14.1.1 POST-EMPLOYMENT BENEFITS

Defined contribution plans

The group provides defined contribution retirement funds for the benefit of employees, the assets of which are held in separate funds. These funds are funded by contributions from employees and the group, taking account of the recommendations of independent actuaries. The group’s contributions to the defined contribution funds are recognised in profit or loss in the year to which it relates.

The group does not provide guarantees in respect of returns in the defined contribution funds.

Defined benefit obligations

A post-retirement medical contribution obligation exists for certain in-service and retired employees who are members of accredited medical aid funds. This benefit is no longer offered to employees. The liability is determined using the projected unit credit method. Remeasurements arising from experience adjustments and changes in actuarial assumptions are recognised immediately in other comprehensive income. Remeasurements recognised in other comprehensive income will not be reclassified to profit or loss. Net interest expense and other expenses related to the post-retirement medical contribution obligation are recognised in profit or loss.

14.1.2 SHORT AND LONG-TERM BENEFITS

The cost of all short-term employee benefits, such as salaries, bonuses, housing allowances, medical and other contributions, are recognised during the period in which the employee renders the related service.

The vesting portion of long-term benefits is recognised and provided for at financial year end, based on current total cost to company.

14.1.3 TERMINATION BENEFITS

Termination benefits are payable whenever an employee’s employment is terminated before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits.

The group recognises termination benefits when it has demonstrated its commitment to either terminate the employment of current employees according to a detailed formal plan without possibility of withdrawal or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. If the benefits fall due more than 12 months after the reporting date, they are discounted to present value.

14.1.4 EQUITY COMPENSATION BENEFITS

Senior management, including executive directors, and eligible employees participate in the LTIP and DBP incentive schemes.

The LTIP and DBP are treated as equity-settled share-based payment schemes with the fair value being expensed over the vesting period of the instrument with a corresponding increase in equity. The fair value of these schemes are determined at grant date and subsequently reviewed at each reporting period only for changes in non-market performance conditions and employee attrition rates applicable to each scheme.

Exxaro has an agreement with its subsidiary companies to charge the subsidiaries for the equity compensation share schemes granted to the subsidiaries’ employees.

The movement in equity in the company’s financial statements relating to the recharge of the share-based payments of subsidiaries is accounted for against investments in subsidiaries and is eliminated on consolidation for group reporting purposes.

Equity-settled instruments in respect of the Replacement BEE Transaction vested on the grant date, being 11 December 2017, resulting in the recognition of an equity-settled share-based payment expense in profit or loss.

In applying IFRS 2 Share-based Payment, management has made certain judgements in respect of the fair value option pricing models to be used in determining the various share-based payment arrangements in respect of employees, as well as the variable elements used in these models.

For share-based payments, estimates are made in determining the fair value of equity instruments granted. Assumptions are used in the valuation models and include assumptions regarding future dividend yield, risk-free rate, expected employee attrition rate, expected share volatility and expected option life.

BEE credentials valuation: in applying IFRS 2 management was required to make estimates and assumptions in determining the share-based payment expense. The share-based payment expense, amounting to R4 245 million, was calculated with reference to the requirements of IFRS 2 and the SAICA Financial Reporting Guide 2 Accounting for BEE Transactions. Since these options are not tradable, IFRS 2 requires that the fair value of these instruments be calculated using a suitable, market-consistent valuation model.

A Monte Carlo simulation model was selected in order to account for the path-dependency inherent in the transaction arising from the relationship between the share price and the strike price (the outstanding preference share liability balance at maturity after taking into account dividends used to repay the preference share liability and preference dividend). The valuation was based on 30% of Exxaro’s issued ordinary share capital being held by Eyesizwe at a spot Exxaro share price of R152.35 per share, being the closing share price as at 11 December 2017. Established derivative pricing theory requires the use of the underlying share value on the valuation date, and precludes the use of WATP (VWAP), for the purposes of measuring a sharebased payment expense and for this reason the closing share price was used. The model applied a term structure of dividend yields over the life of the transaction, using estimated dividend forecasts. The dividend term-structure used equated to an average continuously compounded dividend rate of 4.49% per annum. The model assumed an option life of five years, an average flat, continuous risk free rate of 8.02% and a historical share volatility of 41.20% as inputs into the valuation model. The model further assumed funding rates of 80% of Prime Rate for the preference share liability. The outstanding preference share liability balance, as at the valuation date, of R2 491 million was used as the starting point in modelling the outstanding preference share liability balance as at the maturity date of the transaction. Exxaro’s 24.9% interest in Eyesizwe was deducted from this value as an intercompany adjustment. The re-investment cost by the BEE Parties was subtracted from the share-based payment expense as this represented a cost to those shareholders for the participation in the Replacement BEE Transaction.

In applying IAS 19 Employee Benefits, management is required to make judgements when determining the classification of each scheme, such judgements include the identification as to the nature of benefits provided by each scheme.

For defined benefit schemes, management is required to make annual estimates and assumptions about the discount rate, future remuneration changes, employee attrition rates, administration costs, changes in benefits, medical cost trends, inflation rates, exchange rates and life expectancy. In making these estimates and assumptions, management considers advice provided by external advisers, such as actuaries.

14.3.1 RETIREMENT FUNDS

Independent funds provide retirement and other benefits for all permanent employees, retired employees and their dependants. At the end of the financial year, the main defined contribution retirement funds to which Exxaro was a participating employer were:

• Exxaro Pension and Provident Fund
• Iscor Employees’ Umbrella Provident Fund
• Mine Workers Provident Fund
• Sentinel Retirement Fund.

Bargaining unit employees pay a contribution of 8%, with the employer’s contribution of 15% to the above funds being expensed as incurred.

Other members generally pay a contribution of 7% with the employer’s contribution of 10% to the above funds being expensed as incurred.

All funds registered in South Africa are governed by the South African Pension Funds Act of 1956.

14.3.2 MEDICAL AID

The group and company contribute to defined contribution medical aid schemes for the benefit of permanent employees and their dependants who choose to belong to one of a number of employer accredited schemes. The contributions charged against income amount to R132 million (2017: R116 million).

14.3.3 SHORT-TERM INCENTIVES

The following schemes based on individuals, business unit, commodity and group-level performance are in place:

• Individual performance reward
• A two-tier performance incentive
  — On-target business unit incentive
  — Commodity business and group improvement incentive.

Individual performance reward

A short-term incentive scheme focused on the individual is used to augment the performance management process and retention strategy across junior to senior management levels of employment within the group.

The two-tier performance incentive

First tier

The first tier is a line-of-sight incentive based on achieving 100% of a combination of the business unit’s net operating profit and production targets and is currently equal to 8.33% of annual gross remuneration for all full-time employees of every business unit, commodity, services and corporate office department.

Second tier

The second tier is based on exceeding a combination of budgeted consolidated net operating profit and production targets by an improvement percentage at commodity business unit and group level. The second tier is profit-based and 30% of gains above budget are shared with employees.

14.3.4 EQUITY COMPENSATION BENEFITS

Equity compensation benefits are provided to selected employees through the following share-based payment schemes:

LTIP

An LTIP is a conditional award of Exxaro shares offered to qualifying senior employees of the group. The shares vest after three years subject to certain performance conditions being met. The extent to which the performance conditions are met governs the number of shares that vest. The LTIP is an equity-settled share-based payment scheme.

Participants to the 2018 and 2017 LTIP grant obtained the right, provided performance conditions are met, to receive a number of Exxaro shares. The vesting of the award is based on:

• 33.33% of HEPS of the group and is calculated for a minimum and maximum performance condition
• 33.33% of the TSR of the group and is calculated for a minimum and maximum performance condition
• 33.34% for achievement of environmental, safety and governance targets.

Performance between these targets will result in proportional vesting which will be calculated using a linear sliding scale between the minimum and maximum performance conditions. Grants have a vesting period of three years at which the performance conditions are calculated.

DBP

The aim of the DBP is to encourage executive directors and senior management to sacrifice a part of their bonuses for the purpose of acquiring shares in the company in exchange for an upliftment in the number of shares received. Participants may sacrifice a percentage of their (post-tax) bonus in exchange for Exxaro shares at the ruling market price. The pledged shares are then held in trust for a three-year period, thus until the vesting date of the matching award. At vesting date, the company will make an additional award of shares by matching the shareholding on a one-for-one basis (matching award). Participants will consequently become unconditionally entitled to both the original pledged shares as well as the matching award of shares.

A participant may at its election dispose of and withdraw the pledged shares from the scheme at any stage. However, if the pledged shares are withdrawn before the expiry of the pledge period, the participant forfeits the matching award. The DBP is an equity-settled share-based payment scheme.

Details of the schemes:

Fair value of equity compensation instruments

In determining the fair value of services received as consideration for equity instruments, measurement is referenced to the fair value of the equity instrument granted.

During the current year, three new DBPs and one new LTIP have been granted.

The conditional matching awards granted in terms of the DBP are the economic equivalent of granting an Exxaro share at no consideration, but without dividend rights for the period from the grant date to vesting date. Therefore, the value of the DBP is equal to the grant date share price less the present value of the future dividends expected to be granted over the term of the scheme, multiplied by the pledged shares in trust.

The value of the LTIP is the economic equivalent of granting an Exxaro share at no consideration, but without dividend rights for the period from the grant date to vesting date. Therefore, the value of the LTIP is equal to the grant date share price, less the present value of the future dividends expected to be granted over the term of the scheme. In determining the fair value, a Monte Carlo simulation model has been used to take into account the market vesting condition (TSR target). The non-market vesting conditions (HEPS and ESG targets) are taken into account when determining the number of options expected to vest.

Following the merger with Eyesizwe Proprietary Limited in November 2006 and the successful creation of Exxaro, the postemployment healthcare benefit which was provided to a group of continuation and in-service members on the Witbank Coal Medical Aid Scheme was honoured. During 2017, Exxaro Coal Mpumalanga Proprietary Limited withdrew from the Witbank Coal Medical Aid Scheme and the members were moved to the Discovery Health Medical Scheme and Bonitas Medical Aid Scheme. This benefit, which is no longer offered, applied to certain employees previously employed by Eyesizwe Proprietary Limited or Ingwe Coal and comprises a subsidy of contributions.

Exxaro Coal Mpumalanga Proprietary Limited’s contribution to the post-retirement medical aid benefit of retired employees for the year ended 31 December 2018 amounts to R8 million (2017: R8 million).

The obligation represents a present value amount, which is actuarially valued every two years. Any remeasurements are recognised in other comprehensive income.

The movement in the net defined benefit medical obligation over the year is summarised as follows:

14.5.1 REMUNERATION POLICY

The remuneration and nomination committee has a defined mandate from the board of directors aimed at:

• Ensuring that the chairman, directors and senior executives are fairly rewarded for their individual contributions to the group’s overall performance.
• Ensuring that the remuneration strategies and packages, including the incentive schemes, are related to performance, are suitably competitive and give due regard to the interests of the shareholders and the financial and commercial health of the group.

14.5.2 SUMMARY OF REMUNERATION

Retirement amounts relate to defined contribution retirement funds.

Retirement amounts relate to defined contribution retirement funds.

14.5.3 INTEREST IN EXXARO SHARES

(i) Number of shares

(ii) Percentages (direct and indirect)

There have been no changes in the directors’ interests in Exxaro shares between the end of the financial year 2018 and the date on which the annual financial statements were approved.

14.5.4 SHARE OPTIONS AND RESTRICTED SHARE AWARDS

The following options and rights in shares in the company were exercised or are outstanding in favour of directors and prescribed officers of the company under the company’s share option schemes:

Management SARs¹

Management share scheme — LTIP

Management share scheme — DBP