Performance related pay

2014

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Our context

We simply cannot ignore our context anymore

Our context plays an important role in setting our Reward philosophies, policies and strategies

Global Reward Trends

2012

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McKinsey research Sept 2012

90 Million people will lose their jobs by the year 2020

Who ate my job?

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In our new world of work, unemployment is high yet skilled and talented people are in short supply

A big driver of Reward management in the future is Economics – Supply and Demand

5 Years Ago

Now

The Greatest Mismatch of All Time

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Growt_ & P_ofitThe world’s most successful companies have this

one figured out

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Top Remuneration Issues

1. The “wage gap” / Gini-coefficient

2. Performance Related Pay

3. LTI design

4. Selecting appropriate comparators

5. Pay restraint, Governance and Compliance

6. Best value for money spend/cost control

7. Remuneration committee performance

8. Board performance and measures

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Changing Remuneration

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Major guidelines and frameworks

Financial Stability Forum

Commission of European Union

Financial Services Authority

King III

JSE Listing requirements

Pillar III

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The highest paid CEOs of 2012 USA

1. David Simon, Simon Property Group, $137.2 million, up 458 percent

2. Leslie Moonves, CBS, $68.4 million, up 20 percent

3. David M. Zaslav, Discovery Communications, $52.4 million, up 23 percent

4. Sanjay K. Jha, Motorola Mobility, $47.2 million, up 262 percent

5. Philippe P. Dauman, Viacom, $43.1 million, down 49 percent

6. David M. Cote, Honeywell International, $35.7 million, up 135 percent

7. Robert A. Iger, Walt Disney, $31.4 million, up 12 percent

8. Clarence P. Cazalot Jr., Marathon Oil, $29.9 million, up 239 percent

9. John P. Daane, Altera, $29.6, million, up 278 percent

10. Alan Mulally, Ford Motor, $29.5 million, up 11 percent

11. Gregory Q. Brown, Motorola Solutions, $29.3 million, up 113 percent

12. Richard C. Adkerson, Freeport-McMoRan, $28.4 million, down 19percent

13. Ian M. Cumming, Leucadia National, $28.2 million, up 531 percent

14. Brian L. Roberts, Comcast, $26.9 million, down 13 percent

15. Jeffrey L. Bewkes, Time Warner, $25.7 million, down 2 percent

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The Gorilla of Wall Street, as Dick Fuld was

known, steered Lehman deep into the

business of subprime mortgages, bankrolling

lenders across the country that were making

convoluted loans to questionable borrowers.

Lehman even made its own subprime loans.

The firm took all those loans, whipped them

into bonds and passed on to investors billions

of dollars of what is now toxic debt. For all this

wealth destruction, Fuld raked in nearly $500

million in compensation (pay for

performance?) during his tenure as CEO,

which ended when Lehman did.

Rogues gallery – exhibit 1

Time Magazine: 25 people to blame for the financial crisis

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Who decided banks had to be all things to all

customers? Sandy Weill did. Starting with a low-

end lender in Baltimore, he cobbled together the

first great financial supermarket, Citigroup. Along

the way, Weill's acquisitions (Smith Barney,

Travelers, etc.) and persistent lobbying shattered

Glass-Steagall, the law that limited the investing

risks banks could take. Rivals followed Citi. The

swollen banks are now one of the country's major

economic problems. Every major financial firm

seems too big to fail, leading the government to

spend hundreds of billions of dollars to keep them

afloat (taxpayers money!). The biggest problem

bank is Weill's Citigroup. The government has

already spent $45 billion trying to fix it.

Rogues gallery – exhibit 2

Time Magazine: 25 people to blame for the financial crisis

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The formula exists…

Why are we more comfortable with sports peoples pay or actors pay?

It is because we can see what they do to earn their money…

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Critical success factors for PM to work

1. The chief executive officer (CEO) owns performance

management in the organisation

2. A clear understanding of the corporate strategy by

all

3. Simple documentation

4. A conversation takes place

5. An output-oriented culture

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The business case for PMFinancial Measures

Total Shareholder

Return

Return on

Equity

Return on

Assets

Cash Flow Return

on Investment

Real Growth

in Sales

Productivity Measures

Sales per

Employee

Income per

Employee

Real Growth in

Employees

0.0%

7.9%

4.4%

10.2%

4.5%

8%

4.7%

6.6%

1%

2.1%

$126,100

$169,900

$1,900

$5,700

1.1%

0.0%

Companies with

Performance

Management

Companies without

Performance

Management

437 Companies – Boston

Consulting Group

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EVP and Employee Engagement

Finding the right people is hard enough;

keeping them motivated and engaged once on board is even harder

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Creating the best Workplace on Earth

1. Let people be themselves

2. Unleash the flow of information

3. Magnify people’s strengths

4. Stand for more than shareholder value

5. Show how the daily work makes sense

6. Have rules people can believe in

HBR 2013

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“Dream Company” Diagnostics

How close is your organisation to the ideal?

1. Let me be myself

2. Tell me what’s really going on

3. Discover and magnify my strengths

4. Make me proud I work here

5. Make my work meaningful

6. Don’t hinder me with stupid rules

HBR 2013

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Keeping Talent – the 5 GREATS

Or Retention – the big 5

1. GREAT Company

2. GREAT Leaders

3. GREAT Culture

4. GREAT Roles / Career

5. GREAT RewardsGatherer and Craig

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Reward categories influencing attraction,

motivation and retention of employees

Attract Retain Motivate

Monthly Salary/guaranteed

remuneration73.5% 19.7% 9.8%

Variable Pay 5.4% 22.1% 29.7%

Benefits 3.1% 7.0% 1.8%

Performance & career management 8.9% 27.0% 34.3%

Quality of work environment 1.8% 3.3% 6.2%

Work/home integration 7.3% 20.9% 18.1%

100% 100% 100%

Nienaber & Bussin, 2009

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Performance Related Pay Frameworks

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Remuneration Definitions and Terminology

Base / Basic Salary

+ Long-term Incentive

+ Short-term Incentive

Total

Earnings / Total Cost

to

Company

+ Car Benefit

+ Other Benefits

+ Cost of employee benefitsGuaranteed

Package / Total

Guaranteed

Package

Variable

Pay

Base /

Basic

Salary

Fixed

Pay

Total

Remuneration/ Total Cost of

Employment

Rolling

Incentive

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The link between Performance and Pay

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PRP – Performance Related Pay

There are 3 main methods of linking Pay to Performance:

1. Individual performance related pay – based on the performance

appraisal score. This is added to CTC and employee keeps it

forever

2. STI – short-term incentive scheme. This can be target based or

formula based

3. LTI – Long-term incentive scheme. A rolling cash incentive scheme

should be considered

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First link - Merit Matrix for awarding individual

pay increases

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STIs – second link• These are incentive schemes that reward superior performance over a period of

one year. Typically, they reward "what happened" last year. The main examples of STIs are:

• Profit Sharing (PS)

• Gain Sharing (GS)

• Bonus Schemes (BS)

• Commission Schemes (CS)

LTIs – third link

• These are incentive schemes that "look into the future" and reward superior performance over more than one year. Typical examples are:

• Rolling Incentives (RI)

• Value Add Schemes (VAS)

• Share Schemes (SS)

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1. Example of profit-related formula

for an incentive fund

Formula = 10% of pre-tax profit that exceeds

8 % of the company’s capital employed

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2. Bonus schemes

Unlike profit sharing and gainsharing, bonus schemes are often

not formula driven, but targets are set. Targets are typically

quantitative and qualitative in nature. Bonus schemes usually

have between 4 and 7 measures which are carefully chosen to

drive business strategy. Targets are usually expressed as

threshold (budget), target and stretch target. Most organisations

would choose a few targets related to the business as a whole

(business targets) and then a few for each function or division.

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Example of Bonus Framework

Group Objectives (50%) Threshold(50%)

Target(100%)

Outstanding(150%)

1. Net Profit beforeTax (30%)

(30%) 100m 105m 110m

2. Sales Volume (20%) 500 510 520

Strategic Objectives(Function/ Division/ Department

(50%)

1. New productregistration

(20% 10 15 20

2. Employeedevelopment

(10%)

3. Implement newstrategy

(10%)

4. Implement (10%)

100%

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The “Two Factor” Goal Orientated Approach

85% 95% 110% 125% 150%

75% 85% 100% 110% 125%

50% 75% 85% 95% 100%

Growth in

Sales

Exceptional

Target

Threshold

Threshold Target Exceptional

Company Profitability% Achievement

X

Target Payout

= Incentive R

Sales and Profitability

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“Multiple Measures” Goal-orientated Approach (Matrix)

Performance Measures Weight 80 90 100 110 120 Score

Net Revenues 40% R10m R11m R12m R13m R14m 36

(Collections less returns)

Contribution Margin

(Net income before taxes 35% 12% 14% 16% 18% 20% 39

and profit sharing)

Customer Satisfaction

(Results of Customer 25% 80 85 90 95 98 25

Satisfaction Survey)

Payout Opportunity0 - 79 0

80 - 89 3%

90 - 99 5%

100 - 109 8%

110 - 119 12%

120 18%

100

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3. Commission schemes

These are typically applied to sales and business development staff. They would earn a percentage of what they sold and the percentage is often set depending on the difficulty of selling and the average lead time for the sale to happen. The diagram below sets out the principle on a scale of 1 to 10.

0 (Easy sell/order taking) 5 (Average) 10 (Hard sell/cold calling)

Low percentage commission High percentage commission

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Third link - LTI - Example of rolling bonus scheme

1 2 3 4 5 6 7

50% 30% 20%

Earnings 50% 30% 20%

50% 30% 20%

50% 30% 20%

50% 30% 20%

Total for year 50% 80% 100% 100% 100% Etc. Etc.

Year

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PRP design considerations

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Industry (or product) Maturity – this shapes the remuneration mix

EMBRYONIC GROWTH MATURE AGING

Common Strategies

Start up

New product development

Acquire market share

Find new markets

Consolidate position

Find and protect market niches

Become low cost producer

Cost reduction

Withdraw from unprofitable market segments

Industry Maturity

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Determining the right level

Alignment

of all performance

measures to SHV

Long Term

Performance

Financial Structuring

Mergers &

Acquisitions

Strategy Formulation

Products & marketsProfitability

Working Capital

Product Volumes & Price

Product Mix

Equipment reliability

Production Cost

Maintenance Cost

Wastage (Yield)

Production Volume

Costs

Quality

Safety

Equipment uptime,

downtime & utilisation

Market

Company

BU

Site

System

Unit

Sub-system

Component

Shareholders

CEO / Board

Line

Management

Operational

Management

Team

leaders

Individual

Worker

Operational

Sec HrMin Shift Day Wk Month Qtr Yr Yrs

Tactical Strategic

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Linking Pay to Performance

Disentangle skill from luck

The best way to avoid a “NO” vote at AGM

Targets are both quantitative and qualitative

Not just what was paid – how did you earn it?

The single best way to alleviate entitlement –

clear, robust scheme rules

When the rules are not clear, it creates entitlement

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Short-term Incentives – market data

Annual Percentages

Paterson Grade Description P10 P25 P50 P75 P90

F Upper CEO and MD 6% 16% 49% 108% 186%

F Lower Executive / Director 3% 14% 35% 76% 129%

E Upper General Management 3% 11% 26% 60% 112%

E Lower Senior Management 2% 9% 21% 46% 95%

D Middle management 2% 7% 16% 27% 69%

C Advanced operational 1% 4% 8% 16% 35%

B, A Basic and operational skills 1% 4% 7% 13% 29%

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Long term incentives – market data

Appreciation Share Multiples

Paterson Grade Description P10 P25 P50 P75 P90

F Upper CEO and MD 0.9 2.7 8.1 17.9 30.9

F Lower Executive / Director 0.6 2.4 5.8 12.6 21.4

E Upper General Management 0.4 1.8 4.4 9.9 18.6

E Lower Senior Management 0.3 1.4 3.5 7.7 15.8

D Middle management 0.3 1.2 2.6 4.4 11.4

C Advanced operational 0.1 0.6 1.4 2.6 5.7

B, A Basic and operational skills 0.1 0.6 1.2 2.2 4.8

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Long term incentives (cont)

Full Share Multiples

Paterson

GradeDescription P10 P25 P50 P75 P90

F Upper CEO and MD 0.3 0.8 2.5 5.4 9.3

F Lower Executive / Director 0.2 0.7 1.7 3.8 6.5

E Upper General Management 0.1 0.5 1.3 3.0 5.6

E Lower Senior Management 0.1 0.4 1.1 2.3 4.8

D Middle management 0.1 0.4 0.8 1.3 3.5

C Advanced operational 0.0 0.2 0.4 0.8 1.7

B, A Basic and operational skills 0.0 0.2 0.4 0.7 1.5

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WHAT IS IT EXACTLY?

Equal pay for work of equal value

The Wage Gap

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Two aspects to “excessive” executive pay

1. The size of the pay gap (a social issue):

• “There is a strong sense of injustice that those at the top continue to reap

significant rewards, while the wages of ordinary workers are cut in real

terms and their jobs become more uncertain”

• “The growing pay gap has increased public distrust and disillusionment in

business”

2. Poor linkage of pay and performance (a business

issue)

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2 common methods to calculate pay gap ratio (PGR)

1. CEO pay vs. lowest paid income group

PGR = CEO pay / median pay of lowest band of workers

PGR = 3, 555, 500 / 43, 484

PGR = 82

2. CEO pay vs. median of all other staff in the company

PGR = CEO pay / median pay of all workers in company

PGR = 3, 555, 500 / 258, 781

PGR = 14

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Critical success factors for PRP to work

1. I understand what the organisation strategy is and

how my part fits in

2. I know exactly what I must do to earn a bonus

3. Simple and clear scheme rules that I can work out

easily what I can earn

4. My line of sight / locus of control is good

5. The enablers to help me perform are in place

‘Crisis’ in Mandarin apparently means

both ‘challenge’ and ‘opportunity’

What is Africa’s opportunity?

Growing!

At around 8%...

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5

2

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We need to act

now!

We only have till 2045 to get it all right. Then computers will take over everything we do…

THANK YOU

for this opportunityto be with you