Integrated Annual Report
2019

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Remuneration committee report

This report sets out Italtile's remuneration philosophy and policy for non-executive directors, executive directors and prescribed officers. It also provides a description as to how the policy has been implemented and discloses payments made to non-executive and executive directors and prescribed officers during the year under review.

The report focuses on the fixed and variable elements of executive remuneration, as well as fees paid to non-executive directors and uses the single figure disclosure format. Assessed against King IVTM and the amended JSE Listings Requirements, the Remuneration Committee is satisfied with the Company's compliance.

In line with leading practice as prescribed by King IVTM, this report is divided into three sections:

Section
01


BACKGROUND STATEMENT WITH FEEDBACK FROM THE CHAIRPERSON OF THE REMUNERATION COMMITTEE


Section
02


OUR REMUNERATION PHILOSOPHY, POLICY AND FRAMEWORK


Section
03

IMPLEMENTATION REPORT AND REMUNERATION DISCLOSURE OF EXECUTIVE DIRECTORS AND PRESCRIBED OFFICERS




DEAR STAKEHOLDERS

I am pleased to present Italtile's Remuneration report for the year ended 30 June 2019.

As members of Italtile's Remuneration Committee, our focus has been to assist and advise the Board on matters relating to remuneration governance and matters relating to the remuneration of senior management. The Committee is focused on responsible remuneration practices across the Company and strives for fair, responsible and transparent remuneration through the review of remuneration practices.

A core responsibility of the Remuneration Committee is to ensure that the remuneration philosophy and policy supports Italtile as follows:

  • aligns executive reward with the Group's commercial success and sustainability; and
  • supports the Group's strategic objectives and allows for the recruitment, motivation and retention of senior executives, ultimately maximising shareholder value while complying with relevant legislation and requirements of the King IVTM Report on Corporate Governance for South Africa (2016).

The Group's financial performance was solid despite difficult trading conditions. Consolidated turnover increased by 15% year on year:

  • Group trading profit increased by 18% year on year;
  • costs were contained, margins maintained and working capital efficiencies lead to improved stock turns and cash reserves year on year; and
  • Group basic earnings per share increased by 8% and headline earnings per share by 7%.

Significant progress was made in many operational areas, with the biggest challenge remaining sales growth and the further development of the people pipeline.

Satisfactory progress has been made against the objectives set in the strategic plan as approved by the Board.

Some strategic successes include:

  • the Africa growth strategy is on track with a detailed property plan for future store roll outs as well as a new distribution centre in Kenya that is operational;
  • satisfactory progress has been made on reducing Group-wide distribution costs;
  • the Group has an excellent web offering showing solid growth;
  • good progress has been made on our BBBEE plan;
  • ongoing focus on the franchise and business model; and
  • focus on executive leadership development.

REMUNERATION COMMITTEE AT A GLANCE

As tasked by the Board, the Committee assists in setting the Company's remuneration policy and remuneration for directors and prescribed officers. As per its terms of reference, published on our website, the Committee's responsibilities are to:

  • assist the Board in developing and setting the Group's Remuneration Policy;
  • determine and approve the total remuneration of executive directors and executive management;
  • determine and approve the performance measures for executive directors;
  • review the compensation basis and proposed average annual increases for the Group's employees;
  • review remuneration and Board best practice and trends in order to assess the appropriateness of the remuneration policy;
  • review remuneration matters for top management promotions, transfers and termination of employment;
  • oversee any proposed major changes to employee benefit structures throughout the Group;
  • review and recommend short and long-term incentive policies and targets for directors, executive management and staff;
  • set the participation principles for the various remuneration schemes;
  • review and recommend performance management policies;
  • ensure compliance with applicable laws and codes;
  • advise on the fees for non-executive directors; and
  • review and evaluate the contribution of each executive director and member of senior management and determine their salary adjustments on an annual basis.

Key decisions taken by the Remuneration Committee during the year under review include:

  • approval of increases and adjustments for executives and senior management, as well as the framework for increases for all other employees;
  • approval of short and long-term incentive structures and awards for executives and senior management as well as the framework for all other employees;
  • approved the key performance indicators for the executives; and
  • recommendation of non-executive director fees for approval to the Board.

As required by the Companies Act and King IV, the following resolutions will be tabled for shareholder voting at the AGM, details of which can be found in the AGM notice:

  • binding vote on non-executive directors' fees; and
  • a non-binding advisory vote on the Group's remuneration policy.

The Committee Chairperson reports to the Board after each Committee meeting and attends the AGM to answer questions from shareholders on the Committee area of responsibility.

The Committee is focused on responsible remuneration practices across the Company. Our industry faces many challenges and we recognise the need to retain top talent to ensure a focused drive to meeting shareholder expectations. It is important that Italtile presents a competitive value proposition in remuneration and benefits.

REMUNERATION COMMITTEE COMPOSITION

The Remuneration Committee is a sub-committee of the Board. The Committee meets at least twice per annum. The Committee is chaired by an independent non-executive director and comprises three directors. The majority of directors on the Committee are independent.

The current members of the Committee are:

Mrs S M du Toit (Chairman), Mr G A M Ravazzotti and Mr S G Pretorius.

The Board considers the Committee's composition to be appropriate in terms of the necessary knowledge, skills and experience of its members.

The Italtile Group Company Secretary, E J Willis, attends all meetings of the Committee as secretary. The Chief Executive Officer attends all meetings by invitation in order to provide input and guidance with regard to executive director and senior management remuneration.

No attendee may participate in any discussion or decision regarding his or her own remuneration.

The Committee met twice during the year. Attendance at the meetings was as follows:

Members and invitees Attendance at meetings
S M du Toit 2/2
G A M Ravazzotti 2/2
S G Pretorius 2/2

At the AGM on 16 November 2018, our remuneration policy was endorsed by 82,35% of our shareholders. We believe that this reflects recognition of our ongoing commitment to engage with our shareholders, and act on concerns where necessary.

In the event that the remuneration policy or implementation report is voted against by shareholders exercising 25% or more of the voting rights, dissenting shareholders will be invited to engage with the Company. The manner and timing of such engagement will be provided, if necessary.

We trust that this Remuneration report provides an accurate overview of the Company-wide remuneration policy and its implementation and specifically an in-depth view on executive management remuneration in the past year.

Susan du Toit

Remuneration Committee Chairman

7 October 2019

REMUNERATION PHILOSOPHY

Italtile is committed to maintaining pay levels that reflect an individual's worth to the Group. The Group's philosophy is to treat employees as business partners, developing a sense of ownership.

Our remuneration philosophy is governed by the principles of equity, fairness and affordability, ensuring alignment between management and shareholder requirements.

Remuneration policies are designed to attract, reward and retain the executives and employees needed to deliver on Italtile's business strategy.

REMUNERATION POLICY

The remuneration policy subscribes to King IVTM recommendations and principles on which it is based include the following principles:

  • remuneration practices are aligned with Company strategy;
  • total rewards are set at competitive levels in the relevant market to ensure we attract, motivate and retain highly talented individuals;
  • total rewards are managed to align to the principle of responsible and fair pay;
  • total remuneration costs need to be affordable at an individual corporate entity level and justifiable to employees and stakeholders;
  • incentive-based results are linked to achieving demanding performance conditions consistent with shareholder interest over the short, medium and long term; and
  • performance measures and targets for incentive plans are structured to operate effectively throughout the business cycle and support the business strategy.

ELEMENTS OF REMUNERATION

Italtile has an integrated remuneration and reward model which includes guaranteed remuneration, short-term incentives and long-term incentives. The components of total remuneration for permanent employees, prescribed officers and executives are fixed remuneration and variable remuneration.

Fixed remuneration comprises a basic salary and benefits, aligned to roles and performance. Variable remuneration comprises short-term incentives and long-term incentives, aimed at retention of critical employees. Performance is measured against set performance indicators.

All employees share in Group profits, based on an individual's contribution to the Group. The Group has a minimum cost to Company target of R120 000 per employee.

During the 2014 financial year, the Group implemented a Share Incentive Scheme for all qualifying employees of the Group and its franchisees that had been in the employ of the Group and/or franchise network for a period of three uninterrupted years at each allotment date in August, every year from the implementation date. Until vesting, the shares will continue to be accounted for as treasury shares and have an impact on the diluted weighted average number of shares.

The allotment is funded by the Group and the shares are restricted instruments which will vest with employees following a further three years of employment. Until vesting, the shares will continue to be accounted for as treasury shares.

The various elements of remuneration are outlined below:

Guaranteed salary for employees

Guaranteed salary is reviewed annually and positioned competitively against peers that are comparable in size, sector and business. Company performance, affordability, individual performance and average industry and sector increases are considered in determining any annual adjustment. Increases are generally inflation-linked and, where affordable, additional budget is allocated for adjusting remuneration levels that are not appropriately aligned to internal pay ranges and/or market rates for a specific job.

Benefits

Benefits offered to employees include medical aid, provident fund and other benefits relevant to Italtile.

Incentives

The Italtile Group administers incentive schemes to encourage and reward delivery of its strategic priorities over the short, medium and long term. The short-term incentive focuses on achieving business targets in that financial year, while the long-term incentive closely aligns the interests of executives with shareholders over the longer term.

Short-term incentives

All employees share in profit. Executives take part in the Executive Profit Share Scheme.

Long-term incentives

As per the policy on long-term incentives, there are three long-term incentive schemes within the Italtile Group, each rewarding performance in an appropriate manner, designed to reward and retain key personnel. The long-term incentives include the Italtile Share Appreciation Rights Scheme, the Executive Retention Plan and the Ceramic Industries Equity Incentive Scheme.

Qualifying criteria for the long-term incentives are as per the executive scorecards.

  • Share Appreciation Rights Scheme

    In accordance with the Share Appreciation Rights Scheme ("SARS"), selected directors and employees of the Group are awarded a conditional share award linked to the value of notional Italtile Limited shares ("shares"). 25% of the awards vest after three years from grant date, and the balance (75%) after five years. The value of an award is equal to the increase in the value of the shares between grant date and vesting date (the value at the latter date is defined as the volume weighted average price of Italtile Limited shares as traded on the JSE over the 10 trading days preceding and including the vesting date).

    The qualifying criteria specific to SARS awards are the short-term strategic initiatives and operational KPIs per the executive scorecards.

  • Executive Retention Plan

    The Executive Retention Plan is an additional mechanism, over and above the existing Italtile Limited Share Appreciation Rights Scheme, to retain and reward selected employees and directors in line with the Group's values and remuneration philosophy of partnership. Italtile selectively enters into Retention Plan agreements with employees and directors in terms of which retention payments are made to them in conjunction with awards in terms of the Share Scheme. The payment of a retention award to an employee or director is subject to such employee or director remaining with the Group for a period of at least five years. The employee or director shall be the registered and beneficial holder of the shares acquired pursuant to the retention award from the date of transfer of such shares.

    Awards from these two schemes are to be applied towards the obligatory subscription and/or purchase of Italtile Limited ordinary shares.

  • Ceramic Industries Equity Incentive Scheme

    The scheme is used to incentivise senior management on long-term profitability. A number of notional shares are awarded to an individual. These shares are due in two tranches (25% after two years, 75% after four years). Of the shares vesting in any one of the tranches, 20% are not conditional, while 80% are conditional. For conditional shares, there is a minimum profit target (below which no conditional shares are received). A straight-line calculation is used to find the number of shares to be received if the profit lies between the minimum and maximum targets. The targets are based on the profit for two years (year one and two for the first tranche and year three and four for the second tranche). The 'shares' are cash-settled. After tax is paid, the balance of the cash payment is applied towards the obligatory purchase of Ceramic Industries ordinary shares.

    Executives and prescribed officers are encouraged to build a meaningful shareholding in the Company over time.

Malus and clawback

The Committee has the discretion to clawback the pre-tax proceeds of any discretionary payment or share award received by employees in the event of a trigger event.

A trigger event would include, inter alia:

  • the discovery of material misstatement of the financial statements, in terms of which the discretionary payment was made, to which the Board is satisfied that the employee has contributed or is responsible for;
  • the discovery that the assessment of any metrics upon which the award was made was based on erroneous, inaccurate or misleading information;
  • any action or conduct which, in the reasonable opinion of the Board, amounts to dishonesty, misbehaviour, fraud or misconduct;
  • the discovery of a material failure in risk management to which the employee had contributed to or is responsible for; and/or
  • the discovery that performance related to financial and non-financial targets was misrepresented and that such misstatement led to the over-payment of incentives.

The clawback applies for three years after the discretionary payment is made, or in the case of share schemes, three years after the awards have vested.

EXECUTIVE AND KEY MANAGEMENT PERFORMANCE MANAGEMENT

Executive and key management's performance is measured in the following categories, with specific performance targets/indicators per category, namely:

  • progress against the strategic plan milestones;
  • financial performance;
  • human capital;
  • BBBEE;
  • customer satisfaction; and
  • cultural fit/values.

The key performance areas for executives for the year under review, were as per the table below:

Focus area   Desired outcome Performance Rating
1. Strategic plan   Drive eight key strategic objectives of approved five-year plan In progress Achieve
  Three regional distribution centres on track by June 2019 In progress Achieve
  Trial new lighting merchandise category across the Group and pilot at least three U-Light stores In progress Achieve
  Property portfolio growth:
  • Open 10 to 15 new stores for the year
  • Close up to five non-performing stores
  • Improve return on property portfolio
  • Opened 17 + 15 pipeline
  • Closed five non-performing stores
  • Improving
Achieve
  Build stronger CTM leadership and equity partner Complete Achieve
  Restructure operations team as well as hybrid JV and franchise in regions to ensure longer-term sustainability Complete
  Enhance online offering and open TopT webstore on Magento 2 platform Complete
2. Financial performance  

Grow Group profit for the year:

  Half-year Full year Achieve*
 
  • HEPS greater than 10%
HEPS 13% 7%
 
  • Trading profit greater than 15%
Trading profit 35% 18%
  Improve Group working capital management and Group stock turn by 10% Improved Achieve
  Return on shareholders’ interest improved (minimum 23%) Actual 23% Achieve
3. Human capital   Improve employee engagement score Actual 74 in November Achieve
 

Implement two leadership initiatives:

  • Diversity training
  • Introduce 360 assessments for Exco and senior management
Complete Achieve
  Store operator pipeline improved to 10 per annum In progress Achieve
  Identify international or relevant local training courses for executive management and prescribed officers In progress with Woodburn Mann and Insead (CEO) Achieve
4. BBBEE   Achieve 70 points and aim for level 6 76,6 points and level 6 achieved Superior
  Improve preferential procurement scoring Good progress from 6 to 16 points achieved Superior
  Ownership initiative implemented not to be discounted Yard Holdings transaction completed end-August 2019 Achieve
5. Customer satisfaction   Improve score and measurement in all three retail brands including new brand health monitor:
  • Italtile Retail
  • CTM
  • TopT
Improvement across all brands and measures with exception of sentiment score in CTM Achieve
6. Cultural fit/values   Entrench the Group’s core values of partnerships, hands-on approach, performance driven, entrepreneurial flair, high work ethic, transparency in communication, dignity, empowerment, integrity and putting the customer first Improved Achieve
  Maintain good relationships with external shareholders Good progress Achieve
* HEPS under achieved but on balance KPI was achieved.

SERVICE CONTRACTS OF EXECUTIVE DIRECTORS AND PRESCRIBED OFFICERS

  • Executive directors and prescribed officers have permanent contracts.
  • The notice period prescribed by the contracts is one calendar month.
  • Contracts are regularly reviewed to ensure they remain aligned with governance and legislative requirements.

NON-EXECUTIVE DIRECTOR FEES

  • Non-executive director appointments are made in terms of the Company's Memorandum of Incorporation ("MoI") and confirmed at the AGM of shareholders after the appointment.
  • Fees reflect the directors' role and Committee membership and are not linked to the Italtile share price. A fee applies for any additional ad hoc work but not exceeding 100 hours a year above Board and Committee meetings.
  • Fees are reviewed by the Committee annually and require approval from shareholders at the AGM.
  • Non-executive directors do not participate in any of the Company's short or long-term incentive plans, and they are not employees of the Company.
  • The recommendation of the Remuneration Committee on the proposed fees is submitted to the Board for consideration before being proposed to shareholders for consideration and approval at the AGM. If approved, the fees become effective in the month following the AGM.

Non-executive director fees for 2019 are tabulated in section 3 of this Remuneration report.

USE AND JUSTIFICATION OF REMUNERATION BENCHMARKS

The Remuneration Committee reviews remuneration and Board leading practice and remuneration trends in order to assess competitiveness in the market. External remuneration benchmark reviews published by PwC, EY and the Institute of Directors in Southern Africa are reviewed and taken into account when determining pay levels and structures.

NON-BINDING ADVISORY VOTE

Shareholders are requested to cast a non-binding advisory vote on section 2 of this Remuneration report (remuneration policy).

The implementation report details the outcomes of implementing the approved policy in section 2 of this report.

The outcome of the performance assessment directly impacts decisions on guaranteed pay, short-term incentives and long-term incentives, as illustrated in the table below:

Description     Assessment of performance     Impact on executive remuneration
Guaranteed basic salary     Scorecard KPIs – achieved    
CEO: 30%   increase*
Executive Retail: 5%      increase
Executive Manufacturing: 5%      increase
Executive Finance: 5%      increase
Short-term incentives    

0,3% of profit before tax shared between the CEO, CFO and Executive Retail

CEO: 100  units
Executive Retail: 60    units
Executive Finance: 40    units
   
  • Executives shared in profits
  • Group profit before tax grew by 15%
Long-term incentives     Awarded to high-performing, high-potential employees and executives in line with the Group's philosophy of partnership     All three executives and the two prescribed officers share in long-term incentives as disclosed in this section of this report
* The guaranteed basic salary of the CEO was adjusted by 30% effective 1 July 2019, considering market trends, industry expertise, success in the role and size of the Group in order to ensure competitiveness in the market.

The Committee concluded that, on an overall basis, the executive directors met the expectations and achieved the targets set by the Board as per the scorecard in section 2.

EXECUTIVE DIRECTORS’ AND PRESCRIBED OFFICERS’ PARTICIPATION IN SHARE INCENTIVE SCHEMES

Executive directors' holdings under the SARS are set out in the table below:

Executive director  Awards held at 
1 July 2018 
Awarded 
during 
the year
 
Vested and 
exercised 
during 
the year
 
Forfeited 
during 
the year
 
Awards 
held at 
30 June 2019
 
J N Potgieter  3 250 000  –  –  –  3 250 000 
B G Wood  2 437 500  –  (437 500) –  2 000 000 
T T A Mhlanga  500 000  –  –  –  500 000 

Executive directors' holdings under the Executive Retention Plan are set out in the table below:

Director  Awards held at 
1 July 2018 
Awarded 
during 
the year
 
Vested 
during 
the year
 
Forfeited 
during 
the year
 
Awards 
held at 
30 June 2019
 
  
J N Potgieter  4 000 000  –  –  –  4 000 000    
B G Wood  1 500 000  –  (500 000) –  1 000 000    
T T A Mhlanga  –  500 000  –  –  500 000    

Prescribed officers' holdings under the Ceramic Industries Executive Share Scheme are set out in the table below:

Prescribed officers Awards held at
1 July 2018
Awarded
during
the year
Vested
during
the year
Forfeited
during
the year
Awards
held at
30 June 2019
 
L Foxcroft 207 069 207 069  
T Molefakgotla 165 656 165 656  

DIRECTORS' AND PRESCRIBED OFFICERS' EMOLUMENTS ("SINGLE FIGURE REMUNERATION")

All figures in R000 Base
salary
Short-term
incentives
Provident
fund and
medical
contributions
Gain on
share
scheme
awards
Other Total
2019
  Total
2018
 
Executive directors
J N Potgieter 2 848 2 513 472 13 887 550 20 270   20 938  
B G Wood 2 240 1 637 360 6 633 357 11 227   7 969  
T T A Mhlanga 1 728 923 272 1 985 228 5 136   1 988  
2019 6 816 5 073 1 104 22 505 1 135 36 633      
2018 6 243 106 1 011 22 878 657     30 895  
All figures in R000 Base
salary
Short-term
incentives
Provident
fund and
medical
contributions
Gain on
share
scheme
awards
Other Total
2019
  Total
2018
 
Prescribed officers
L Foxcroft 2 822 2 892 691 8 619 382 15 406   15 378  
T Molefakgotla 1 835 2 024 433 6 895 319 11 506   10 664  
2019 4 657 4 916 1 124 15 514 701 26 912  
2018 4 250 3 569 1 030 15 514 1 679 26 042  
IFRS 2 expense recognised for Executive Share Awards.

BOARD MEETING ATTENDANCE OF EXECUTIVE DIRECTORS

Executive directors and prescribed officers do not draw any additional remuneration for attending the main Board or Committee meetings.

NON-EXECUTIVE DIRECTORS’ FEES

Payments to non-executive directors
All figures in R000 Board
fees
Other Total
2019
  Total
2018
Non-executive directors
G A M Ravazzotti 1 687 1 687   1 610
L R Langenhoven 192 192  
S I Gama   117
S M du Toit 884 884   772
S G Pretorius 550 550   453
N Medupe 481 481   416
N V Mtetwa 380 380   244
N P Khoza 291 291   28
Z Nyanga 8 8  
2019 4 473 4 473  
2018 3 640 3 640
Aggregate emoluments of directors who served during the year 68 018   60 577

The following fixed fees were in place for the year under review:

Basic annual fee R100 000
Board meeting fee R25 000
Committee fee R21 000
Chairman of Committee R26 000
Strategy session fee R30 000
Hourly rate for ad hoc work, not exceeding 100 hours a year R3 400 per hour
Chairman of the Board R1 251 000

NON-BINDING ADVISORY VOTE

Shareholders are requested to cast a non-binding advisory vote on section 3 of this Remuneration report.

STAKEHOLDER ENGAGEMENT

We value our continued engagement with various stakeholders, and we endeavour to maintain our relationships with all in the hope that we will continue to receive their valued input.

NEW RETENTION SCHEME

A new Retention Scheme will be tabled for approval at the AGM. Refer to Annexure 1 of the notice of annual general meeting. The objectives of the new Retention Scheme are similar to those of the existing Executive Retention Plan, other than that the shares will only be allocated and vest at the end of the retention period in the new scheme.

APPROVAL

This Remuneration report was approved by the Board of directors of the Company on 7 October 2019.