("the Logicalis SAR Scheme"), SARs are granted annually to senior managers. Since the implementation of the Logicalis and PLLAL CSP schemes (above), participation in the Logicalis and PLLAL SAR schemes has been restricted to those senior managers who do not participate in the CSP.

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 SAR Scheme for its 65% subsidiary PromonLogicalis Latin America Limited. The terms of this scheme are the same as those of the Logicalis SAR 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.

Westcon International Equity Appreciation Plan

During FY19, the Remuneration Committee implemented an EAP for Westcon International senior management to incentivise value generation. Participants have been awarded "Units", whose value will be linked to the value of Westcon International; this is a notional base value which was estimated to be US$125 million (the "Hurdle"). The Units will not have any share rights, in particular they will not have the right to dividends or votes. The standalone net book value of Westcon International at 28 February 2019 was US$27 million (US$180 million external net assets less a US$153 million inter-company loan from Datatec PLC).

10% of the value of Westcon International above the Hurdle will be paid to the EAP Pool on a sale of Westcon International. Each Unit will receive a pro rata share of the EAP Pool when Westcon International is sold.

For example, if Westcon International is sold for US$300 million, the EAP Pool will be US$17.5 million: ((US$300m – US$125m) x 10%). If there are 100 000 Units in issue, each Unit will be worth US$175.

If Westcon International is not sold within five years, the equity value of Westcon International will be determined by an independent valuer at 1 March 2023 and the EAP will pay out to participants on the basis of that valuation. Such a valuation will be undertaken using a methodology which is fair and reasonable to all stakeholders including Datatec shareholders and participants in the EAP.

Westcon International Share Appreciation Rights Scheme

During FY19, the Remuneration Committee implemented the SAR Scheme to incentivise the senior management who were not awarded units in the EAP (above).

SARs were granted in July 2018 with an exercise price of US$1.25 based on a notional share capital for Westcon International of 100 million shares. The base valuation for the SARs was thus the same as the Hurdle for the EAP. The SARs will vest after two years without performance conditions and thereafter may be exercised over the following three years (a maximum of one-third per year).

Westcon Group, Inc. Share Appreciation Rights Scheme

The Westcon Group, Inc. Share Incentive Plan which provided for grants of SARs based on Westcon Group, Inc. common shares to employees and directors (including non-executive directors) terminated during FY18 in accordance with the change of control provisions set out in the scheme rules. This was triggered by the SYNNEX transaction completing on 1 September 2017. Participants received cash settlement for their vested SARs to the extent the value of Westcon shares implicit in the SYNNEX transaction exceeded the grant price of the SARs.

An element of the value of the Westcon shares on completion was dependent on the earn-out provisions of the transaction.

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.

Other share schemes

Some start-up operations within the Group have involved the use of share incentive schemes for key management of the new operations whereby they will receive a cash-settled share of the equity growth in the business excluding any capital advanced by Datatec. Such schemes are in operation in Datatec Financial Services and Logicalis SA.

Details of the operation of the subsidiary division share schemes, including grants, exercises and lapses during FY19 and the prior year, are included in Note 2 to the consolidated annual financial statements.

Discretion

The remuneration policy set out in this Part 2 of the remuneration report has been significantly expanded and developed by the Remuneration Committee during FY19 following consultation with shareholders as summarised in Part 1. It is not intended that there should be any departure from the policy in FY20.

The Remuneration Committee retains the ability to exercise discretion in responding to particular situations and if this necessitates departing from the policy such an occurrence would be reported in future implementation reports. Any significant changes to the policy in future will be undertaken only after consultation with shareholders.

Exceptional incentive awards

In addition to the three elements of remuneration noted above (base salary, short-term and long-term incentives) the Remuneration Committee may, in highly exceptional circumstances, award bonuses to management for the successful execution of significant disposal transactions which generate exceptional value for shareholders. In such rare circumstances the committee would consult with shareholders in advance of making such awards.

Remuneration consultants

The Remuneration Committee may use the services of specialist consultants in the field of executive remuneration to provide advice. This advice may include best practice on disclosure, target setting and general remuneration matters. The remuneration consultants may also provide the committee with benchmarking information in terms of remuneration. The information provided is for the advice and information of the committee which has the responsibility of setting remuneration policy and determining the remuneration of directors and employees. The consultants themselves do not set policy or determine remuneration.

Scenario analysis

The following tables show the minimum, on-target and maximum remuneration the executive directors can earn under the revised policy applicable with effect from FY20, compared to the policy that applied in FY19

CEO – FY20 (US$’000)

CEO – FY19 (US$’000)

Under the minimum scenario the executives earn only their guaranteed package of base salary, benefits and company pension contributions. All STI metrics are assumed to be below the lower guard-rail resulting in no STI payment and consequently no DBP deferral being possible. The CSP performance conditions are assumed not to be met.

The threshold scenario includes the guaranteed package plus the minimum STI which would be earned if all STI metrics were triggered at the lower guard-rail threshold and 40% of on-target bonus was earned. It assumes that 25% of the bonus would be deferred into the DBP. Under this scenario it is assumed that the CSP performance conditions are triggered three years after grant only at threshold level resulting in 50% vesting.

The on-target scenario assumes the achievement of STI targets and it assumes that 50% of the bonus will be deferred in the DBP with the corporate multiplier of x2 applied. In addition the CSP award is assumed to vest 75% (half-way between the threshold and maximum scenarios).

The maximum scenario assumes that all STI metrics are over-achieved above the upper guard-rail resulting in the maximum STI being earned. This is 160% of the on-target STI for FY19 but in FY20 the cap is restricted to a lower multiple of on-target. This scenario also assumes the executives will defer the maximum proportion of their bonus, 75%, into the DBP with the corporate multiplier of x2 applied. For the CSP, the assumption is the same as the on-target scenario being 100% vesting of the conditional share awards (there is no "over-performance" provision in the LTI). It should be noted that the LTI components of the scenario analysis will only become available to the executives three years after the financial year shown in the analysis. No discounting for the time value of money has been applied and also no change in the underlying share price from the date of grant has been assumed.

CFO – FY20 (US$’000)

CFO – FY19 (US$’000)

The annual long-term incentive grant of Datatec CSP conditional shares for the Datatec executives who participate in the Westcon International EAP will, from FY20 onward, be reduced by an "equivalence" factor to avoid "double dipping" in relation to reward opportunities. Therefore the actual LTI CSP figures for FY20 shown above will be lower than the amounts shown in the scenario analysis.

This scenario analysis illustrates the effect of the Remuneration Committee’s decision to change the mix of executive directors’ remuneration by reducing basic pay with a potential for higher performance-related STI. Under each of the four scenarios above the total remuneration for the executive directors is less in FY20 than it is in FY19. Under the minimum scenario, just the guaranteed package, the CEO’s remuneration in FY20 is 17% less than in FY19 and the CFO’s remuneration is 9% less.


Shareholding guidelines

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 time. The share-based remuneration schemes are intended to enable new executive directors to achieve this shareholding guideline.

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 an employment contract with Logicalis, Inc. a 100% subsidiary of the Group registered in New York State, USA.

The employment contracts of executive directors are terminable at six months' notice by either party and contain contractual provisions for payment on termination covering the guaranteed package but no commitment relating to STI.

If an executive director resigns from the Company or is terminated for fault, eg dismissal on grounds of misconduct, proven poor performance, dishonest or fraudulent conduct ("bad leaver") all unvested LTI awards are forfeited. This includes shares in the DBP within the three-year holding period. In addition, such executives will be required to repay all dividends (pre-tax value) earned from the award date under the DBP.

If termination is at the Company's instigation and not for fault ("good leaver"), the executive will retain a portion of LTI share incentive awards which have been granted but not yet vested. The proportion will be determined pro rata to the time of the vesting period which has elapsed up to the termination date and will in the case of the CSP, be adjusted based on the extent to which performance conditions have been met. The terminated executive will continue to hold the reduced amount of awards until the vesting date when they will vest along with the other grants in accordance with the rules of the scheme to the extent that performance conditions are satisfied.

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.

External appointments of executive directors

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.

Non-executive directors' remuneration

The fee structure for non-executive directors, including the Chairman, is recommended to the Remuneration Committee by executive management based on benchmarking studies prepared by external advisers using data from comparable companies. The benchmarking takes account of the international nature of the business.

The Chairman's fee covers his role on the Board and its committees and attendance at subsidiary board meetings and shareholder meetings as required. Other non-executive directors receive a fee for their Board role plus fees for membership/chairmanship of individual committees.

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.

The operation of the Group's remuneration policy in FY19 is described in the implementation report Part 3 of this remuneration report.

Approval of the remuneration policy

The FY18 remuneration policy was put before shareholders for an advisory vote at the AGM on 20 September 2018 and received support from 50.1% of shares voted. The remuneration policy was significantly changed during FY19 following shareholder consultation as set out in Part 1 Background Statement above and the revised remuneration policy set out herein will be put before shareholders for an advisory vote at the 2019 AGM. Substantial new processes around shareholder consultation were put in place during FY19 and the Remuneration Committee will ensure continued and open dialogue with shareholders.

Part 3 – Implementation report

Datatec Group base salary and benefits

For FY19, the Remuneration Committee determined that the base salary of the CEO would increase by 6.5% to US$1,428,000 per annum. The CFO relocated to the USA in December 2017 and his base salary was realigned in accordance with US benchmarks as approved by the Remuneration Committee to US$560,000 for FY19.

Following the shareholder consultation which the Remuneration Committee undertook during November 2018 (see Part 1.3 of this report) the committee recommended a change in the executive directors' remuneration structure, to take effect from 1 March 2019, as follows:

  • For the CEO, a 20% reduction in base pay; 2% reduction in on-target earnings ("OTE"); and 7% reduction in capped (maximum achievable) pay.
  • For the CFO, a 10% reduction in base pay with no change to OTE or capped pay.

There will be no reduction in Company pension contributions for the executives as a result of this change: in FY19 the Group contributed an amount of 15% of the executive directors' base salaries to their Company and private pension schemes, with the individuals contributing 5% of their salary. In FY20, because of the decrease in base salaries the Company pension contributions for the executive directors will be: CEO 18.8%; and CFO 16.7%.

Datatec Group short-term incentives

The STI bonus structure for FY19 and outcome is set out in the following table:

FY19 bonus outcome               Proportion of
total bonus
    Outcome  
1) UEPS               FY19     FY19  
        US cents   Bonus              
  Lower guard-rail –33%   2.0   0%              
  On-target FY19 budget   3.0   100%     30%     48.0%  
  Upper guard-rail +100%   6.0   160%          
  Actual     6.6   160%              
2) EBITDA                        
        US$m   Bonus              
  Lower guard-rail -8%   80   40%              
  Actual     87   100%     20%     20.0%  
  On-target FY19 budget   87   100%          
  Upper guard-rail 15%   100   160%              
3) Share price performance (30-day VWAP on JSE)                        
        ZAR   Bonus              
  Actual (R29.19)     29   0%              
  Lower guard-rail (Feb 2018)   30   40%     30%     0.0%  
  On-target 11%   33   100%          
  Upper guard-rail 21%   36   160%              
4) Personal goals – Westcon International KPIs                        
  Working capital improvement – target net working capital 23 days             5%     4.0%  
  Revenue growth – target budget 10%               5%     5.0%  
  Monthly profitability by February 2019 (at least two months)             5%     7.0%  
  Reduction in central costs – target US$45 million               5%     7.0%  
                  20%     23.0%  
                  On-target     Achieved  
        TOTAL FY19 BONUS     100%     91.0%  

As noted in the shareholder engagement section of Part 1 , the profit-related bonus metrics for FY19 (UEPS and EBITDA) are Group performance metrics. Recognising the crucial part the Westcon International reshaping plays in the Group's strategic goals, the Remuneration Committee gave both executive directors the same quantitative metrics for Westcon International as personal goals as shown above. These Westcon International metrics were:

  • Working capital improvement – target net working capital 23 days; achievement was 24 days but management had taken the decision to increase inventory to mitigate potential risks from Brexit and supply-chain issues. Nevertheless the Remuneration Committee decided that this metric had been 80% achieved so awarded 4% out of the 5% on-target;
  • Revenue growth – the target was 10% being the Westcon International budget revenue for FY19. This was achieved so the full 5% on-target assessment was awarded by the committee;
  • Monthly profitability – the target was to achieve two months of profitable trading at the adjusted EBITDA level. This was overachieved as there were seven months of profitable trading in FY19 and the overall profit was above target. Hence the committee assessed this metric as 7% compared to the 5% on-target amount; and
  • Reduction in central costs – the target of US$45 million for FY19 central costs was disclosed at the time of the FY18 results announcement. The actual central costs for FY19 were US$43 million which the committee considered to be a successful overachievement of the target and awarded 7% for this metric as against the 5% on-target amount.

Because the bonus is 91.0% of the on-target bonus, the executive directors must invest a minimum of 20% of their FY19 bonuses in the DBP.

The on-target bonus levels for FY19 remained the same as for FY18, being: 125% of base salary for the CEO capped at 200%; and 75% of base salary for the CFO capped at 120%. As a result of the restructuring of executive directors' remuneration noted above, the on-target bonus levels for FY20 have changed to: 175% of base salary for the CEO capped at 250%; and 95% of base salary for the CFO capped at 145%.

The targets and outcomes of the annual bonuses of the executive directors for FY19, shown as a percentage of base salary and split by the bonus elements, are illustrated below.

CEO bonus composition as a percentage of basic salary (%)

CEO bonus   US$'000
Cash 50% 812
Deferred 50% 812
    1 624

CFO bonus composition as a percentage of basic salary (%)

CFO bonus   US$'000
Cash 75% 287
Deferred 25% 95
    382

The metrics for the executive directors' STI in FY20 are set out in Part 2 of this remuneration report.

FY18 short-term incentive element delayed

One of the metrics for the FY18 STI was the SYNNEX transaction earn-out. As this earn-out had not been settled when the FY18 STI payment was determined by the committee, this was delayed until such time as the earn-out is determined.

Datatec Group long-term incentives

Conditional share plan awarded during FY19

The new CSP came into operation during FY19 and the first CSP awards were granted to participants on 1 June 2018 following approval by the Remuneration Committee. The awards are subject to the rules of the CSP and will vest after three years subject to the Group meeting certain performance conditions set by the Remuneration Committee. The performance conditions are:

ROIC performance condition – 50% of grant:

the performance condition necessary for half of the conditional award subject to the ROIC condition (ie 25% of the total conditional award) to vest is that the Company's reported ROIC for FY21 must equal or exceed 8%. The performance condition necessary for the second half of the conditional award subject to the ROIC condition (ie 25% of the total conditional award) to vest is that the Company's reported ROIC for FY21 must equal or exceed 12%. If the ROIC for FY21 falls between levels above, ie between 8% and 12%, the proportion of conditional awards which vest will be determined by linear interpolation between 25% and 50% in proportion to the FY21 ROIC between 8% and 12%.

The ROIC figure which will be used for the assessment of the performance condition in this section will be that reported in the FY21 Integrated Report of Datatec Group.

As noted in the remuneration policy (Part 2), the ROIC performance condition for the CSP grant in FY20 will apply to the average ROIC over the three-year vesting period and the threshold and target will be determined in relation to the Group's weighted average cost of capital.

UEPS performance condition – 50% of grant:

the performance condition necessary for the full portion of the conditional award subject to the UEPS condition (ie 50% of the total conditional award) to vest is that the Company's reported UEPS for FY21 must equal or exceed 12 cents. If this target level in UEPS is not achieved, the portion relating to this condition will lapse. The committee set this UEPS target figure at the start of FY19 with the background that FY18 had recorded a loss of 5.6 cents per share and the FY19 budget UEPS was 3.0 cents. The target therefore represented a four times increase in UEPS in two years.

The UEPS figure which will be used for the assessment of the performance condition in this section will be that reported in the FY21 Integrated Report of Datatec Group.

It is noted that the remuneration policy (Part 2) states 50% of the CSP performance condition will be based on UEPS growth. However, the UEPS for FY18 was a loss per share so the committee instead chose a notional target UEPS for FY21 as the target.

Executive directors accepted CSP awards granted as follows:

CSP Grant date Number
of awards
Fair value of
awards on grant US$'000
Grant fair value
as % of
base pay
%
Fair value
of awards at
28 February
2019
US$'000
JP Montanana 1 June 2018 1 291 148 2 142 150 2 704
IP Dittrich 1 June 2018 405 066 672 120 848

The fair value of these awards at date of grant was R20.78 per award being the 30-day volume weighted average share price on 17 May 2018, the date of the Group's FY18 results announcement. The fair value at 28 February 2019 is R29.19 being the 30-day volume weighted average share price on 28 February 2019. In both cases the fair value assumes 100% vesting of the awards, ie that the performance condition targets will be met or exceeded.

Deferred bonus plan awarded during FY19

Executive directors deferred part of their FY18 bonuses under the terms of the new DBP in June 2018. This was the first time the new DBP came into operation. In accordance with the policy, a multiplier of x2 was applied to the deferred bonus amount and Datatec shares purchased which are held for the benefit of the participants but forfeited if they should leave the employment of Datatec within the following three years.

    Amount of bonus
deferred
         
  Grant date % US$’000 Company
contribution
(x2 multiplier)
US$’000
Total
invested
in shares
US$’000
Total
number
of shares
purchased
Fair value
of awards
on grant
US$’000
Fair value of
awards at
28 February
2019
US$’000
JP Montanana 12 and 14
June 2018
83.3 837 837 1 675 1 000 000 1 675 2 094
IP Dittrich 14 June 2018 20.4 40 40 80 47 000 80 98

The fair value of these awards at date of grant was the share price at which the DBP shares were purchased on the dates shown in the table. The fair value at 28 February 2019 is R29.19 being the 30-day volume weighted average share price on 28 February 2019.

The fair value of the Company contribution shares purchased in relation to the FY18 bonus deferment is shown as part of total remuneration for FY18.

Deferred bonus plan awarded during FY20

Executive directors deferred part of their FY19 bonuses under the terms of the new DBP in June 2019. In accordance with the policy, a multiplier of x2 was applied to the deferred bonus amount and Datatec shares purchased which are held for the benefit of the participants but forfeited if they should leave the employment of Datatec within the following three years.

    Amount of bonus deferred          
DBP FY20
grant date (expected)
% US$'000 Company contribution
(x2 multiplier) US$'000
Total invested
in shares US$'000
Total number
of shares purchased
Fair value
of awards
on grant
US$'000
Fair value
of awards at
28 February
2019
US$'000
JP Montanana 1 June 2019 50.0 812 812 1 624 702 407 1 624 1 471
IP Dittrich 1 June 2019 25.0 96 96 191 82 636 191 173

Directors' interests in subsidiary share schemes during FY19

During FY19, the executive directors received awards under the Westcon International EAP by virtue of their leadership roles as CEO and CFO of Westcon International (in addition to their Datatec roles). The Westcon International EAP is explained in Part 2 of this remuneration report. The Datatec executives who participate in the Westcon International EAP will have an adjustment made to the threshold of 10% carried interest annually added to the equity base of US$125 million.

Westcon
EAP
Grant date Number of awards Fair value of
awards on
grant
US$'000
Grant
fair value
as % of
base pay
%
Fair value of awards at
28 February
2019
US$'000
JP Montanana 14 March 2018 30 000 88
IP Dittrich 14 March 2018 15 000 44

In addition to the above, Jens Montanana was granted a conditional award equivalent to 10 000 Westcon International EAP units by Datatec. This award is conditional on the sale of Westcon International being for US$300 million or more. If that condition is met Jens Montanana will receive a cash payment equivalent to the value of 10 000 units in the Westcon International EAP. The award will have the same adjustment made to the threshold, 10% carried interest annually added to the equity base of US$125 million, as the other Westcon International EAP awards provided to Datatec executives. This award had a fair value of US$14 000 at 28 February 2019.

The fair value of these awards on grant was deemed to be nil because the value of Westcon International based on book value was below the equity base threshold of US$125 million. The fair value of the Westcon International EAP awards at 28 February 2019 was determined by an actuarial calculation.

The annual LTI grant of Datatec CSP conditional shares for the Datatec executives who participate in the Westcon International EAP will, from FY20 onward, be reduced by an "equivalence" factor to avoid "double dipping" in relation to reward opportunities.

In accordance with US practice, John McCartney participated in the Westcon Group, Inc. SAR scheme (see Part 2 of this remuneration report) which terminated on the SYNNEX transaction but participants will receive a final payment under the terms of the scheme upon determination of the SYNNEX transaction earn-out.

Previous Datatec Group share schemes

The previous Datatec Group share schemes, the SARs, LTIP and old DBP, operated from 2005 with some modifications approved by shareholders in 2010 and 2011. The last grants under these schemes were in July 2017 (in FY18) and thereafter they were superseded by the CSP and new DBP. Existing grants under the previous share schemes remain active for the three-year performance periods and an update on vesting during FY19 is given below.

Modification to previous Datatec Group share schemes

All share-based awards in the course of their performance periods at the time were modified in FY18 to account for two material transactions: the sale of Westcon Americas to SYNNEX on 1 September 2017; and the disposal of Logicalis SMC. In addition during FY18, a special dividend was paid to shareholders in January 2018.

The modifications required to Datatec’s share-based remuneration to keep the economic interests of participants unchanged were as follows:

Number of awards increased by 69.7%   Exercise price (if applicable) reduced by a factor of 1.697

The factor is calculated as 56/(56-23) where R56 is the share price close the day prior to ex-dividend date and R23 is the amount of the special dividend.

Non-market performance condition modified to account for the fact that Westcon Americas profits were included in the UEPS at the start of the performance period but not at the end of the period (Westcon Americas having been disposed of during the performance period)

The Remuneration Committee decided the non-market performance condition would be modified by adding back the accounting profit on sale of the two disposals to UEPS in the third year of each award which was granted prior to the disposal. The accounting profit per share of the disposal of Westcon Americas and Logicalis SMC in FY18 should therefore be added to the final year UEPS used in assessing the vesting of the May 2015, May 2016 and July 2017 awards, all of which are based on the reported UEPS of financial years which included the earnings of Westcon Americas and Logicalis SMC.

Limits applicable to previous Datatec Group share schemes

The aggregate number of shares that may be issued under the SARs Scheme, the LTIP and the old DBP is limited to 9 250 000. 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 28 February 2018, 2 029 167 shares had been issued in settlement of the schemes. No shares were issued during FY19, so the number of shares which could still be issued before reaching the above limit is 7 220 833.

Datatec Share Appreciation Rights Scheme 2005 vesting during FY19

The SARs granted in May 2015 ("2015 SARs") were assessed for vesting in May 2018. The performance condition set by the Remuneration Committee was that UEPS (in US cents) must increase by 2% per annum above US Consumer Price Index ("CPI") inflation over a three-year performance period in order for 50% of the SARs to vest. For the other 50% of the SARs to vest, UEPS (in US cents) must increase by 4% per annum above US CPI inflation over the three-year performance period. Between those limits a sliding scale would operate. This is a non-market performance condition.

In light of the modification to the non-market performance condition explained above, the Remuneration Committee determined that the 2015 SARs exceeded the upper limit for growth of UEPS and accordingly the 2015 SARs vested in May 2018. The exercise price of the vested SARs is R35.79 which is currently above the Datatec share price and the SARs will only have value for participants if the Datatec share price rises above the exercise price.

The fair value of the SARs granted in May 2015 (during FY16) which vested during FY19 is nil because the grant price (as modified) exceeds the share price at 28 February 2019.

The SARs granted in May 2016 (during FY17) will not vest during FY20 because the performance condition for vesting (share price growth from 1 March 2016 to 28 February 2019 required to be in excess of South African CPI) has not been met. Hence the fair value at 28 February 2019 is nil.

The fair value of the SARs granted in July 2017 (during FY17) is nil because the grant price (as modified) exceeds the share price at 28 February 2019.

Directors' interests in Datatec SARs are shown in the following table:

  Grant
date
Grant
price
(ZAR)
SARs held at
beginning
of year
Exercised
during
the year
Lapsed
during
the year
SARs held
at year-end
Status at
28 February
2019
Fair value
of awards at
28 February
2019
US$’000
  14 May 2015 35.79 629 000 629 000 Vested
  12 May 2016 27.20 1 122 269 1 122 269 Not vested
JP Montanana 28 July 2017 34.94 748 955 748 955 Not vested
  Sub-total   2 500 224 2 500 224  
  12 May 2016 27.20 308 665 308 665 Not vested
IP Dittrich 28 July 2017 34.94 230 039 230 039 Not vested
  Sub-total   538 704 538 704  
  Total   3 038 928 3 038 928  

Datatec Long Term Incentive Plan ("LTIP") 2005 vesting during FY19

Conditional awards under the LTIP granted in May 2015 ("2015 LTIPs") were assessed for vesting in May 2018. The performance condition set by the Remuneration Committee was related to the total shareholder return ("TSR") of Datatec relative to the TSR of an international peer group of 22 comparator companies using a common currency basis. This is a market performance condition.

The modification explained above applied only to the number of LTIP awards in issue which was increased by 69.7%. There is no exercise price associated with LTIP awards to be modified and the performance condition was market-based and therefore modification was not applicable.

In May 2018, the Remuneration Committee determined that the performance condition set for the 2015 LTIP awards had not been met and accordingly the awards lapsed.

Directors' interests in Datatec LTIP awards are shown in the following table:

  Grant
date
Awards held
at beginning
of year
Vested and
settled during
the year
Lapsed/forfeited
during the year
Awards held at
year-end
Fair value
of awards at
28 February
2019
US$’000
  14 May 2015 629 000 (629 000)
  12 May 2016 1 122 269 1 122 269 1 175
JP Montanana 28 July 2017 748 955 748 955 784
  Sub-total 2 500 224 (629 000) 1 871 224 1 959
  12 May 2016 231 499 231 499 242
IP Dittrich 28 July 2017 172 529 172 529 181
  Sub-total 404 028 404 028 423
  Total 2 904 252 (629 000) 2 275 252 2 382

The May 2016 LTIP awards will achieve the UEPS growth performance condition (as modified) but not the ROIC performance condition and accordingly 50% will vest in FY20. The fair value of these awards is accordingly 50% of the awards multiplied by the 30-day volume weighted average share price at 28 February 2019. The same outcome is expected for the July 2017 LTIP awards and they have been valued at 28 February 2019 using the same method as applied to the May 2016 LTIP awards without discounting.

Datatec Deferred Bonus Plan 2005 vesting during FY19

The previous Datatec DBP operated in a different way from the current DBP. Under the old DBP, participants purchased Datatec shares using part of their after-tax cash bonus and these shares, termed pledged shares, were held for a three-year performance period at the end of which participants were awarded matching shares provided they remained in the employment of the Datatec Group. Participants were entitled to receive additional shares on matching, equal in value to the notional accrued dividends arising on the matched shares during the pledge period. The matching shares do not hold any voting rights until vesting.

In June 2015, three participants purchased pledged shares in the old DBP using part of their FY17 annual bonuses. The Remuneration Committee determined that these pledged shares would be matched 100% at the end of three years provided that the participants had not left the Datatec Group in the interim. Additionally a non-market performance condition was applied whereby an additional 50% would vest provided UEPS over a three-year performance period increased by US CPI + 8% per annum.

In May 2018 the Remuneration Committee assessed the outcome of the 2015 DBP. No modification was required to the number of matching shares because the special dividend accrued to the matching shares under the scheme rules. However, the modification to the non-market performance condition was required in the same way as applied to the SAR Scheme UEPS performance condition noted above. Accordingly the Remuneration Committee determined that the 2015 DBP pledged shares would be matched 150% for all participants who were still in employment. One participant (the former CFO) had resigned from the Company during the pledge period and therefore received no matching shares in accordance with the policy in Part 2 of this remuneration report.

Directors' pledged shares in the old Datatec DBP are shown in the following table:


FY19 Date of
purchase of
pledged shares
Matching
share
commitment
at beginning
of year
Performance
condition
achieved
(50%)
Shares added
in lieu of
dividends
during
three-year
pledge period
Matched
during
the year
Matching
share
commitment
at end
of year
Fair value
of awards at
28 February
2019
US$’000
  11 June 2015 130 000 65 000 156 987 (351 987)
JP Montanana 28 June 2016 100 000 50 000 111 823 261 823 548
  Sub-total 230 000 115 000 268 810 (351 987) 261 823 548
IP Dittrich 29 June 2016 45 745 22 873 51 153 119 771 251
  Sub-total 45 745 22 873 51 153 119 771 251
  Total 275 745 137 873 319 963 (351 987) 381 594 799

The pledged shares held by Jens Montanana were matched in accordance with the DBP rules as follows:

Condition     Employment Performance Total
Matching for employment condition   100% 130 000 130 000
Overperformance UEPS condition (modified)   50% 65 000 65 000
Shares in lieu of dividends attaching to matching shares     104 658 52 329 156 987
Total matching shares     234 658 117 329 351 987
The value of the matching shares delivered to Jens Montanana on 25 May 2018 was:     US$384 779 US$192 390 US$577 169

Calculated using R20.78 per share, the 30-day volume weighted average share price on 17 May 2018, the day of the FY18 results announcement and an exchange rate of 12.6727 ZAR/US$.

The old DBP shares pledged in June 2016 are expected to be matched in June 2019 (in FY20) and to achieve the additional 50% performance-based matching. Accordingly, the fair value of the matching share commitment includes the total matching shares to be delivered, valued at the 30-day volume weighted average share price on 28 February 2019.

The Remuneration Committee decided not to operate a grant under the old DBP in 2017, based on deferring FY17 bonuses.

Dilution attributable to Datatec Group share incentive plans

The estimated commitment to settle outstanding share-based payment awards would give rise to the dilution shown in the following table if new shares were to be issued in settlement:

LTI Dilution
%
SARS 0.00
LTIP 0.65
Old DBP 0.09
CSP 0.71
Total 1.45

The new DBP does not give rise to any dilution effect because forfeitable shares are granted to participants at the start of the three-year holding period. None of the divisional share-based remuneration plans could have any dilution effect as they are not settled with Datatec shares.


Single figure remuneration of executive directors

The following tables show the composition of a single figure of remuneration for the executive directors:

      CEO CFO
    Component FY18
US$’000
FY19
US$’000
FY18
US$’000
FY19
US$’000
Old LTI   SARS
    LTIP 1 175 242
             
    DBP 193 183 84
New LTI   CSP
    DBP 837 812 40 95
Total LTI     1 030 2 170 40 421
Exceptional     3 500   1 750  
STI   FY18 – cash 168   156  
    FY18 – deferred 837   40  
    FY19 – cash   812   287
    FY19 – deferred   812   95
Sub-total STI     1 005 1 624 196 382
Pension     201 214 65 84
             
Benefits     26 28 15 43
Base salary     1 340 1 428 436 560
Guaranteed package 1 567 1 670 516 687
      7 102 5 464 2 502 1 490
Old LTI

The May 2015 grant of SARs vested in May 2018 but the grant price (as modified) was higher than the current share price so the fair value is nil in the above table. The May 2016 grant of SARs did not vest in May 2019.

The May 2016 award of LTIPs did not vest in May 2018. The May 2016 award of LTIPs, with a performance period ending 28 February 2019, 50% of LTIP vested in May 2019 and the fair value of the vesting at 28 February 2019 is shown in the above table.

The DBP pledged shares acquired by directors in May 2015 and 2016 both earned a 50% performance-based matching in addition to the matching shares arising from the employment condition. The performance-based matching element (which had a performance period ended 28 February 2018 and 2019) plus the shares accruing to it in lieu of dividends during the performance period is shown in the above table at fair value (being the share price at the time of the vesting for FY18 and at 28 February 2019 for FY19).

New LTI

The value of the shares purchased by the Company equal to the amount of bonus deferred by the directors in respect of their bonuses for FY18 and FY19 is shown in the table. There is no performance-based element in the new DBP.

The CFO re-joined the business in June 2016 and consequently no LTI was scheduled to vest in FY18.

Non-executive directors' remuneration

During FY19, non-executive directors received fees, as approved by shareholders at the AGM on 20 September 2018, as follows:

Role   Fee – US$
Chairman of the Board (total fee inclusive of all committee and subsidiary board work)   201 552
Senior non-executive director   74 256
Non-executive director   63 648
Chairman of the Audit, Risk and Compliance Committee   31 824
Member of the Audit, Risk and Compliance Committee   15 912
Chairman of the Social and Ethics Committee   10 608
Chairman of the Remuneration Committee   15 912
Member of the Remuneration Committee   7 956
Member of the Nominations Committee   5 304
Trustee of Datatec trusts   7 426

Non-executive directors are reimbursed for travel costs necessary for attending Board meetings and do not receive any employment benefits.

For the year ending 28 February 2020, the Remuneration Committee proposes that fees for non-executive directors will remain at the levels set out above. In addition a new fee is proposed for the Chair of Trustees of the Datatec Education and Technology Foundation of US$12 000 per year. These fees will be presented for approval by shareholders at the AGM on 29 August 2019.

Summary of directors' remuneration

The remuneration of directors serving on the Board in FY19 and FY18 is shown in the following tables:

    Guaranteed package        
FY19
US$’000
  Basic salary Pension Other
benefits
Fees STI LTI Total
Executive directors                
JP Montanana   1 428 214 28 1 624 2 170 5 464
IP Dittrich   560 84 43 382 423 1 492
Total executive directors   1 988 298 71 2 006 2 593 6 956
Non-executive directors                
SJ Davidson   202 202
O Ighodaro (to 31 October 2018)   62 62
JF McCartney   90 90
M Makanjee (from 1 November 2018)   28 28
MJN Njeke   110 110
CS Seabrooke (to 20 September 2018)   50 50
E Singh-Bushell (from 1 June 2018)   71 71
NJ Temple (to 20 September 2018)   45 45
Total non-executive directors   658 658
Total directors’ emoluments   1 988 298 71 658 2 006 2 593 7 614
    Guaranteed package        
FY18
US$’000
  Basic salary Pension Other
benefits
Fees STI Deal bonus
(exceptional)
LTI Total
Executive directors                  
JP Montanana   1 340 201 26 1 005 3 500 1 030 7 102
IP Dittrich   436 65 15 196 1 750 40 2 502
Total executive directors   1 776 266 41 1 201 5 250 1 070 9 604
Non-executive directors                  
SJ Davidson   202 202
O Ighodaro   88 88
JF McCartney – Datatec fees   85 85
JF McCartney – Westcon fees
(to 31 August 2017)
  31 31
MJN Njeke   98 98
CS Seabrooke   116 116
NJ Temple   90 90
Total non-executive directors   710 710
Total directors’ emoluments   1 776 266 41 710 1 201 5 250 1 070 10 314

Note: the non-executive directors' fees shown above do not include VAT.

Directors' interests in shares

Directors' interests in the ordinary shares of the Company at 28 February 2019 are shown below:

    At 28 February 2019 At 28 February 2018
    Direct Indirect Associates   Direct Indirect Associates  
    Beneficial Beneficial   Total Beneficial Beneficial   Total
Executive directors                  
JP Montanana   24 004 635 24 004 635 23 004 635 23 004 635
IP Dittrich   93 329 93 329 46 329 46 329
Non-executive directors                  
SJ Davidson   11 001 11 001 11 001 11 001
JF McCartney   1 278 877 1 278 877 1 278 877 1 278 877
    93 329 25 283 512 11 001 25 387 842 46 329 24 283 512 11 001 24 340 842

Directors' interests in ordinary shares of the Company shown above are unchanged as at the date of this report. Non-executive directors not shown in the above tables did not hold any Datatec shares in either year. Executive directors' interests in shares via LTI share schemes (which have not vested/been exercised) are shown earlier in the implementation report. Shares held by executive directors in relation to the DBP (which are forfeited if they resign from the Company) are included in the above table as are the pledged shares held by executive directors under the old DBP.

The implementation of remuneration during FY19 as set out above has been in compliance with the policy in Part 2 except as noted in the text.

The FY18 remuneration implementation report was put before shareholders for an advisory vote at the AGM on 20 September 2018 and received support from 37.1% of shares voted. This FY19 remuneration implementation report will be put before shareholders for an advisory vote at the 2019 AGM. The Remuneration Committee believes that the extensive changes it has made following consultation with shareholders in November 2018 will result in a much improved level of shareholder support for the remuneration implementation in FY19.