Remuneration report

Philosophy

As an internally managed REIT, the guiding principle for our remuneration philosophy is to promote the achievement of the company’s strategic objectives, encourage individual performance and reward sustainable value creation. Given that employee skills are vital to long-term value creation, our approach emphasises the contribution of our employees to building long-term value through fair and balanced remuneration.

Hyprop’s success depends on attracting talented, experienced and motivated individuals who can execute our business strategy to achieve our vision and mission. We use both short and long-term incentives to support this goal.

Target-based short-term incentives (STIs) are strong drivers of performance. A signiﬁcant portion of senior management reward is therefore variable, based on realistic performance targets, and individual contributions to the growth of their division and the wider company. We also reward employees who deliver superior performance in line with our strategic goals. Special bonuses may be considered as additional awards in exceptional circumstances.

Long-term incentives (LTIs) are aligned to Hyprop’s strategic objectives and the investment interests of shareholders.

Remuneration committee

The remuneration committee meets at least twice a year and comprises non-executive directors with a majority of independent non-executives. The chief executive officer and other directors or executives may attend meetings by invitation, but are excluded from deliberations on their individual remuneration.

The committee is responsible for implementing the remuneration policy to ensure:

Salary structures and policies motivate superior performance, and are linked to realistic performance objectives that support sustainable long-term growth
Stakeholders are able to make informed assessments of reward practices and governance processes
Compliance with all applicable laws and regulatory codes.

A formal charter codifies the tasks and responsibilities of the committee. Updates to the charter to effect application of the recommendations of the King III report, or other identified good practice, are approved during the year. The committee is aware of the pending implementation of King IV and will make changes or amendments to the group remuneration report, where practical and applicable, in light of the requirements of King IV. The committee chairman attends the annual general meeting of the company to liaise with shareholders on matters under the ambit of the committee.

The remuneration committee is responsible for:

Reviewing and recommending to the board Hyprop’s remuneration philosophy and policies for directors and staff
Ensuring the remuneration strategy reflects the interests of stakeholders, is comparable to the sectoral remuneration environment, and complies with relevant principles of good corporate governance
Considering whether the objectives of the remuneration policy have been achieved
Ensuring the ratio of fixed and variable pay – in cash, benefits and shares – is aligned with the company’s strategic objectives
Reviewing the effectiveness of recorded performance measures that govern the vesting of incentives
Ensuring all benefits, including retirement benefits and other financial arrangements, are justified and correctly valued
Considering the performance of the chief executive officer and financial director, as directors and as executives, when determining their remuneration
Selecting an appropriate peer group when comparing remuneration levels
Regularly reviewing incentive schemes to ensure alignment with shareholder interests and that they are administered in terms of their rules
Advising on the remuneration of non-executive directors.

The committee uses the services of independent advisers as required. During the year, these advisers supplied market data and advice on market practice and governance, and provided analyses on certain performance measures.

Non-executive directors

Our policy is to remunerate non-executive directors competitively for their service while understanding the required time commitment. Fees are benchmarked against a peer group of JSE-listed companies, and there are no contractual arrangements to compensate for loss of office.

The remuneration and nomination committee reviews these fees annually and makes recommendations to the board which, in turn, proposes fees for approval by shareholders at the annual general meeting.

Remuneration for non-executive directors comprises a base fee, predetermined annually and approved by shareholders at the annual general meeting.

Non-executive directors do not receive STIs nor do they participate in any LTI schemes except if they previously held executive office and are entitled to unvested beneﬁts from this period. Hyprop pays no pension contributions for non-executive directors.

Executive directors and senior executive remuneration

Our executive directors are permanent employees and their employment agreements include a notice period, but no restraints of trade. Hyprop aims to be an employer of choice: to attract and retain individuals of high calibre. We offer competitive remuneration packages and review these annually.

Our remuneration structure includes:

Basic salary

All basic salaries are market related, benchmarked against the median industry norms and adjusted for an employee’s experience, qualifications, responsibilities and nature of work. These are reviewed annually.

Long-term incentives (LTI)

Current plan: Conditional Unit Plan (CUP)
These reward long-term decisions supporting dividend and capital growth. They are also designed to align employee behaviour with shareholders’ interests and retain staff. The LTI comprises a performance and retention component. The split between performance shares and retention shares is 70%:30% for all participants.

Conditions for the performance component of the LTI are shown below:

Performance condition	Detail	Weighting %	Threshold %	On-target %	Stretch %
Growth in distribution/dividend per share relative to peer group*	Growth in distribution per share at the end of performance period compared to prior ﬁnancial year.	40	95	102,5	110
Share price performance relative to peer group*	Growth in share price from start to end of performance period.	40	95	105	120
Strategic component	Determined by remuneration committee in line with circumstances and projects at the time of the award. It is measured over the performance period of three years, and may include project-related or general business activity. Where considered appropriate, the committee has the discretion not to apply the strategic component, in which case this 20% weighting will be split equally between the other two performance conditions. Achieving each of the performance conditions and consequent vesting of performance units occurs severally.	20

* The peer group comprises the five largest South African REITs by market capitalisation listed on the JSE

Awards are offered to executives, senior managers, operational and ﬁnancial managers and staff with speciﬁc core, critical or strategic skills and allocations are approved by the remuneration committee. Performance shares vest three years after initial allocation, provided the relevant performance conditions have been met.

	Date of issue	Offered to	Number of employees participating	% of staff complement
First reward issue	1 January 2014	Executives, senior managers, operational and financial managers and staff with specific core, critical skills	27	13
Second reward issue	1 July 2014	As above	26	13
Third reward issue	1 July 2015	As above	26	13

Retention scheme terms

Retention shares vest five years after initial allocation, subject to continuous employment over the vesting period.

Participants do not pay for the shares, and will only be eligible to receive dividends after shares have vested.

Terms of service

Minimum terms and conditions for employing executive directors are governed by South African legislation. If an executive director’s services are terminated, the committee oversees the settlement of terms, assisted by labour law advisers.

Short-term incentives (STI)

An annual performance bonus aligns short-term rewards with annual performance and supports retention. Performance reviews are weighted significantly to output. The remuneration committee sets key performance deliverables (KPDs) annually at property and company levels, including deliverables for executive directors. These are formally measured and include:

Net income growth
Performance against budget
Increase in trading densities
New/renewed leasing rental values achieved relative to budget
New/renewed leasing escalations achieved
Tenant arrears collections and management
Tenant deposit and bank guarantee management
Documentation administration
Environmental impact targets
BBBEE implementation targets.

Exceptional performance is rewarded with higher incentives, after considering recommendations from general managers, regional executives and executive directors.

The maximum potential bonus for senior management is six months’ salary, at the committee’s discretion. Bonuses for executive directors are aligned with strategic objectives and are at the remuneration committee’s discretion.

Short-term incentive outcomes (STI)

Individual performance reviews are conducted annually, with biannual company key performance deliverable reviews measured against targets. Employees are rewarded on the outcome of these reviews. Bonuses and salary increases are approved by the remuneration committee. Bonuses are payable in December and salary increases implemented from January each year.

Individual performance reviews are completed on the company’s employee self-service system after performance discussions with the employee’s line manager.

Individual performance reviews include:

Professional conduct
Business processes
Customer service
Business operations
Employee management
Implementation of company strategy.

Company key deliverable review targets

The executive committee sets key performance deliverables annually at property and company levels. These are approved by the remuneration committee each year.

Performance against the company deliverable targets carries a 90% weighting, while individual reviews carry a 10% weighting at executive and senior management level.

Key performance deliverables for 2016 were:

	Weighting %	Performance on target	Stretch target	KPI outcome %	Performance achieved
Financial: net distributable income growth	33	8% net income growth year-on-year	10% and above	130	14,2% net distributable income growth year-on-year⁽¹⁾
Financial budget management	28	On budget	Exceed budget by 3%	130	Exceeded budget by 5,2% ⁽¹⁾
Leasing: vacancy movement, rentals, escalations and administration	18,5	Vacancy movement: 0% movement year-on-year. Rentals sustained at same rate. Rental escalation on new leases 8,9%. Rental escalations on renewals 5%. Administration: 2% outstanding documentation.	Vacancy movement – reduced by 5% or more. Rentals achieved 7,5% more than previous rate. Rental escalation on new leases 10% or more. Rental escalations on renewals 7,5% or more than previous rate. Administration 0% outstanding documentation.	100	Reduced vacancies by 45%. Retail rentals 7,0% more than previous rental achieved. Office rentals less than previous rental achieved. 8,1% escalations achieved. 15% of lease documentation still in process.⁽²⁾
Tenant arrears: deposits and total outstanding	6,5	Total outstanding tenant arrears: 2% outstanding as a % raised of rent roll. Deposits: 3% outstanding as a % of deposits raised.	Total outstanding tenant arrears: 0% outstanding as a % of rent roll raised. Deposits: 0% outstanding as a % of deposits raised.	115	0,50% outstanding arrears compared to what was raised on tenant statement.⁽²⁾
Operations: masterfile, waste recycling and energy saving	7	Masterfile: 90% complete. 70% waste recycled. 3% kwh energy saving.	Masterfile 100% complete. 75% waste recycled. Energy saving 5% or more kwh saving.	120	92,1% masterfiles complete. 78% waste recycled. 3% kwh energy saving.⁽²⁾
Trading density	2	1% increase year-on-year	Exceeds 3% increase year-onyear	130	5,2% trading density growth⁽²⁾
Footfall	1	1% increase year-on-year	Exceeds 3% increase year-onyear	85	0,4% decrease year-on-year⁽²⁾
BBBEE: procurement	3	60% of all procurement are from companies with a BEE level of 1 to 4	70% of all procurement are from companies with a BEE level of 1 to 4	130	84,5% procurement from companies with a BEE level of 1 to 4⁽²⁾
BBBEE: employment	1	50% of all new appointments are black	61% and more of all new appointments are black	130	88% new appointments were black⁽²⁾
Total	100			121

(1) Based on the group portfolio
(2) Based on SA portfolio only
(3) Subject to the final ratification by the remuneration committee in November 2016

SCORING METHODOLOGY
Underperformed		Achieved 70% of target
Below expectations		Achieved 80% of target
Solid performance		Achieved 100% of target
Above expectations		Achieved 115% of target
Stretch		Achieved stretch targets (130% of target)

Non-executive directors’ remuneration

	June 2016 R000	June 2015 R000
Directors’ remuneration
Independent non-executive	2 399	2 117
Ethan Dube (paid to Vunani Capital Proprietary Limited)	334	284
Lindie Engelbrecht	535	471
Gavin Tipper	562	490
Louis van der Watt* (paid to Atterbury Property Holdings Limited)	233	235
Mike Lewin	334	284
Thabo Mokgatlha	401	353
Non-executive	1 040	847
Kevin Ellerine	314	252
Louis Norval	306	245
Stewart Shaw-Taylor	420	350

* Louis van der Watt resigned from the board of Hyprop on 4 May 2016

Executive directors’ remuneration

	June 2016 R000	June 2015 R000
Pieter Prinsloo
Basic salary	3 672	3 464
Performance bonus (paid in December)	3 710	2 625
Phantom share scheme⁽¹⁾	3 454	3 436
Pension fund contributions	173	141
Other benefits	122	33
Total	11 131	9 699
Laurence Cohen
Basic salary	2 089	1 958
Performance bonus (paid in December)	2 332	1 650
Pension fund contributions	362	296
Other benefits	69	82
Total	4 852	3 986
Executive directors’ remuneration	15 983	13 685

⁽¹⁾

Phantom share scheme
The Hyprop board recognises that a key factor in the success of the group is the retention and incentivisation of management and staff. Accordingly, a scheme was formulated to reward employees who make a meaningful and sustainable contribution to the financial performance of Hyprop by providing them with the opportunity to participate in its future growth. Senior management and staff were offered this incentive.

The incentive was directly linked to the performance of Hyprop’s shares. Employees were granted “phantom” Hyprop shares at a notional strike price (the initial price (IP)). Employees received an award equivalent to the increase in the market value of the Hyprop share over the initial price. This award was paid in four payments within 30 days after the date on which the relevant payment was calculated.

The payment was calculated as follows:
Cash bonus = 1/4 AS x (P - IP) - relevant taxes
AS = allocated “phantom” shares
P = volume weighted average traded price of Hyprop shares for the 30 JSE trading days prior to the calculation date
IP = initial price

If the market price of the Hyprop share on the relevant calculation date was not greater than the initial price, no payment was made. The award was only applicable if the employee was in the employ of Hyprop on the payment date. No “phantom” Hyprop shares were in issue at 30 June 2016 (2015: 222 222).

The phantom share scheme has expired, no further payments will be made in terms of the Phantom share scheme.

Disclosure of CUP* – Pieter Prinsloo and Laurence Cohen

	Conditional shares granted	Date issued	Vesting date
Pieter Prinsloo
Performance shares	20 153	1/1/2014	1/1/2017
Retention shares	8 637	1/1/2014	1/1/2019
Performance shares	21 845	7/1/2014	7/1/2017
Retention shares	9 362	7/1/2014	7/1/2019
Performance shares	15 794	7/1/2015	7/1/2018
Retention shares	6 769	7/1/2015	7/1/2020
Total	82 560
Laurence Cohen
Performance shares	11 105	1/1/2014	1/1/2017
Retention shares	4 759	1/1/2014	1/1/2019
Performance shares	11 769	7/1/2014	7/1/2017
Retention shares	5 044	7/1/2014	7/1/2019
Performance shares	8 509	7/1/2015	7/1/2018
Retention shares	3 647	7/1/2015	7/1/2020
Total	44 833

* To date, no shares have vested for the two executive directors

Employee earnings ratio

Performance per employee by net operating income and distributable income, as a measure of productivity, is benchmarked annually against peers.

Number of permanent employees		Net operating income per employee		Net distributable income per employee
2016	2015	2016 R000	2015 R000	2016 R000	2015 R000
232	199	7 076	7 029	6 561	6 631
		1% increase year on year		(1%) decrease year on year

Total compensation paid to employees**

	June 2016 R000	June 2015 R000
Total salaries paid
Total compensation paid to employees	123 295	109 519
Average annual payment per employee	455	456

** Including permanent, temporary and contract employees

Employees earning above the Basic Conditions of Employment Act (BCEA) threshold received an average 6% annual salary increase from 1 January 2016.

Employees earning below the BCEA threshold received an average 7% salary increase from 1 January 2016.