25 April 2012

Standard Bank Group releases its 2011 annual integrated report



Standard Bank Group today announced the release of its 2011 annual integrated report. This is the bank's second annual integrated report which aims to provide a succinct and balanced view of the organisation and its performance in 2011. The report will be posted by registered mail to shareholders today, as required by the South African Companies Act, and is also available on the group's investor relations website at: http://annualreport2011.standardbank.com/

Remuneration
The chairman of the group's remuneration committee, Mr Ted Woods, has written a letter to shareholders, which appears in full below.

In his letter Mr Woods states that: "Rewards to bankers are of deep concern to shareholders, regulators and taxpayers across much of the world. Correctly, a spotlight is on remuneration that is inappropriately high when measured against sustainable value created.

"Each year remco performs detailed evaluations of the performances of the group chief executive, the deputy chief executives and other senior executives. Criteria emphasise a range of financial performance measures, but also include sound judgement, integrity, human leadership, innovation and delivery against board-approved strategy. We do not slavishly correlate with current year performance, but analyse multi-year evidence. Remco's decisions on senior executive remuneration are anchored in this process.

"The group chief executive was rewarded no annual incentive in the banking environments of 2009 and 2010. Remco members were unanimous in resolving that this was no longer appropriate in 2011. A high standard of excellence has characterised the chief executive's leadership of your group in remco's evaluation, and this reflects in variable remuneration awarded to Jacko Maree in 2011. Your board of directors fully endorses this assessment."

The Remuneration report states that: "Remco believes that the setting of performance criteria needs to balance the desire for consistent financial growth with the recognition of the inherent complexity and diversity of the group's operations. Remco incorporates both quantitative and qualitative measures into performance criteria. Variable remuneration is not linked to revenue or profit targets in a formulaic way. The incentive award for senior executives is subject to remco's assessment of performance against various predetermined criteria. As a general principle these criteria are weighted as follows:

  • 70% financial (against a range of financial metrics, together with delivery of financial objectives related to strategic initiatives); and
  • 30% non-financial (targets cover qualitative aspects of leadership and delivery against board-approved strategy).
"The financial criteria applied for 2011 included performance against earnings growth objectives, achieving rigorous cost control targets and increasing return on equity. In this context, the group's headline earnings per share increased by 20%, costs were flat and ROE increased to 14.3%."

The group has improved its disclosure this year by including the value of long term incentives awarded after the year end (but in respect of the 2011 year). The current fair value of option type share incentive awards was established by performing a Black - Scholes valuation, assuming all conditions are met over the vesting period. This has been added to fixed remuneration, cash bonuses and deferred bonuses to provide a complete and transparent view of total remuneration awarded.

For the 2011 year, the Jacko Maree earned fixed remuneration of R6.9 million. His variable remuneration consisted of a cash bonus of R8.8 million, a deferred bonus of R9.0 million which vests over the next three and a half years and a long term incentive currently valued at R2.5 million which is subject to performance conditions and vests over the next five years. The deferred bonus and long term incentive are linked to the future growth in the Standard Bank share price. The total of these elements amounts to R27.2 million. Jacko Maree did not receive a cash bonus, deferred bonus or long term incentive award for 2010.

Letter from the chairman of the group's Remuneration Committee

Dear Shareholder
Rewards to bankers are of deep concern to shareholders, regulators and taxpayers across much of the world. Correctly, a spotlight is on remuneration that is inappropriately high when measured against sustainable value created.

Two issues, among many, are sharply highlighted. Firstly, remuneration designs and levels of pay affect human motivations and decisions, and consequently, risk outcomes that are ultimately borne by shareholders. Pay must therefore reflect value delivered, adjusted appropriately for risk assumed. This is not negotiable.

Secondly, risk in a bank is also shaped by the calibre of human abilities that the bank can attract and retain. Top level financial skills are in demand globally, and the price for such talent is a function of supply and demand. The cost to a bank and its stakeholders of losing highly skilled and experienced people should not be downplayed. Remuneration scheme designs and levels of pay must therefore be competitive in the international marketplace.

Conservatism and competitiveness confront each other in banking remuneration. Standard Bank has not been constructed upon a bonus-centric culture with all its distortions. It rewards good people well, but strives to build teams of people who are energised by the strategic potential and human values of the group. These are the foundations of intrinsic motivation and loyalty.

Loyalty is, of course, reciprocal. The group remuneration committee (remco) works to reward all our people in a manner that is fair to both the individual and to shareholders, that is competitive in the marketplace and acceptable to regulators. These are bedrock principles in our remuneration designs.

In this context, remco resolved in 2011 to commission an external assessment of the fairness and competitiveness of our deferred remuneration vehicles. Deloitte Consulting was mandated to conduct a full, groupwide review of those schemes.

The findings of that review, together with remco's own analysis, have led to improvements in our remuneration designs. I should like briefly to touch on several of those changes, although more details are given in the remuneration report that follows.

Senior executive personal shareholdings in Standard Bank Group effectively place our leaders in the same risk-reward environment as shareholders. Consequently, our key senior executives will, from 2012, be required to maintain shareholdings valued at least at the average of their last three years' total reward. This is a long-term requirement and shareholdings may be accumulated over time. Where valuation shortfalls occur, the full after-tax value of deferred compensation that vests will be applied in acquiring additional shares until the required shareholding is in place. This provision applies to incentive awards granted from March 2012.

These personal shareholdings will be in addition to the exposure our leaders have to the Standard Bank share price through deferred remuneration schemes. Remco believes that the principle underlying these requirements is correct at this time.

Our deferred bonus schemes, with some design amendments, remain the default vehicle for retaining deferred remuneration. Deferral percentages have been increased and standardised on a marginal percentage basis across the group, subject to local regulatory requirements. Vesting will now be in three equal tranches at 18, 30 and 42 months across all African-based employees, replacing a single vesting at 36 months.

'Clawback' of deferred remuneration, triggered in specific circumstances, continues unchanged.

From 2011 we give senior executives the choice at award date to have the value of their deferred remuneration, or part thereof, invested in the equity growth scheme (EGS), which is an option-type scheme, rather than in the deferred bonus scheme (DBS). Freedom for each executive to choose is, we believe, a positive and constructive feature.

As a shareholder, you may have a particular interest in the performance conditions attached to our EGS and group share incentive scheme (GSIS) awards to senior executives. The primary condition is that the group delivers real compound headline earnings growth over the vesting period. The purpose is clear. Those executives who are accountable for our group's performance should pay a personal price for low earnings growth.

But such conditionality can be a double-edged sword. Penalising strongly performing executives for unusually adverse external environments can erode motivation and morale. For this specific reason, failure to achieve real earnings growth over any vesting period triggers two consequences. Firstly, vesting is delayed by one year. Secondly, the period of the real compound earnings growth test is extended by one year. If that longer test fails, vesting is lost, subject to partial mitigation at remco's sole judgement should specific circumstances be present.

Each year remco performs detailed evaluations of the performances of the group chief executive, the deputy chief executives and other senior executives. Criteria emphasise a range of financial performance measures, but also include sound judgement, integrity, human leadership, innovation and delivery against board-approved strategy. We do not slavishly correlate with current year performance, but analyse multi-year evidence. Remco's decisions on senior executive remuneration are anchored in this process.

The group chief executive was awarded no annual incentive in the banking environments of 2009 and 2010. Remco members were unanimous in resolving that this was no longer appropriate in 2011. A high standard of excellence has characterised the chief executive's leadership of your group in remco's evaluation, and this reflects in variable remuneration awarded to Jacko Maree in 2011. Your board of directors fully endorses this assessment.

Feedback from shareholders and other stakeholders on our remuneration policies and practices is highly valued. One suggestion, for example, was that variable remuneration should be formulaically capped at a multiple of fixed remuneration. Another was that a ceiling should be placed on the ratio of the chief executive's pay to the average employee's pay. Such subjects are thoroughly analysed by remco members. Our objective is to take decisions in the best long-term interests of a sustainable, growing business, for the benefit of shareholders.

I trust that the remuneration report which follows will give you a clear, high-level understanding of our remuneration governance. The integrity of our remuneration system is paramount. Beneath that overarching demand, we seek to harmonise our people costs with our competitiveness for vital skills and the returns delivered to you and other stakeholders over time.

Yours sincerely,
Ted Woods
Chairman, remco
7 March 2012

The full remuneration report can be accessed on:
http://annualreport2011.standardbank.com/ensuring-our-sustainability/remuneration-report/

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