Governance and Remuneration: Directors’ Remuneration Report
Mr Trevor D Petersen
Chairman of the Remuneration Committee

LETTER FROM THE REMUNERATION COMMITTEE CHAIRMAN

Dear Shareholder,

On behalf of the Board, I am pleased to present the Mediclinic International Directors’ Remuneration Report for 2018.

The Remuneration at a Glance section, which follows this introduction, highlights the key areas that will be of primary focus to the reader, such as pay outcomes for the year and details of how our policy will be implemented in 2019.

Over the past year, the Remuneration Committee kept fully abreast of the evolving views of shareholders on pay and, in particular, the UK Government consultation on corporate governance. We focused on ensuring that our approach to pay is fair and that pay in the wider workforce is considered and reflected in the Committee’s deliberations. The next UK Corporate Governance Code is expected to increase the remit of the Committee to include a level of oversight for the wider workforce and we are well placed to incorporate this additional responsibility. The Committee is regularly updated on wider workforce pay and we make our decisions relating to the remuneration of senior executives and key management in the context of relativity of reward practices across each operating division.

Chief Executive Officer transition

A key part of our work in the year has been supporting the Nomination Committee in the Chief Executive Officer succession planning and ensuring that the approach to recruitment remuneration for our incoming CEO was appropriately fair, taking into account our workforce practices and compliance with our policy and relevant share plan rules.

Mr Danie Meintjes will retire from the Company after a tenure of over 30 years of service, the last eight of which have been as its CEO. Mr Meintjes played a vital role in the transformation of the Mediclinic Group during his tenure. The Committee is currently considering the treatment of Mr Meintjes’ outstanding share-based awards when he steps down as an executive director. Details will be disclosed to shareholders as soon as they have been finalised.

Dr Ronnie van der Merwe will take on the role of CEO from 1 June 2018. Dr Van der Merwe joined the Mediclinic Group in 1999 and the Executive Committee in 2008, where he most recently held the role of Chief Clinical Officer. Dr Van der Merwe is one of Mediclinic’s most experienced executives and ideally equipped to build on the foundations Mr Meintjes has left in place.

Dr Ronnie van der Merwe’s remuneration arrangements as CEO are in line with the Group remuneration policy and in line with the package for Mr Meintjes in his final full year as CEO. Dr Van der Merwe’s base compensation (inclusive of Board fees) has therefore been set at £558 198, whilst his maximum short and long-term incentive opportunities have been set at 150% and 200% of base compensation respectively. Whilst Dr Van der Merwe’s ’s base compensation is in line with Mr Meintjes for his final full year as CEO, it is recognised this level is positioned towards the bottom end of the market competitive range for the CEO of a company of similar size and complexity to that of Mediclinic. The Committee therefore intends to keep the remuneration arrangements for the CEO under review.

Performance and reward over the reporting period

2017 was the first year of operation of our revised Remuneration Policy, which was approved by shareholders at the 2017 Annual General Meeting (“AGM”) (see chart below for AGM voting outcomes) and applies for three years from that date.

AGM VOTING OUTCOME 2017

For the year under review, on an adjusted basis, the Group performed slightly ahead of expectations, driven by a significant second half improvement from the Middle East division. The Southern Africa division delivered second half revenue growth ahead of expectations with a stable adjusted EBITDA margin for the year. In Switzerland, Hirslanden was faced with a number of regulatory changes that came into effect during the year, which impacted divisional EBITDA performance.

The executive directors’ short-term incentive (“STI”) was calculated on a Group achieved EBITDA measure defined as Group adjusted EBITDA performance, calculated at budgeted exchange rates and further adjusted to remove the impact of employee bonus accruals and to amend for other specific items subject to approval by the Remuneration Committee. This is combined with detailed operating metrics measured at the divisional level, which comprise financial and operational objectives, including measures of clinical excellence. The bonus framework operates such that the non-achievement of subset performance indicators (i.e. those measured at a divisional level) give rise to a reduction in the bonus that is payable. Based on performance delivered in the year, as described in more detail below, the overall bonus for executive directors was approved at 61.37% of maximum, which is reflective of the financial and operating performance delivered in the year.

No long-term incentive awards were due to vest in the year, therefore no such awards are included within the single figure tables as set out on below.

Proposed remuneration implementation 2019

Incentives

In line with the 2018 STI, the 2019 Group STI will continue to be based on Group achieved EBITDA performance and operating divisions’ subset performance indicators, which include financial and operational objectives. To further support delivery of the Group’s “Patients First Strategy” additional focus has been placed on improving clinical performance through the introduction and/or enhancement of additional non-financial performance measures, which include clinical performance, patient experience, staff engagement and patient safety measures.

In line with the commitment we made to investors ahead of the introduction of our new policy in 2017, we have reviewed the performance measures underlying our plans. The Board is confident that a focus on adjusted earnings per share (“EPS”) and total shareholder return (“TSR”) within our long-term incentive plan (“LTIP”) remains appropriate for 2018, as it is directly aligned with the value we deliver to shareholders. The 2018 LTIP awards will therefore continue to be based on adjusted EPS and TSR. Details on the underlying targets are set out on below. The Board will continue to keep the performance measures used for the purpose of the LTIP under review over the course of 2018.

Base compensation

In line with South African employment practices, the Committee reviewed the base compensation for the current CEO, Mr Danie Meintjes, for the coming year and approved an increase of 4.7%, which was below the average increase for other employees of Mediclinic Southern Africa of 5.6%.

The Committee also reviewed the base compensation positioning for the Chief Financial Officer, Mr Jurgens Myburgh, who was appointed on base compensation of £319 000 in August 2016. On appointment to the role, in line with best practice and in line with the positioning for the CEO, his base compensation was positioned towards the bottom end of the market competitive range to reflect that this was his first role as CFO of a UK listed company. Taking into consideration Mr Myburgh’s performance since his appointment and the level of input he provides to the Executive Committee and Board in delivering business performance, the Committee agreed to a salary increase of 9.6%. Mr Myburgh’s new salary of £411 486 will remain towards the lower end of the market competitive range. This marks the first salary increase awarded to Mr Myburgh since his appointment in August 2016. Whilst the Committee recognises that such salary increases are not common in the current UK climate, given Mr Myburgh’s performance since appointment and taking into account wage increases in the South African business, the Committee believes that the increase is in the best interests of the business.

I trust the information presented in this report enables our shareholders to understand how we have implemented our remuneration policy over the year, and the rationale for our decision-making. We continue to be committed to an open and transparent dialogue with our investors and the Committee welcomes any feedback or comments on this report or the way in which we implement our Remuneration Policy.

Mr Trevor D Petersen
Chairman of the Remuneration Committee

23 May 2018

REMUNERATION AT A GLANCE

This section summarises the remuneration outcomes for the 2017/18 financial year, including how the Remuneration Policy was implemented during the year and the link between remuneration and our strategy.

OUR REMUNERATION PRINCIPLES

Our Remuneration Policy is designed to support our overall objective of generating long-term shareholder value. By appointing, investing in and retaining competent staff, we strive to be an employer of choice in the local and international markets in which our Company operates.

Our remuneration arrangements are simple in design and seek to balance the need to reward performance appropriately, fairly and competitively – while remaining mindful of our responsibility to deliver value to shareholders.

Our remuneration structure comprises of two pay components – fixed and variable pay. To determine the shape, size and variability of each element of pay, the Committee follows key remuneration principles as set out below:

SUMMARY OF REMUNERATION FRAMEWORK

The overall remuneration framework applicable to the executive directors under the current policy is summarised in the following table.

Notes
1 New CEO’s arrangements, with effect from 1 June 2018. The departing CEO’s base compensation was set at £585 728 with effect from 1 April 2018.

ILLUSTRATION OF REMUNERATION OUTCOMES IN THE PAST YEAR

The following chart show the 2017/18 actual remuneration against the maximum policy levels of remuneration for the executive directors.

Under the policy, the remuneration payable to each executive director is based on salaries at the start of 2017/18. The elements of remuneration have been categorised into three components: (i) fixed guaranteed salary; (ii) STI; and (iii) LTIP. In addition, for the purposes of comparison we have included the actual single figure remuneration paid in 2017/18.

DIRECTORS’ REMUNERATION POLICY

INTRODUCTION

This report sets out the Company’s policy on the remuneration of its executive and non-executive directors, which was approved by the shareholders at the AGM on 25 July 2017. The policy took effect from this date and may operate for up to three years. Our policy details can be accessed on the Company’s website, and are contained in the 2017 Annual Report and Financial Statements. However, in the interests of full disclosure, the Remuneration Committee (the “Committee”) has included these below to be read alongside the remuneration outcomes for the year ended 31 March 2018.

The policy was prepared in accordance with The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended). The policy has been developed taking into account the principles of the UK Corporate Governance Code and takes account of the views of our major shareholders and proxy agencies, as expressed during previous engagements.

POLICY OVERVIEW

The Committee is responsible, on behalf of the Board, for establishing appropriate remuneration arrangements for the executive directors and other senior management of the Group.

In setting the Remuneration Policy for the executive directors, the Committee will ensure that the structures are in the best interest of the Group and its shareholders, by taking into account the following general principles:

  • to lead our chosen markets in medical quality by attracting, retaining and motivating the best person for each position;
  • to ensure total remuneration packages are simple and fair in design so that they are valued by participants;
  • to ensure that the fixed element of remuneration is determined with reference to the region in which the executive operates and the broader international market, taking account of individual performance, responsibilities and experience; and to ensure a significant proportion of the total remuneration package is linked to financial performance;
  • to balance performance pay between the achievement of the Group’s financial performance objectives and delivering sustainable stock market out-performance, creating a clear line of sight between performance and reward; and providing a focus on sustained improvements in profitability and returns; and
  • to provide performance-related pay linked to share price and with a requirement to hold shares to facilitate senior management to build a shareholding in the business and, therefore, align management and shareholders’ interests and the Group’s performance, without encouraging excessive risk-taking.

CONSIDERATION OF SHAREHOLDER VIEWS

The Company is committed to maintaining open and transparent dialogue with its shareholders. The Committee engages regularly in a process of investor consultation.

The Committee considered shareholder feedback in relation to the Directors’ Remuneration Report for the prior year at its first meeting following the AGM. This feedback, as well as any additional feedback received during any other meetings with shareholders, was considered as part of the Company’s annual review of remuneration arrangements for the following year. Where appropriate, the Committee will actively engage with shareholders and shareholder representative bodies, seeking views which may be considered when making any decisions about changes to the Directors’ Remuneration Policy.

The Committee considers the AGM to be an opportunity to meet and communicate with shareholders, giving investors the opportunity to raise any issues or concerns they may have. In addition, the Committee will seek to engage directly with major shareholders and their representative bodies should any material changes be made to the Directors’ Remuneration Policy.

SUMMARY OF THE DIRECTORS’ REMUNERATION POLICY

The following table sets out the key aspects of the Directors’ Remuneration Policy.

Notes
1

The annual STI is focused predominantly on key financial performance indicators, to reflect the Group’s success in managing its operations. The balance is determined based on executive directors’ performance against annual Group operational targets, including measures of clinical excellence.

The executive directors’ STI is calculated on Group achieved EBITDA performance together with other financial and strategic business targets of the three operating divisions, weighted relative to their respective adjusted EBITDA contribution.

The structure of the executive directors’ pay policy on annual STIs is generally in line with the policy for remuneration of management within the Group, although the levels of award will be different. The performance measures that apply to operating division management are based on the respective division’s adjusted EBITDA performance, further adjusted to remove the impact of employee bonus accruals, specific costs allocated by corporate and to amend for other specific items subject to approval by the Remuneration Committee and division specific operational targets, including measures of clinical excellence. The annual STI awards for management are paid in cash with no deferral.

2

The LTIP rewards significant long-term returns to shareholders and long-term financial growth. Targets are set on sliding scales that take account of internal strategic planning and external market expectations for the Company. Modest rewards are available for achieving threshold performance with maximum rewards requiring substantial out-performance of challenging strategic plans approved at the start of each year or on the date of award, as the case may be.

The Committee operates long-term incentive (“LTI”) arrangements for the executive directors and key senior management in accordance with their respective rules, the Listing Rules and the rules of relevant tax authorities, where relevant. The Committee, consistent with market practice, retains discretion over a number of areas relating to the operation and administration of the plans. These include (but are not limited to) the following:

  • number of participants;
  • timing of the grant and/or payment of award;
  • the size of an award (up to plan limits) and/or payment;
  • discretion to reduce the number of awards vesting if certain performance underpins are not met;
  • discretion relating to the measurement of performance in the event of a change of control or reconstruction – determination of a good leaver (in addition to any specified categories) for incentive plan purposes;
  • adjustments required in certain circumstances (e.g. rights issues, corporate restructuring and special dividends);
  • the ability to adjust existing performance conditions for exceptional events to fulfil their original purpose; and
  • the relative weighting between relative TSR and adjusted EPS are determined annually by the Remuneration Committee – for the current reporting period adjusted EPS weight is 60% and relative TSR is 40%. This will remain the weighting for 2018/19.

The structure of the executive directors’ pay policy on LTIPs is generally in line with the policy for remuneration of key senior management within the Group, although the levels of award are different. The LTIP awards for key senior management are denominated in shares, with vesting dependent on the achievement of performance conditions over a three-year period. Awards may be settled in cash, with the cash payment taking account of the share price movement during the vesting period. There is no award deferral for key senior management.

3 At the discretion of the Committee, awards may be adjusted before delivery (malus) or reclaimed after delivery (clawback) if an adjustment event occurs. Such circumstances may include: a material misstatement of the Group’s audited financial results; a material miscalculation of any relevant performance measure; a material failure of risk management or regulatory compliance by a relevant entity; material reputational damage to the Group; or the participant’s material misconduct. Management within the Group is also subject to malus and clawback provisions based on the adjustment events defined above.

Previous awards

The Company has authority to honour any commitments entered into with current or former directors before they became a director (such as the vesting or exercise of past share awards) or before the policy came into effect, including those granted by companies in the Group prior to that company becoming part of the Group (such as the Mediclinic International Limited Forfeitable Share Plan).

THE COMMITTEE CONSIDERS PAY AND EMPLOYMENT CONDITIONS OF EMPLOYEES IN THE GROUP WHEN DETERMINING THE EXECUTIVE DIRECTORS’ REMUNERATION POLICY

When considering executive directors’ base compensation, the Committee considers market-related salary levels, including bonuses of appropriate comparable companies. Further, the Committee reviews base compensation and STI arrangements for the management team, to ensure that there is a coherent approach across the Group. The STI arrangements operate on a similar basis across the management team. The key difference in the policy for executive directors is that remuneration is more heavily weighted towards long-term variable pay than other employees. This ensures there is a clear link between the value created for shareholders and the remuneration received by the executive directors.

The Committee does not formally consult with employees in respect of the design of the executive directors’ Remuneration Policy, although the Committee will keep this under review.

REMUNERATION SCENARIOS FOR THE EXECUTIVE DIRECTORS

The total remuneration for each executive director that could result from the Remuneration Policy in 2018/19 is shown below under three different performance levels, being: below threshold (when only fixed pay is receivable), on-target and maximum. The chart highlights how the performance-related elements of the package comprise a significant portion of total remuneration at on-target and maximum performance. Remuneration is earned in pounds sterling and South African rand. The rand portion of the remuneration package is translated into pounds sterling at a rate of £1: ZAR17.22.

EXECUTIVE DIRECTOR REMUNERATION (£‘000)

Assumptions
1 Salary levels apply as at 1 April 2018.
2 The value of taxable benefits is based on actual amounts as at 31 March 2018 of benefits and cash allowances.
3 The value of pension contribution is based on a Company contribution of 9% of base salary.
4 Minimum performance assumes no award is earned under the STI plan and no vesting is achieved under the LTIP; at on‑target, 60% of a maximum bonus is earned under the STI plan and 63% of the maximum award opportunity is achieved under the LTIP; and at maximum, full vesting occurs under both plans.
5 Share price movement and dividend accrual have been excluded from the above analysis.

DIRECTORS’ RECRUITMENT AND PROMOTIONS

The policy on the recruitment or promotion of an executive director takes into account the need to attract, retain and motivate the best person for each position, while ensuring close alignment between the interests of shareholders and management:

  • If a new executive director is appointed, the Committee will seek to align the remuneration package with the Remuneration Policy approved by shareholders.
  • New executive directors will participate in the STI plan and LTIP subject to the same limits as set out in the policy.
  • Depending on the timing of the appointment, the Committee may deem it appropriate to set different STI performance conditions to that of the current executive directors for the first performance year of appointment.
  • An LTIP award can be made following an appointment (assuming the Company is not in a closed period).
  • Flexibility will be retained to set base compensation at the level necessary to facilitate hiring candidates of appropriate calibre in external markets and make awards or payments in respect of deferred remuneration arrangements forfeited on leaving a previous employer. In terms of remuneration to compensate for forfeited awards, the Committee will look to replicate the arrangements being forfeited as closely as possible and, in doing so, will take account of relevant factors including: the nature of the deferred remuneration, performance conditions and the time over which they would have vested or been paid. The face and/or expected values of the award(s) offered will not materially exceed the value ascribed to the award(s) foregone.
  • For an internal appointment, any incentive amount awarded in respect of a prior role may be allowed to vest on its original terms or be adjusted as relevant to take into account the appointment. Any other ongoing remuneration obligations existing prior to appointment may continue.
  • The Committee may agree that the Company will meet certain relocation and incidental expenses as appropriate.
  • For an overseas appointment, the Committee will have discretion to offer cost-effective benefits and pension provisions which reflect local market practice and relevant legislation.

For the appointment of a new Chairman or non-executive director, the fee arrangement will be set in accordance with the approved Remuneration Policy at that time.

DIRECTORS’ SERVICE AGREEMENTS AND PAYMENT FOR LOSS OF OFFICE

The Committee seeks to ensure that the contractual terms of the executive directors’ service agreements reflect best practice. It is the Company’s policy that all executive directors have rolling contracts that can be terminated by the employee in line with his service agreement. Executive directors service agreements are terminable on six months’ notice. Consistent with the UK Corporate Governance Code, all directors are subject to re-election by shareholders at each AGM.

In circumstances of termination on notice, the Committee will determine an equitable compensation package, having regard to the particular circumstances of the case. The Committee may require notice to be worked or to make payment in lieu of notice or to place the director on garden leave for the notice period. Such a decision is made to protect the Company’s and shareholders’ interests.

In case of payment in lieu of notice or garden leave, the salary, benefits and pension will be paid for the period of notice served on garden leave or paid in lieu of notice. If the Committee feels it would be in shareholders’ interests, payments will be made in phased instalments. In the case of payment in lieu of notice, payments will be subject to be offset against earnings elsewhere.

An STI payment may be made in respect of the period of the incentive year worked by the director. There is no provision for an amount in lieu of bonus to be payable for any part of the notice period not worked. The bonus payment will be scaled back pro rata for the period of the incentive year worked by the director and would remain payable at the normal payment date.

Awards held under the deferred STI and LTI arrangements are subject to the rules containing discretionary provisions setting out the treatment of awards where a participant leaves and is designated as a good leaver. In these circumstances, a participant’s awards will not be forfeited on cessation of employment and instead will continue to vest on the normal vesting date or earlier at the discretion of the Committee, subject to the performance conditions attached to the relevant awards. The awards may be scaled back pro rata for the period of the vesting period worked by the director.

In addition to the above payments, the Committee may make any other payments determined by a court of law in respect of the termination of a director’s contract or may pay any statutory entitlements or any sums to settle or compromise claims in connection with a termination (including, at the discretion of the Committee, reimbursement for legal advice and provision of outplacement services) as necessary.

In the event of a change of control, all unvested awards under the deferred STI and LTIP arrangements will vest, to the extent that any performance conditions attached to the relevant awards have been achieved. The awards will, where the Committee dictates, be scaled back pro rata for the period of the performance period worked by the director. Executive directors may, on nomination from Mediclinic International plc, take on outside appointments, however, all fees will be retained by the Company. The dates of the executive directors’ service contracts are:

The service contracts are available for inspection during normal business hours at the Company’s registered office, and at the AGM.

NON-EXECUTIVE DIRECTORS’ TERMS OF ENGAGEMENT

Non-executive directors do not have service contracts but instead have letters of appointment setting out the terms under which they provide their services to the Company. The dates of their original appointment are shown in the table below. Non-executive directors are normally appointed for an initial period of three years that, subject to review, may be subsequently extended for further such terms. Any third term of three years would be subject to rigorous review. Non-executive directors’ appointment is terminable by three months’ notice on either side. In accordance with the UK Corporate Governance Code, all directors are subject to annual election or re-election by shareholders at the Company’s annual general meetings.

In 2018 all non-executive directors, except Dr Edwin Hertzog and Mr Jannie Durand, were considered to be independent of the Company. The terms of engagement are available for inspection during normal business hours at the Company’s registered office, and at the AGM.

REMUNERATION FOR THE REPORTING PERIOD

This part of the report was prepared in accordance with Part 4 of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 and 9.8.6R of the Listing Rules. The report will be put to an advisory shareholders’ vote at the 2018 AGM. Certain specified information in the Directors’ Remuneration Report was audited.

CONSIDERATION OF DIRECTORS’ REMUNERATION

The Committee is responsible for determining and agreeing with the Board the policy on executive directors’ remuneration, including setting the over-arching principles, parameters and governance framework and determining the initial remuneration package of each executive director. In addition, the Committee monitors the structure and level of remuneration for the senior management team and is aware of pay and conditions in the workforce generally. The Committee ensures full compliance with the UK Corporate Governance Code in relation to remuneration.

The Committee’s main responsibilities are to:

  • determine and agree with the Board the Company’s Executive remuneration strategy and policy;
  • determine individual remuneration packages and terms of employment within that policy for the executive directors, members of the Executive Committee and others division executives;
  • oversee the operation of the Company’s incentive schemes, including designing and setting performance measures and targets for short-term and long-term incentive schemes;
  • consider major changes in employee remuneration in the Group;
  • select and appoint consultants to advise the Committee;
  • report to shareholders through annual reports; and
  • make recommendations to the Board on the fees offered to the Chairman, after taking independent professional advice,

all of which it carries out on behalf of the Board.

MEMBERS AND ACTIVITIES OF THE REMUNERATION COMMITTEE

The composition of the Committee complies with the Code, which provides that the Committee members should comprise at least three independent non-executive directors. Mr Petersen (Committee Chairman), Prof Dr Leu and Mr Keating (all independent non-executive directors) held office during the year. The Company Secretary acts as secretary to the Committee.

None of the Committee members have day-to-day involvement with the business, nor do they have any personal financial interest in the matters to be recommended. When considering the fees for non-executive directors, the Chairman of the Board consults the executive directors. The proposed fees of the Chairman of the Board were considered by the Committee.

The Committee met seven times during the year. Including routine monitoring and approval activities, the material issues discussed are summarised below:

The Committee Chairman presents a summary of material matters to the Board and minutes of Committee meetings are circulated to all directors. The Committee reports to shareholders annually in this report and the Committee Chairman attends the AGM to address any questions arising.

REMUNERATION COMMITTEE MEETING ATTENDANCE

The number of formal Committee meetings held during the financial year and the attendance by each member is shown in the table below. The Committee also held informal discussions as required.

Mr Durand and/or his alternate Pieter Uys attend Committee meetings by invitation but are not voting members. The Committee meetings are also attended by the CEO, Chief Human Resources Officer, the Group Executive: Reward, the Company Secretary and representatives from New Bridge Street by invitation, all of whom provide material assistance to the Committee. None of the aforementioned attend as a right, nor do they attend when their own remuneration is being discussed.

Notes
1 The composition of the Committee is shown as at 31 March 2018.
2 The attendance reflects the number of scheduled meetings held during the financial year. Four additional ad hoc Committee meetings were held during the financial year to deal with urgent matters; the majority of members made themselves available at short notice for these meetings. Three Committee meetings were held between the Company’s financial year-end and the Last Practicable Date; all three were attended by all Committee members.
3 Prof Dr Leu will retire as a director of the Company, and consequently as a member of the Committee, at the conclusion of the Company’s 2018 AGM. It is the intention that the composition of the Committee will be reviewed in advance of his retirement, to ensure it continues to meet the requirements of the Code.

PERFORMANCE AND PAY

Performance graph and CEO pay

The graph below shows the value at 31 March 2018 of £100 invested in the Company on inception on 21 June 2013, compared with the value of £100 invested in the FTSE 100 Index on the same date. The intervening points are the financial year ends prior to the date of the Combination on 15 February 2016 and the financial year ends since.

The FTSE 100 was used as a comparator as this is the Company’s primary comparator group.

TOTAL SHAREHOLDER RETURN

Source: FactSet

The table below shows the total remuneration for the CEO over the period since inception. Consistent with the calculation methodology for the single figure for total remuneration, the total remuneration figure includes the total STI award based on that year’s performance and the LTIP award based on the three-year performance period ending in the relevant year.

Note
1 STI and LTIP percentages represent a percentage of the maximum potential award.

SINGLE TOTAL FIGURES FOR DIRECTORS’ REMUNERATION

DIRECTORS’ REMUNERATION (audited)

Notes
1 South African rand remuneration was translated into pounds sterling at a rate of £1: ZAR17.221 at 31 March 2018 and £1: ZAR18.41 at 31 March 2017.
2 Mr Myburgh was appointed as a director on 1 August 2016 and his remuneration for 2016/2017 covers the period from employment date to the end of the reporting period.
3 Mr Durand’s fees are paid to Remgro and include services rendered by Mr Durand or his alternate, Mr Pieter Uys.
4 Dr Harvey joined the Board from 3 October 2017 and Dr Al Hashimi joined 1 November 2017. Their remuneration for 2017/18 covers the period from appointment date to the end of the reporting period.

ADDITIONAL REQUIREMENTS IN RESPECT OF THE SINGLE TOTAL FIGURE TABLE (audited)

The sections that follow provide further detail of the remuneration shown in the table above.

SALARIES FOR THE REPORTING PERIOD (audited)

Base salaries are reviewed in April each year. The Committee considers the remuneration packages in the context of other London-listed companies of similar size and international footprint. Remuneration levels were set with reference to local South African pay levels and a broader international comparison, however, given the widening geographic footprint of the Group, the Committee placed greater weight on the international comparators.

None of the executive directors received any adjustments to their salary over the reporting period.

Mr Meintjes’ salary for the reporting period was £559 858 and Mr Myburgh’s salary was £373 431. All figures were converted to pounds sterling at a rate of £1: ZAR17.22 at 31 March 2018.

BENEFITS AND PENSION FOR THE REPORTING PERIOD (audited)

The benefits of Mr Meintjes and Mr Myburgh include private medical insurance, life insurance and reimbursements for reasonable business-related expenses (e.g. travel, accommodation and subsistence). In some instances, the associated tax was borne by the Company.

The executive directors participated in the Mediclinic Southern Africa defined contribution fund and received a 9% company pension contribution, in line with the Remuneration Policy.

None of the executive directors have prospective rights to a defined benefit pension.

Non-executive directors were reimbursed for reasonable business-related expenses (e.g. travel, accommodation and subsistence) and, in some instances, the associated tax was borne by the Company. They receive no other benefits and do not participate in short-term or long-term reward schemes.

Short-term incentive FOR THE REPORTING PERIOD (AUDITED)

Achieved bonuses were determined based on the Group achieved EBITDA performance and operating divisions subset performance indicators, which comprise financial and operational objectives, including measures of clinical excellence. Achieved EBITDA for the purposes of the executive directors’ STI comprises Group adjusted EBITDA calculated based on budgeted foreign exchange rates (£12.0m) excluding the impact of STI bonus accruals for the Group’s key management and employees (£15.3m) and subject to further amendment by approval of the Remuneration Committee (£17.5m). In 2018, these further amendments included adjustments for factors not incorporated into the budget at the start of the year, including for instance the impact of new evolving regulatory changes and practices in Switzerland, the acquisition of Linde and the cost associated with setting up a Group Purchasing Organisation in Hirslanden.

The target is based on the sum of the respective divisions approved budgeted adjusted EBITDA.

The Group achieved EBITDA performance which sets the initial bonus outcome percentage. The non-achievement of subset performance indicators then gives rise to a reduction in this bonus percentage. The subset performance indicators relate to the three operating divisions, weighted relative to each division’s respective adjusted EBITDA contribution.

The performance indicators, targets and performance against the targets are set out below.

Note
The foreign exchange rate used for budget purposes was £1: ZAR17.17; £1: CHF1.25 and £1: AED4.56.

The STI achieved was 61.37% of the maximum bonus. The amount awarded to the executive directors is set out below:

Note
1 All figures are translated into pounds sterling at an exchange rate of £1: ZAR17.22 as at 31 March 2018.

The STI bonus payable for the reporting period will be paid in cash. 50% of the award will be deferred in shares for a period of two years. Deferred shares will be settled in cash, subject to continued employment. This deferral is not subject to any further conditions.

LTIP AWARDS VESTING IN THE REPORTING PERIOD TO EXECUTIVE DIRECTORS (AUDITED)

No LTIP awards to executive directors were due to vest in the reporting period.

LTIP AWARDS GRANTED IN THE REPORTING PERIOD TO EXECUTIVE DIRECTORS (AUDITED)

2017 LTIP

Note
1 Number of shares granted was based on the average middle-market quotation of an LSE Share during a period of 5 dealing days ending with the dealing day before the grant which was £8.07.

At grant, vesting of 60% of the award was based on adjusted EPS growth and the remaining 40% was determined by TSR, ranked relative to constituents of the FTSE 100 Index.

Adjusted EPS and relative TSR are considered to be the most appropriate measures of long-term performance, in that they ensure the executive directors are incentivised and rewarded for the adjusted financial performance of the Company and creating value for shareholders. The award is subject to clawback and malus provisions.

Adjusted EPS growth is measured by taking the compound annual percentage growth in adjusted EPS over the performance period.

TSR ranked relative to constituents of the FTSE 100 Index is measured by ranking and comparing the Company’s TSR to the relevant TSR targets.

Awards are denominated in shares, with vesting dependent on the achievement of performance conditions over a three-year period. Awards granted to the executive directors have a vesting period of five years from the date of grant. After this time, the value will be calculated by alignment to share price movement but settled in cash. Where a director has not yet met the share ownership guidelines, this cash must be used to purchase shares in the Company.

CHANGES TO THE BOARD

Dr Ronnie Van Der Merwe: New Chief Executive Officer

As announced on 27 November 2017, Dr Van der Merwe was appointed as the successor to the position of CEO designate to succeed Mr Meintjes as CEO of the Company on 1 June 2018. This follows the announcement made on 25 July 2017 that Mr Meintjes will retire from his position as CEO by no later than 31 July 2018.

As set out in the letter from the Remuneration Committee Chairman, Dr Van der Merwe’s remuneration arrangements as CEO are in line with the Group remuneration policy and in line with the package for Mr Meintjes in his final full year as CEO.

Dr Van der Merwe’s base compensation (inclusive of Board fees) has therefore been set at £558 198. Whilst the base compensation level is in line with Mr Meintjes for his final full year as CEO, it is recognised this level is positioned towards the bottom end of the market competitive range for the CEO of a company of similar size and complexity to that of Mediclinic. The Committee therefore intends to keep the remuneration arrangements for the CEO under review.

Dr Van der Merwe will be eligible to participate in the Company’s STI scheme and LTIP, designed to incentivise and reward the successful delivery of the business strategy and sustained shareholders value creation. His maximum award opportunity under the STI will be 150% of his annual salary, half of which will be subject to a compulsory deferral for a period of two years.

Awards under the LTIP are up to a maximum value of 200% of annual salary, with vesting subject to performance over a three-year period and an additional two-year holding period required, following vesting and prior to their release. In accordance with best practice, the STI and LTIP contain provisions that will allow the Company to recover or withhold value in the event of certain defined circumstances. Dr Van der Merwe’s service agreement may be terminated on six months’ notice by either him or the Company.

PAYMENTS TO FORMER DIRECTORS (AUDITED)

As reported in the 2017 Directors’ Remuneration Report of the 2017 Annual Report, Mr Craig Tingle retired as CFO on 15 June 2016.

In respect of the award made in 2014, under the Mediclinic International Limited Forfeitable Share Plan (“FSP”), where performance was tested at the time of the Combination, 27 700 awards were released to Mr Tingle on 1 June 2017. The value of the award vested was £220 057 which was calculated using the volume weighted average share price of the middle market quotation on the JSE for the period five days prior to vesting (1 June 2017), which was £7.94 and translated at the exchange rate at grant of £1: ZAR16.78 as at 1 June 2017. In respect of the award made in 2015, under the FSP, 19 816 awards will be released to Mr Tingle on 1 June 2018.

PAYMENTS FOR LOSS OF OFFICE (AUDITED)

There were no payments for loss of office in the year.

PERCENTAGE CHANGE IN REMUNERATION LEVELS

The table below shows how the percentage change in the CEO’s salary, benefits and bonus in the reporting period compared with the percentage change in the average of each of those components of pay for employees in South Africa in local currency. The Committee selected employees in South Africa, as these provide the most appropriate comparator as they are subject to the same inflationary conditions.

Note
1 The percentage change in the CEO’s salary, benefits and bonus is the annualised CEO’s 2017 local salary paid in ZAR as compared to the 2018 local salary, benefits and bonus paid in South African rand. The CEO received no adjustment to his salary over the reporting period.

RELATIVE IMPORTANCE OF THE SPEND ON STAFF COSTS

To place the directors’ remuneration in context with the Group’s finance, the Committee used the below comparison. The table below shows the spend on staff costs for the reporting period compared to the spend on staff costs in the previous reporting period, as disclosed in last year’s Directors’ Remuneration Report, compared to returns to shareholders over the same period:

Note
There were no share buybacks or other significant use of profit during the year.

DIRECTORS’ SHAREHOLDING AND SHARE INTERESTS (AUDITED)

The tables below set out the directors’ shareholding, including shareholding by persons connected to them, and share interests. There were no changes in the directors’ shareholding between the financial year end and the Last Practicable Date, being 23 May 2018. Full details of the directors’ shareholdings and share allocations are given in the Company’s Register of Directors’ Interests, which is open to inspection at the Company’s registered office during business hours.

The executive directors are required to build up a minimum shareholding in Mediclinic, as explained in the Directors’ Remuneration Report. Shares are valued for these purposes at the year-end-price, which was £6.02 per share as at 31 March 2018.

Notes
1 Unvested awards held under the LTIP are subject to performance conditions. Awards will be settled in cash and therefore are not taken into consideration as part of determining whether shareholding requirements have been met.
2 Unvested awards held under the Mediclinic International Limited FSP where performance has been tested but shares have not yet been released. Final vesting will take place on the original vesting date subject to continued employment. Awards are settled in JSE Shares.
3 Deferred STI shares, where performance has been tested, will be settled in cash and therefore are not taken into consideration as part of determining whether shareholding requirements have been met.

The shareholding in Mediclinic by non-executive directors is shown below:

Notes
1 As announced on 27 April 2018, on 8 and 10 January 2018, the Waledro Trust, a testamentary trust of which Dr Hertzog is the sole trustee, transferred its entire holdings in the Company to the beneficiaries of the trust at the cost price. Dr Hertzog is not a beneficiary of the trust.
2 Mr Uys is the alternate to Jannie Durand.
3 Dr Harvey joined the Board from 3 October 2017 and Dr Al Hashimi joined 1 November 2017.

There are no requirements for non-executive directors to hold shares, nor for any former director to hold shares once they have left the Company.

SHARE SCHEDULE DILUTION LIMITS

The Company is committed to protecting its shareholders’ interests and ensuring that the dilution of shares remains within a reasonable limit. In line with the Investment Association guidelines, the Company limits equity-based awards under its employee share plans to 10% of the Company’s issued share capital over a 10-year calendar period. These limits are consistent with the guidelines of institutional shareholders.

IMPLEMENTATION OF THE REMUNERATION POLICY FOR 2019

Base compensation

The Committee considers the remuneration packages in the context of other London-listed companies of similar size and international footprint. Remuneration levels were set with reference to local South African pay levels and a broader international comparison. Given the widening geographic footprint of the Group, the Committee placed greater weight on the international comparators.

Base salaries were reviewed in accordance with the Remuneration Policy, taking into account Company and individual performance, wider workforce comparisons, and market benchmarks of South African pay levels and London-listed companies of similar size and international footprint.

In line with South African employment practices, the Committee reviewed the base compensation for the current CEO, Mr Danie Meintjes, for the coming year and approved an increase of 4.7%, which was below the average increase for other employees of Mediclinic Southern Africa of 5.6%.

The Committee also reviewed the base compensation positioning for Mr Myburgh, who was appointed on a base compensation of £319 000 in August 2016. On appointment to the role, in line with best practice and in line with the positioning for the CEO, his base compensation was positioned towards the bottom end of the market competitive range to reflect that this was his first role as CFO of a UK listed company. Taking into consideration his performance since his appointment and the level of input he provides to the Executive Committee and Board in delivering business performance, the Committee agreed to a salary increase of 9.6%. Mr Myburgh’s new salary of £411 486 will remain towards the lower end of the market competitive range. Whilst the Committee recognises that such salary increases are not common in the current UK climate, given his performance since appointment and taking into account wage increases in the South African business, the Committee feels that the increase is in the best interests of the business.

Notes
1 Salaries are translated into pounds sterling at a rate of £1: ZAR17.22 at 31 March 2018 and £1: ZAR18.41 at 31 March 2017 as previously reported.
2 The percentage increase was calculated on the South African rand base compensation to ensure exchange rate fluctuations are eliminated.

Between 70% and 80% of the total potential remuneration offered to executive directors is subject to meeting performance conditions.

Details of Dr Van der Merwe’s salary from date of appointment as CEO can be found above.

STI 2019

The executive directors have a maximum STI opportunity of 150% (CEO) and 133% (CFO) of annual salary.

For executive directors, 50% of the achieved award will be deferred in shares for two years. Deferred shares may be settled in cash, subject to continued employment. Where awards are cash settled, and a director has not yet met the share ownership guidelines, this cash must be used to purchase shares in the Company. Dividends that accrue on the deferred shares during the vesting period may be paid in cash at the time of vesting.

The performance measure for the executive directors’ STI in 2018/19 will be calculated on the Group achieved EBITDA performance.

We do not publish details of the financial targets in advance since these are commercially confidential. We will publish achievement against these targets when we disclose bonus payments in the Annual Report, so that shareholders can evaluate performance against those targets.

The award will be subject to malus and clawback provisions.

LTIP AWARDS TO BE GRANTED IN 2018

The Committee intends to grant an LTIP conditional award to the executive directors in 2018, over shares with a value of 200% (CEO) and 150% (CFO) of salary.

Adjusted EPS and relative TSR are considered to be the most appropriate measures of long-term performance, in that they ensure the directors are incentivised and rewarded for the adjusted financial performance of the Group and creating value for shareholders.

Vesting of 60% of the award will be based on adjusted EPS growth and the remaining 40% will be determined by TSR measured relative to the constituents of the FTSE 100 Index over three years. Executive directors will be required to hold vested awards for two years. After this time, the value will be calculated by alignment to share price movement but settled in cash. Where a director has not yet met the share ownership guidelines, this cash must be used to purchase shares in the Company. Dividends that accrue during the vesting and holding periods will be paid in cash to the extent that awards have vested. Adjusted EPS and relative TSR are considered to be the most appropriate measures of long-term performance, in that they ensure the directors are incentivised and rewarded for the adjusted financial performance of the Group and creating value for shareholders.

An “underpin” applies, which allows the Committee to reduce or withhold vesting if the Committee is not satisfied with the adjusted operational and economic performance of the Company. The underpin evaluation includes consideration of environmental, social and governance factors, and financial performance.

Executive directors will be required to hold vested awards for two years. After this time, the value will be calculated by alignment to share price movement but settled in cash. Where a director has not yet met the share ownership guidelines, this cash must be used to purchase shares in the Company. Dividends that accrue during the vesting and holding periods will be paid in cash to the extent that awards have vested.

The Committee will keep the performance measures under review and may change the performance conditions for future awards if they are not considered to be aligned with the Company’s interests and strategic objectives. However, the Committee will consult with major shareholders in advance about any proposed material change in performance measures.

The award will be subject to clawback and malus provisions.

PENSION ENTITLEMENT

The executive directors participate in the Mediclinic Southern Africa defined contribution fund and will be eligible for a 9% Company pension contribution, in line with the Remuneration Policy.

FEES FOR THE CHAIRMAN AND NON-EXECUTIVE DIRECTORS

The Board Chairman’s remuneration is determined by the Committee. Non-executive directors’ remuneration is determined by the Board, based on the responsibility and time committed to the Group’s affairs and appropriate market comparisons. Individual non-executive directors do not take part in decisions regarding their own fees. Each non-executive director receives a fixed fee for their services based on their Board membership and membership of the Board committees. The Board Chairman fee is an all-inclusive fee, which includes Board committees and membership fees, where applicable.

Non-executive directors’ fees were reviewed against median fees paid to non-executive directors in companies of similar size and complexity to that of Mediclinic. In light of this review, the fee levels applicable from 1 April 2018 are shown in the table below.

Whilst the Committee recognises that such salary increases for the Board Chairman are not common in the current UK climate, the fees remain below the Committee’s assessment of an appropriate market level. In line with granting no increases to executive directors last year, there were also no adjustments to the Board Chairman fee and the non-executive directors’ fees in the reporting period. The fee increase from 1 April 2018 for the Board Chairman reflects our ongoing intention to move the Board Chairman fee to a market median positioning.

SHAREHOLDER VOTING AT THE AGM

The Remuneration Policy and the Directors’ Remuneration Report were approved with 95.95% and 96.25% votes in favour, respectively, at the Company’s AGM on 25 July 2017. The Remuneration Policy incorporated a number of changes, taking into account the principles of the UK Corporate Governance Code and the views of major shareholders and proxy agencies, as expressed during previous engagements on remuneration matters.

The following votes were received from shareholders:

ADVISOR TO THE COMMITTEE

During the year, the Committee and the Company retained an independent external advisor to assist them on various aspects of the Company’s remuneration as set out below:

The Committee considered the independence and objectivity of NBS. NBS provided assurances to the Committee that it has effective internal processes in place to ensure it is able to provide remuneration consultancy services independently and objectively. NBS confirmed to the Company that it is a member of the Remuneration Consultants Group and, as such, operates under the code of conduct in relation to executive remuneration consulting in the UK. The Committee is, following its annual review, satisfied that NBS has maintained independence and objectivity.

In April 2018, following a robust selection process, the Committee appointed Deloitte LLP to replace NBS as its independent advisor. In line with existing policy, this appointment is subject to an annual review. The Committee would like to thank NBS for the advice and support received since they were first appointed.

Signed on behalf of the Remuneration Committee.

Trevor D Petersen
Chairman of the Remuneration Committee

23 May 2018