Sanlam’s remuneration philosophy and policy support the Group strategy by incentivising the organisational behaviour required to meet and exceed predetermined strategic goals. Both short and long-term strategic objectives are measured and rewarded and this blended approach strongly mitigates excessive risk-taking and balances longer-term strategic objectives with short-term operational performance. The remuneration philosophy is therefore also an integral part of the Group’s risk management structure. In setting up the reward structures, cognisance is taken of prevailing economic conditions, as well as local and international governance principles.
A great deal of attention is given to correctly position both the nature and the scale of remuneration relative to relevant comparator groups and international best practice. Steps are also taken to ensure alignment with the applicable regulatory and governance requirements in each of the countries in which the Group operates. In South Africa, those specifically include the King Code of Corporate Governance (King III), while also conforming to the remuneration principles contained in the codes of good practice, which support Employment Equity legislation.
Sanlam is the sole or part owner of a number of subsidiaries, joint ventures and associates. While compliance with the Sanlam Group remuneration strategy and policy is primarily targeted at Group operating subsidiaries, Sanlam will use its influence to encourage the application of sound remuneration practices in those businesses where it does not hold a controlling interest.
The Group Human Resources and Remuneration committee of the Sanlam Board (GHRRC) is responsible for developing the remuneration strategy of the Group and presenting it to the Board for approval. Its activities include approving the guidelines and philosophy to be applied in formulating mandates for all bonus and long-term incentive schemes and setting remuneration packages of the Sanlam Group Executive committee (Executive committee) and the Sanlam Heads of Control functions (Actuarial Control, Internal Audit, Compliance and Risk Management), relative to industry benchmarks. The GHRRC has the prerogative to make all remuneration decisions it deems appropriate within an approved framework and may propose amendments to any part of the Group’s remuneration policy as necessitated by changing circumstances. It also makes recommendations to the Board regarding the remuneration of Sanlam directors, other than the GHRRC’s committee fees. To fulfil the role described above, the GHRRC undertakes the following:
The South African Companies Act, 71 of 2008 (the Act), introduced the concept of a ‘prescribed officer’. The duties and responsibilities of directors under the Act also apply to ‘prescribed officers’ as well as members of board committees who are not directors. The Board has considered the definition of ‘prescribed officers’ and resolved that the members of its Executive committee are the prescribed officers of Sanlam. Remuneration details of the Executive committee are accordingly also disclosed in this report.
Sanlam’s corporate governance practices, including the remuneration policy, are discussed with major shareholders and proxy voting organisations as part of the Group’s stakeholder engagement process.
The lower level of shareholder support in 2016 compared to 2015 related to revised views of an international proxy voting agency and commensurately some shareholders that the performance measurement of pre-2017 Deferred Share Plan (DSP), Performance Deferred Share Plan (PDSP) and Restricted Share Plan (RSP) awards effectively amounted to retesting. This is not in line with the Group’s view and the intention of the schemes. After extensive engagement with stakeholders, it became clear that unanimity is unlikely to be reached. The performance measurement of these LTIs were accordingly amended with effect from 2017, as outlined further in this report, to ensure that the Group’s remuneration practices remain fully aligned with prevailing shareholder requirements or those guided by international proxy voting agencies.
The Board recognises that appropriate remuneration for executive directors, members of its Executive committee and other employees is inextricably linked to the attraction, development and retention of top-level talent and intellectual capital within the Group. Given the current economic climate, changes in the regulatory requirements and the ongoing skills shortage, it is essential that adequate measures are in place to attract and retain the required skills. In order to meet the strategic objectives of a high-performance organisation, the remuneration philosophy is positioned to reward exceptional performance and to maintain that performance over time.
Sanlam’s remuneration philosophy aims to:
Sanlam executive directors and members of the Sanlam Executive committee are contracted as full-time, permanent employees for employment contracting purposes. As a standard element of these contracts, a restraint of trade (up to 12 months) is included, which Sanlam has the discretion to enforce depending on the circumstances surrounding the individual’s departure. Notice periods are three months’ written notice. Bonus payments and the vesting of long-term incentives that are in place at the time of an individual’s termination of service are subject to the rules of the relevant scheme with some discretion being allowed to the GHRRC based on the recommendations of the Group Chief Executive. No clauses are included in employment contracts that relate to any form of payments in the event of a change in control of Sanlam. In the event of a change in control the vesting of share awards will only be accelerated if an offer is made that does not substitute unvested LTI’s with arrangements on terms similar to that of the existing terms and conditions.
A detailed description of each component follows in the next section.
Where applicable, the quantum of the different components of the package is determined as follows:
As an integral part of TGP, Sanlam provides a flexible structure of benefits that can be tailored, within certain limits, to individual requirements. These include:
Where the bonus targets are not achieved in full, a reduced bonus, based on a sliding scale, will be paid only if a minimum threshold performance level has been achieved.
Where the annual business bonus targets are not achieved, an amount may be set aside to reward exceptional individual performance at the discretion of the Group Chief Executive.
The annual bonus targets at a Group and cluster level incorporate a number of financial and non-financial performance measures that are directly linked to the Group strategy and key performance indicators, including net result from financial services, adjusted Return on Group Equity Value (RoGEV) and employment equity. The specific performance targets and relative weighting is determined per cluster based on the cluster’s strategic initiatives. The Group office targets reflect the overall performance of the Group.
The Group delivered an overall satisfactory performance during the 2016 financial year, as elaborated upon in the 2016 Integrated Report. A number of businesses outperformed targets for the year, with the Group in general largely meeting the stretched overall targets. Adjusted RoGEV in particular significantly exceeded the Group hurdle with substantial shareholder value created during 2016. This resulted in a weighted average bonus achievement of 129,1% (2015: 110%) at a Group office level.
Long-term incentive awards granted are split between individual performance (granted under the DSP and awards made without business-related performance conditions under the RSP) and business-related performance awards (granted under the PDSP and awards made with business-related performance conditions under the RSP).
Awards granted to any one individual under all equity-settled plans (the DSP, PDSP, RSP and OPP) are subject to an overall limit of 6,5 million unvested shares.
For all shares awarded under the DSP pre-2017, the measurement period is five years and early vesting may occur as follows, provided that all the vesting conditions have been met:
The award granted under the DSP is not subject to the satisfaction of the Group performance conditions but does require meeting individually contracted performance hurdles. Typically, the award granted under the DSP has a face value of up to 105% of TGP. To the extent that this percentage falls, whether through vesting or due to a promotion or salary increase, an additional award may be granted on an annual basis to maintain the level of participation under the DSP. For the year ended 31 December 2016 allocations in respect of 4 516 170 shares (2015: 3 921 545) were made to 828 participants (2015: 813) under the DSP.
In addition to the individual remaining employed by the Group throughout the measurement period and maintaining agreed upon individual performance hurdles, the vesting of the award is also subject to the condition that the Group’s RoGEV exceeds its cost of capital for the relevant measurement period (Group performance hurdle-(adjusted RoGEV for pre-2016 grants)). Cost of capital is defined as the nine-year government bond rate in South Africa plus 400 basis points (300 basis points in respect of awards made before 2016). The exact condition varies by reference to the value of the performance award as a proportion of the individual’s TGP. The higher the award allocated, the more stretching the vesting conditions are. For awards in excess of 175% of TGP the vesting conditions also include a business- specific hurdle in addition to the individual and Group performance hurdles.
The exact performance conditions are set by the GHRRC at the relevant date of grant.
The use of RoGEV as a performance condition is considered appropriate as this is the key performance indicator of the Group’s strategy and long-term sustainability, and the use of this measure means a direct link between the long-term incentive reward, Group strategy and shareholders’ interests.
For all shares awarded under the PDSP pre-2017, the performance measurement period is six years. To the extent that they are not met at the end of this period, the performance- related awards will lapse.
However, awards accepted by participants under the PDSP pre-2017 can vest prior to the end of the six-year performance measurement period on a proportional basis similar to the pre-2017 DSP. This arrangement was aimed at encouraging performance that will result in performance hurdles being met earlier within the agreed performance measurement period.
A change in performance measurement similar to that proposed for awards under the DSP from 2017 will apply to awards made under the PDSP with effect from 2017 to address shareholder concerns around retesting (refer above).
To the extent that the value of performance awards falls below the specified multiple of TGP, whether through vesting or due to a promotion or salary increase, an additional award may be granted on an annual basis to maintain the level of performance awards and encourage ongoing long-term performance.
For the year ended 31 December 2016 allocations in respect of 1 593 330 shares (2015: 1 375 071) were made to 236 participants (2015: 227) under the PDSP.
The RSP has to date been operated in conjunction with the annual bonus plan (refer to short-term incentives section above) for selected senior staff. Where a bonus payment is awarded that is in excess of the cash bonus cap, that excess amount will be awarded as restricted shares under the RSP. Under this plan, individuals receive fully paid-up shares in Sanlam. The individual owns the shares from the date of grant and is entitled to receive dividends. However, the shares are subject to vesting conditions and may be forfeited and the dividends repayable if these conditions are not met during the measurement period.
The restricted shares awarded require the individual to remain employed within the Group until the final vesting date and maintain the agreed individual performance hurdles. A portion of the restricted shares awarded is subject to a Group performance condition. The performance condition for awards granted to date is that the Group’s RoGEV (adjusted RoGEV for pre-2016 grants) per share exceeds the Group’s cost of capital – and such condition varies between 0% and 100% of the award depending on the individual’s role.
For awards pre-2017 the measurement period is six years, but early vesting can occur on a basis similar to that of the pre-2017 PDSP on the third, fourth and fifth anniversary of the date of grant, provided that all vesting conditions are met on such dates, as determined by the GHRRC. For the year ended 31 December 2016, allocations in respect of 385 671 shares (2015: 391 830) were made to 13 participants (2015: 17) under the RSP.
A change in performance measurement similar to that proposed for awards under the DSP and PDSP from 2017 will apply to awards made under the RSP with effect from 2017 to address shareholder concerns around retesting (refer above).
From time to time, at the discretion of the GHRRC, participation in an individual OPP is extended to certain members of the Sanlam Executive committee who are leaders of the Group’s main operating businesses or, in very limited circumstances, to senior leaders within the main businesses. The OPP rewards superior performance over a three to five-year measurement period.
No payment is made under the OPP unless the agreed growth target over the period is exceeded and full payment is only made if the stretched performance target is met. The maximum payment that can be made under the OPP is 200% of the annual TGP in the final year calculated over the respective three or five-year measurement period (e.g. 6 or 10 times the annual TGP of the final measurement year).
No payment is made under the OPP unless the agreed performance target over the period is exceeded and full payment is made only if the stretched performance target is met. The maximum payment that can be made under the OPP is 200% of the annual TGP in the final year calculated over the respective three or five-year measurement period (e.g. six or 10 times the annual TGP of the final measurement year).
In exceptional circumstances, a collective OPP arrangement may be extended to a business Executive committee. This has been implemented for the Santam Executive committee.
To encourage alignment between executive and stakeholder interests, Sanlam applies a minimum shareholding policy to all current and future members of the Sanlam Executive committee, including executive directors (participating executives). In terms of these arrangements, the following minimum shareholding levels, expressed as a percentage of annual TGP, must be reached by later of 31 December 2021 or within six years from the date of appointment of a participating executive:
Participating executives are required to maintain the target shareholding throughout their tenure with the company. Unvested shares under any long-term incentive arrangement will not be taken into account when assessing compliance with the MSR policy.
Incentive arrangements implemented after 1 January 2016 may include MSR terms and conditions as determined by the GHRRC to ensure compliance with the prescribed levels in the prescribed periods, as well as the implications of not adhering to the MSR.
For the purposes of determining compliance with the MSR levels, the value of a participating executive’s shareholding at the end of each financial period will be determined by using the average closing price of Sanlam ordinary shares on the JSE for the trading days in that financial period and expressed as a percentage of the participating executive’s annual TGP at the end of that financial period.
Remuneration earned by executive directors and members of the Sanlam Executive committee was as follows:
The TGP (in rand) of the executive directors and members of the Executive committee are reflected in the table below. Due to increases in TGP being granted during the year, the TGP amounts reflected in the table will not correspond to those included in the summary remuneration table.
The average salary increase paid to executive directors for 2016 was 5,3% (2015: 5,6% – excluding Johan van Zyl and Ian Kirk) and that of members of the Executive committee was 7,7% (2015: 5,2% – excluding Anton Gildenhuys, Hubert Brody and Robert Roux) compared with an average salary increase paid to all employees of 7,0% (2015: 6,5%). The exclusions in respect of 2015 took account of changes in positions and the special arrangement that applied to Johan van Zyl in order to determine a normalised increase. The higher than normal overall increase to Executive committee members (7,7%) is due to benchmarking corrections related to both competitiveness and performance. The remuneration increase trends for the last seven years are as follows:
The performance targets for the annual bonus plan are set by the GHRRC on an annual basis for executive directors and members of the Executive committee. In respect of the 2016 annual bonus, the split between business, Group and personal performance criteria for executive directors and members of the Executive committee was as follows:
The payments that can be achieved by executive directors and members of the Executive committee at the target and stretch levels are as indicated below. These levels are benchmarked with comparator groups together with other components of remuneration.