Remuneration report

Dear shareholder,

I am pleased to present this background letter and the accompanying remuneration report for Life Healthcare.

The group remuneration and human resources committee (the committee) recognise the increased need for stakeholder engagement, and we will continue to engage with major shareholders in this regard.

During the year, the committee dealt successfully with a number of key issues which include:

  • dealing with the impact of the rights issue on the Company’s incentive schemes;
  • the exit of the Group Chief Executive Officer on mutually agreed terms;
  • external benchmarking and review of non-executive directors’ fees which were lagging behind our peers, primarily as a result of a freeze in fees during 2016. The review included the introduction of separate fees for the role of lead independent non-executive director; and
  • addressing the continued shortage of key clinical nursing and pharmacy skills by improving the value proposition to these categories of staff. Staff turnover has improved to the best levels ever experienced in the history of the Company.

We recognise the importance of incentivising our employees and management. We believe that strongly committed employees and management promote the Group’s growth, quality, efficiency and sustainability strategic focus areas.

As the demand for healthcare increases, the labour market becomes increasingly competitive. Continued slow economic growth has been a challenge, and global mobility has resulted in the loss of key skills. The Group continues to seek creative ways to attract and retain skilled individuals to address the slow growth of the talent pool, especially regarding clinical skills. Over the past two years, offshore expansion and local market pricing have negatively impacted aspects of profitability. As a result, our LTIs and performance bonuses are becoming challenging.

Challenges like these may lead to executives looking for opportunities outside the Group. It is imperative for us to ensure we prevent the loss of key skills. The committee, in collaboration with the Group as a whole, strives to address challenges faced to ensure future success. The committee has consequently initiated a review of our employee (managerial) value proposition by a leading consulting group.

We endeavour to design and continue calibrating our executive remuneration, in a manner that promotes the achievement of key business objectives in order to qualify for variable remuneration.

The committee is of the opinion that the Group’s HR strategy delivered a sound value proposition to employees in the past year, and improved employee retention rates support this. Our employee reward and recognition initiative was developed to ensure a broader application of recognition at all levels in the Company. It recognises when individual and Group performance goes beyond expectation and continues to drive the correct behaviour. The performance of the Life Healthcare share price and resultant lack of retention value offered by the long-term incentive scheme is, however, of concern. The value proposition to senior managers is a key item on the committee’s agenda for 2018.

The committee solicits and receives independent, external professional advice on matters within the scope of its duties. During the year, we received assistance on matters associated with remuneration in general and executive remuneration specifically by a number of consultants who, in the view of the committee, are fully independent.

Royden Vice
Chairman: Remuneration and human resources committee

Please note

Life Healthcare Group Holdings Limited and its subsidiaries are defined as the Group, while Company refers to the southern Africa business.

Remuneration policy report

Introduction

In embracing positive governance and effective disclosure, our remuneration policy and implementation are explained in compliance with King IV and draft guidelines and practice notes of IoDSA. The remuneration policy report and the accompanying remuneration implementation report (implementation report) are to be tabled at the upcoming annual general meeting and are to be subject to separate non-binding advisory votes by shareholders.

Through these non-binding advisory votes, the shareholders express their views separately on the remuneration policy and the implementation thereof as disclosed in the implementation report.

We will continue to engage with shareholders as well as other stakeholders regarding our remuneration policy and in particular, be sensitive to our employees’ needs and the requirements of the Company to retain our talented and skilled people.

All information relates to southern Africa unless stated otherwise.

Remuneration philosophy

The Group’s remuneration strategy’s objective is to attract and retain key talent and to motivate and reward employees appropriately to ensure they achieve key organisational objectives.

The remuneration philosophy is informed by business objectives, market competitiveness, employee growth and development, the retention of scarce and specialised skills and legislative compliance.

Our remuneration strategy aims to:

  • support the Group’s business, human resource strategy, and provide a platform for the provision and articulation of the remuneration policy;
  • provide a platform for fair, responsible and transparent remuneration throughout the Group;
  • align management’s interests with those of shareholders;
  • encourage innovation and progress;
  • promote an ethical culture and responsible corporate citizenship;
  • offer support aligned to the vision and direction of the Group’s goals and strategy;
  • be flexible in order to adapt and change as the business responds to market forces; and
  • continually monitor its efficacy to ensure that the unique needs of the employees and Group are being met.

The Group acknowledges that focused management and employee attention to business objectives are critical success factors for sustained long-term value creation for stakeholders. To this end, its remuneration strategy aims to attract and retain the talent required to give effect to these objectives.

Therefore, the Group will periodically solicit a number of market survey providers for an indication of the guaranteed remuneration and annual cash incentive payments, made generally and sectorally. This is undertaken in order to assess our positioning compared to the market in terms of key talent, and to assess our own performance in delivering a value proposition to all employees of fair and equitable remuneration.

The committee has a systematic agenda to review the remuneration strategy and overall policy (including higher-level strategic reward principles). It oversees, without interfering in areas where management ordinarily have discretion, the implementation of policy over an annual cycle. At least annually, formal feedback is provided to the board on how the policy objectives are being achieved, and this feedback forms part of the process of obtaining approval of the remuneration report.

In the annual review of the benefits offered by the Group, the committee considers whether they are appropriate and competitive given the industry, the Group’s financial position, legislative requirements, and market benchmarks and trends, and if the costs relating to the administration of the benefits/schemes are justified.

The committee reviews the policy and objectively assesses the appropriateness of the fixed to variable remuneration mix for the Group, to ensure that it reflects the remuneration strategy, and:

  • serves the Group’s operational needs and objectives;
  • is competitive;
  • is sustainable; and
  • serves the achievement of strategic objectives and promotes positive outcomes.

At the same time, it ensures that the tenets of fair and equitable remuneration are addressed, by assessing:

  • how the benefits are perceived and understood by participants;
  • if the benefits/schemes/trusts are soundly governed;
  • whether the benefits/schemes meet the needs of employees and are fair towards all employees; and
  • whether benefits that are offered to executives are similarly offered to employees and if not, what the justification is.

This remuneration philosophy and the attendant policies that support it are widely shared with employees, and can also be accessed by the public at www.lifehealthcare.co.za.  

Fair and equitable remuneration structures

The Group targets a mix of remuneration elements to align reward strategy to its stated objective of providing fair, responsible and transparent remuneration throughout the Group, in order to:

  • attract, motivate, reward and retain human capital;
  • promote the achievement of strategic objectives within the Group’s risk appetite;
  • promote positive outcomes;
  • promote an ethical culture and responsible corporate citizenship; and
  • provide a balanced remuneration mix within the Group’s financial constraints.

The following aspects are considered in the delivery of a compelling value proposition to employees:

  • Job evaluation/job sizing
  • Design and implementation of remuneration structures based on a unique mix of remuneration elements specific to Life Healthcare
  • Development of integrated performance management systems
  • Bonus, incentive and employee ownership plans
  • Non-monetary rewards

All elements of remuneration that are offered in the Group are set out in the detailed remuneration policy that follows, including:

  • Fixed remuneration: Salary and benefits and how these are determined, including contributions to retirement, risk funds and medical benefits, leave entitlements, allowances and flexible work conditions
  • Variable remuneration: Short-term performance incentives – Annual or shorter incentives and (generally) cash performance-based payments
  • Variable remuneration: Long-term incentives – share-orientated awards that are performance and retention based
  • Retention and sign-on payments
  • All other types of payments including, for example, loss of office or termination payments and restraint payments
  • Non-executive directors’ fee structures and the principles for setting of fees

The proposed introduction of policies on malus (pre-vesting) and clawback (post-vesting) provisions and minimum shareholding requirements/guidelines are also discussed.

Non-binding advisory votes on the remuneration policy and remuneration implementation report

In the event that less than 75% support for the remuneration policy and remuneration implementation report are achieved at the annual general meeting, Life Healthcare will invite dissenting shareholders to send reasons for such votes in writing whereafter further engagements may be scheduled.

At a practical level, the Group strives for:

The Group offers senior employees a combination of guaranteed remuneration, short and long-term incentives. Short-term incentives are paid to employees at middle management and higher grades who have a line of sight to business objectives. Targets are stretched to encourage superior performance. Senior managers who have a more strategic focus participate in the Group’s long-term incentive scheme to ensure long-term sustainability of the Group and alignment with shareholders’ interests.

The on-target pay mix apportionment for a number of executive positions in Life Healthcare is shown in more detail in the graph below.

The potential consequences of the remuneration policy on the total remuneration for executive management are illustrated below. The standard minimum, on-target and maximum expected reward mix for executives in Life Healthcare are depicted. Actual remuneration in the year under review is also identified for illustrative purposes, but is commented on more fully in the remuneration implementation report.

Notes

  • LTIP actual payments are based on 2014 allocations that vested in January 2017.
  • For simplicity in the above graph, any actual payments made for extraordinary or outside policy decisions, for example for recruitment or termination, are included under benefits. These benefits are separately detailed and explained in the accompanying implementation report, single-figure disclosure.

Scanmed has a similar remuneration offering to Life Healthcare, i.e. guaranteed remuneration, short and long-term incentive plans. The Group commissioned an international survey house to establish benchmark management salaries for similar sized companies in the Polish market. The combined remuneration offering creates strong alignment to Scanmed company financial performance.

Guaranteed remuneration

Base salary    
  • Attraction and retention of key employees
  • Internal and external equity
  • Rewarding individual performance
Benefits    
  • External market competitiveness
  • Integrated approach towards wellness, driving employee effectiveness and engagement
Allowances    
  • Compliance with legislation
  • Key focus on attraction and retention of clinical skills
  • Specialist allowances are paid for specialised employees to recognise skills and incentivise and retain employees. Higher premiums are paid to qualified employees to heighten professionalism and Group excellence
  • Other variable allowances are paid for additional services rendered
Guaranteed package    
  • Salaries are benchmarked against general market surveys and specific healthcare market data

The Company benchmarks remuneration against the market median which is derived from representative salary surveys.

In southern Africa an average increase of 6.0% in guaranteed package was granted to the executives in the 2017 salary review, which was lower than the average increase granted to salaried employees.

Wage gap

Research suggests that the so-called 10:10 ratio provides an insightful view on the top versus bottom earnings comparison in organisations.

This methodology analyses the average guaranteed remuneration of the highest earning 10% of employees against the lowest earning 10% of employees. The Company’s 10:10 ratio reflects a more conservative distribution of income compared to the private sector as depicted alongside. The Company’s efforts in increasing the wages of lower paid employees is evidenced by the reduction in the ratio from 2016 to 2017:

1 Source: African Journal of Reward – Edition 2 (Bryden Morton and Chris Blair) – March 2017.

Employee benefits

The benefits that form part of total cost to company include the following:

Retirement funds

The Company operates two defined contribution retirement funds:

  • The Life Healthcare Provident Fund
  • The Life Healthcare DC Pension Fund

In addition, the Company operates two defined benefit funds that have been closed to new membership since 1996. The Life Healthcare DB Pension Fund provides retirement benefits for 121 active members and 246 pensioners. The remaining 10 active members of the Lifecare Group Holdings (LGH) Pension Fund joined the Life Healthcare DB Pension Fund with effect from 1 March 2017, following registration of a rule amendment to allow the Life Healthcare Fund to accept the LGH members. The next step will be to outsource the pensioner liability in the LGH Fund to an insurer, as the fund advances towards closure and deregistration.

The Company-supported retirement funds offer Group life cover and disability benefits to members. Permanent disability and death are covered by lump sum payments that are underwritten by an insurer. The standard cover for new employees is three times annual salary for death and disability cover. Some historical anomalies to this standard cover exist.

Medical aid

It is a condition of employment for permanent employees earning above R7 000 per month (with effect from 1 January 2018) to belong to a Company-supported medical aid, unless membership of a spouse’s medical aid can be proven.

Membership of a principal member, spouse and up to two children is subsidised by the Company.

The Company participates in the open medical scheme market and offers Medshield and Discovery Health as options to employees. In addition, medical aid membership is voluntary for employees who earn below the threshold level referred to above. However, the Company will, in instances where employees earning below R 7 000 per month (with effect from 1 January 2018) opt not to join a medical aid, procure a primary health benefit for such employees. This benefit covers, via a bespoke network, doctors’ consultations, medication and a certain number of prescribed minimum benefits.

Other benefits

All other benefits are industry benchmarked and are granted on the basis that they aid employee retention and/or provide an efficient work environment for the employee. Such benefits are priced and form part of the annual salary review mandate process.

Short-term incentives

Short-term incentives    
  • Alignment with Group and business unit performance
  • Individual performance, which includes transformation and quality
  • Rewards performance against targets

The Group’s variable compensation plan (VCP) is a short-term reward scheme based on balanced scorecard methodology and is offered to managers who have line of sight and contribute to the profitability of the business.

Balanced scorecard measures are weighted differently at each level of the organisation in line with the accountability of employees and the behaviour that needs to be encouraged; and both modifiers and gatekeepers are applicable where appropriate, where the gatekeeper acts as a penalty, and a modifier may enhance or decrease incentives for performance relative to targets.

In setting targets, the committee is mindful that external factors, some of which are unpredictable, can mitigate performance, but it strongly believes that overall sustainable performance should still be carefully considered and then targeted, within a mix of financial and non-financial measures that are directly controllable, but still in the context of overall affordability and alignment with shareholder outcomes.

The board may apply its discretion on all payments, to mitigate against unintended consequences, but this discretion is reluctantly applied, and only used in extreme and exceptional circumstances. Such discretion for executives is fully disclosed in the remuneration implementation report.

For each performance measure or scorecard element, a weighting is set reflecting its overall importance for that year, as well as levels for threshold, target and stretch performance. Individual and corporate performance targets are reviewed annually in advance.

The Group emphasises pay for performance only, and any business and/or personal performance below a set threshold will result in non-payment of incentives.

Life Healthcare variable compensation plan (VCP) (southern Africa)
a) Balanced scorecard measures

Payments under the VCP scheme are based on personal and financial performance (which is either business unit performance, or a combination of Group and business unit performance).

Note

Specific detail applicable to the Group Chief Executive Officer financial measures are reflected below, and are not illustrated in the above diagram.

The Group CEO has a bespoke balanced scorecard which, for the financial year under review, comprised the following measures:

Financial     Group    
  • Group normalised earnings per share against budget
  • Group return on equity
    Southern Africa    
  • EBITDA delivered against budget
  • Free cash flow against budget
    Poland    
  • EBITDA delivered against budget
  • Improvement of EBITDA margin
Personal     Group    
  • Total growth in current and new business including complementary services
  • A number of strategic objectives aimed at improving efficiency, quality and sustainability, namely environmental, social and governance (ESG)
b) On-target and maximum payments

The level of potential reward has been industry benchmarked and directly influences total remuneration. A targeted percentage, ranging from 10% to 72.5% of remuneration, represents a theoretical on-target reward should the targeted objectives be met, which escalates as responsibility increases. However, actual reward may exceed this percentage if targets are exceeded. Maximum rewards are as follows:

  • Group performance – capped at 225% of on-target remuneration
  • Business unit performance – capped at 225% of on-target remuneration
  • Personal performance criteria – capped at 120% of on-target remuneration

The maximum potential reward based on the above criteria ranges from 12.6% to 149% of salary, depending on the management level.

Scanmed short-term incentive scheme (Poland)

Short-term variable compensation is paid to the management board of Scanmed, and targeted reward is based on seniority. Payment is made every six months and is based on the following targeted reward:

  Weighting
Measures Chief
Financial
Officer
Management
team
     
Financial goals 75% 50%
Personal performance 25% 50%
Alliance Medical short-term incentive scheme (UK)

Short-term variable compensation is paid to the management board of Alliance Medical and targeted reward is based on seniority. Payment is made annually and is based on the following targeted reward:

Weighting Senior
management
   
Financial goals 67%
Personal performance 33%

Long-term incentive plan

Long-term incentives    
  • Direct alignment with shareholders’ interests by making the award conditional upon the achievement of targets.
  • Awards are made annually to eligible managers.
  • Scheme reviewed annually to ensure its continuous alignment to strategic goals.
  • Recently extended to executive management of Scanmed (Poland)
Purpose

The purpose of the long-term incentive plan (LTIP) is to motivate and reward executives and senior managers who are able to influence the long-term performance and sustainability of the Group. This is done by rewarding participants based on Group performance against key long-term measures.

The aims of the plan are
  • to provide a long-term financial incentive to maximise a collective contribution to the Group’s continued growth and prosperity;
  • to allow managers to share in the growth of the Group;
  • to align managers’ interests with those of the Group’s shareholders;
  • to assist with the recruitment and motivation of managers of the Group;
  • to reward executives for sustained out-performance; and
  • in terms of a newly adopted policy to encourage unencumbered share ownership, an element of retention, but still governed by performance criteria.
The scheme design

The LTIP is a notional performance share plan for all senior managers and executives. The notional value of the performance shares is linked to the Company’s share price. Allocations are made annually.

a) Allocation levels and maximum vesting

The value of the award is set to realise a targeted percentage payment of guaranteed package when vesting, assuming targeted performance levels are achieved. The quantum of reward increases with seniority and is market benchmarked.

The value of the performance shares will be determined by the Company’s listed share price, using a 30-day volume weighted average traded price (VWAP).

The maximum vestings for the Group Chief Executive Officer, Group Chief Financial Officer, executive directors and prescribed officers are as follows:

b) Sustained performance/retention modifier

The allocation of performance shares can be enhanced via a performance/retention modifier to retain key high-performing individuals with no allocation for poor performance, while the allocation for top performance may be enhanced up to 130% of on-target allocations.

c) Vesting and settlement

All units vest at the end of the third year, and the cash value is determined. The after-tax value is used to purchase Life Healthcare shares on the open market, which are delivered to participants.

d) Performance measures

Two performance measures generally apply, namely total shareholder return (TSR) and earnings before interest and tax (EBIT). However, to align closer with shareholder interests, the Group Chief Executive Officer and Group Chief Financial Officer are measured on headline earnings per share (HEPS) in place of EBIT.

Measure   Rationale Reward
threshold
On-target
performance
Maximum
performance
TSR
50%
  Key external indicator ensuring alignment with shareholder interest. Below 50th
percentile =
no payment
60th percentile 80th percentile =
200% award
EBIT
50%
OR
HEPS
(Group CEO,
Group CFO)
50%
 

A key internal indicator of the underlying profit performance of the Group, reflecting both revenue and costs.

A key indicator of the effective disclosure of the profits and losses of a company in a given trading period.

Below
CPI + 1% =
no payment
CPI + 4%

CPI + 8% =
200% award

The LTIP scheme is currently under review to possibly include ESG measures, either as gatekeepers or as modifiers.

  • Total shareholder return
    The target TSR is set as relative to a comparator group of 27 listed companies, which are similar in size and investor profile. The comparator group excludes banks, telecommunications and resources companies, but includes direct competitors in the private healthcare market. On vesting, the actual TSR will be compared to the TSR of the comparator group. This determines the modifier for the number of performance shares vesting.

The target thresholds are set at date of allocation of units, and vesting only occurs starting at median performance. The multiplier for the performance shares will be on a sliding scale from 0% to 200% for each performance measure, thus complete outperformance in comparison to the comparator group results in a maximum 200% award.

  • EBIT (HEPS for Group Chief Executive Officer and Group Chief Financial Officer)
    The internal financial measure of EBIT is the absolute performance measure that will be used to modify the value of the performance shares vesting. This measure will be set relative to inflation (CPI).

The target thresholds are set at date of allocation of units, and no vesting occurs under CPI + 1%.

Long-term incentive schemes: Rights issue adjustments

The rules of the Company’s long-term incentive schemes require that adjustments be made to accommodate the effects of a rights issue. The Company sought advice from a leading investment bank and the committee approved the following adjustments:

Previous LTI Scheme (2013 and 2014 allocations remain)

The last allocation in terms of this scheme was made in 2014. All allocations have vested, however, there are still employee purchased shares and Company matched shares held in trust until restrictions are lifted in 2018 (2013 allocation) and 2019 (2014 allocation).

  • The rights issue offer applied to shares held in the LTIP Trust. Where participants elected to follow their rights, they were required to pay for additional rights issue shares with own funds. Under such circumstances the Company matched the employees’ commitment by funding the following of rights on Company matched shares.
New LTI Scheme (introduced from 2015)
  • An adjustment ratio of 1.21367 was applied to all Performance shares held by participants. The ratio was based on the change in the VWAP in the 10 days before the finalisation date (23 March 2017) and the 10 days VWAP post the rights issue date.
  • Base EBIT will be adjusted to reflect the acquisition of Alliance Medical.
  • The TSR ranking is obtained from a service provider that factors in any corporate action.

Employment contracts

Executive employment contracts for management are generally subject to a three-month notice period and a subsequent six-month restraint of trade.

The letters of appointment for executive directors specify that he/she “be required to tender his/her resignation as an executive director on the board with effect from the 3rd anniversary date of the date of commencement of the Contract and on the anniversary date of each subsequent 3 (three) year period for the duration of the Contract”.

They are entitled, but not obliged, to offer themselves up for re-election as executive director on the Life Healthcare board.

If their re-election is supported by the board, but they are not re-elected, the executive director will resign and the notice period will apply, or alternatively, an appropriate payment in lieu of the notice period may be agreed upon between the parties.

On expiry of the notice period, Life Healthcare will make the following payments:

  • An amount equivalent to 12 (twelve) months guaranteed remuneration and the amount of the 13th cheque payment (if applicable)
  • An amount equivalent to 12 (twelve) months of the variable compensation plan payment, based on the amount paid to the executive director during the immediately preceding 12-month period, to be escalated by the CPI increase over the same period
  • They would be granted good leaver status with all benefits as provided for in the Life Healthcare LTIP

Employee share plan

An employee share ownership plan was implemented via a trust. Commencing in 2012, the Company funded, via the trust, the purchase of shares to the value of R50 million per annum for the benefit of employees. This year an increased contribution of R60 million was approved by the board to purchase shares on behalf of employees.

The trust holds the shares and confers “rights” or units to shares to employees. Permanent employees who belong to Company retirement funds and have one year’s service at the date of grant are eligible for an allocation. The rights have been equally distributed to all qualifying employees.

The objectives of the plan are to incentivise and retain employees. To fulfil these objectives, certain conditions need to be attained by the employees to transfer these rights into actual shares:

  • Employees need to remain in the employ of the Company for seven years to obtain the full quota of the rights of each allocation made.

Dividends start to flow to employees from the onset of the plan.

Employees who resign or are dismissed during the duration of the scheme will lose their rights to all allocations made, and their rights will be distributed equally among the remaining employees. Thus, the number of rights will increase by the time of transfer of shares to remaining employees. Good leavers, for example those who are retrenched or retire, will have the proportionate number of shares they hold at the time of termination paid out to them, less tax and costs. They will no longer participate in the employee share plan.

Shares, or the after tax equivalent in cash, are transferred from the trust to the employee after five years as follows:

  • 25% of the allocated rights transfer to the employee in year five.
  • 25% of the allocated rights transfer to the employee in year six.
  • 50% of the allocated rights transfer to the employee in year seven.

The first vesting of 25% of the 2012 allocation has taken place in the current year. This means that in the next three years the scheme will be fully ramped up to provide a 100% vesting to each employee who received their first allocation in 2012.

The Company will continue to acquire shares on an annual basis to ensure that the opportunity is granted to new employees and the objectives of the plan are continuously achieved. Each allocation will be managed separately and will vest according to the same criteria.

The efficacy of the plan is proving advantageous, as employee turnover for the qualifying participants has reduced substantially.

Non-executive directors’ remuneration

The fees in respect of non-executive directors are reviewed on an annual basis, and independent survey house data is used for benchmarking purposes. Fees are paid as a combination of a retainer and a fee per meeting to ensure alignment with the emerging market practice and Company culture.

An average increase of 9.6% was granted to non-executive directors, in 2017, to address anomalies in the market.