Remuneration report

Remuneration Committee Chairperson’s report

On behalf of the Remuneration Committee (Remco), I am pleased to present the FY2021 remuneration report.

The COVID-19 pandemic has created uncertainty and challenges for doing business. The nature of the impact of the pandemic on the broader socio-economic landscape has presented challenges to business. Business has had to make significant changes to deal with the operational challenges and the impact on business performance. Telkom has proactively looked to address and embrace the challenges and uncertainty of doing business to ensure it emerges as a stronger business post the pandemic.

Remco ensures our reward policy, plans and practices incentivise the right behaviour to deliver positive outcomes aligned with shareholders’ expectations in the short, medium and long term, and continues to ensure a financially sustainable business. The balance in this regard was tested as we sought to support the business over the pandemic. We ensure our remuneration policy and decisions are aligned to achieving the Group strategic business objectives, per our mandate.

Our remuneration levels are set to attract and retain the required talent, and to sustain overall Group performance. Talent retention remains a significant business challenge, especially in the current uncertain environment. Leadership stability and retention of critical specialist skills are key if Telkom is to successfully navigate the uncertain macroenvironment, and deliver on its sustainability and growth ambitions. The retention decisions taken this year will support and help ensure both leadership stability and a managed succession process.

In view of the retrenchments in Openserve, Telkom Consumer, BCX and Yep! (Yellow Pages), Remco supported the difficult decision taken to grant a 0% increase to all employees. Talent Share Awards* were issued to 82 employees as retention and no shares were allocated in terms of the approved LTIP scheme.

Remco responded to the impact of the COVID-19 pandemic to ensure that the Group Executives remained focused on investing for the future, seeking new revenue growth opportunities, while ensuring a strong focus on costs, capex expenditure and working capital management.

The Group embraced and adapted to the challenges and the impact of conducting business in a COVID-19 environment, including initiatives implemented with regard to remote work. Refer to the human capital report .

* We awarded talent shares for retention.

Remco believes the objectives outlined in the remuneration policy were met, and that all decisions complied with the policy.

After assessing remuneration factors including the number of Group-wide participants and with due cognisance of market conditions created by COVID-19, Remco approved the following policy and structure changes with respect to the STI for FY2021:

The hurdle rate to qualify for the STI was decreased from 95% to 85%
The STI pool was increased from 7.9% to 12% of actual PAT achieved
Financial triggers and measures remained unchanged with the addition of FCF as an additional measure

AGM voting results in favour of the:	FY2018 %	FY2019 %	FY2020 %
Remuneration policy	95.84	97.19	79.57
Implementation report	73.62	98.80	79.69

Key abbreviations

EBITDA	earnings before interest, tax, depreciation and amortisation
ESOP	employee share ownership plan
FCF	free cash flow
GP	guaranteed package
HEPS	headline earnings per share
LTIP	long-term incentive plan
PAT	profit after tax
ROIC	return on invested capital
STI	short-term incentive
TSA	talent share awards
TSR	total shareholder return

The Chairperson of the Board and Remco engaged with shareholders on the resolutions. In order to address the concerns raised by shareholders the following actions were taken:

Shareholders’ concerns

Remco feedback and actions

Shareholders raised the lack of FCF as a KPI for both the STI and LTI, given Telkom’s capex investment strategy.

Some shareholders believe FCF should also be included in the LTI, as it ensures discipline in terms of capex management. The telco industry is capital intensive, therefore management should be incentivised to manage capex and returns
The LTI currently includes TSR (50%), ROIC (25%) and HEPS (25%). Some shareholders believe the TSR weighting of 50% is too high and proposed that it be reduced and FCF be included as a fourth indicator. Although TSR is aligned to shareholder interests, some shareholders consider the weighting of 50% unfair to management, as it does not have control over the share price

A shareholder enquired whether the Board would make an adjustment for COVID-19 for TSR, as management does not have control over all the factors influencing TSR.

FCF was introduced in the STI scheme.

Remco reviews share award performance conditions annually based on strategic deliverables and the operating environment for a particular financial year. FCF is not considered as an LTI performance condition, at this stage
Long-term investment commitment of strategic shareholders is critical for business sustainability, therefore 50% weighting is placed on TSR. Vesting performance conditions are reviewed annually by Remco and will consider shareholders’ inputs.

Telkom is not planning to make any adjustments in relation to previously set LTI performance vesting conditions.

FY2021 AGM

As required by the Companies Act and recommended by King IV, the following resolutions will be tabled for shareholder voting at the AGM in August 2021 (Notice of annual general meeting):
Advisory vote on the remuneration policy (Notice of annual general meeting)
Advisory vote on the implementation report (Notice of annual general meeting)

Should the remuneration policy or the implementation report or both be voted against by more than 25% of the voting rights exercised, an engagement process will be initiated with the dissenting shareholders. This will be done on behalf of the Board by the Chairperson, Remco Chairperson and Group Company Secretariat to:

Ascertain the reasons for the dissenting vote
Appropriately address legitimate and reasonable objections and concerns raised

After engagement with shareholders, the Remco will deliberate on the inputs received and agree on the most suitable way to address legitimate and reasonable objections and concerns raised. The voting results, concerns and steps taken will be disclosed in the FY2022 integrated report.

Remco objectives for FY2022

Remco is committed to ensure our remuneration policy, practices and decisions support achieving the Group strategic business objectives, and that they:

Represent a fair and balanced remuneration mix between guaranteed/base pay, STI and LTI
Are designed to retain key Executive leadership, top talent and critical skills specialists
Reward superior performance

We will continue to review and align our policies to ensure all incentive structures adequately reflect market best practices, current trading conditions, business requirements and our responsibilities to shareholders and employees.

Key focus areas:

Reviewing the FY2022 STI plan to support/facilitate the evolution of Telkom’s operating model
Monitoring the remote work journey based on the remote work framework (refer to Human capital)
Reviewing remuneration practices and introducing appropriate compensation and reward models to support the remote work journey
Closely monitoring the succession plan for the Executive Directors and Group Executives
Proactively reviewing Telkom’s ability to retain key Executive leadership, top talent and critical skills specialists

Independent external advisors

Remco contracted PricewaterhouseCoopers Inc. (PwC) to share general market practice, which was enhanced by an analysis of the STI plans of the top 100 companies listed on the JSE. It included general guidance on the treatment of the STI in a COVID-19 environment. Remco also contracted the services of external service providers to review the complexities of Executive remuneration. Remco is satisfied with the independence and objective view of the service providers.

Closing remarks

We believe the remuneration policy achieved its stated objectives in FY2021. We will continue to comply with legislation and King IV requirements, while remaining conscious of disclosing sensitive information. In our view, this report complies with the King IV principle 14 disclosure requirements.

Thank you to our shareholders for their continued feedback and support. I look forward to our future interactions. To my fellow Remco colleagues, thank you for your valuable counsel and contribution during the year.

Rex Tomlinson
Chairperson
Remuneration Committee

The remuneration report relates to FY2021. It does not include subsequent events after year-end. The remuneration report is divided into two sections:

Section 1: Our remuneration philosophy, policy and framework for FY2021

Section 2: Implementation report and remuneration disclosure of Executive Directors, Non-executive Directors and other prescribed officers for FY2021