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Remuneration report
Section 1: Remuneration philosophy, policy and framework

Remuneration philosophy and policy

The Telkom remuneration strategy is designed to attract, motivate and retain high-calibre talent, and supports the delivery of our strategy in a sustainable manner without encouraging undue risks. As the market expands with operators in all spheres of our business, it is increasingly challenging to retain experienced executive leadership, and to attract the necessary talent required for the new and growing areas of our business. Meeting challenges requires a competitive and attractive remuneration offering.

To ensure we remunerate employees competitively, we use market and industry benchmarks. These benchmarks determine appropriate market-related offerings that are higher than the minimum prescribed wages.

Telkom recognises “equal pay for work of equal economic value”, and strives to remunerate employees doing substantially the same work, within the same range in accordance with the Labour Relations Act. However, Telkom recognises that there could be differences which are attributed to the following:

  • Individuals’ respective seniority or length of service
  • Individuals’ respective qualifications, ability, competence or potential above required levels of performance for the job
  • Individuals’ performance – all employees are equally subject to Telkom’s performance management system
  • Demotion due to restructuring without a concomitant reduction in remuneration
  • Individual’s lack of relevant skill for a particular job level
  • Any other non-discriminatory differentiator

Remuneration objectives

The remuneration policy is designed to attract talent in a competitive labour market and enable Telkom to achieve the following objectives:

  • Promote sustainable value creation through transparent alignment with agreed group strategy
  • Ensure proper risk management processes and ensure that remuneration is appropriately aligned with short and long-term performance
  • Ensure all employees are remunerated competitively relative to industry benchmarks, provided with appropriate incentives to encourage performance, and rewarded for their individual contributions to the group’s success
  • Ensure that remuneration is affordable and reasonable in terms of sustainable value creation for shareholders

Remuneration principles

Telkom recognises that, in this competitive environment, we need to differentiate based on strategic roles and growing areas of the business to value employees’ contribution. Therefore, our remuneration and reward policies and practices must be based on the following principles:

  • Motivate and reinforce superior performance
  • Encourage the development of organisational, team and individual performance
  • Develop the competencies for future business needs
  • Employees should share in the success of the group
  • Aim to get the appropriate remuneration mix to ensure Telkom achieves its strategic obje
  • Be fair and non-discriminatory

The remco believes that the objectives outlined in the remuneration policy have been met, and that all decisions complied with the policy.

Remuneration structure

The remuneration structure is aligned with the group strategy and the agreed risk appetite, which seeks to reward success fairly, responsibly and transparently, while avoiding overpaying.

We follow a holistic, balanced approach across the following remuneration elements, as set out below.

             
Element   Guaranteed package (GP)   STI     LTI
Context  

GPs are influenced by the scope of the role and the knowledge, skills and experience required for the position.

The packages reflect the market median which is determined through external market research.

 

The STI rewards management employees who meet their annual performance targets.

The level of achievement determines the payment against each weighted group performance measure. The STI plan is aligned with shareholder expectations.

   

Telkom’s share incentive plans are structured to optimise the group’s overall position, while providing benefits that will assist the group to attract, retain and incentivise executives and top talented employees.

The plan is designed to align management and shareholder interests, and grow shareholder value. The objectives are to motivate long-term sustainable performance, and retain business-critical and top talented employees.

Type   Fixed   Variable     Variable
Participants
and
composition
of pay
  All eligible employees in the group
GPs comprise a basic pensionable salary, retirement provision and flexible benefits, that include a non-pensionable allowance and a motor allowance where applicable.
 

All eligible employees in the group

STIs comprise a cash payment that is payable after finalisation of audited financial results.

Bargaining unit employees

14th cheque – payable if the employees meet individual performance outputs.

   

All eligible employees in the group

A free transfer of shares is awarded to employees, under the condition of forfeiture in the case of termination of service before the vesting/release date; and achievement of the group’s pre-determined performance levels.

  • LTIP: senior leadership, M3 to M0 employees
  • ESOP: middle management and bargaining unit employees, A to M4/S4
  •  
Desired
outcome
 

To offer competitive market-related GPs to attract, retain and motivate talented and high-performing employees.

  Reward employees for achieving annual performance targets.    

Motivate long-term sustainable growth, and align management’s and shareholders’ interests by issuing forfeitable shares.

Consequences  

No increases are awarded to management employees who do not meet individual performance outputs.

  No bonuses are payable to employees who do not meet individual performance outputs.    
  • No shares are awarded to employees who do not meet individual performance outputs.
  • No shares will vest if performance conditions are not met.
  • Shareholder requirement – it is expected of employees, M3 and higher levels, to purchase total number of shares equal to 15 percent of guaranteed package over a three-year period.

Note: These structures will be phased in until all employees in the group are remunerated according to group performance in terms of STI and LTI.

GPs

GPs are aligned throughout the group with no significant disparities. Benefits and service conditions are similar within the group. Therefore, there is no immediate need to align benefits.

The GPs consist of a basic pensionable salary, retirement provision and flexible benefits. Flexible benefits includes the following:

  • Company contributions to retirement
  • Other flexible benefits:
    • Travel allowance
    • Non-pensionable allowance
    • Company contribution to medical aid
    • Management provident fund

Employees are not entitled to annual GP increases. Annual increases are subject to industry market conditions, employee performance, internal equity, strategic investments and the group’s overall financial

position, financial performance and affordability. The packages are reviewed against individual performance, set against a market median, and determined on a total cost-to-company basis.

Employees can structure their packages within the framework of the applicable policies, practices and regulations. Remuneration adjustments outside the annual remuneration review process may be considered in exceptional circumstances and will be subject to the agreed authorisation.

All positions are evaluated to determine their relative value and contribution in terms of complexity and required outcomes. Positions are evaluated using the group’s job evaluation system, which correlates with the Paterson Job Grading System. Telkom , has implemented a uniform hierarchical structure, with both the STI and LTI framework for all divisions.

Hierarchical level of leadership Telkom grade

Hierarchical level of leadership Telkom grade

Executive committee

GPs are in line with similar roles in the comparable market analysis according to organisational size, profitability and complexity. They are influenced by the scope of the role and knowledge, skills and experience required of the employee. GPs are reviewed against individual performance, and set against market median. The average guaranteed package increase was 6 percent (FY2017: 0 percent).

Executive and management employees

GPs for management levels are reviewed annually as part of the group’s overall remuneration review process, and are assessed against individual performance. The average guaranteed package increase was 6 percent (FY2017: 0 percent).

Bargaining unit employees

Telkom follows a balanced approach in granting annual salary increases for bargaining unit employees with due consideration of the Consumer Price Index (CPI), market movements and affordability.

The company entered into a two-year collaboration partnership agreement with organised labour in June 2016. The agreement will expire on 30 June 2018. As part of this agreement, a 6 percent salary increase was implemented based on market functional areas’ 50th percentile (FY2017: 0 percent).

Performance Pays was introduced for bargaining unit employees in FY2017, to focus on customer satisfaction, fault rate improvement, productivity and quality.

We have not reached maturity on Performance Pays as yet. Often performance is impacted by external factors such as system downtime, and we are still in process to refine the real impact thereof on productivity and pay-outs. In areas where the output is not unit based, it is not always easily quantifiable. Therefore, we will find a better balance on the contribution of the individual in terms of the value chain impact to ensure the efforts in the vertical responsibility translate to customer and/or profit impact.

Benchmarking

Executive remuneration is benchmarked by independent remuneration consultants, data provided in national executive remuneration surveys, and information disclosed in the integrated reports of JSE-listed companies.

The remco ensures an appropriate peer group review is conducted to retain the integrity and appropriateness of the benchmark data. Executive pay is benchmarked annually.

Performance management

Performance culture and systems are critical enablers to executing business strategies, by creating a performance culture and transparency within our performance management system.

Performance management principles are:

  • Develop employees through real-time coaching and feedback, through an integrated talent management approach
  • Identify what “great” looks like and how to assess it
  • Promote effective performance management behaviours
  • Fit for purpose
  • Embrace simplicity and transparency

We focus on defining KPIs for the GCEO, GCFO, business unit CEOs and their direct reports including for frontline employees.

Overall performance management process

The principles for KPI design and cascading include:

  • Strategic: KPIs must be aligned with the group strategy and financial objectives, and must contain a mix of customer, financial, operational and people metrics.
  • Focused: Individuals’ KPIs are limited to between four and six, spread across categories. There should be at least one or two relevant shared/team KPIs (for example, Telkom Consumer EBITDA).
  • Practical: Employees must be able to directly influence their KPIs (other than group/business unit KPIs).

GCEO

The GCEO is rewarded on the delivery of the strategic and operational objectives in line with shareholder expectations and business strategy. The remuneration strategy for the GCEO is designed to align remuneration with long-term shareholder growth and sustainable profitability. The reward should demonstrate the critical and pivotal role the GCEO plays in the group’s strategic objectives and operational goals.

The following key performance areas were contracted with the GCEO:

Weighting %   Category   Key metrics   Measurement
40  

Financial

 
  • Gross revenue
  • EBITDA – Rand value (total group)
  • HEPS
  • Return on invested capital
 
  • Percent improvement
  • Percent improvement
  • Year on year growth in HEPS
  • Percent return
25  

Executing key strategic milestones

 
  • Review group structure – operating model
 
  • Review of the operating model including to leverage group synergies
  • Creating more accountability within the business unit environments
  • Hold business units and subsidiaries directly accountable for performance and contribution to the group
 
  • Establish separate business unit for Small to medium business segment
 
  • Integrate fragmented SMB segment for the group to maximise participation in SMB growth and profit pool
 
  • B-BBEE ownership diversification
 
  • Diversify Telkom ownership to include HDIs
 
  • Improve the B-BBEE certification rating of the group
 
  • Improve B-BBEE certification rating from level 6 to level 5
20   Customer experience  
  • Orange Index
 
  • Improvement of composite score
15  

People goals (leadership and employees)

 
  • Talent management
  • Succession of the GCEO and executive management
  • Identified top talent and critical skills
 
  • All executive positions to be mapped
  • Identified successors for each position
  • Retention of top talent/critical skill specialists

GCFO

The following key performance areas were contracted with the GCFO:

Weighting %   Category   Key metrics   Measurement
40  

Financial

 
  • EBITDA margin
  • Capex to revenue
  • Net debt to EBITDA
 
  • As per guidance (23 - 25 percent)
  • As per guidance (17 - 20 percent)
  • As per guidance (≤1)
25  

Executing key strategic milestones

 
  • Implement SAP HANA programme
  • Process optimisation
  • Integration: alignment of systems and processes
  • Capital investment: ensure investments optimise long-term shareholder returns
  • Liquidity and funding
  • New group financial operating model
  • Address control environment weaknesses
  • Shareholder relationship
 
  • Project deliverables
  • BSS/OSS transformation
  • Capital allocation framework
  • Cash framework
  • Finance transformation
  • Internal and external audit feedback
  • Investor relations feedback
20   Customer experience  
  • Orange Index
 
  • Improvement of composite score
15  

People goals (leadership and employees)

 
  • Talent management and succession planning
  • Performance management
  • Collective performance: financial measures for STI plan and financial vesting conditions for LTIP
 
  • Number of employees identified as key top-performing individuals
  • Number of executive positions mapped and successors identified aligned with talent management framework
  • Identify group financial KPIs to be cascaded
  • Remco and board approval
STI

The STI rewards management employees who meet annual performance targets. The level of achievement determines payment against each weighted group performance measure. The STI plan is designed and aligned with shareholder expectations.

STI plan changes

The board approved the changes to the FY2018 STI plan for eligible management employees, including aligning the STI plan with group performance, and not just company performance, and removing the interim 25 percent payment. The new STI plan is based on overall group results and applies to all Telkom management employees.

The FY2018 plan was approved with the following clearly defined principles:

  • Group financial triggers and allocation:
    • Triggers: EBITDA and PAT must be achieved on group level to trigger any STI payment
    • Allocation: The STI pool will be determined by the achievement of the following targets (each of which has a 33 percent weighting):
    • Group EBITDA before STI
    • Group PAT before STI
    • Group cash from operating activities (before dividend paid and capex)
  • STI pay-out mechanism
    • Group STI pool is set at 7.9 percent of the group PAT before STI payment
    • Group STI pool set at 100 percent of budgeted target (R359 million after tax)

Target Achievement
%
  Pay-out of STI pool
%
 
Less than hurdle rate <95   0  
Hurdle rate 95   95  
Target 100   100  
Stretch 110   110  
Maximum cap 120   120  

The overall group performance will be measured at group, subsidiary, business unit and divisional level as indicated below.

  Telkom /Corporate centre/business unit/subsidiaries   Exco   Total (%)  
Financial: EBITDA, PAT and group cash from operating activities (before dividend paid and capex) 10 percent group   80 percent
group financials
20  
Business unit/subsidiaries/Corporate centre/group EBITDA and PAT 60 percent business unit/subsidiaries income statement   80  
Divisional/team (%) 30   20      
Total (%) 100   100   100  

The remco annually recommends the STI plan’s rules, targets and measurements to the board for approval, subject to the actual audited group performance.

Eligible bargaining unit employees have Performance Pays and 14th cheque payment instead of an STI plan. Employees who perform at or above a three performance rating, which indicates that deliverables for the year have been achieved, will receive a 14th cheque. The 14th cheque is calculated based on an individual’s total package value, subject to the group meeting its financial performance targets.

STI plan awarded for FY2018

In accordance with the approved company STI plan, STIs were allocated to business units based on their actual achievement and divisional performance. Individual performance is recognised in the respective business units based on the achievement of individual performance contracts. FY2018 group STI targets and achievements are shown below.

  Performance criteria Weighting
%
  Baseline
FY2017

R’million
  Target
FY2018

R’million
  Actual
achievement

R’million
  Achievement
%
 
Group EBITDA before STI 33   11 361   11 433   10 862   95  
Group PAT before STI 33   4 204   3 254   3 396   104  
Group cash from operating activities (before dividend paid and capex) 33   7713   8 667   8 274   95  
Group STI pool     486   359   362      

 

LTIP

Overview

In terms of the forfeitable share plan (FSP), a free transfer of shares is awarded to employees, under the condition of forfeiture in the case of termination of service before the vesting/release date; and achievement of the group’s pre-determined performance levels.

From the grant date, the employee has shareholder rights to receive dividend rights and voting rights. The Telkom LTIP is an FSP, which has two components:

  • LTIP component (senior leadership, M3 to M0)
  • ESOP component (middle management and bargaining unit, A to M/S4)

Vesting of awards

The performance conditions are measured after three years, and the number of shares to vest is based on the extent to which the performance conditions are met.

Vesting period: LTIP (%)

Award (M3 – M0) 2016   2017   2018   2019   2020   2021   2022   Total
2013 50   30   20                   100
2014     50   30   20               100
2015         50   30   20           100
2016             50   30   20       100
2017                 50   30   20   100
Total 50   80   100   100   100   50   20    

Vesting period: ESOP (%)

Award (M3 – M0) 2016   2017   2018   2019   2020   Total
2013 100                   100
2014     100               100
2015         100           100
2016             100       100
2017                 100   100
Total 100   100   100   100   100    

The following table indicates the percentage target achievement to determine the number of shares to vest.

  Target achievement %   Share vesting %  
Target 100   100  
Hurdle 90   50  
Less than hurdle rate < 90   0  

The table below sets out the threshold sliding scale:

Achievement % 90   91   92   93   94   95   96   97   98   99   100
Vesting % 50   55   60   65   70   75   80   85   90   95   100

FY2018 share award – awarded in June 2017

The following performance conditions were set for the vesting of the FY2018 share awards:

Category   Performance
condition
Weight
%
  Target
    FY2018 FY2019 FY2020 FY2021 FY2022
Financial   Total shareholder return (TSR) 50   Risk-free* + 4% Risk-free* + 4% Risk-free* + 4% Risk-free* + 4% Risk-free* + 4%
    HEPS 25   As per the business plan
    Return on invested capital 25   As per the business plan
* Government bond (R203) with a three-year term to maturity to correspond with term of vesting. A risk-free rate of 7.4 percent plus 4 percent equates to CPI plus 5.74 percent (real return).
  • TSR: Combines share price appreciation and dividends paid to show the total return to the shareholder expressed as an annualised percentage
  • HEPS: The weighted average number of shares outstanding excludes treasury shares
  • Return on invested capital: Invested capital is the book value of fixed assets plus current assets less current liabilities less cash

Total number of shares issued up to 31 March 2018

Year awarded
FY2014  FY2015  FY2016   FY2017    FY2018   
Date awarded November 2013  April 2015  June 2015   June 2016    June 2017   
Total number of shares available 26 039 195  23 469 057  20 695 819   21 080 842    17 007 878   
Total number of shares awarded (6 559 290) (4 685 734) (4 733 159)* (4 886 209)   (5 444 803)  
Sub-total 19 479 905  18 783 323  15 962 660   16 194 633    11 563 075   
Forfeited shares 3 989 152  1 912 496  1 408 056   813 245    412 135   
Shares purchased     3 710 126       1 300 561   
Remaining shares available 23 469 057  20 695 819  21 080 842       11 975 210   
* Restated due to reinstatement.

Vesting of the 2017 share (shares awarded in 2013 and 2014):

LTIP – 2017 vesting (shares awarded in 2013) – 30 percent vesting subject to free cash flow (FCF)

               
                      Vesting %  
Year FCF target
R’million
  FCF
achievement
R’million
  Achievement
%
  Weighting
%
  Vesting
%
  Remco
discretion
 
FY2014 120   120   100   25   25   25  
FY2015 901   1 332   100   25   25   25  
FY2016 2 958   2 212   75   25   0   12.50*  
FY2017 4 021   (862)   0   25   0   12.50*  
Total                 50   75  
                (15 of 30)   (22.5 of 30)  
* As a result of the overall business performance and PAT overachievement, remco applied discretion (25 percent).

Vesting of the 2017 share (shares awarded in 2013 and 2014):

LTIP 2017 – vesting shares awarded in 2014 – 50 percent vesting subject to the following performance conditions.

       
Category   Performance condition Weighting
%
  Target – Rand value   Achievement
%
 
FY2015   FY2016   FY2017  
Financial
70%
  TSR 20   Risk-free* + 4%
(R19.91)
  Risk-free* + 4%
(R21.88)
  Risk-free* + 4%
(R24.0)
  20  
  Overall achievement     R79.2 (396%)   R57.57 (263%)   R75.03 (312%)      
  HEPS 30   419 cps   333 cps   526 cps   30  
  Overall achievement     607 cps
(144%)
  330 cps
(100%)
  729.8 cps
(138%)
     
  FCF 10   R901m   R2 958   R4 021m   3.33  
  Overall achievement     R1 332m
(140%)
3.33%
  R2 212m
(74.7%)
(0)
  (R862) (0%)
(0)
     
  Return on invested capital (%) 10   8.30   9.80   12.10   10  
  Overall achievement (%)     12.2 (146)   9.6 (98)   14.5 (119)      
Operational
30%
  Customer first 15   59.9   61.7   63.4   13.8  
  Customer loyalty measure (CLM) – Telkom overall quality (revenue weighted composite score) baseline 58.6 (FY2015) Actual: 58.7   Actual: 55.5   Actual: 56.7      
    Achievement: %
98
  Achievement: %
89.95
  Achievement: %
89.43
     
  Overall achievement     92%
  Customer experience 15   Composite
score: 1
  Composite
score: 1
  Composite
score: 1
  14.7  
  TSA 100 index Threshold: 0.90   Threshold: 0.90   Threshold: 0.90      
    Composite
score: 0.98
  Composite
score: 0.99
  Composite
score: 0.96
     
  Assurance index Actual: 0.96   Actual: 0.93   Actual: 0.87      
  Fulfilment index Actual: 0.99   Actual: 1.05   Actual: 1.05      
  Overall achievement 100   98%      
FCF – remco discretion   3.3  
Total vesting   95.1  
* Risk-free rate - government bond (R203) with a three-year term to maturity to correspond with term of vesting. A risk-free rate of 7.4 percent plus 4 percent equates to CPI plus 5.74 percent (real return).

ESOP – 2017 vesting (shares awarded in 2014):

100 percent of forfeitable share will vest in year three based on achievement of the following performance conditions.

       
Category   Performance condition Weighting
%
  Target   Achievement
%
 
FY2015   FY2016   FY2017  
Operational
100%
  CLM – Telkom overall quality (revenue weighted composite score) baseline 58.6 (FY2015) 50   Target: 59.9   Target: 61.7   Target: 63.4   46  
        Actual: 58.7   Actual: 55.5   Actual: 56.7      
        Achievement:
98%
  Achievement:
89.95%
  Achievement:
89.43%
     
  Overall achievement     92%   46  
  Customer experience 50   Composite
score: 1
  Composite
score: 1
  Composite
score: 1
     
  TSA 100 index     Threshold: 0.90   Threshold: 0.90   Threshold: 0.90      
        Composite
score: 0.98
  Composite
score: 0.99
  Composite
score: 0.96
     
  Assurance index     Actual: 0.96   Actual: 0.93   Actual: 0.87      
  Fulfilment index     Actual: 0.99   Actual: 1.05   Actual: 1.05      
  Overall achievement     98%   49  
Overall vesting 100       95  

Summary of 2017 vesting (shares awarded in 2013 and 2014)

A total of 2 065 873 forfeitable shares vested on 5 June 2017 at a share price of R78.76 each:

  • 100 percent vesting of additional performance shares awarded in 2015 and 2016 in respect of the GCEO – 57 916 shares
  • LTIP – 75 percent of the 30 percent forfeitable shares awarded in 2013 for qualifying employees (M3 to M0) – 215 116 shares
  • LTIP – 75 percent of the 50 percent forfeitable shares awarded in 2014 for qualifying employees (M3 to M0) – 503 823 shares
  • ESOP – 75 percent of the 100 percent of forfeitable shares awarded in 2014 for qualifying employees on senior management and lower levels (M4 to A) based on the achievement of performance conditions – 1 289 018 shares

Employment contracts

GCEO

Sipho Maseko was appointed on 1 April 2013. He is a fulltime employee with a three-month notice of termination period. He may be required to work notice, be placed on garden leave or, if not required to work, full notice may be paid in lieu of notice period on duty. There are no other obligations in executive employment contracts that could give rise to payments on termination of employment or office. Refer to the corporate governance report on page 86 for the GCEO’s other directorship.

Other prescribed officers

Employment contracts exist which require three months’ notice of termination by the employee and the company. Employees may be required to work notice, be placed on garden leave or, if not required to work, full notice may be paid in lieu of notice period on duty.

Employees must be in service on 31 March to qualify for STI payments subject to individual and group performance. No STI is payable in cases of dismissals. Pro rata payments only apply to new appointees for the number of months in service during the financial year. Employees must be in service on the vesting date of shares to qualify for any vesting.

Good leavers will receive pro rata share vesting for the number of months employed during the vesting period on duty.

There are no other obligations in executive employment contracts which could give rise to payments on termination of employment or office.

The retirement age for executive directors is 65 years. A standard restraint of trade clause is incorporated into the employment contract for a maximum of three months without reward.

All prescribed officers are employed on a full-time employment contract except for LM de Villiers and A Vitai, who exited the group on 31 March 2018.

External directorships

Executive directors are allowed to hold one external directorship in any company following board approval. All compensation earned from external directorships will accrue to Telkom . The board may decline external directorships as it may deem appropriate. Refer to page 88 for external directorships.