Telkom Integrated Annual Report 2020

Remco chairperson's report

Remco continues to ensure that our reward policy and practices are shareholder centric and enable a financially sustainable business

We remain focused on linking our remuneration strategy, policy and practices purposefully to business strategic targets to deliver long-term sustainable growth to shareholders. Our remuneration levels are set to attract and retain the required talent, and to sustain overall group performance and ever-changing business challenges in our trading environment.

We aim to apply a common remuneration policy and remuneration structure/mix across the group. Differentiation will only be based on best market practices and statutory and regulatory requirements. We continue to integrate overall group performance as a payment trigger for short-term incentives (STIs).

The combination of tough trading conditions and recent market and regulatory events point to a tougher outlook in the next few years. Changes in our environment require us to continuously review our business model to ensure stability and that we respond appropriately to the changing macroenvironment, which will impact Telkom’s sustainability and growth ambitions.

Talent retention is a significant business challenge in the 21st century. For many organisations, particularly those in knowledge-intensive industries, human capital is fundamental to maintain a sustainable competitive advantage. Increased mobility and greater employment choice, particularly for senior executives, top talent and critical skill specialists, pose a challenge for many employers in retaining these key employees. Failure to retain executive talent can have financial and nonfinancial implications for the group, including replacement cost, loss of organisational knowledge, experience and relationships. Therefore, retention forms a critical part of Telkom’s talent management framework. Our retention approach aims to ensure employee engagement while targeted strategies focus on retaining key talent and critical skill specialists including key executives. Research around retention acknowledges the role remuneration plays as part of a retention proposition. Equity and transparency play a critical role in designing an effective retention proposition. We apply these principles in reward setting and achievement-based rewards. It is important that remco ensures it follows its current mechanisms, which are consistent and fair.

Remco believes that the objectives outlined in the remuneration policy were met, and that all decisions complied with the policy.

Policy changes, key decisions and focus areas

After assessing remuneration factors and with due cognisance of shareholder feedback, the following policy and structure changes were approved by remco with respect to the STI for FY2020:

• Achieving group EBITDA and PAT remain a trigger for any group STI payment
• Reintroduced free cash flow (FCF) as an additional measure to determine the size of the STI pool. Therefore, the pool will be determined by the achievement of:
  • Group EBITDA before STI
  • Group PAT before STI
  • Group revenue
  • FCF
• Each allocation has a 25% weighting
• Malus and clawback provisions were included in both STI and long-term incentive plans (LTIP) plans (FY2020 and in FY2021 LTIP – July 2020 share award and share vesting)

The remco took the following key decisions:

• Approved salary increases and adjustments for executives, senior management, management and bargaining unit employees
• Approved non-executive directors’ fees
• Approved STIs for executive, senior management and other employees, and the 14th cheque for bargaining unit employees
• Evaluated and approved the vesting conditions for FY2015, FY2016 and FY2017 for LTIP and FY2017 for the Employee Share Ownership Plan (ESOP)
• Approved the FY2020 STI plan, vesting performance conditions for FY2020 LTIP and ESOP share awards, awarded in June 2019

Remco also reviewed the group's section 189 notices, and the VERP and VSP. Refer to the human capital report.

Harmonising benefits across the group

• Vacation leave and sick leave provisions are aligned
• Alignment of medical aid provision concluded and included in the total cost to company
• One retirement fund for all employees across the group (Telkom Retirement Fund (TRF)): The benefits of the TRF and the BCX funds administered by Alexander Forbes are aligned and harmonised in terms of disability and death benefits. Current progress and challenges:
  • BCX underlying companies have 12 pension funds which have a degree of different benefits and designs; BCX is in the process of resolving this
  • All employees who took the new BCX offer, after the section 189 process in 2019, joined the TRF
  • The investment strategy of the funds is based on the life stage model
  • Intercompany transfers between companies – all members remained/moved to the TRF
  • Once the current section 189 process is concluded at BCX and the company, we need to embark on a communication exercise to transfer members across to TRF
  • It is envisaged that the establishment of one retirement fund will be finalised in FY2021

The remco also oversaw that all senior executive positions were mapped as part of Telkom’s talent management process. Remco completed detailed succession planning for senior executive management and reviewed the retention of top talent and key critical specialists planning for senior executive management.

Shareholder voting and engagement

AGM voting results (%)

The Chairperson of the board and chairperson of remco engaged with shareholders on the resolutions. Shareholders raised the following concerns relating to remco:

Shareholders’ concerns			Remco feedback and actions
The lack of FCF as a KPI for both STI and LTI, given Telkom’s capex investment strategy			Reintroduced FCF as an additional measure to determine the size of the STI pool. Therefore, the pool will be determined by the achievement of: Group EBITDA before STI Group PAT before STI Group revenue FCF Each allocation has a 25% weighting Achieving group EBITDA and PAT remain a trigger for any group STI payment
The rationale for removing the customer experience score (as this is a challenge in the Telkom environment) under the operational target, and how this is currently managed			Customer experience is measured at business unit levels, as follows: Business unit financials (30%) Customer experience (20%)* Execution of key strategy milestones including operational measures (30%) People management (20%) Weightings might differ between business units. Therefore, we factor operational measures into STI at an individual level and business unit level. Remco will consider additional shareholder input when share awards and performance conditions are set for the LTI FY2021.
Shareholders want to understand the status of the discretionary powers post the 2018 share awards			The FY2020 share award, awarded in June 2019, was reduced by 5.83% per eligible employee participating in LTIP The 5.83% reductions did not apply to newly appointed employees and employees who did not receive the benefit as part of the vesting in FY2018 Discretion is only used in exceptional circumstances
There was a concern that there were no malus and clawback provisions in place for the STI and LTI			Malus and clawback provisions were included in FY2019 and FY2020 STI plans. A malus and clawback provision will be introduced any FY2021 LTI share awards if the share awards are granted, which is normally made in June.

*

Customer satisfaction is currently measured through the Orange Index IT measures service within industries, and across industries since 2001. The Orange Index gives companies a real comparison in terms of performance within their industry, highlighting best practice, pain points, opportunities and a reality of current performance relative to the South African trend. The survey includes most of the relevant benchmarks, i.e. NPS; overall satisfaction; customer effort scores; first-call resolution benchmarks and reputation index.

AGM

As required by the Companies Act and recommended by King IV, the following resolutions will be tabled for shareholder voting at the AGM in September 2020: 

• Advisory vote on the remuneration policy
• Advisory vote on the implementation report

Should the remuneration policy or the implementation report or both be voted against by more than 25% of the voting rights exercised, an engagement process will be initiated with the dissenting shareholders. This will be done on behalf of the board by the Chairperson, remco chairperson, and Group Company Secretariat to:

• Ascertain the reasons for the dissenting vote
• Appropriately address legitimate and reasonable objections and concerns raised

After engagement with the shareholders, the remco will deliberate on the inputs received and agree on the most suitable way to address legitimate and reasonable objections and concerns raised. The voting results, concerns and steps taken will be disclosed in the FY2021 integrated report.

 

Independent external advisors

Remco contracted an external service provider to review remuneration policies and practices to create long-term sustainable value for shareholders and employees, including reviewing the current LTI scheme with particular focus on value creation and executive awards. The review included benchmarking the remuneration mix of guaranteed package, STI and LTI with our peer group. The outcome of the benchmarking confirmed that Telkom’s total remuneration compares favourably with the market median:

• Guaranteed package is in line with peers relative to, inter alia, size of business
• Executive STI pool is capped at 7.9% of PAT and is generally in line with median
• Executive LTI ratios are lagging market median and peers

The remco is satisfied with its independence and objective view.

Appreciation

We will continue to comply with legislation and King IV requirements, while remaining conscious of disclosing sensitive information, this report complies with the King IV disclosure requirements.

I would like to thank my fellow remco colleagues for your valuable contribution during the year. I look forward to your continued support and commitment going forward.

Santie Botha
Chairperson of the remuneration committee