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

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

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

3. 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. • 2007 - Cabinet approve the DPE Remuneration Guideline - based on asset and revenue of the SOC. CONFIDENTIAL 3

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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? CONFIDENTIAL 12