REMUNERATION OF EXECUTIVE AND NON- EXECUTIVE DIRECTORS: STATUS UPDATE TO PORTFOLIO COMMITTEE 24 APRIL 2012

CONTENTS Background & Problem Statement The Review Key Issues Considered Status Quo Conclusion 2 CONFIDENTIAL

BACKGROUND & PROBLEM STATEMENT (1) Remuneration of directors (executives & non) is a complex and widely debated topic - both in public & private sector - Recent media reports on ABSA, Citigroup, Barclays. Challenge in striking a fine balance between several variables. Full and adequate disclosure of the fees – out of pocket allowance, stipends, ‘away–from-home’ allowances; Short term vs long term incentives & criteria used to award such incentives. Fee structure:  simplistic approach where lump sum is paid;  fixed Board fees; or  retainers subject to meeting attendance Cabinet approve the DPE Remuneration Guideline - based on asset and revenue of the SOC. CONFIDENTIAL 3

BACKGROUND & PROBLEM STATEMENT (2) Challenges: Evolution of the DPE shareholder function. Market forces & shortage of skills especially in light of the massive SOC infrastructure plans. The guideline is not applied in a uniform and consistent manner; In certain instances an alternate model is being used. The monitoring and evaluation of the guideline has been informal and ad hoc; The guidelines did not explicitly provide the link between national strategic objectives and the remuneration of the executives and non-executives. CONFIDENTIAL 4

BACKGROUND & PROBLEM STATEMENT (3) December 2010: Panel was established with the ff mandate: Undertake a comprehensive review to test the remuneration practices laid down in the 2007 guidelines; Alignment (SOC activities & remuneration) with shareholder developmental objective; Consideration for market trends. Four work streams were established: Remuneration and benefits; Corporate Governance; Employment Contracts; Stakeholder engagement. CONFIDENTIAL 5

BACKGROUND & PROBLEM STATEMENT (4) Consultations with key stakeholders was necessary: SOC, as directly affected parties. Other Government departments (EDD, DTI, NT & DPSA); Presidential Review Committee; All supported the rationale for the review. Outcome: Further submissions on the SOC remuneration model. Alignment of various stakeholder interests. Consensus on the application of the future model. SOC within DPE oversight only; or All major public entities (PFMA Schedule 2) CONFIDENTIAL 6

KEY ISSUES CONSIDERED (1) In initiating the review, a number of material questions were asked. What are the minimum activities that require benchmark & the benchmark tool? – King III, JSE listing requirement, international companies e.t.c. Should we consider uniform implementation of performance agreements for all CEOs & senior executives? How do we achieve consistent approach to conditions of service across all SOC? What is the link between remuneration & SOC effectiveness? Short vs long term incentives - how do we strike the balance? Good corporate governance & the effectiveness of the Board Remuneration Committees – what is the test? What is the alignment of Board fees to the market? CONFIDENTIAL 7

KEY ISSUES CONSIDERED (2) In the main, the Panel highlighted the ff observations: In some instances the DPE guidelines are followed in others not; Other SOC use external benchmarks & totally disregard the DPE guidelines; In some instances approval of the DPE sought in others not; In some instances SOC adopt DPE guidelines in others a different policy altogether; The need for trade offs between remuneration vs SOC ability to attract skilled and competent directors & executives; Succession planning & determining the appropriate levels of remuneration for executives – comparative benchmarks; The need to align the short and long-term incentive practices terms of quantum, with the SOC level of achievement; Recognition for SOC public mandate which differ from private companies. These issues constitutes the scope of the Panel’s recommendations. CONFIDENTIAL 8

KEY ISSUES CONSIDERED (3) Panel submitted its recommendations to Minister of Public Enterprises. Cabinet has noted the panel’s report and requested the Minister to engage in further consultations. Further/Additional Questions: How do we balance remuneration against scarce skills & service delivery objectives? How do we inculcate the culture of public service obligation as opposed to the high risk environment of the profit driven private sector? Status of the guidelines: How does Government address remuneration challenges within the current legal landscape – remuneration is a subject of negotiations? Officials and executives employed within Government & serving on SOC Boards – should they receive additional remuneration? CONFIDENTIAL 9

STATUS QUO DPE is addressing Cabinet’s request. Review of DPE guidelines to retained aspects that are necessary for Shareholder oversight and have proven to be good practice; Remodel short term incentives to be linked to performance against compact targets; Examine the practice and methodology to abolish long term incentives for executive directors; Establish imperatives other than asset and revenue such as developmental mandate, complexity of the SOC business environment, funding structure e.t.c; Undertake benchmarking exercise into other regimes; Address best practice in Board fees with a view to enhancing the effectiveness of the Board & committees. The appointment of a suitable service provider to develop the Guidelines. endorsed that Minister will determine the way forward after consultation with key stakeholders CONFIDENTIAL 10

CONCLUSION DPE is the only shareholder department that has developed the remuneration guidelines for SOC – inevitable challenges in light of changing market conditions. Competition between the public & private sector for competent skills - attraction & retention is critical. New Paradigm Shift: As the DPE & SOC mandates evolve, innovation will be necessary to find better remuneration models; Remuneration framework should be able to provide the public with assurance w.r.t applicability & transparency. Lessons Learnt: Appropriate disclosure (in addition to Annual Reports) and Communication on remuneration levels. A well considered position must be taken before submission of a final recommendation to Cabinet. CONFIDENTIAL 11

12 QUESTIONS?