This remuneration report outlines our remuneration philosophy and provides detail on pay structures and how we reward executives, salaried and bargaining-unit employees. It covers the guaranteed and variable remuneration of salaried and bargaining-unit employees, and the key decisions taken by the remuneration, social and ethics committee (RSEC) during the year under review.
The remuneration context in 2014
Sluggish steel demand, lack of recovery in the domestic market, cheap imports and the effects of the global economic recession, coupled with the impact of the Newcastle Works blast furnace rebuild, contributed to another year of poor financial performance.
Our company faces many daunting challenges. These we are resolved to confront and overcome. Remuneration plays an important role in rewarding executives and staff for delivery on strategic business objectives and in the creation of a high-performance culture, which is essential to our survival and growth. In the context in which we find ourselves at present, while keenly aware of the need to retain and incentivise talent, we are equally mindful of the need to cut costs in our drive to create sustainable value.
Our remuneration philosophy seeks to balance the need to reward performance appropriately, fairly and competitively (and thereby attract and retain skilled employees) while remaining mindful of our responsibility to deliver value to shareholders. This philosophy is underpinned by the following principles:
- We consider external equity and internal parity to ensure the fair formulation and execution of the remuneration policy;
- Appropriate benchmarking against internal and external comparatives ensures that total reward structures are externally competitive and support our retention efforts;
- Rewards are market competitive when compared with a selection of peer companies of similar size and scope, and are benchmarked at the market median of this peer group;
- Cost impact and budget constraints drive internal equity;
- Pay-for-performance structures serve to motivate employees, teams and functional areas;
- We balance the need for individual reward design flexibility with regulatory constraints in the execution and deployment of all reward programmes; and
- We communicate our remuneration philosophy, policies, practices and general principles to all employees clearly and transparently.
We periodically review the remuneration philosophy to ensure it continues to be aligned with our evolving business strategy, changing market conditions and the corporate governance requirements of King III. There were, however, no material changes to the philosophy made during the year under review.
Remuneration, social and ethics committee
The remuneration, social and ethics committee (RSEC) met three times during the period under review.
The committee monitors the company’s activities in respect of the environment, health and safety (including employee and public) and does so while having regard to any relevant legislation, other legal requirements or prevailing codes of best practice. The committee has recommended certain improvements in these processes to be implemented in the forthcoming year.
At each of its meetings, the committee received reports from management, and in turn reports on relevant matters within its mandate to the board.
The roles, responsibilities and the work plan for the committee are set out in a comprehensive terms of reference approved by the board.
As part of the board appraisal conducted, the committee assessed its effectiveness through the completion of a self-assessment process. The board and committee discussed the results of the self-assessment process and actions were taken and processes put in place to improve the areas identified.
The objectives and responsibilities are aligned with the committee’s statutory functions as set out in the Companies Regulations 2011 and form the basis of an annual work plan. In summary the committee has a duty to:
- Monitor social, economic, governance, employment and environmental activities of the Group;
- Bring matters relating to these activities to the attention of the board as appropriate; and
- Report annually to shareholders on the matters within the scope of its responsibilities.
The committee has adopted appropriate formal terms of reference as its mandate, has regulated its affairs in compliance with this mandate, and has discharged all of the responsibilities set out therein.
The committee was mandated by the board to develop and approve the remuneration policy for the company. In addition to executing its social and ethics responsibilities, RSEC’s key activities and achievements during the year included reviewing and acting on:
- The framework for the remuneration of executive and senior management;
- Targets and rules for performance-related pay schemes;
- General salary increases and mandates for negotiations with trade unions;
- Ensuring a proper system of succession planning for top management, and monitoring the succession planning in the rest of the organisation;
- Confirming appointments to senior management positions;
- Employment equity plans for implementation; and
- Matters relating to corporate culture and management performance in terms of retention and talent development.
Remuneration design structure
Our remuneration structures are designed to align the value, signiﬁcance and contribution of the job with the remuneration mix.
A job evaluation system is used to assess each job’s relative worth to the organisation. This is then aligned with the pay structure.
This system means that the proportion of ﬁxed pay to variable pay differs between lower-level and higher-level job categories. Employees in lower-level categories receive higher ﬁxed pay and lower variable pay while for top-level jobs a greater emphasis is attached to variable remuneration. This ensures that we incentivise and reward high performance while shifting a greater proportion of risk to top-level, higherpaid employees.
We embrace the total-reward concept, which incorporates ﬁxed pay, short-term and long-term incentives. Executives and employees are rewarded for their contribution through:
- The payment of industry-competitive annual packages (ﬁxed salary and company beneﬁts);
- Variable annual, bi-annual or monthly performance reward programmes; and
- Long-term cash-based equity schemes for senior management.
The remuneration mix
The guaranteed remuneration of “package” category employees is on a total cost to company basis and includes basic salary, travel and other allowances as well as contributions to retirement savings, death and disability risk insurance and medical aid cover. These annual packages are usually determined with effect from 1 April each year and are informed by parameters approved by the board, differentiated pay levels, and factors such as inflation, changes in market pay and individual performance. While remuneration is benchmarked against peer employers, the results of individual annual performance reviews may allow employees to earn a salary above the market median for their position.
As detailed above, straitened economic conditions this year continued to impact our profitability. These challenges were exacerbated by the delay in completing the Newcastle reline. The underperformance of the business this year led us to implement an across-the-board pay increase of 3% in April 2014, including a targeted pay adjustment for critical skills and glaring pay anomalies within the package pay categories. This pay increase was below market pay adjustments, which averaged 6%. We continue to conduct market pay benchmarks and review changes in legislation to inform our pay strategy.
We have analysed the recently promulgated Employment Equity Act regulation on equal pay for equal work and are implementing corrective pay measures to maintain compliance with this new legislative requirement, effective from 1 February 2015.
The guaranteed remuneration of bargaining unit employees is negotiated with the National Union of Metalworkers of South Africa (Numsa) and Solidarity. During the year we successfully concluded an overall one-year wage agreement of 7.4% with unions, which was within budget and backdated to 1 April 2014. Given that the duration of the agreement is one year, we will begin the process of negotiating a new wage agreement with unions in Q2 2015. Unionised employees’ pay progression is governed by competency-based remuneration, allowing for pay adjustments up to three times per annum in accordance with the individual’s assessed competency level. This pay progression model for the bargaining unit has been implemented since 2003.
Variable pay structures include the performance bonus plan, the productivity bonus scheme, the medium-term incentive scheme and the long-term incentive scheme. These allow us to incentivise, recognise and reward high-performing employees at all levels.
The performance bonus plan – package employees
The performance bonus plan gives package-category employees an annual performance bonus based on company and individual performance reviews. A performance scorecard is used to measure ﬁnancial (ebitda and free cash flow) and non-ﬁnancial (health and safety, and business-specific measures – BSMs) performance, weighted respectively on a 70/30 basis. This is outlined in the table below, which also demonstrates the threshold, target and stretch levels to be achieved against the business plan.
Our aim is to align our objectives and key performance for all areas, including cascading and measuring annual, monthly and daily performance, in driving our high-performance culture. Specific business measures for 2014 were cascaded to all departments which consisted of:
- Domestic market share;
- Achieving imperative elements of the B-BBEE codes;
- Management gains;
- Cost optimisation;
- Working capital efﬁciency; and
- Prudent allocation of capex.
The bonus participation for senior executives ranges from 15% (at 80% threshold) to 60% (at 120% stretch) of total cost to company. Individual performance scores are also used as multipliers to determine the final bonus amount.
The current management bonus plan will remain in place for the duration of 2015 other than business specific measures.
Productivity bonus scheme – bargaining unit employees
The productivity bonus scheme is negotiated for bargaining-unit employees with trade unions as part of wage agreement negotiations. It seeks to drive improved safety and productivity by rewarding bargaining-unit employees for achieving monthly KPI targets that include:
The extent to which individual employee performance is measured against these three targets is determined by employees’ ability to influence safety and productivity in their areas.
As part of wage negotiations with unions during the year we further enhanced line of sight for the productivity bonus scheme. In terms of these enhancements, the safety target will now be measured and rewarded separately from ebitda. This is the same principle that is applied to the short-term incentive scheme for salaried employees.
The productivity bonus payment is determined as a percentage of the monthly base salary and a maximum payment of 7% is applied.
Production and maintenance bonus – production employees
In order to further enhance our reward offering and drive our performance culture, an additional element was added to the productivity bonus. Middle managers linked directly to the production of steel are measured in the same way as their staff members and incentivised in driving safety, quality and throughput. This monthly productivity bonus payment is determined as a percentage of monthly salary with a maximum of 5% achievement.
The medium-term incentive scheme
The medium-term incentive scheme is aimed at retaining critical scarce skills in various key specialist positions below senior management. Participants need to have been in employment for three years from the date of the ﬁrst payment and, where necessary, are required to participate in a formal mentorship and coaching programme to develop successors. The scheme has been successful in retaining key skills in engineering and technical areas with a reduced labour turnover of 2% when compared with an 8% labour turnover in 2009. The scheme comes to an end in May 2015 and no major impact is expected on current employee turnover. We have also expanded this offering to retain our government-certificated engineers; it will be implemented in early 2015.
The average overall voluntary labour turnover remains at 4% as reflected below:
The long-term incentive plan – local employees
The long-term incentive plan (LTIP) which has been in operation since 2012, is a conditional share scheme that awards participating employees shares in ArcelorMittal South Africa. This supports the closer alignment of management and shareholder interests.
The scheme’s participants may be divided into two groups:
- Designated members of the executive committee, who receive LTIP shares based on performance conditions: return on capital employed (ROCE) and total cost of employment per tonne (TCOE/t), which are equally weighted; and
- Senior management, who receive LTIP shares based on service conditions which include ongoing employment and individual performance.
All LTIP shares vest after a period of three years provided the individual employee has continued to be employed in the company during this time and achieved the required performance conditions. There is provision for proportional awards when there is a change in the effective control of the company, or when an employee is retrenched, retires, or dies while in service.
The potential annual share allocation to senior managers and designated executives varies between 20% and 100% of guaranteed pay. The remuneration, social and ethics committee also approved performance targets for ROCE and TCOE/t for the conditional shares issued to designated executives, namely the CEO and general managers; these shares vest at the end of 2017. The achievement of these targets over the three-year period entitles designated executives to 100% of the LTIP allocation.
LTIP shares allocated to senior management during 2014 are shown below. The international executives participate in the ArcelorMittal group share scheme according to international mobility policy.
The current LTIP plan will remain in place for additional awards in 2015 with the following changes that RSEC approved:
- Revise the TCOE/t current performance threshold from 80% to 95%; capped at 115%, and reduce the performance interval from 20% to 5%; capped at 115%.
- Cascade ROCE and TCOE/t performance conditions to manager roles by linking 50% of LTIPs allocated to performance conditions.
Average of three years will change to annual performance determination, yet three-year vesting condition will remain.
The following table shows the performance conditions and vesting scale for LTIP issued in 2015:
A once-off executive retention payment potentially costing R3.8 million was implemented in September 2013. This once-off cash equivalent will be payable to qualifying executives in August 2016.
ArcelorMittal South Africa share option plan
The group and company operate the Management Share Trust, which consists of an option share plan for the benefit of the group’s and company’s senior management, including executive directors.
This scheme was effective from 12 December 2005 to present. Share options are offered at market prices on the grant date and are released in three annual tranches of 33.3%, 33.3% and 33.4%, commencing on the first anniversary of the offer date and expiring after 10 years. This is an open plan.
The option plans are equity-settled as each share option converts into one ordinary share of ArcelorMittal South Africa Limited on exercise. The options carry neither rights to dividends nor voting rights. Options may be exercised at any time from the date of vesting to the date of their expiry.
The number of options granted is calculated in accordance with employees’ role grading within the company and group as approved by the remuneration committee of ArcelorMittal South Africa and as incorporated within the trust deed of the Management Share Trust. Upon resignation, the share options lapse immediately. Upon death, the options lapse within six months.
The administration of participant transactions of both the share option and the long-term incentive plans are outsourced to EOH Human Capital Solutions (Pty) Ltd, an external service provider.
There were no share option grants made in 2014 or 2013 and as at 31 December 2014, all share options had vested.
International executive share plans
International executive mobility share plan
The ArcelorMittal group issued equity settled share options over its own shares, denominated in USD, to its executive employees seconded to ArcelorMittal South Africa.
Restricted/performance stock unit plan
The ArcelorMittal group commenced with the restricted/performance stock unit plan in 2011. The stock units are issued for the benefit of senior executives of the group seconded to ArcelorMittal South Africa. The restricted stock unit entitles the holder of the unit to receive one ArcelorMittal group share on or after the vesting date of the restricted stock unit, subject to the vesting conditions being met. Restricted stock units vest after three years of continued employment within the group. Performance stock units vest upon continued employment as well as specific performance conditions being met. This plan replaces the Executive International Mobility Share Option Plan. Please refer to note 33 of the annual financial statements for additional information.
We do not have any ﬁxed-term contracts with executive directors or senior executives and there exists no restraint or special severance compensation payable to such employees. A period of restraint with standard non-compete and non-solicitation conditions is included as a generic clause in employment contracts.
The chief executive ofﬁcer’s period of notice for termination of employment is two months on either side while executive directors and senior executives are also required to give two months’ notice on either side, in line with the standard terms and conditions of employment, unless otherwise speciﬁed.
Non-executive directors do not receive short-term or long-term incentives. They are appointed based on proposals submitted by the nominations committee to the board and shareholders for approval and their term of ofﬁce is three years. One-third of all directors retire at the annual general meeting, but they are eligible for re-election.
RSEC is responsible for setting the fees and determining the terms of service for the chairman and non-executive directors. The fees for non-executive directors are reviewed annually and informed by market best practice and the time commitment and responsibilities associated with each role. Non-executive directors receive an annual fee and a fee for attending board meetings while the chairman receives an annual fee that includes remuneration for attendance at all board and board committee meetings. Non-executive directors do not participate in any type of incentive scheme nor do they receive any medical and pension-related beneﬁts.
A resolution proposing an increase in non-executive directors’ fees was approved by shareholders on 29 May 2014. RSEC is currently reviewing non-executive directors’ fees for 2015 and a proposal will be put to the board in May 2015.
Remuneration of directors and prescribed officers
This is a summary of the remuneration of directors, prescribed officers and the highest paid senior employees (who are not directors) for services rendered to ArcelorMittal South Africa Ltd.
- The short-term incentives relate to benefits for the December 2013 financial year, paid in April 2014.
- Further detail on the equity incentives can be found under directors’ unexercised share options and LTIPs in the table that follows.
- Other includes medical benefits, separation payments, leave encashments, business travel claims, settlement allowance, housing benefits, international mobility allowance and hardship allowance. Included in Other is a separation payment of R4 653 838 and leave entitlement of R992 490 paid to N Nyembezi-Heita.
- N Nyembezi-Heita resigned as chief executive officer effective 18 February 2014. PS O’Flaherty was appointed chief executive officer with effect from 1 July 2014.
- MJ Wellhausen resigned as an executive director and chief financial officer of the company with effect from 15 March 2015. Gerhard van Zyl has been appointed as acting chief financial officer with effect from 15 March 2015.
Remuneration of directors and prescribed officers
Directors’ remuneration is not paid to the non-executive directors in the employment of the international ArcelorMittal group and have therefore not been disclosed in this note.
- LP Mondi’s remuneration is paid directly to the Industrial Development Corporation.
- Appointed on 1 October 2013.
- MJN Njeke retired as non-executive director and chairman of the board on 4 February 2013. PM Makwana joined the board as independent non-executive director and chairman with effect from 5 February 2013.
- Resigned on 1 October 2013.
- Retired on 29 May 2013.
ArcelorMittal South Africa equity-settled share option and long-term incentive plans
Options issued to directors, prescribed officers and the highest-paid senior employees (who are not directors), which form part of the 15,9 million (2013: 38,4 million) shares allocated to the Management Share Trust, are as follows:
The following table reflects the status of unexercised options held by executive directors, prescribed officers and the highest-paid senior employees, the gains and as a result of past awards during the year ended 31 December 2014.
- Share options vest within three years and are exercisable within 10 years from the date of issue.
- Only those share options granted since the date of becoming an executive director or prescribed officer have been disclosed in this note.
- No options were exercised during the year.
- All share options have vested at the end of the period. All share options are “out of the money”, therefore the present value is nil at 31 December 2014.
International executives restricted stock unit (RSU)/performance stock unit (PSU) plans
The following table reflects the number of restricted and performance stock units allocated to executives, prescribed officers and the highest-paid senior employees who belong to the ArcelorMittal group share-based payment scheme.