Part one: Background statement
Our remuneration journey
2017 was a year of significant change with the Separation, changes in our regulatory landscape and the introduction of King IV. These changes have presented a unique opportunity to define the organisation we want to be, including how our remuneration philosophy and principles will give effect to our new corporate strategy. Our new reward philosophy and principles will be deliberate in addressing the views of our stakeholders, and will be informed by a fact base of competitor practices while complying with our changing regulatory landscape.
Our history – regulatory impacts on reward practices
Until we achieve regulatory deconsolidation from Barclays PLC (expected during 2018), we are required to comply with the European Union’s Capital Requirements Directive IV (CRD IV), and the Prudential Regulatory Authority Remuneration Rulebook, which create an explicit regulatory and shareholder reward framework. Since 1 January 2017, the European Banking Authority Guidelines (which the Prudential Regulatory Authority accepts) have prohibited the payment of dividends or interest on deferred share awards for material risk takers (for awards from the performance year 2017), and further extended the holding periods from three years to five years which is applicable to the executive directors and material risk takers.
CRD IV, which came into effect in January 2014, has also had a significant impact on our reward practices and pay mix, primarily as a result of the 2:1 maximum ratio of variable to fixed pay for executives and material risk takers. Consequently, we implemented role based pay to remain market competitive. This has distorted the executive and material risk taker pay mix and undermined the nexus between performance and pay. Lower variable pay, partly due to contained short-term incentives and no long-term incentive awards during the period 2014 to 2016, resulted in inadequate executive exposure to the share price and gearing to long-term performance. These regulations are not applicable to local peers and competitors, and have impacted our market competitiveness.
Our new reward strategy is being developed for the future, taking into account regulatory deconsolidation.
While implementing this revised reward strategy is a journey with financial and regulatory constraints, we are confident that it will ultimately build stakeholder confidence in our reward outcomes through a strong and transparent correlation with performance; encourage and direct our employees’ discretionary efforts; and ensure we make fair and responsible reward decisions.
Shareholder engagement and voting
We had a 75.7% vote ‘for’ our remuneration policy at our 2017 annual general meeting. We seek to improve this result and have made our comprehensive disclosure more transparent to enable active and extensive engagement with our shareholders. Our responses to remuneration matters raised by shareholders are outlined below.
|Feedback||Actions taken/response to feedback|
|The pay mix of executives is distorted and too high due to the combination of conventional salary and role based pay.||Role based pay remains in place to ensure market competitiveness until we achieve regulatory deconsolidation from Barclays PLC, after which it will terminate, and we will align fixed pay with the market. 29 material risk takers received role based pay in 2017.|
|The current 10% new share issuance limit for ‘reward shares’ is higher than what is considered appropriate.||Currently Barclays Africa does not issue new shares for the release of deferred or long-term incentive share awards. These shares are purchased on the open market, and therefore have no impact on share price dilution. We seek shareholder approval at the 2018 annual general meeting for a maximum 5% limit, and a 0.5% individual limit, for the number of shares awarded across all share incentive schemes.|
|The variable remuneration arrangements are not subject to performance periods longer than one year.||Long-term incentive awards made in 2017 were under the existing Long-Term Incentive Plan which has a three-year performance period. These will vest between three and five-and-a-half years depending on an individual’s material risk taker status. The Group Remuneration Committee (RemCo) determined the 2017 short-term bonus incentive pool based on the 2017 financial year performance of Barclays Africa and individual business units. Specific deferrals of payout are highlighted later in this report.|
|The level of disclosure around performance measurement should be enhanced.||We held numerous engagements with shareholders, and include additional disclosure regarding targets and stretch in this remuneration report.|
|No clear linkage to targets on incentives – there should be quantitative stretch targets that can be tracked.||The Long-Term Incentive Plan awards in 2017 have a threshold, target and stretch approach. The RemCo determined the 2017 short-term bonus incentive pool based on affordability as well as the Group’s and individual business units’ performance (in particular headline earnings).|
|Success in separating from Barclays PLC should be a factor in the Long-Term Incentive Plan conditions.||The 2017 Long-Term Incentive Plan metrics incorporate a strategic measure which includes progress against organisational objectives such as the Separation.|
How we have applied King IV
The RemCo has applied Principle 14 of King IV, and is committed to ensuring that we remunerate fairly, responsibly and transparently. Within this remuneration report, we have made our disclosures and current remuneration policies more transparent and comprehensive. We have considered the recommended practices under Principle 14 by mindfully contemplating how each practice could enhance the quality of our disclosures, considering each recommended practice in light of what is appropriate for Barclays Africa and the sector, and in light of other required and voluntary governance standards with which we comply.
The recommended practices which have been applied in this remuneration report are listed below. We have:
- restructured our remuneration report according to the three parts recommended in King IV. The remuneration policy overview and implementation report focus on executive management as defined within King IV. In addition, within the remuneration policy, the remuneration elements and design principles informing the remuneration arrangements for other employees are included at a high level.
- focused on fair and responsible remuneration, and have contextualised how our policy addresses fair and responsible remuneration for executive management in the context of overall employee remuneration.
- provided details of any obligations in executive employment contracts which could give rise to payments on termination of employment or office.
- adopted the single, total figure reporting within our remuneration disclosures.
- implemented the new voting regime, and have requested advisory endorsement of our remuneration policy and the implementation report.
Fair and responsible pay
Society, including our customers and regulators, expects us to be a force for good, including fair and responsible pay for all employees and those of third-party providers.
PwC Actuarial Services conducted a comprehensive analysis of our annual basic pay, using regression analysis, to assess equal pay for work of equal value. This analysis showed that there are no unjustifiable variances in annual basic pay across Group-wide management and bargaining unit populations. In addition, PwC and Global Remuneration Services/Mercer conducted appropriate reputable remuneration surveys to ensure our internal equity and external competitiveness.
Our annual minimum basic pay of R144 000 is higher than the national minimum and living wage, and where feasible, we monitor the remuneration paid by our third-party service providers. The Group’s Gini coefficient increased marginally to 0.45% from 0.44% in 2016, due to the specific interventions to lock-in critical senior employees during the Separation. We continue awarding higher increases to our more junior employees, as outlined in part three of our remuneration report.
Symmetry in reward, risk and conduct is a key tenet of our approach to remuneration. We maintain a sound governance structure of material risk takers to ensure that their remuneration is in line with our Values, and does not encourage undue risk. Our Remuneration Review Panel is an executive sub-committee of the RemCo and is chaired by the Chief Risk Officer. The Remuneration Review Panel makes recommendations to the RemCo on risk management, compliance and control matters relating to remuneration. In particular, it makes recommendations on adjustments to bonus pools, individual awards, malus adjustments and clawback.
We considered executive director and prescribed officer remuneration alongside a detailed comparison to the broader employee population’s remuneration to ensure consistency across the Group.
This year we present part two (the main overview of the remuneration policy) and part three (the implementation report) to the shareholders for advisory votes. This is in alignment with the amended JSE Listings Requirements and the provisions of King IV. Part two outlines the Board’s measures in the event of a negative vote on the remuneration policy of 25% or more.
Our remuneration approach and disclosures comply with regulatory and statutory provisions relating to reward governance in all the countries in which we operate. They are also in accordance with relevant regulatory requirements in the United Kingdom and European Union.
As part of our commitment to good corporate governance, we have changed the structure of this report to align with the principles and recommended practices of King IV as follows:
- This report is split into three sections: Part one sets out the context of remuneration decisions during the year; part two sets out our remuneration policy and governance; part three addresses the implementation of the remuneration policy during 2017.
- We continue to be transparent, to ensure fair and responsible pay through the disclosure of relative measures such as our 2017 Gini coefficient.
- As required by Regulation 43 of the South African Banks Act, the remuneration of risk, compliance, legal, and internal audit employees is determined independently within each function, rather than by the business they support, though within the parameters of the pool we allocate to them.
- While we remain regulated by the Prudential Regulation Authority, we will comply with the European Union’s CRD IV, and, in particular, the 2:1 maximum ratio of variable to fixed pay, and additional holding periods and clawback provisions for material risk takers.
- We take note of the newly promulgated South African Twin Peaks legislation which will establish prudential and conduct regulatory bodies in South Africa to govern and regulate the financial services industry in a similar manner to the United Kingdom and will adapt our remuneration governance to reflect the requirements established by these bodies.
The RemCo is satisfied that the advice received from PwC was objective and independent.
Pay and performance highlights
Our pay decisions considered financial performance holistically, including progress against our Balanced Scorecard, which is fundamental to how our business is run. This is in line with improving returns to shareholders and accelerating delivery. Our policy is to pay above the market median for our top performers and critical talent. By retaining our highest-quality people, we best deliver our strategy and shareholder value.
Barclays Africa’s 2017 financial results were satisfactory in a challenging macro environment, with normalised headline earnings increasing by 4% (7% in constant currency). We continued to benefit from a diversified portfolio as stronger growth outside South Africa supported overall performance. Group return on equity at 16.4% remained strong and largely in line with the prior year, while earnings were marginally better than the Board-approved target in constant currency terms.
The 2017 annual discretionary bonus incentive pool increased in absolute terms by 2% compared to normalised headline earnings growth of 4%. Total incentives, which grew by 5%, includes:
- formulaic incentives;
- a Separation bonus pool of R184m for individuals who support our separation efforts; and
- the restricted share awards granted in 2017.
The Separation bonus pool included additional highly skilled resources specifically hired for the project, particularly in the IT function. 334 employees were dedicated full-time to the Separation. The Separation bonus is a temporary pool, which will cease once the Separation has been achieved.
Our decisions on total compensation were made against the backdrop of these performance headlines, while considering our compensation trends over prior years. The outcomes of our decisions on the Group’s total compensation for 2017 can be summarised as follows (these are based on normalised profit before tax):
The staff cost-to-profit before tax (pre-staff costs) ratio decreased by 0.1 percentage points. During 2017, we employed an additional 670 employees.
- The staff cost-to-net income ratio is 35.1%, which is 0.4 percentage points higher than 2016.
- The cost-to-income ratio increased to 56.8% (2016: 55.2%).
- Total staff cost increased to R23 138m (4.7%), of which salaries increased to R18 684m (4.5%).
- The ratio of our annual bonus pool to headline earnings continued to reduce in 2017 (14.9%).
These year-on-year changes illustrate our continued focus on generating quality earnings with a focus on costs.