In my letter last year, I outlined the group’s remuneration policy and I am pleased to report that this policy remains mostly unchanged. However, there are two notable additions to the remuneration policy.
Firstly, the introduction of a clawback clause on incentive awards that have already vested in the event of certain trigger events occurring. Secondly, we have linked the annual variable pay awards of all group exco members to both SBG performance as well as the performance of their business units, in the ratio of 40% SBG/60% business unit, to incentivise collaborative behaviour and performance outcomes across our universal financial services organisation. More detail can be found here.
Your Remuneration committee’s (Remco) overriding focus is to ensure that the group’s earnings are fairly shared between our shareholders, senior executives and staff and accurately reflect the group’s overall performance, with consideration given to both the financial and non-financial metrics laid out in the group’s strategic plan.
In this review I will outline the key elements of the group’s financial performance, the general trading environments globally, in South Africa and across the continent, and the methodology agreed by your remuneration committee on how to share the group’s earnings between shareholders, senior executives and employees. In doing so, your committee also considered how well the group performed against the strategy approved by the board. The strategy remains unchanged with three key areas of focus; client centricity, digitisation and integration into a universal services organisation, and measured by five strategic value drivers of: client focus, employee engagement, risk and conduct, financial outcome and SEE impact.
The operating environment in 2018 proved once again to be challenging.
Globally: uncertainty everywhere
- Geopolitical developments (Brexit, US-China trade issues) combined with higher oil prices and rising US rates led to uncertainty and contributed to emerging market (EM) pressures which in turn negatively impacted EM exchange rates, including the rand and South African bank equities.
In South Africa: very challenging conditions
- 2018 started with a sense of optimism; however, ‘Ramaphoria’ faded, policy progress remained slow and the prolonged debate on land reform contributed to uncertainty.
- The uptick in business and consumer confidence levels early in the year reversed and demand was subdued throughout the remainder of the year.
- The country entered into a technical recession in quarter two. This combined with tax bracket creep and inflationary pressures limited spending and despite a slightly improved second half, full year GDP growth remained subdued at 0.7%.
In Africa Regions: some upside
- Economic growth in West Africa was strong and was supported by improvements in Nigeria (~2%) and strong growth in Ghana (~6%).
- East Africa also improved with average growth at 5% while South & Central Africa continued to be impacted by the sluggish environments in Zimbabwe and Namibia.
- Inflation stabilised and started to edge up in several markets, driven by increases in taxes and fuel prices while interest rates have declined year-on-year.
- general, currencies devalued relative to the USD. Angola was the standout with depreciation of the kwanza by more than 80% against the USD.
Other relevant markets
- Argentina has experienced significant upheaval following the devaluation of the ARS against the USD.
- Global fixed income, currencies and commodities were impacted by markets and lower levels of activity.
Against this backdrop the group’s performance was considered to be acceptable. Despite strong headwinds experienced at various times during the year, senior management remained focused on delivering against all aspects of the strategy. While some financial targets were missed, revenue growth in Africa Regions and group return on equity (ROE) showed pleasing increases. The breadth and diversity of the group’s franchise across Africa proved to be a real strength balancing markets which were under pressure with better performing markets. Continued good progress was made in the areas of client focus, employee engagement, risk and conduct and SEE.
The group’s headline earnings (HE) grew to R27.9 billion, an increase of 6% from 2017. Recognising the very poor economic environment impacting on the group’s largest market, South Africa, this was considered to be a fair result. ROE grew to 18.0%, up from 17.1% in the prior year. A pleasing result. Within these results banking activities grew HE to R25.8 billion, up 7% on the prior year, while ROE was 18.8%, up 80 basis points on 2017.
The remuneration committee was disappointed to note that the cost-to-income ratio remained stubbornly high and that negative jaws between costs and income increased. However, the group executives took decisive action to reduce costs in a sustainable way. Full year planned costs were reduced by R2.3 billion but not enough to counter the muted revenue growth in the key market of South Africa.
The Liberty business continued to make good progress. HE attributable to the group grew to R1.6 billion, up 11% from the prior year. Pleasingly, operating earnings were up 42% indicating good underlying growth. However, this was offset by a very poor performance in the shareholder investment portfolio, where earnings were down by 81% compared to 2017, driven by very poor market activity across the globe. ROE grew to 15.2% up from 12.7% in the prior period, evidencing good progress in normalised operating earnings which increased by 42%.
SBSA, which is now considered and managed as a separate business in its own right, had a difficult year impacted by a rather uncertain and stagnant economy and increasingly intense competition. HE at R16 billion was flat on 2017, while ROE increased by 10 basis points to 16.7%. As the largest market in the group, the very subdued economic environment had a significant impact on group results.
The investment into Africa Regions continued to bear fruit. HE was R8 billion, up 19% on the prior year and up 26% on a constant currency basis. ROE was 24%, up from 23.8% in 2017. Africa Regions now contributes 31% of banking activities HE and 28.8% of group HE and is fulfilling its strategic potential to become a very significant and important part of the group.
From a balance sheet perspective, loans and advances were up 7% to over R1 trillion, deposits were up 9% (wholesale up 9%, retail up 10%) and the group is well capitalised with a tier one capital ratio of 13.5%, higher than board approved range of 11.0 – 12.5%.
Non-financial strategic value drivers
In addition to the financial results, the group’s performance against the other strategic value drivers showed continued improvement, strong evidence of the underlying strength of the business and the progress being made against the strategic imperatives.
In assessing the performance of the group and senior executives, your committee has again carefully considered its responsibilities to all stakeholders especially shareholders, consistent with the remuneration philosophy.
The methodology used to size incentive pools is a combination of a top down approach which articulates overall guidance to business units and countries, and a bottom up approach based on executives’ self-assessment of the performance of their teams, coupled with consideration of shareholders’ interest and stakeholder concerns.
The policy aims to avoid a short-term bonus-centric culture but rewards sustainable performance on a through-the-cycle basis. Your committee measures performance to ensure earnings are not the result of one year’s work but rather the planned outcome of work done in past years.
The following chart demonstrates how the split between shareholders and employees has varied over the past few years and highlights the relationship between HE growth and the growth in employee incentive pools.
Results for the group were acceptable but fell short of expectations. The growth in HE was 6%. The incentive pools were reviewed by the committee and agreed to be set 1% lower than last year. The proposed incentive pools for 2018 as a percentage of HE are 27.8%, down from 29.7% in 2017 and down from 30.1% in 2016.
In addition to the reduction in the incentive pools, your committee has agreed, with the support of the CEO, that high earners across the group earning more than cost to company of R1.5 million (or equivalent) will receive no increase and for those below that earnings level only moderate increases, usually less than inflation.
The committee deliberated on the performance of each of the senior executives and again used current market data and published remuneration reports of local and international banks to appropriately benchmark these individuals. The performance evaluations considered the delivery of all five value drivers in the strategic plan. No fixed remuneration increases have been awarded to executive directors and prescribed officers with effect from 1 March 2019.
In his first full year as the sole CEO for the group, Sim’s steady, determined style steered the group through a challenging period to produce an acceptable set of results. He used the strategic plan document to focus on areas of improvement for the group and to a very large extent mitigated many of the environmental, political and economic risks faced by the business at various points of the year. Sim’s faith in the investment made into Africa Regions is beginning to pay dividends as this business is now a significant and important part of the future of the group. Sim led significant changes to the architecture of the group, where importantly he created a distinct South African franchise, simplifying and clarifying the relationship between the group and SBSA. Recognising the impact of the poor economic environment in South Africa, Sim took decisive action by implementing a broad cost reduction initiative.
HE grew 6% year-on-year and ROE rose to 18.0% up, from 17.1% in 2017. It was disappointing to see the cost-to-income ratio rise again after a fall last year and to see a widening of the jaws between revenue and costs. However, Sim took decisive action and reduced planned full year costs by R2.3 billion. These were perhaps the only negative metrics in an otherwise credible performance in difficult trading conditions.
Steady progress was made in the key areas of client focus where NPS scores improved across the business and many prestigious awards were won. Employee engagement scores improved again and the excellent work undertaken by the group and led by Sim in the important areas of SEE continued with great success.
Sim has established himself as a first-class CEO. His intelligence, integrity, vision and energy for the success of the bank make him an extremely valuable resource for the group, the country, and the industry.
|1 Fixed remuneration||10||9 987||9 103|
|2 Annual cash award||–||11 350||11 350|
|3 Annual deferred award||–||14 050||14 050|
|4 PRP award||–||14 000||14 000|
|Total reward||2||49 387||48 503|
Excludes once-off payment of R632 000 in respect of death in service and permanent death income benefits.
2018 was Ben’s last year in the group and he selflessly stepped down from the position of joint CEO in 2017 and announced his retirement effective 31 December 2018. Ben has been an incredibly important executive for the bank and has had broad experience over all the various aspects of the industry, key stakeholders both across the continent and internationally, his relationship with Industrial and Commercial Bank of China (ICBC), our largest shareholder, has been invaluable and places Ben at the very summit of banking CEOs.
Ben proved to be a very valuable partner with Sim as the joint CEO, a position that another executive would have struggled with. Among the many areas of responsibility that Ben undertook for the group perhaps his largest contribution was the implementation of the complex IT programme which was completed last year. It was Ben’s astute management that laid the foundation for this strategically important project. This foundation was the catalyst for the future technology architecture of the group.
Based on this performance and the generally challenging environment the committee awarded Ben the following remuneration.
|1 Fixed remuneration||9||9 906||9 079|
|2 Annual cash award||–||11 125||11 125|
|3 Annual deferred award||–||13 825||13 825|
|4 PRP award||(100)||–2||12 500|
|Total reward||(25)||34 856||46 529|
Excludes once-off payment of R3 022 000, in respect of death in service, permanent death income and retirement benefits.
No award made due to retirement.
After two and half years in the role as group financial director, Arno has established himself as a valuable resource. He has an intimate grasp of all the numbers and has remodelled and revised the way in which the group reports its financial performance. Arno has managed the balance sheet well, achieved Basel III compliance for liquidity coverage ratio and NSFR and managed the complex IFRS 9 transition. The group remains strongly capitalised and internal financial control indicators are well managed and maintained.
As group financial director, Arno’s performance is linked to the group’s results. Arno worked closely with the group CEO on the cost reduction initiative which reduced planned costs by R2.3 billion. He managed complex processes to increase the group’s stakes in the Nigeria and Kenya subsidiaries.
Arno is well respected by colleagues, media and regulators alike and despite a very complex and demanding schedule he remains calm, pleasant and always ready to help.
With these achievements in mind the committee recommended the following remuneration for Arno.
|1 Fixed remuneration||10||6 294||5 697|
|2 Annual cash award||–||8 025||8 025|
|3 Annual deferred award||–||8 725||8 725|
|4 PRP award||20||12 000||10 000|
|Total reward||8||35 044||32 447|
Excludes once-off payment of R111 000 in respect of death in service and permanent death income benefits.
Kenny and the CIB team had a difficult year especially in the largest market, South Africa, during 2018. HE were R11.2 billion, down 1.9% on the previous year, while ROE at 19.3% was 2.3% lower than 2017. The cost-to-income ratio deteriorated to 54% and jaws were negative 4%, mainly driven by revenue pressures in South Africa.
There were, however, several encouraging results which should stand the business in good stead when the South African economy, especially, improves. Client revenues were up 10% and 14% on a constant currency basis. Strong growth was recorded in the important sectors of non-bank financial institutions and power and infrastructure. The credit loss ratio was 20 bps. From an employee standpoint the eNPS score increased from +7 to +14 and the emotional NPS score from +44 to +53.
While the performance was muted Kenny demonstrated strong thoughtful leadership and fully expects a rebound in 2019 performance as markets, especially in South Africa, stabilise and return to growth.
After due consideration of all factors the committee awarded Kenny the following remuneration.
|1 Fixed remuneration||7 588||4 0151|
|2 Annual cash award||8 650||9 150|
|3 Annual deferred award||10 350||10 850|
|4 PRP award||12 000||10 000|
|Total reward||38 588||34 015|
For the period 1 June 2017 to 31 December 2017.
Excludes once-off payment of R710 000 in respect of death in service and permanent disability income benefits.
Zweli Manyathi as the leader of the PBB business produced a good set of results for 2018. Zweli took over leadership of the PBB business in April last year stepping up from the head of PBB Africa Regions to the top job. He has acquitted himself very well and the transition has been seamless.
Against a backdrop of very challenging macroeconomics and intensifying competition from traditional banks and new high technology entrants, PBB achieved full year headline earnings of R15.5 billion, a 10% growth on the previous year. PBB in South Africa had a more difficult year in a very challenging environment producing HE of R13.7 billion, 3% up in the prior period.
PBB Africa Regions delivered excellent growth more than justifying the investments made over previous years. Eleven out of the fourteen countries achieved growth and the business finished the year with HE of R817 million compared to R183 million in 2017, a very significant increase.
Zweli demonstrated astute leadership in his new role and has mapped out an exciting growth strategy for the future for PBB. The committee reviewed his performance and approved the following remuneration for Zweli.
|1 Fixed remuneration||5 634|
|2 Annual cash award||9 900|
|3 Annual deferred award||11 600|
|4 PRP award||10 000|
|Total reward||37 134|
1 April 2018 to 31 December 2018, being the period he has been a prescribed officer.
Wealth under the expert management of Margaret produced a strong set of results. HE of R3.1 billion grew by 24% and ROE finished at 37% – excellent results.
The international business in particular, achieved exceptional results with HE growth of 60%. During the year, Margaret led a significant shift both in the Wealth culture and in the ability of the business to deliver a fully integrated offering to clients. These initiatives resulted in a pleasing increase in the NPS to 69.
Wealth won over 20 prestigious awards from established industry publications, including the South African title of the Best Local Private Bank, reflecting Margaret’s strong leadership and influence.
As a result the committee awarded the following remuneration.
|1 Fixed remuneration||13||6 257||5 517|
|2 Annual cash award||8||7 213||6 650|
|3 Annual deferred award||8||7 913||7 350|
|4 PRP award||–||10 000||10 000|
|Total reward||6||31 382||29 517|
Excludes once-off payment of R78 000 in respect of death in service and permanent disability income benefits.
Your committee continues to believe that the remuneration policy supports the business imperatives and the five value drivers articulated in the group’s strategic plan. The committee also believes that the remuneration policy properly incentivises employees and encourages correct, professional behaviour in their everyday work. We seek to continuously improve and take input from our shareholders and other stakeholders. As chairman, I value the annual interaction with shareholders. The feedback we receive is appreciated and we strive, where possible to include that feedback into the group’s remuneration policy.
SUMMARY: OUR EXECUTIVE REMUNERATION PROCESS
A comprehensive evaluation of all the executive directors and prescribed officers was undertaken and considered various categories, such as clients and market share, people, leadership, development and retention, technology and platform efficiency and effectiveness, financial performance, strategy design and execution. There is a direct link between the categories of executive evaluation and the value drivers.
How did we perform?
- Financial outcome: single digit revenue growth due to tough macroeconomic environment and currency headwinds. Credit impairment charges and operating expenses well managed. Banking activities headline earnings pre minority interests and incentive accounting charge (HEpMI) of R33.9 billion up 7%. SBG ROE of 18% (2017: 17.1%) approaching the target band. Banking activities ROE 18.8% (2017: 18.0%).
- Risk and conduct: regulatory and economic capital within risk appetite. Credit loss ratio of 0.56% improved on prior year.
- Client focus: positive trend on client experience and satisfaction scores. Client transactions on digital platforms continue to exceed volumes on traditional platforms. Strengthened our franchises across Africa Regions.
- Leadership and people: key executive positions were filled by a combination of succession planning and external recruitment. Active participation and leadership displayed in key forums such as WEF, IMF, IIF, BLSA and BASA1. Good progress on employee net promoter score to +23 from +14.
- SEE: significant transformation in several areas, maintaining level 1 BEE status.
How do we assess performance 2 and determine pay?
- Proactive approach to assessing performance: enables the board to make fully informed decisions.
- Performance is assessed in 15 categories over a multi-year period linked to the five value drivers: this drives short-, medium- and long-term shareholder value.
- Annual incentives and deferred awards: based on quantitative and qualitative measures set in advance and evaluated.
- Performance reward plan: annual awards with a rolling three-year delivery if performance conditions are met to ensure consistent and significant long-term investment in shares to align with shareholders.
- Minimum shareholding requirement for chief executive and prescribed officers: ensures that together with unvested awards linked to the share price, executives are significantly invested in shares and aligned to shareholder interests.
How did we pay our CEs and 3 other prescribed officers?
- CE pay level: the board and the chief executives agreed to have no increases to fixed remuneration for executives and themselves for 2019 given the social and economic pressures in South Africa. Union increases for the lowest levels in the bank in South Africa were 7.3% and the minimum wage in the bank in South Africa has increased to R167 050 per annum.
- CE annual incentives and deferred awards: the board awarded Sim Tshabalala R25.4 million of which R14.1 million, i.e. 55.3%, was deferred for up to 3.5 years.
- CE long-term incentives: the board awarded Sim Tshabalala a conditional performance reward plan award with a face value at award of R14 million.
- Prescribed officer and executive director pay levels are set based on the overall group performance, individual business unit performance and individual performance.
- CE pay mix in total: over 56.7% of total remuneration is deferred in shares for up to 3.5 years.
- Prescribed officer pay mix: over 57.7% of the total remuneration is deferred in share-linked instruments for up to 3.5 years.
What are our pay practices?
Three remuneration elements for senior executives:
short-term incentive (STI). Annual cash incentive with an annual deferred award over 1.5, 2.5 and 3.5 years. This element is at risk2.
long-term incentive (PRP) annual awards are subject to performance conditions and vest in three years if conditions are met. This element is at risk3.
- Shareholder aligned remuneration philosophy: drives remuneration decision-making across the group.
- No special executive benefits: in terms of severance golden parachutes. Guaranteed bonuses are paid by exception in the case of hiring and only for the first year.
- Strong focus on share ownership and minimum shareholding requirements.
How do we address risk and control?
- Strong corporate governance from the remuneration committee on executive remuneration with board oversight.
- Rigorous process to review risk and control issues: which can and has led to incentive pool and individual risk adjustments for risk breaches and risk events.
- Forfeiture clauses in all our share plans/deferred awards which can and have led to forfeiture in the past: clawback clauses introduced in March 2019 and applies to cash awards, deferred awards, share incentive awards, long-term incentive awards and related notional dividends.
World Economic Forum (WEF), International Monetary Fund (IMF), Institute of International Finance (IIF), Business Leadership South Africa (BLSA) and Banking Association of South Africa (BASA).
Subject to an annual evaluation of performance of each executive.
Subject to performance conditions set by the committee at the time of the award.
Our people ultimately underpin the successful execution of our strategy
We work to ensure that our pay framework supports the motivation and reward of performance, while at the same time meeting regulatory requirements and stakeholder expectations.
We continually review our pay practices to align with shareholder interests and to ensure that the practices support our businesses and changes in our operating environment. We actively seek shareholder views and revise our reporting to improve transparency. We seek to remain competitive and relevant across Africa, where often the talent is scarce and markets are competitive. We set practices that consider local conditions within a group governance framework. Specific focus areas for 2018 are detailed below.
- In March 2018 we executed the delivery of our performance reward plan in respect of awards made in March 2015. We achieved 117.6% delivery out of a possible 200% of awards made.
- We visited several stakeholders to discuss our remuneration policy and implementation report as required by King IV. These were approved at the AGM held in May 2018 with 94.2% of shareholders in support of the remuneration policy and 95.3% of shareholders in support of the implementation report.
- their annual STI determined by consideration of both group and business line performance. These executives are already currently aligned to group performance in their long-term incentives via the performance reward plan (PRP). This change supports the group strategy of client centricity – working together in the interest of the client as a universal financial services organisation.
- Clawback provisions on vested or paid awards have been introduced to the group’s material risk takers with effect from 1 March 2019. This applies to cash awards, deferred awards, share incentive awards, long term incentives and related notional dividends. The events that will trigger clawback are contained in the full remuneration report.
- In November 2018, Standard Bank won the South African Reward Association’s Award for the Best Remuneration Report incorporating the adoption of King IV.
- No cost to company increases have been awarded to senior executives across the group, effective 1 March 2019.
- We will continue to focus on the employee experience of reward through benefit choice and communication, particularly across the African continent, delivering an application, to our employees mobile devices.
- We will continue to ensure that reward supports our efforts in client centricity, driving our universal financial services organisation and our digital outcomes.
- We will focus on gender pay across our geographic footprint.
Fair and responsible remuneration
Remco believes that fair and responsible remuneration means ensuring that remuneration in the group is both externally competitive and internally equitable. The group’s remuneration policy and implementation thereof assists the group in achieving its short-, mediumand long-term goals and is adjusted for risk taken and thereby supports sustainability. Remco ensures that the reward process is independently governed to enhance the sense of fairness. Remco recognises that fair and responsible remuneration is not just a South African issue but should apply in all the geographies that the group operates in.
- Impartial, free from discrimination, free from self-interest, favouritism or prejudice on grounds including race, gender and sexual orientation.
- Rational and objective.
- Aligned with the Employment Equity Act’s principle of equal pay for work of equal value in South Africa.
- Funded by, and linked to, the creation of value over the long term, in a way that is transparently reported in the full remuneration report.
- Approved by Remco and recommended to the board.
The wage gap and minimum salaries
Remco has stated that it pays for value delivered in its policy and that remuneration must be externally competitive. The outcome of these two principles is that remuneration differs across levels, roles and geographies and therefore a wage gap exists. However, Remco can satisfy itself that minimum incomes in the group are fair and enable the lowest levels in the group to participate in the economies of the countries where they reside. To this end, Remco has undertaken an exercise to determine what the minimum levels of income are in each country that the group operates in and continues to monitor this.
A comparison has been done on each of these minimums against financial service/banking minimums in each country and against prescribed minimum incomes (where these exist). This has shown that in all countries but one, the group’s minimum salaries are above both market and prescribed norms. In Angola the minimum salary is above prescribed norms but not above market.
The group also invested R931 million for 48 210 employees in learning and development. In addition, we spent R51.8 million on bursaries for 1 933 employees. This investment together with development opportunities, internal job opportunities, and promotion opportunities allows individuals to progress their careers and therefore their earning potential.
In order to ensure that remuneration is fair and responsible, Remco undertakes the following activities:
- seeking the input of shareholders via an annual shareholder roadshow
- continuously improving the extent and transparency of remuneration reporting
- ensuring breadth and depth of experience, as well as diversity and independence in Remco membership.