Remuneration report

Philosophy

As an internally managed REIT, the guiding principle for our remuneration philosophy is to promote the achievement of the company’s strategic objectives, encourage individual performance and reward sustainable value creation. Given that employee skills are vital to long-term value creation, our approach emphasises the contribution of our employees to building long-term value through fair and balanced remuneration.

Hyprop’s success depends on attracting talented, experienced and motivated individuals who can execute our business strategy to achieve our vision and mission. We use both short and long-term incentives to support this goal.

Target-based short-term incentives (STIs) are strong drivers of performance. A significant portion of senior management reward is therefore variable, based on realistic performance targets, and individual contributions to the growth of their division and the wider company. We also reward employees who deliver superior performance in line with our strategic goals. Special bonuses may be considered as additional awards in exceptional circumstances.

Long-term incentives (LTIs) are aligned to Hyprop’s strategic objectives and the investment interests of shareholders.

Remuneration committee

The remuneration committee meets at least twice a year and comprises non-executive directors with a majority of independent non-executives. The chief executive officer and other directors or executives may attend meetings by invitation, but are excluded from deliberations on their individual remuneration.

The committee is responsible for implementing the remuneration policy to ensure:

  • Salary structures and policies motivate superior performance, and are linked to realistic performance objectives that support sustainable long-term growth
  • Stakeholders are able to make informed assessments of reward practices and governance processes
  • Compliance with all applicable laws and regulatory codes.

A formal charter codifies the tasks and responsibilities of the committee. Updates to the charter to effect application of the recommendations of the King III report, or other identified good practice, are approved during the year. The committee is aware of the pending implementation of King IV and will make changes or amendments to the group remuneration report, where practical and applicable, in light of the requirements of King IV. The committee chairman attends the annual general meeting of the company to liaise with shareholders on matters under the ambit of the committee.

The remuneration committee is responsible for:

  • Reviewing and recommending to the board Hyprop’s remuneration philosophy and policies for directors and staff
  • Ensuring the remuneration strategy reflects the interests of stakeholders, is comparable to the sectoral remuneration environment, and complies with relevant principles of good corporate governance
  • Considering whether the objectives of the remuneration policy have been achieved
  • Ensuring the ratio of fixed and variable pay – in cash, benefits and shares – is aligned with the company’s strategic objectives
  • Reviewing the effectiveness of recorded performance measures that govern the vesting of incentives
  • Ensuring all benefits, including retirement benefits and other financial arrangements, are justified and correctly valued
  • Considering the performance of the chief executive officer and financial director, as directors and as executives, when determining their remuneration
  • Selecting an appropriate peer group when comparing remuneration levels
  • Regularly reviewing incentive schemes to ensure alignment with shareholder interests and that they are administered in terms of their rules
  • Advising on the remuneration of non-executive directors.

The committee uses the services of independent advisers as required. During the year, these advisers supplied market data and advice on market practice and governance, and provided analyses on certain performance measures.

Non-executive directors

Our policy is to remunerate non-executive directors competitively for their service while understanding the required time commitment. Fees are benchmarked against a peer group of JSE-listed companies, and there are no contractual arrangements to compensate for loss of office.

The remuneration and nomination committee reviews these fees annually and makes recommendations to the board which, in turn, proposes fees for approval by shareholders at the annual general meeting.

Remuneration for non-executive directors comprises a base fee, predetermined annually and approved by shareholders at the annual general meeting.

Non-executive directors do not receive STIs nor do they participate in any LTI schemes except if they previously held executive office and are entitled to unvested benefits from this period. Hyprop pays no pension contributions for non-executive directors.

Executive directors and senior executive remuneration

Our executive directors are permanent employees and their employment agreements include a notice period, but no restraints of trade. Hyprop aims to be an employer of choice: to attract and retain individuals of high calibre. We offer competitive remuneration packages and review these annually.

Our remuneration structure includes:

Basic salary

All basic salaries are market related, benchmarked against the median industry norms and adjusted for an employee’s experience, qualifications, responsibilities and nature of work. These are reviewed annually.

Long-term incentives (LTI)

Current plan: Conditional Unit Plan (CUP)
These reward long-term decisions supporting dividend and capital growth. They are also designed to align employee behaviour with shareholders’ interests and retain staff. The LTI comprises a performance and retention component. The split between performance shares and retention shares is 70%:30% for all participants.

Conditions for the performance component of the LTI are shown below:

Performance condition Detail Weighting
%
Threshold
%
On-target
%
Stretch
%
Growth in distribution/dividend per share relative to peer group* Growth in distribution per share at the end of performance
period compared to prior financial year.
40 95 102,5 110
Share price performance relative to peer group* Growth in share price from start to end of performance period. 40 95 105 120
Strategic component Determined by remuneration committee in line with circumstances and projects at the time of the award. It is measured over the performance period of three years, and may include project-related or general business activity. Where considered appropriate, the committee has the discretion not to apply the strategic component, in which case this 20% weighting will be split equally between the other two performance conditions. Achieving each of the performance conditions and consequent vesting of performance units occurs severally. 20      

* The peer group comprises the five largest South African REITs by market capitalisation listed on the JSE

Awards are offered to executives, senior managers, operational and financial managers and staff with specific core, critical or strategic skills and allocations are approved by the remuneration committee. Performance shares vest three years after initial allocation, provided the relevant performance conditions have been met.

  Date of issue Offered to Number of
employees
participating
% of staff
complement
First reward issue 1 January 2014 Executives, senior managers, operational and financial managers and staff with specific core, critical skills 27 13
Second reward issue 1 July 2014 As above 26 13
Third reward issue 1 July 2015 As above 26 13

Retention scheme terms

Retention shares vest five years after initial allocation, subject to continuous employment over the vesting period.

Participants do not pay for the shares, and will only be eligible to receive dividends after shares have vested.

Terms of service

Minimum terms and conditions for employing executive directors are governed by South African legislation. If an executive director’s services are terminated, the committee oversees the settlement of terms, assisted by labour law advisers.

Short-term incentives (STI)

An annual performance bonus aligns short-term rewards with annual performance and supports retention. Performance reviews are weighted significantly to output. The remuneration committee sets key performance deliverables (KPDs) annually at property and company levels, including deliverables for executive directors. These are formally measured and include:

  • Net income growth
  • Performance against budget
  • Increase in trading densities
  • New/renewed leasing rental values achieved relative to budget
  • New/renewed leasing escalations achieved
  • Tenant arrears collections and management
  • Tenant deposit and bank guarantee management
  • Documentation administration
  • Environmental impact targets
  • BBBEE implementation targets.

Exceptional performance is rewarded with higher incentives, after considering recommendations from general managers, regional executives and executive directors.

The maximum potential bonus for senior management is six months’ salary, at the committee’s discretion. Bonuses for executive directors are aligned with strategic objectives and are at the remuneration committee’s discretion.

Short-term incentive outcomes (STI)

Individual performance reviews are conducted annually, with biannual company key performance deliverable reviews measured against targets. Employees are rewarded on the outcome of these reviews. Bonuses and salary increases are approved by the remuneration committee. Bonuses are payable in December and salary increases implemented from January each year.

Individual performance reviews are completed on the company’s employee self-service system after performance discussions with the employee’s line manager.

Individual performance reviews include:

  • Professional conduct
  • Business processes
  • Customer service
  • Business operations
  • Employee management
  • Implementation of company strategy.

Company key deliverable review targets

The executive committee sets key performance deliverables annually at property and company levels. These are approved by the remuneration committee each year.

Performance against the company deliverable targets carries a 90% weighting, while individual reviews carry a 10% weighting at executive and senior management level.

Key performance deliverables for 2016 were:

  Weighting
%
  Performance on target Stretch target   KPI
outcome
%
  Performance achieved  
Financial: net distributable income growth 33   8% net income growth
year-on-year
10% and above   130   14,2% net distributable income growth year-on-year(1)  
Financial budget management 28   On budget Exceed budget by 3%   130   Exceeded budget by 5,2% (1)  
Leasing: vacancy movement, rentals, escalations and administration 18,5   Vacancy movement: 0% movement year-on-year. Rentals sustained at same rate. Rental escalation on new leases 8,9%. Rental escalations on renewals 5%. Administration: 2% outstanding documentation. Vacancy movement – reduced by 5% or more. Rentals achieved 7,5% more than previous rate. Rental escalation on new leases 10% or more. Rental escalations on renewals 7,5% or more than previous rate. Administration 0% outstanding documentation.   100   Reduced vacancies by 45%. Retail rentals 7,0% more than previous rental achieved. Office rentals less than previous rental achieved. 8,1% escalations achieved. 15% of lease documentation still in process.(2)  
Tenant arrears: deposits and total outstanding 6,5   Total outstanding tenant arrears: 2% outstanding as a % raised of rent roll. Deposits: 3% outstanding as a % of deposits raised. Total outstanding tenant arrears: 0% outstanding as a % of rent roll raised. Deposits: 0% outstanding as a % of deposits raised.   115   0,50% outstanding arrears compared to what was raised on tenant statement.(2)  
Operations: masterfile, waste recycling and energy saving 7   Masterfile: 90% complete. 70% waste recycled. 3% kwh energy saving. Masterfile 100% complete. 75% waste recycled. Energy saving 5% or more kwh saving.   120   92,1% masterfiles complete. 78% waste recycled. 3% kwh energy saving.(2)  
Trading density 2   1% increase year-on-year Exceeds 3% increase year-onyear   130   5,2% trading density growth(2)  
Footfall 1   1% increase year-on-year Exceeds 3% increase year-onyear   85   0,4% decrease year-on-year(2)  
BBBEE: procurement 3   60% of all procurement are from companies with a BEE level of 1 to 4 70% of all procurement are from companies with a BEE level of 1 to 4   130   84,5% procurement from companies with a BEE level of 1 to 4(2)  
BBBEE: employment 1   50% of all new appointments are black 61% and more of all new appointments are black   130   88% new appointments were black(2)  
Total 100         121      

(1) Based on the group portfolio
(2) Based on SA portfolio only
(3) Subject to the final ratification by the remuneration committee in November 2016

SCORING METHODOLOGY    
Underperformed   Achieved 70% of target
Below expectations   Achieved 80% of target
Solid performance   Achieved 100% of target
Above expectations   Achieved 115% of target
Stretch   Achieved stretch targets (130% of target)

Non-executive directors’ remuneration

  June 2016
R000
  June 2015
R000
 
Directors’ remuneration        
Independent non-executive 2 399   2 117  
Ethan Dube (paid to Vunani Capital Proprietary Limited) 334   284  
Lindie Engelbrecht 535   471  
Gavin Tipper 562   490  
Louis van der Watt* (paid to Atterbury Property Holdings Limited) 233   235  
Mike Lewin 334   284  
Thabo Mokgatlha 401   353  
Non-executive 1 040   847  
Kevin Ellerine 314   252  
Louis Norval 306   245  
Stewart Shaw-Taylor 420   350  

* Louis van der Watt resigned from the board of Hyprop on 4 May 2016

Executive directors’ remuneration

  June 2016
R000
  June 2015
R000
 
Pieter Prinsloo        
Basic salary 3 672   3 464  
Performance bonus (paid in December) 3 710   2 625  
Phantom share scheme(1) 3 454   3 436  
Pension fund contributions 173   141  
Other benefits 122   33  
Total 11 131   9 699  
Laurence Cohen        
Basic salary 2 089   1 958  
Performance bonus (paid in December) 2 332   1 650  
Pension fund contributions 362   296  
Other benefits 69   82  
Total 4 852   3 986  
Executive directors’ remuneration 15 983   13 685  
(1)

Phantom share scheme
The Hyprop board recognises that a key factor in the success of the group is the retention and incentivisation of management and staff. Accordingly, a scheme was formulated to reward employees who make a meaningful and sustainable contribution to the financial performance of Hyprop by providing them with the opportunity to participate in its future growth. Senior management and staff were offered this incentive.

The incentive was directly linked to the performance of Hyprop’s shares. Employees were granted “phantom” Hyprop shares at a notional strike price (the initial price (IP)). Employees received an award equivalent to the increase in the market value of the Hyprop share over the initial price. This award was paid in four payments within 30 days after the date on which the relevant payment was calculated.

The payment was calculated as follows:
Cash bonus = 1/4 AS x (P - IP) - relevant taxes
AS = allocated “phantom” shares
P = volume weighted average traded price of Hyprop shares for the 30 JSE trading days prior to the calculation date
IP = initial price

If the market price of the Hyprop share on the relevant calculation date was not greater than the initial price, no payment was made. The award was only applicable if the employee was in the employ of Hyprop on the payment date. No “phantom” Hyprop shares were in issue at 30 June 2016 (2015: 222 222).

The phantom share scheme has expired, no further payments will be made in terms of the Phantom share scheme.

Disclosure of CUP* – Pieter Prinsloo and Laurence Cohen

  Conditional
shares granted
  Date issued   Vesting date  
Pieter Prinsloo            
Performance shares 20 153   1/1/2014   1/1/2017  
Retention shares 8 637   1/1/2014   1/1/2019  
Performance shares 21 845   7/1/2014   7/1/2017  
Retention shares 9 362   7/1/2014   7/1/2019  
Performance shares 15 794   7/1/2015   7/1/2018  
Retention shares 6 769   7/1/2015   7/1/2020  
Total 82 560          
Laurence Cohen            
Performance shares 11 105   1/1/2014   1/1/2017  
Retention shares 4 759   1/1/2014   1/1/2019  
Performance shares 11 769   7/1/2014   7/1/2017  
Retention shares 5 044   7/1/2014   7/1/2019  
Performance shares 8 509   7/1/2015   7/1/2018  
Retention shares 3 647   7/1/2015   7/1/2020  
Total 44 833          

* To date, no shares have vested for the two executive directors

Employee earnings ratio

Performance per employee by net operating income and distributable income, as a measure of productivity, is benchmarked annually against peers.

Number of permanent employees   Net operating income per employee   Net distributable income per employee  
2016   2015   2016
R000
  2015
R000
  2016
R000
  2015
R000
 
232   199   7 076   7 029   6 561   6 631  
        1% increase
year on year
      (1%) decrease
year on year
     

Total compensation paid to employees**

  June 2016
R000
  June 2015
R000
 
Total salaries paid        
Total compensation paid to employees 123 295   109 519  
Average annual payment per employee 455   456  

** Including permanent, temporary and contract employees

Employees earning above the Basic Conditions of Employment Act (BCEA) threshold received an average 6% annual salary increase from 1 January 2016.

Employees earning below the BCEA threshold received an average 7% salary increase from 1 January 2016.