This report sets out the Group’s remuneration policy for executive and non-executive directors and executive management and provides detail of their remuneration and share interests for the financial year ended 31 March 2013.

Role of the Remuneration Committee and terms of reference

The Remuneration Committee (Remco) acts on behalf of the Board in setting remuneration policy and oversee executive remuneration for executive directors and senior executives, monitoring the execution of the remuneration policy and making recommendations to the Board on the total remuneration of the Chairman, group CEO, members of the Board and senior executives.

The committee shall:

Remco held four scheduled meetings and no special meetings during the financial year. A quorum for a meeting is 50% of the members.

Members of Remco

The committee consists of non-executive directors. Executive management attends by invitation as provided for in the Group’s MOI. Ms S Botha, an independent non-executive director, was appointed chairman of Remco as of 18 February 2013. For the 2013 financial year Remco comprised the following non-executive directors (three of which are independent):

S Botha (Independent chairman-appointed with effect from 18 February 2013)
B du Plessis (Independent)
K Kweyama (Independent – appointed with effect from 18 February 2013)
JA Mabuza (Appointed with effect from 18 February 2013)
J Molobela
JN Hope (Resigned with effect from 24 October 2012)
PL Zim (Retired with effect from 24 October 2012)

By invitation

NT Moholi (Resigned as group chief executive officer with effect from 31 March 2013)
TE Msubo (Chief of Human Resources)
JH Schindehütte (Chief of Finance)
JC Smit (Group executive: total remuneration and performance management)

Remuneration policy

The Telkom remuneration strategy is designed to attract, retain and motivate high-calibre talent in a challenging ICT environment.

The market environment that Telkom operates in is characterised by:

This requires a competitive and attractive remuneration offering, to ensure that Telkom continues to draw, motivate and retain the best talent to drive group strategy and deliver operational results.

The remuneration structure is designed to ensure that individual contribution is rewarded and aligned to strategic, operating and financial performance, for long-term sustainability as well as short-term business plan deliverables, for profitability, both of which are imperative to shareholder interest and value creation.

We follow a holistic balance approached across the following remuneration elements:

Our general philosophy, which is aligned with market practice, is to reward all Telkom employees on total earnings of market median. To ensure we remunerate employees competitively we use regular market and industry benchmarks – peer group and ICT industry.

Remuneration Objectives

As we approach the rejuvenation of Telkom, the remuneration policy is designed to compete for talent in a competitive labour market in order for Telkom to successfully achieve the following objectives:

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 employee contribution. Therefore, our remuneration and reward policies and practices must be based on the following principles:

Guaranteed packages

Guaranteed packages (GP) are influenced by the scope of the role and the knowledge, skills and experience required of the position holder and reflects the market median determined through external market research that yields market data and appropriate salary ranges for specific positions.

Employees do not have a right to annual guaranteed package increases. Annual increases are subject to industry market conditions, employee performance, internal equity, strategic investments and the Group’s overall financial position and the ability to pay. Guaranteed packages are reviewed against individual performance, and set against market median. GP is determined on atotal-cost-to-company basis. GP consists of a basic pensionable salary, retirement provision and flexible benefits which includes a non-pensionable allowance and a travel allowance where applicable.

Employees can structure their guaranteed packages within the framework of the applicable policies, practices and regulatory requirements. Remuneration adjustments outside the annual remuneration review process may be considered under 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 (decision tree) which correlates with the Paterson grading system, as follows:

Group chief executive officer

The group chief executive officer (GCEO) is rewarded on the delivery of the strategic and operational deliverables 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 achievement of company strategic objectives and operational goals. Guaranteed package is set at market median.

Executive committee and executive management team

Guaranteed packages are in line with similar roles in the applicable market according to organisational size, profitability and complexity. It is also influenced by the scope of the role and knowledge, skills and experience required of the position holder. Guaranteed packages are also reviewed against individual performance, and set against market median.

For full details on the Exco and the executive management team, refer to pages 60 to 63.

The average guaranteed package increase for the current year was 4.66%, the prior year was 3% and the average increase for the 2014 financial year is 3%.

Executive employees

The average guaranteed package increase for the current year was 6%, the prior year was 3% and the average increase for the 2014 financial year is 3%.

Management employees

Guaranteed packages for management levels are reviewed annually as part of the Group’s overall remuneration review process and are assessed against individual’s performance. The average salary increase for the current year was 6% the prior year was 3% and the average increase for the 2014 financial year is 3%.

Bargaining unit employees

Telkom follows a balanced approached in granting annual salary increases for bargaining unit employees with due consideration of CPI, market movements and affordability. The current long-term agreement with organised labour expired on 31 March 2013. The Group is currently still in negotiations with organised labour. The negotiated annual salary increases for the current year was 6.5%, the prior year was 7%, and the average increase for the 2014 financial year is 6.8%.

Short-term incentive (STI)

STI component is an incentive that delivers reward on achievement of annual performance targets. The level of achievement determines the level of payment against each weighted company performance measure. The STI comprises a cash payment which is payable after finalisation of audited results at the end of the relevant financial year.

The objectives of the STI plan are as follows:

In line with the new remuneration policy approved by shareholders, overall company performance will be measured at group, business unit and divisional level as indicated below:

The performance of the Group and business units will be measured against the following indicators:

Group Level

Business Unit level

The rules, targets and measurements are tabled annually on recommendation of Remco to the Board for approval, subject to the actual audited company performance reflected in the plan under review.

Short-term incentive plan awarded for the 2013 financial year

For the purpose of calculating the Company performance against the short term incentive plan, the cost relating to voluntary severance and early retirement packages of R434 million and the provision of R592 million for the fines handed down to Telkom by the Competition Tribunal were excluded.

The average overall achievements of performance targets for financial year 2013 are reflected below:

The board of directors has decided to pay employees an incentive to recognise their efforts under challenging circumstances. To this effect an average incentive was approved of 50% for both management and bargaining unit employees and 45% for the executive committee and executive management team (2012: 42.75% for the bargaining unit employees and 30.54% for management, Exco and executive management employees).

Long-term incentive awards

Currently no long-term incentive (LTI) share plan is in place. The initial shareholder concerns with the 2012 LTI submission as well as proposed changes to address and accommodate shareholders are highlighted on the following page below:

The company will submit a share incentive plan to the 2013 Annual General Meeting, scheduled for the 27th of September 2013, for shareholder approval.

The proposed share incentive plans is structured to optimise the Group’s overall position, while providing benefits that will assist the Group attract, retain and incentivise executives and top talented employees. The plan is designed to support the principle of alignment between management and shareholder interests with the aim to ultimately ensure growth in shareholder value. The objectives are to motivatelong-term sustainable performance, align the interests of top management with those of shareholders and retain business critical and top talented employees.

The plan will consist of the following share based incentive plans: the share appreciation right scheme and forfeitable share plan for senior management (M4 and higher) a forfeitable share plan for employees below senior management levels (employee shared owner plan(ESOP)) (M5 and lower).

Share Appreciation Right Scheme (SARs)

Eligible employees will receive annual grants of share appreciation rights, which are rights to receive shares equal to the value of the difference between the exercise price and the grant price. Vesting of the rights is subject to specific performance conditions.

When the holder elects to exercise the vested right, the company settles the difference between the market price on grant date and the exercise price in equity.

Forfeitable share plan

Forfeitable share plan entails a free transfer of shares to an employee, under the condition of forfeiture in the case that:

From grant date, the employee has shareholder rights in respect of the forfeitable shares to receive dividend rights and voting rights.

Performance conditions for vesting

The following financial measures must be achieved for forfeitable share in order for awards to be vested:

Total shareholder return

The Board will annually determine performance conditions for each allocation.

Limits to the proposed incentive share plans

The aggregate number of shares which may be allocated under the long-term incentive plan (LTIP) when added to the total number of conditional awards, which have been allocated previously under the LTIP and any shares allocated to employees under any other managerial scheme operated by the Group, shall not exceed 26,039,195 shares equating to approximately 10% of the current number of issued ordinary shares of the Group.

The maximum number of shares allocated to all unvested awards granted to any participant, in respect of the LTIP and any other managerial scheme operated by the Group, shall not exceed 5,207,839 shares, representing approximately 1% of the current issued ordinary share capital of the Group.

Remco may not grant conditional awards to an employee in any financial year if it would at the proposed date of grant because the face value of the grant which such employee has been granted in that financial year to exceed 120% of the employee’s guaranteed package at the proposed date of grant. In order to enhance the Company’s ability to attract external candidates, Remco has the discretion to increase such limit to 240% in the year of appointment of an employee.

Shareholding/ownership guideline

The Board wants to encourage individual shareholding in the Company to align shareholder interest and reinforce long-term decision making. Top Management - Executive committee members, Managing/Group executives and executives (M3 and higher) are expected to purchase a number of shares with the following minimum shareholding:

The shareholding requirements are the criteria to participate in the FSP scheme. No shares will vest until the minimum requirements have has been met.

The total number of shares purchased after 3 years which are equal to 15% of GP should be retained for a minimum period of:

In addition, the above shareholding requirements by executives to demonstrate their commitment and alignment with shareholder interests, the company will make a loan facility available to executives to purchase additional shares. The loan will be @ a rate of 0% interest and the executive should retain these shares until retirement.  The maximum loan granted will be equal to 1 x guaranteed package. Fringe benefit tax will apply to the loan amount.

What can shareholders expect going forward?

External appointments

Executive directors are not permitted to hold more than one external directorship of listed companies or offices without the prior approval of the Board. To avoid conflict of company interest or impair the executive directors’ ability to render productive service to Telkom, the executive directors may not accept membership of a board of directors without prior written permission. In the case of a member of the executive committee permission should be obtained from the GCEO. Telkom may withdraw permission to serve on a board of directors at any stage. Executive directors may accept compensation flowing from directorship. However, such compensation should be declared when applying for permission. Board meetings may be attend in members’ own time by taking vacation leave.

Service agreements

NT Moholi announced on 5 November 2012 that she has notified the board of directors of her intention to step down before the end of her contract period and therefore requested early termination of employment contract. She resigned as GCEO and director effective 31 March 2013 – contracted termination date. As part of the separation agreement signed with the employee, the employee acknowledged that she remains bound by the restraint of trade agreement that she signed on the 8th of April 2009 and 14th of April 2011 respectively. The restraint period is for a 24 month period from the date of termination of the employment contract. In accordance with the restraint agreement and for the duration of the restraint period the Employee shall not , whether as proprietor, partner, director, shareholder, employee, member, consultant, contractor, financier, agent, representative, assistant or otherwise and whether for reward or not, directly or indirectly, carry on or be interested or engaged in or concerned with, or employed by any company, close corporation, firm, undertaking or concern carried on in the territory, which engages in any way in, the competitive activity or provides services which are the same as or similar to the competitive activity of the Company.

Telkom entered into a full-time employment contract with SN Maseko effective from 1 April 2013, with a termination clause subject to three (3) calendar months’ notice given on either side.

Retention and restraint agreements

In order to ensure that Telkom attracts highly skilled and experienced ICT business leaders Telkom can sign retention and/or restraint of trade agreement for specific candidates in specific roles. The main objective is to protect Telkom’s interest with reference to trade secrets and confidential information. Confidential information to include,inter alia, information relating to Telkom strategic objectives, information relating to business activities, technical, scientific commercial, financial and market information, business data and plans, designs, drawings, and technical requirements and specifications of Telkom. After termination of the employment contract and for the duration of the restraint period the employee shall not carry on or be interested or engaged in/or concerned with or employed by any company which engaged in any way in, the competitive activity or provides services which are the same as or similar to the competitive activity.

No retention agreements were signed with any of the executive committee members during the financial year.

Sign-on bonus

Sign-on bonuses may be allocated on the discretion of the GCEO on recommendation of executive committee members, to prospective staff members who meet specific criteria. The intention of the sign-on bonus is to act as a recruitment incentive to assist in talent attraction and compensate for potential loss of benefits from previous employer. The full sign-on bonus amount will be recovered if the individual terminate his/her employment contract.

Telkom paid a sign-on bonus to A Vitai, MD Telkom Mobile, in November 2012. The bonus will be recovered should he resign from his position before 31 October 2015.

Non-executive directors’ remuneration key principles and policies

The board of directors, on the recommendation of Remco, determines the fees of the non-executive directors. These fees are set out on pages 140 and 141 and in note 39 in the consolidated annual financial statements.

Fees for Telkom’s non-executive directors are determined by the board of directors based on market practice, within the restrictions contained in Telkom’s MOI. Telkom’s non-executive directors receive no other pay or benefits other than directors’ fees, with the exception of reimbursement of expenses incurred in connection with their directorships. The non-executive directors do not participate in the long-term incentive share plan or in the short-term incentive plan outlined herein and are not eligible for pension scheme membership.

The remuneration structure is considered to be fair and reasonable and in the best interest of the Group.

Service agreements

PL Zim had a service agreement with Telkom effective from 16 February 2011, which had a one-year term, expiring 15 February 2012. On 8 February 2012, shareholders were advised that PL Zim has been reappointed as chairman with immediate effect. On 9 September 2012, PL Zim has informed the board of directors of his retirement as chairman and director with effect from 24 October 2012.

Telkom entered into a service agreement with JA Mabuza effective from 16 November 2012, which has a one-year term, expiring 15 October 2013

Non-executive directors’ remuneration

Non-executive directors’ fees effectively 1 April 2012 were as follows:

Board meetings – five scheduled per annum.

Special board meetings fee:

Board sub-committee meetings:

Where any board member voluntarily attends a committee meeting that they are not a member of, there is no fees payable for their attendance.

All fees are paid proportionally to the period in which office is held.

Remuneration and benefits awarded to prescribed officers during 2013

Executive directors’ remuneration

Remuneration and benefits paid and short-term incentives approved in respect of the 2013 financial year are set out in the following table:

Executive committee and prescribed officers (excluding executive directors)

The aggregate remuneration and benefits paid, short-term incentives approved and for the 2013 financial year are set out in the following table:

Executive management team

31 March 2013

Non-executive directors

The following table details emoluments paid to non-executive directors for services rendered:

Directors’ shareholding as at 31 March 2013

Directors’ shareholding as at 31 March 2012

Directors’ interests in contracts

The directors of the Group annually and as required declare their interest in any transaction with the Group in terms of the Companies Act, 2008. In accordance with the Companies Act, 2008, Telkom SA SOC Limited maintains a register of directors’ interests in contracts.

None of the directors declared an interest in any contract during the year under review.