Remuneration report

Remuneration Policy

This report describes the activities of the Remuneration Committee for the period ending 31 December 2015.

Our Remuneration Policy, a summary of which is set out below, was approved by shareholders on 6 May 2015 and is on our website and forms part of our online
integrated report for 2015.

Our remuneration philosophy

Merafe’s primary remuneration intent is to employ and reward high calibre and high performing employees who subscribe to the values and culture of our Company. We recognise that our employees are integral to the achievement of our corporate objectives and that they should be remunerated accordingly for
their contribution, and the value that they deliver. Additionally, non-executive fees should be determined in the context of good governance and be market-related.

Our remuneration strategy

Our remuneration strategy is designed to be aligned with our business strategy and its execution. As we strive to attract, retain, motivate and reward employees
for executing our business strategy, their remuneration must clearly be market related, and our Remuneration and Nomination Committee uses third parties for
the purpose of benchmarking to the appropriate segment. The general principle of this strategy is to structure executive and employee remuneration to provide:

guaranteed annual salaries and benefits that are commensurate with the market for key talent
annual cash incentives that reward short-term operational performance
long-term (share-based) incentives that promote retention and drive performance in alignment with shareholder goals

The Remuneration and Nomination Committee

Responsibility for the Company’s remuneration policies rests with the Merafe Resources Board of Directors, which has in turn appointed the Remuneration and
Nomination Committee.

The committee comprises three members, all of whom are non-executive directors. The Chairperson of the committee and the majority of its members are independent. The committee is governed by formal terms of reference approved by the Board.

The primary role of the committee is to ensure that the Company’s directors and senior executives are paid fairly for their individual contributions to the Company’s
performance, and that remuneration policies are appropriate to attract, retain and motivate quality directors and senior management, committed to achieving the
overall goals of the Company.

This role essentially consists of:

assisting the Board in setting and monitoring remuneration policies, which promote the achievement of strategic business objectives and encourage individual performance
ensuring that remuneration policies are adopted and reviewed and aligned with the strategy of the organisation and linked to individual performance
reviewing the outcome of the implementation of the Remuneration Policy

The committee is responsible for making recommendations to the Board on Remuneration Policy for the directors and, to the extent it deems necessary,
makes external comparisons between remuneration packages currently available to the Company’s own executive directors and those available to directors of other companies of a similar size in the comparable industry sector.

The committee meets formally at least three times a year. The Chairperson of the Board and the CEO attend meetings to discuss the performance of other
executive directors and to make proposals as necessary.

The Chairperson of the committee may meet with the CEO and the Company Secretary to discuss important issues and agree on the agenda. The CEO, other
senior employees, professional advisors and Board members may attend the meeting by invitation only, but they may not vote. The Company Secretary is the
secretary of the committee.

The Remuneration Committee reviews the benefits offered by the Company to determine whether they are appropriate and competitive given the industry, the
company’s financial position, legislative requirements, and market benchmarks and trends, if the costs relating to the administration of the benefits/schemes are justified if the schemes are well governed, whether the benefits/schemes meet the needs of employees and are fair and non-discriminatory towards all employees.

The Board performs an evaluation of the effectiveness of the committee on an annual basis.

Remuneration Policy

The key principles of Merafe’s Remuneration Policy are:

Policy is governed by the Remuneration and Nomination Committee who regularly review all policies to ensure that they are relevant and support Company strategy
Guaranteed remuneration is targeted broadly at the median position of the relevant market data
All employees are members of medical and retirement funds and have group life and disability cover
Variable pay is an important component of remuneration and both annual and long-term performance-based schemes are in place in support of the Company’s business strategy
Incentive scheme performance measures are assessed by the Remuneration and Nomination Committee. These measures are weighted between corporate, individual, and financial and non-financial criteria
Performance measures are applicable to the time period to which the scheme relates
Annual cash incentive bonuses are based on performance for the financial year, while the long-term incentive scheme measures are based on long-term sustainability and shareholder value
Annual salary adjustments are governed by factors such as the Consumer Price Index (CPI), retention strategies, the Producer Price Index (PPI), industry performance, projected growth, contractual arrangements and affordability
Industry average increase surveys are taken into consideration in setting increases
Both short-term and long-term incentive schemes are benchmarked against practices at similar companies
The overriding principle governing payments for non-executive directors is that they are made in the context of good governance

Executive remuneration

Executive remuneration as set out in the Remuneration Policy is aligned with the Company’s strategic objectives. The Remuneration and Nomination Committee conducted an independent benchmark of executive remuneration during 2015.

Executive pay mix

Executive pay mix is defined as the balance targeted between the major components of executive remuneration, namely:

Guaranteed pay – based on total guaranteed cost to company (TCTC), being the combination of basic salary and benefits Guaranteed pay is designed to attract and retain talented employees, reflect the scope and nature of the role and provides competitive pay and rewards performance.
Performance variable pay, being made up of on target reward from short-term incentives in the form of annual cash incentives and the expected value from long-term (share-based) incentives. Performance variable pay is designed to motivate and rewards achievement of business and individual performance and keep employees focused on the defined business imperatives
Long-term incentives are designed to drive sustainable longer-term performance, retain key skills by linking performance to long-term value creation, encourage loyalty and ownership (by aligning the interests of executives to those of the Group and its shareholders), and wealth creation.

The balance between guaranteed pay (total cost to company), targeted annual cash incentives and the expected value from long-term (share-based) incentives for executives is shown in the pie charts on the right and in the diagram below.

Note: Expected value is defined as the present value of the future reward outcome of an offer, given the targeted future performance of the Company and of its share price. It should not be confused with the term ‘fair value’ which is used when establishing the accounting cost for reflection in a company’s financial statements. Neither should it be confused with the term ‘face value’ which is used to define the current value of the underlying share at the time of an offer.

Relative apportionment between the major elements of reward
Chief Executive Officer Executive director


Note that, through acquisitions and business combinations over time, and due to the impact of individual and business performance, actual pay mix will inevitably deviate from the targeted pay mix structure.

Merafe’s executive remuneration aims to align employee incentives with the interests of our shareholders.

Guaranteed remuneration

Merafe aims to establish and maintain an integrated pay line with pay levels that ensure that it is able to remain competitive, while managing costs. Salaries and benefits are reviewed annually and are targeted broadly at the median position in the relevant market. The Company conducts regular market pricing exercises against the top management reward surveys. The benchmark used is the median total guaranteed cost of employment for similar positions in similarly sized listed companies. When deciding on salary reviews the Remuneration and Nomination Committee also takes into account business performance, salary practices prevailing for other employees in the Company and, when setting individual salaries, the individual’s performance and experience in the role.

Short-term incentives 2015

Merafe’s annual incentives are aimed at rewarding a combination of both business and individual performance. Business performance (a weighted combination of financial performance and key strategic metrics) determines the size of a bonus pool for the Company and individual contributions to this performance (measured in terms of individual value driver scorecards) determine the bonus pool’s distribution to individuals.

Business performance is assessed in terms of a select scorecard of performance indicators, covering both financial and non-financial sustainability elements. Actually achieved performance against a targeted EBITDA which is given a weighting of 60% as is the achievement of additional ferrochrome business (as defined from time to time) and other sustainability factors, which include optimal funding, growth and (as submitted in a body of evidence and approved by the Remuneration and Nomination Committee) which is given a weighting of 40%.

These metrics are assessed against a five-point scale as follows:

1 Unsatisfactory (does not participate in the incentive bonus pool)
Performance/reward curve
Performance/reward curve
2 Satisfactory (worthy of a minimal, if any, incentive bonus)
3 Very good – on target (100% of the on-target bonus award)
4 Excellent – significantly above target (140% award of on-target bonus)
5 Truly excellent (award capped at 200% of on-target bonus)

The performance curve that identifies the relationship between the overall company performance against the above metric(s) and the bonus pool to be shared amongst participants is shown alongside.

The actual targets for the business metrics described are disclosed to the participants and the external auditors up front. No post measurement modifications are made to these targets except where a windfall event out of control of the participants is deemed significant enough to impose a reduction in the performance pool created.

Individual performance is assessed from a weighted (“balanced”) scorecard of key performance areas or value drivers. The selection of these is informed by Merafe’s performance management framework.

The same Performance/Reward Curve is used to identify the individual’s claim on the bonus pool created from corporate performance.

The percentage split between targeted EBITDA, the achievement of additional ferrochrome business and sustainability elements will be discussed and agreed by the Remuneration and Nomination Committee annually, but is currently set at 60%/40%.

The on-target percentages are set out below:

  Role On-target bonus
  Chief Executive Officer 50% of TCtC
  Executive directors 40% of TCtC
  Senior management 30% of TCtC
  Management 25% of TCtC
  Admin 15% of TCtC

The formula for determining the cash bonus is described by the following example:

TCTC X 50% (CEO) + TCTC X 40% (exec directors) etc. = On-target bonus
Individual Performance Score 3.25 = 110% of On-target bonus
Performance pool created using the measurements of EBITDA and Business metrics described above.
Example rating out of five against the two measurements = 2.5
On-target bonus pool = the sum of all on-target bonuses
Pool to be distributed = 50% of the on-target bonus pool i.e. score of 2.5 / 5 results in 50% of the potential bonus being created as an actual bonus.
The sum of all bonus claims (i.e. all employees who qualify for a bonus) is modified against the pool to be distributed and each participant receives this modified percentage of their personal score
This individual receives 110% of the modified pool to be distributed %

Intended changes to the short-term incentive policy 2016

During February 2016, a decision was made by the Remuneration and Nomination Committee to follow a less mechanistic approach in determining the bonus awards. In this regard, the incentive scheme performance measures are assessed by the Remuneration and Nomination Committee and these measures are determined by taking into account corporate, individual, financial and nonfinancial criteria (see the updated Remuneration Policy on our website and 2015 online report). The total short-term incentive pool available is capped at 3% of net profit after tax. No bonuses are payable where the net profit after tax in any financial year is less than R100 million. In addition, the percentage for short-term incentives is capped for the various categories of employees as set out below:

  Position Maximum % of TCTC
  Chief Executive Officer 100
  Executive directors 80
  Senior management 60
  Management 50
  Admin 30

Long-term (share-based) incentives

The intention behind the offer of long-term (share-based) incentives is both to reward employees, including executive directors, for long-term performance and shareholder alignment, and to serve as a retention mechanism for employees whose services are regarded by the Company to be crucial to its future growth and sustainability.

Share incentive schemes

On 14 December 1999, Merafe’s shareholders approved a share option scheme for employees (including executive directors) of the Company and its subsidiaries to encourage employees to identify more closely with the activities of the Company and to promote its continued growth by giving them an opportunity of acquiring shares in the Company.

All options vest one third per year on the third, fourth and fifth anniversaries and are settled by physical delivery of shares against receipt of payment of the option price. These options lapse if not exercised after 10 years by employees and options are forfeited when an employee resigns from the Group not having exercised his/her options.

On 13 April 2010, a new share incentive scheme was approved by shareholders providing for offers of both share options and full value (free) shares. The offers of full value (free) shares for directors were split 50%/50% between performance-oriented awards being subject to performance vesting conditions and retention-oriented grants with no performance conditions other than continued employment.

All offers vest in equal tranches on the third, fourth and fifth anniversary and are settled by physical delivery of shares. Alternatively, the Company has the right to settle the value accruing to an individual via the payment of an equivalent value cash bonus as per the policy guidelines.

The Board of Directors of the Company, on the recommendation of the Remuneration and Nomination Committee, made various offers of share options and full value (free) shares during 2010, 2011 and 2012.

Performance/vesting curve
Performance/reward curve

In 2012, the Remuneration and Nomination Committee made a decision to vary the balance between performance-oriented awards and retention-oriented grants and to simplify the performance criteria that determine vesting of the performance-oriented awards. From 2013 awards are governed by a single performance metric that compares Merafe’s total shareholder return over a three-year period with that of a selection of JSE-listed small cap mining and resources companies.

The peer group has been selected based on market capitalisation, using a basket of resource companies larger and smaller than Merafe.

The comparator group is set out in our Remuneration Policy and consists of 12 listed companies in the resource sector.

Using the above companies as a benchmark vesting of grants will be in accordance with the following curve:

If Merafe’s TSR over the three-year period places it in one of the top three positions, then the full number of performance granted shares will vest in equal proportions on the third, fourth and fifth anniversaries of their grant.

If Merafe’s TSR over the three-year period places it in sixth position, then one third of the number of performance granted shares will vest in equal proportions on the third, fourth and fifth anniversaries of their grant.

If Merafe’s TSR over the three year period places it in 10th or below 10th position, then none of the granted shares will vest.

If Merafe’s performance over the three-year period lies between any of the above, then a prorated number of performance granted shares will vest in equal proportions on the third, fourth and fifth anniversaries of their grant.

The fundamental principles governing Merafe’s revised long-term incentives are as follows:

Share options and share grants are only offered at the discretion of the Board
Full value share offers are made annually to all employees, the targeted reward of which is dictated by the Company’s reward strategy – pay mix
Performance-oriented share awards and retention-oriented grants are offered to senior managers and above, with the proportion of awards, in relation to grants, increasing with seniority as per Table A set out below
Performance-oriented award values are calculated as a percentage of an individual’s total cost to company guaranteed package
Retention-oriented grant values in any one year are, at the discretion of the Board, calculated either as a percentage of the current total cost to company guaranteed package, or as a percentage matching of the past year’s annual incentive payout
Performance-oriented grants predominate over retention-oriented grants at senior levels.

Table A
  Grouping Participant
offer value
Award value
grant value
grant value
  Chief Executive Officer 1 70 50 70/30 35 15 33
  Executive director 2 50 35 60/40 20 15 40
  Senior management 3 40 30 50/50 15 15 55
  Management 2 30 25 0/100   25 100
  Administration 4 20 15 0/100   15 100

Claw back

Any remuneration previously paid to executive directors that are subsequently found to have been the result of criminal or otherwise illegal activities must be repaid to the Company.

In the event of restatement of the Company’s results (other than a restatement caused by a change in accounting policy, standards or interpretation) which results in lower performance-based remuneration had it been calculated on the restated results, the Remuneration Committee shall review such performance based remuneration and determine the amount to be recovered from the executive.

Non-executive directors’ fees
In accordance with Merafe’s policy of ensuring that non-executive directors’ fees are market related, the Company consults regularly with independent experts regarding the appropriate fee structures and levels, the last review having been undertaken in November 2015. The 2015 benchmark exercise concluded that the fees of the current Board and committee fees were market related. The committee decided not to increase the fees for 2016.

The fees for non-executive directors are provided in the context of good governance, and in line with the strategy of attracting and retaining high calibre individuals as custodians of the Company’s business.

Fees are primarily derived from a methodology which takes into account expertise, the contribution made by the director, and attendance. Independent benchmark advice is sought and the present policy is that non-executive directors’ fees are positioned midway between the median and upper quartile of those fees found in listed companies of a similar size. The fees vary according to the different roles that non-executive directors undertake in the various committees.

To avoid any conflict of interest, non-executive directors do not, and will not, participate in any share-based incentive scheme or any other incentive scheme that the Company may implement.

Non-executive directors’ fees are tabled annually for approval by the shareholders of the Company. The non-executive directors’ fees paid during 2015 are set out below, as are the proposed non-executive fees for 2016.

Fees are based on four meetings a year with a split of a 60% retainer and a 40% attendance fee. In addition, attendance fees are payable for special Board or committee meetings. Should the Chairpersons of the Board and committees be required to undertake ad hoc duties, additional remuneration is payable for the time spent, in accordance with Merafe’s Remuneration Policy and as determined by the Board.

A detailed breakdown of share options and share grants can be found in note 8 of our annual financial statements.
Approved and proposed non-executive directors’ fees

Directors’ remuneration, as presented for approval at the Annual General Meeting, is based on four meetings a year and is unchanged from 2015. It is proposed that the non-executive director fees for 2016 be kept the same as the approved fees for 2015.

  Committee Membership Proposed
annual cost
per annum
fees per
  Board Chairperson 492 291 295 375 196 917
Member 265 350 159 210 106 140
  Audit and Risk Chairperson 191 500 114 900 76 600
Member 120 085 72 051 48 034
  Remuneration and Nomination Chairperson 103 516 62 109 41 406
Member 63 185 37 911 25 274
  Social, Ethics and Transformation Chairperson 103 516 62 109 41 406
Member 63 185 37 911 25 274

None of the fees above result in a proposed fee being above the median. The restructuring of the Board to fewer non-executive directors in 2015 has resulted in a saving in non-executive fees for 2015.

Non-executive fees paid

These fees are paid in accordance with the approved fees set out above. We held five Board meetings during 2015 including a strategy session. We also held four Audit and Risk Committee meetings, four Remuneration and Nomination Committee meetings and three Social, Ethics and Transformation Committee meetings in 2015.

    C Molefe
N Majova A Mngomezulu K Nondumo M Mamathuba S Blankfield M Mosweu Z van der Walt Total
  Board 541 521 291 886 265 350 265 350 25 152 172 478 265 350 291 886 2 118 973
  Audit and Risk 120 085 108 077 191 500 120 085 539 747
  Remuneration and Nomination 63 185 34 752 103 516 201 452
  Transformation 56 867 93 164 5 989 28 433 184 453
  2015 661 572 505 135 373 427 456 850 31 141 207 230 293 784 515 486 3 044 624

Executive directors' and prescribed officers' remuneration
Bonus and
benefits and
leave pay
of share
options and
share grants
  Executive directors              
  ZJ Matlala 3 409 2 798 313 511 1 132 8 163
  DC Chocho* 2 527 1 824 374 379 3 518# 4 686 13 308
  B McBride 2 901 1 907 457 435 2 339 8 039
  Prescribed officers              
  K Bissessor 1 224 1 224 172 169 292 2 635
  A Mahendranath^ 526 614 121 73 1 448+ 1 269 3 821
  Executive directors              
  ZJ Matlala 3 618 3 822 283 635 2 019 10 377
  K Bissessor 1 806 1 643 237 310 269 4 265
  B McBride(a) 6 456 448 91 4 441(b) 5 411 11 037
* Resigned 31 December 2014
^ Resigned 30 September 2014
(a) Resigned 2 March 2015
# Includes R990 000 retrenchment share grants
+ Includes R338 000 retrenchment share grants
(b) Includes R1 014 000 retrenchment share grants

Share options outstanding at 31 December 2015 in favour of directors and prescribed officers of the Company (000s)
  ‘000s ZJ Matlala K Bissessor
  Average exercise price (cents) 136 69
  Exercisable on 30 June 2009
  Exercisable on 30 June 2010
  Exercisable on 31 December 2010
  Exercisable on 1 March 2011
  Exercisable on 30 June 2011
  Exercisable on 1 March 2012
  Exercisable on 1 March 2013
  Exercisable on 1 April 2012 1 000
  Exercisable on 1 April 2013 1 000
  Exercisable on 1 April 2014 1 000
  Exercisable on 1 October 2013 885
  Exercisable on 1 October 2014 1 770
  Exercisable on 1 October 2015 1 770
  Exercisable on 1 October 2016 885
  Total 5 310 3 000

Share grants outstanding as at 31 December 2015 to directors and prescribed officers

  Vesting ZJ Matlala K Bissessor
  1 October 2014 114 275
  29 October 2016 457 094
  1 April 2014 17 456 4 100
  1 April 2015 17 456 4 100
  1 April 2016 139 650 81 991
  4 May 2016 183 950 70 754
  4 May 2017 183 950 70 754
  13 June 2016 1 488 584
  13 June 2017 1 488 584
  6 March 2016 759 575 166 600
  6 March 2017 759 575 166 600
  6 March 2018 759 575 166 600
  1 April 2017 626 752 136 182
  1 April 2018 626 752 136 182
  1 April 2019 626 752 136 182
  1 April 2018 850 548 302 337
  1 April 2019 850 548 302 337
  1 April 2020 850 548 302 337
  Total 10 801 624 2 047 056
Share options granted under the share incentive scheme approved by shareholders on 14 December 1999 are not subject to performance criteria and vest one third per year on the third, fourth and fifth anniversaries and are settled by physical delivery of shares against receipt of the option price
Share options and share grants under the Company’s share incentive scheme approved by shareholders on 13 April 2010 are subject to performance conditions
In 2010, 2011 and 2012 the performance conditions related to market and non-market conditions, being capacity growth, assets under management, being a participant on the JSE SRI Index and performance against the JSE small capitalisation index and mining index (all with the weighting of 25% each)
In 2013, the performance criteria for share grants and/or options were amended and that from 2013 share options or grants would be governed by a single performance metric that compares Merafe’s total shareholder return (TSR) over a three-year period with that of a selection of JSE listed, small cap mining and resources companies
For more information on the performance conditions, see our Remuneration Policy and see our annual financial statements, which form part of our online integrated report for 2015.