Remuneration report

Introduction

The Board delegates responsibility for the oversight of the Group's remuneration practices to the South African and United Kingdom (UK) Remuneration Committees.

This report details Netcare's remuneration policy for executive and non-executive directors, and executive committee members in South Africa (SA).

Remuneration Committee

The Committee meets biannually and attendance for the year is shown on page 110 of the corporate governance report.

The members of the Committee for the year under review were:

• HR Levin (Chairman)
• APH Jammine
• MI Sacks (retired with effect 30 September 2011)
• SJ Vilakazi

APH Jammine and SJ Vilakazi are both independent non-executive directors. HR Levin is a not an independent non-executive director. However, the Board has deemed his position appropriate, given his extensive commercial and business experience, knowledge and skills. The independence of the committee will be bolstered with the appointment of T Brewer, an independent non-executive director, as of 1 December 2011.

The Group Chief Executive Officer (CEO) and the Group Human Resources Director attend meetings by invitation and are not present when matters relating to their own remuneration are discussed. The Group Company Secretary or such approved nominee acts as the secretary for the Committee.

The role of the Committee is set out in written terms of reference and includes the following:

• Developing and implementing a philosophy on remuneration practices within the Company;
• Making recommendations to the Board in respect of the general remuneration strategy for the Company;
• Ensuring competitive reward strategies and programmes are in place to facilitate the attraction, retention and motivation of senior executives and managers in support of the Company's strategic objectives;
• Approving the criteria for assessing performance of executive directors and executives;
• Appraising the performance of the Group CEO annually and determining the appropriate level of remuneration in respect of the Group CEO and his direct reports;
• Monitoring and reporting to the Board in respect of outcomes of the remuneration review for executives;
• Reviewing and making recommendations to the Board on the level of remuneration for non-executive directors; and
• Suitable benchmarking of remuneration.

The Committee members have full access to all financial information contained in the books and records of the Company, including personnel records for those employees for whom the Committee makes remuneration recommendations.

The Committee may appoint external consultants for the purpose of obtaining salary survey information and for assisting in the conduct of any review. The Committee may also consult with the Company's attorneys and its auditors where necessary. In addition, the Committee is empowered to obtain the assistance of the Group Human Resources Director in obtaining relevant information.

Remuneration policy

The remuneration policy is aimed at encouraging sustainable performance based on a values-driven organisational culture and providing incentives for employee attraction, motivation and retention. The demands of the business dictate that Netcare should at all times attract and have in its employ exceptional individuals who perform at the highest level. Remuneration, reward and recognition play a key role in this process and is inculcated in the remuneration policy.

The remuneration policy has the following main objectives:

• Recruiting and retaining high quality employees in order to achieve Netcare's strategic goals;
• Ensuring that all employees are recognised and rewarded for their performance in a fair, equitable and consistent manner;
• Ensuring that remuneration and benefits provided to employees are competitive within the healthcare industry;
• Recognising the basic needs of employees and ensuring that compensation levels consistently address the cost of living and inflation;
• Rewarding employees for achieving predetermined corporate, business unit and personal performance targets to ensure ongoing alignment with shareholder interests; and
• Ensuring that employee costs are within budget as determined by the Group Executive Committee and are thus sustainable.

Netcare is committed to creating a strong performance culture that drives performance over and above the expectations of shareholders and the market. Accordingly, incentive programmes are designed to reward individual, team and group performance and ensure the alignment of the efforts and outputs of management with the strategic objectives of the Company. The long-term sustainability of Netcare is an underlying principle in determining remuneration. The Remuneration Committee and Board are satisfied that the financial targets do not encourage an inappropriate level of risk taking to achieve the performance targets set. The remuneration policy will be subject to a non-binding advisory vote at the annual general meeting of shareholders in January 2012.

Remuneration structure

Executive remuneration

The table below summarises the different remuneration elements of the executive directors' and executive committee members' packages.

Summary of executive remuneration structure

Fixed remuneration

Guaranteed package

Netcare aims to remunerate its employees at the market median while taking into account individual responsibilities and performance. Guaranteed remuneration packages are benchmarked against the market every three to four years. Guaranteed pay includes salary, employee benefits (such as retirement funding and medical aid contributions), Group life cover, funeral cover and disability insurance.

The guaranteed remuneration is reviewed annually and increases take effect in March. Annual increases are performance and market related, taking into account factors such as the prevailing economic conditions, inflation, Company performance and affordability.

Details of the executive directors' and prescribed officers' guaranteed packages can be found in note 36 of the Group annual financial statements.

Variable pay

Short-term incentives

Executives and senior management participate in an annual short-term incentive plan which delivers a cash bonus based on Netcare's achievement of financial targets and on strategic and personal performance objectives set annually. The Remuneration Committee approves the incentive targets annually, which are based on a combination of the following broad Company measurements combined with specific strategic objectives in SA:

• Earnings before interest, tax, depreciation and amortisation (EBITDA);
• Cash conversion and other financial and efficiency parameters;
• Patient care feedback;
• Staff satisfaction feedback; and
• Transformation targets.

The maximum bonuses that may be earned by executives and senior management as a percentage of total annual, guaranteed package (excluding Company contributions to retirement funding and medical aid as well as cellular phone allowances) are as follows:

• Group CEO – 75%
• Executive Committee members – 60%
• Other executives/ senior mangement – 50%

Medium-term incentives

The Executive leveraged bonus scheme is a core element of the retention strategy of executives that aligns the interests of shareholders with those of executives. The Remuneration Committee has, from time to time, approved awards under this scheme. The current scheme is due to run until 30 November 2012 and is not envisaged to be repeated. Other alternative incentives will be explored in future.

Details of the Executive leveraged bonus scheme can be found in note 37 to the Group annual financial statements. Details of the executive directors' and prescribed officers' phantom shares, vesting dates and strike prices are presented in note 36 to the Group annual financial statements.

Long-term incentives

Long-term incentives are offered through participation in the Netcare Share Incentive Scheme, intended to reward improved, sustainable business performance and create alignment with shareholder interest over the longer term. Executives and senior management are given the opportunity to own shares in Netcare. Share options granted vest in equal amounts over five years commencing on the second anniversary of the grant date. Share options are granted at the discretion of the Remuneration Committee, taking into account management's recommendations.

Details of the Netcare Share Incentive Scheme and can be found in note 37 to the Group annual financial statements. Details of the executive directors' and prescribed officers' share options in terms of the Netcare Share Incentive Scheme are presented in note 36 to the Group annual financial statements.

Dilution

The potential dilution that could occur if all the share options are implemented under the Netcare Share Incentive Scheme is addressed in note 29 to the Group annual financial statements.

Service contracts

Executive directors are not employed on fixed-term contracts and have standard employment service agreements with current notice periods of three months. RH Friedland is restrained from competing with Netcare for a six-month period should he terminate his employment with the Company.

Executive remuneration details

The remuneration relating to the Company's prescribed officers is in terms of the requirements of the Companies Act No 71 of 2008.

Summarised details of the executive directors' and prescribed officers' remuneration can be found in the table below.

Further details of the executive directors' and prescribed officers' remuneration can be found in note 36 to the Group annual financial statements.

Executive and prescribed officers' remuneration for the years ended 30 September 2010 and 2011

1 The short-term incentives include the amounts approved in respect of the 2010 financial year which are payable in the following year.
2 Resigned 31 July 2011.
3 RH Friedland has contributed 20% of his post tax remuneration for the year to a variety of charitable organisations and causes or to individuals in need of assistance.
4 Effective 1 August 2011.

Non-executive directors' remuneration

Non-executive directors receive a fixed level of remuneration for their services based on their participation in Board meetings and other committees. King III requires non-executive directors to be paid an attendance fee and a base fee. Netcare has elected to pay the non-executive directors a fixed fee for services rendered, on the basis that the services of directors extend beyond the boardroom and are therefore not confined to just attendance at meetings.

Non-executive directors do not qualify for participation in any share or incentive schemes.

The remuneration of non-executive directors is reviewed annually by the Remuneration Committee and recommendations for increases are made to shareholders at the annual general meeting for consideration and approval.

The non-executive directors' fees for the year ended 30 September 2011 are shown in the table below, together with the fees for the year ended 30 September 2010, and the proposed fees for the year ending 30 September 2012. The average increase is approximately 7%, which is consistent with the increasing demands faced by non-executive directors in respect of personal liability and ongoing regulatory demands.

Non-executive directors' remuneration details

Further details of payments made to non-executive directors for the years ended 30 September 2010 and 2011 can be found in note 36 to the Group annual financial statements.

Summary of UK remuneration structure

The UK Remuneration Committee is chaired by Sir PO Gershon. The Committee reviews and sets General Healthcare Group’s (GHG) remuneration strategy, salary and benefit levels, to ensure competitive remuneration. It also monitors the management of equity arrangements.

The remuneration elements in the UK consist of the following:

Guaranteed package

The guaranteed package is similar to that of SA. Guaranteed remuneration is reviewed annually and increases take effect in October.

Short-term incentives

The short-term incentives are similar to those of SA.

The Committee approves the incentive targets annually, which are based on a combination of the following four key UK measurements combined with specific strategic objectives:

• Revenue;
• Earnings before interest, taxation, depreciation and amortisation (EBITDA);
• Cash; and
• Patient satisfaction scores.

The maximum bonuses that can be earned by executives and management as a percentage of total guaranteed package excluding company contributions to retirement funding and medical insurance is as follows:

• CEO – 75%
• Executive Committee members – 50%
• Senior mangement – 45%

Long-term incentives

Two equity-based long-term incentive programmes were in place for senior executives, both of which are now fully vested. Proposals are being considered for a new cash-based long-term incentive scheme to cover a broad management population in the UK business.