Reward presentation University of Cape Town – 29 September 2008

1. Reward presentation University of Cape Town – 29 September 2008 Kobus du Plessis Area Reward Manager British American Tobacco

2. the bigger picture Employee Benefits & Non-financial Rewards Market surveys Improved performance Pay levels & relatives Total remuneration Business Strategy Reward Strategy Pay structures Performance pay Job Evaluation/ Job Profiling Foundation Market and pay Organisational processes Performance Management & Employee Development/Structure

3. agenda • reward foundation • job profiling and evaluation • market & pay • market surveys • pay levels • variable pay • organisational processes • employee benefits • non-monetary benefits • performance management & employee development • pay for performance Total Reward

4. job evaluation OUTPUT PROCESS INPUT Job evaluation measures the OUTPUT, PROCESS and INPUT requirements of the JOB and NOT the performance of the individual in the job relative to these job requirements

5. job evaluation Paterson JE Manager Hay F Top Management 1801+ 225 - 275 Senior Management E 735 - 1800 175 - 224 Professionally qualified specialists and middle management D 371- 734 125 - 174 Skilled workers and junior management C 192 - 370 75 - 124 Clerical, equipment operating, junior supervisory staff B 85 - 191 25 - 74 Staff with narrow range of basic skills Up to 84 A 0 - 24

6. example - BATSA 7 The JE Manager system uses standardised questions and decision trees to arrive at JE Manager points 6 • Example: • Acquisition and Application of Theoretical Knowledge • X - Minimum level of knowledge required Y Q.7 5 N A B Q.2 4 Y N Q.6 C 3 N Q.5 Y Q.1 2 N 1 N A Y Q.3 Q.4 B

7. example - BATSA Job evaluation result produced by JE Manager…

8. example - BATSA The job evaluation process in BAT SA… Employee / Manager Job evaluation request & actual evaluation Notification JE Facilitator Job evaluation results approved Job evaluation results reviewed JE Audit Committee

9. agenda • reward foundation • job profiling and evaluation • market & pay • market surveys • pay levels • variable pay • organisational processes • employee benefits • non-monetary benefits • performance management & employee development • pay for performance Total Reward

10. More complex job Job Grade 34 Job Grade 33 Job Grade 32 Job Grade 31 Job Grade 30 Less complex job What do we need from salary surveys and how does this relate to job grades…. salary surveys • We need: • Lower quartile • Median • Upper quartile • 90th percentile • details per job grade JE Manager Salary Surveys By Survey Company

11. Defining the lower quartile, median, upper quartile and 90th percentile… salary surveys 90th Percentile Highest salary 90% of salaries exceeded Upper Quartile 75% of salaries exceeded Rank order of ALL salaries of ALL companies at a particular job grade Median 50% of salaries exceeded Lower Quartile 25% of salaries exceeded Lowest Salary

12. example - BATSA Intelligence Report 2007

13. pay levels & relatives • Market position • Which market – national, regional, sector, etc. • Date of data

14. pay levels & relatives • Pay scale principles • Number of grades • Number of different pay scales • Pay ranges, pay slope and pay overlap Different norms in different countries

15. pay levels & relatives • A successful pay structure…….. • reflects the company’s business strategy and culture • reflects the culture and pay practices of the country • rewards adequately for higher levels of job responsibilities, skills or competencies • reflects the target market • is affordable • adheres to sound design principles • provides a structure to reward performance

16. BATSA example Company Selected Pay range Market Comparatios 140 +40% High skills High performance 90th percentile 100 On standard skills and performance 75th Percentile Market anchor Low skills Low performance 90 -10% Median Job Grade X

17. variable pay Best Practice: Most Successful Incentives • Cascade/Aligned with important business goals to clarify how value is created • Measure what counts not what can easily be measured • Goal setting: Top-Down - Participants involved in ‘How To?’ • Results, not activity accomplishment • As measurement improves, performance focus shifts to more individual and less team, group, organisation-wide • Organisation: Did we get value? (ROI) • Participants: Were awards consistent with what I/we contributed? REGULAR COMMUNICATION

18. variable pay …alternative design options Primary Corporate Objectives Net turnover target Profit target Sales volume target Cash flow target Corporate Incentive Table Supportive Business unit Objectives Business Unit Incentive Table Supportive Individual Performance Objectives Individual Incentive Table

19. variable pay….share participation schemes Typically limited to senior executive teams and senior professional staff: Retention ability of scheme results from fact that employee would be leaving a monetary entitlement behind should he/she resign… % of Salary Converted to Share Allocation Share allocation transferred to individual following a vesting period

20. example – market trends

21. example - BATSA • Inclusiveness: • “Include everyone.” • Reward team results as opposed to individual results: • “In the emerging world of work, business success is increasingly determined by team effort rather than individual effort” • Line of sight: • “Ensure that employees see a link between what is required of them and the incentive payments.” • Simplicity: • “Keep it simple.” • Incentives must become part of the daily business agenda: • “Incentive targets and achievements against these targets must be common knowledge for employees and a source of daily inspiration for behaviour”

22. example - BATSA CompanyScore Card & Ratings Annual Incentive Payments 5 Bonusable Objectives Company Charter Line of Sight Objectives Functional Line of Sight Objectives Functional Charter Functional Score Card Individual Performance Contract Individual Performance Objectives Ensure employees see link between what is required of them and incentive pay Individual Performance Rating Individual Salary

23. example - BATSA 25% Net Turnover Profit 25% Sales Volume 25% Cash Flow 25% 30% Incentive Payment Year-to-date Threshold Target Stretch Override

24. agenda • reward foundation • job profiling and evaluation • market & pay • market surveys • pay levels • variable pay • organisational processes • employee benefits • non-monetary benefits • performance management & employee development • pay for performance Total Reward

25. employee benefits In deciding which benefits to offer, it is very important to understand the difference between the following two mayor benefit classes: • Core Benefits: • These are benefits where participation is a condition of employment for all employees. A core benefit is therefore compulsory for all employees and the core benefit offering by the company is largely determined by: • The company’s social responsibility view. • The social security benefits available from the state. • Non-Core benefits: • These are the balance of the benefits a company elects to offers to all staff or certain categories of staff. • The benefit selection offered is determined by the company’s need to be competitive on benefits relative to its key competitors for talent. • Where practical, the company would allow the employee to exchange a non-core benefit (partially or fully) for cash or another non-core benefit.

26. employee benefits Benefit design trend Traditional Design Salary * # + Benefits = Total (fixed) Package * + Incentives = Total Cost of Employment* Modern Design Flexible Package # + Core Benefits = Total (fixed) Package * + Incentives = Total Cost of Employment* Salary Car benefit Medical benefit Contribution to retirement fund In-service life cover Disability cover Annual incentive scheme * = Benchmark points to labour market # = Pensionable and incentive basis

27. Benefit selection and designModel design for medical benefits… Traditional Design Modern Design Fixed monthly amount as core benefit contribution, ($80) irrespective of plan chosen by employee and number of employee dependants Balance of premium required for chosen benefit plan: Gold ($120) Silver ($40) Bronze ($0) Company pays Employee pays Full or significant portion of premium No or insignificant portion of premium Choice of Medical Plans: Gold ($200) Silver ($120) Bronze ($80) Single Medical Benefit Plan

28. non-monetary benefits Proposed recognition channels within recognition mandate • Simple “thank you” cards that can be sent by anyone to anyone in the organisation • Small “thank you” gifts (e.g. book, music CD, flowers, etc.) with a capped maximum value – expenditure to be approved at management level • Achievement certificate / trophy presented at some form of awards ceremony. • Development opportunity – i.e. attendance of an innovation conference

29. BATSA example

30. pay for performance – BATSA example Competitive Comparatio Individual Exceed Market Maximum 140 + BAT SA Skills with market value Performance 10% of employees in SA market Up to 15% of BAT SA employees in order 125 Reward for skills with high demand in market Tools Market 90th Percentile 115 Performance management system (PerForm) 110 100 Market Anchor Market Upper Quartile 75th Percentile 100 Job evaluation (JE Manager) + Salary surveys 95 Succeed 90 Nearly There Inadequate

31. pay for performance Target performance distributions per performance rating…. The reality is that if more that 25 % of employees achieve exceed ratings, OUR STANDARDS ARE TOO LOW ! Nearly there & Inadequate Exceed Succeed 65% - 80% <10% 15% - 25%

32. Battlefield bonuses… • When should they be used… • Where performance of an individual/team goes well beyond an ‘exceeds’ performance. • Where an individual/team has contributed to a significant activity or project which was not in the work plan. They have delivered successfully on this significant unplanned item as well as delivering their agreed work plan. • They have made a significant personal sacrifice to manage a workload well above that normally expected, usually in the situation where significant unplanned activity appears during the year. • In other words, battlefield bonuses are there to recognise truly exceptional performance that goes significantly beyond the exceed benchmark • Quantum of Battlefield bonuses • In most circumstances the payment of 1 month’s salary would be appropriate • In very exceptional cases the payment of up to 3 month’s salary can be made

33. reward governance and communication Issue: who should make which remuneration decision in the company… Decision maker: • Board Compensation Committee (BCC) • Human Resources • Line Management • Employee Decision mandate: • Remuneration strategy and policy decisions • Research remuneration best practices in market and: • Motivate appropriate remuneration practices and levels for organisation to BCC • Train and guide line managers in application of approved remuneration practices. • Application of approved remuneration practices within constraints of an approvals framework. • Make-up of his/her total remuneration package within the constraint of his/her own total remuneration package value.

34. reward governance and communication Advantages and disadvantages of communication alternatives: • Written communication + Accessibility – can reach everyone with written communication. + Relatively cheap medium. - Information in written communication can get outdated very quickly. - When updated communication gets distributed, difficulty in recovering/disposing of outdated version. • Electronic medium + Information can easily be kept relevant and up to date at all times. + Easily facilitates add-on services – electronic payslips, decision support tools, etc. as well as e-mail question and answer facility for line managers and employees. - Access to information can be more difficult - not everyone might have access to a computer and even if computers are available (through for example employee computer kiosks), employees might still have difficulty in accessing information due to lack in basic computer skills. - Technology investment costs to put these facilities in place, could be significant. • R&B training: + Caters for personal interaction which can greatly facilitate learning and understanding. - Relatively expensive due to travelling. - Increases “down-time” in company - Have to take line managers and employees out of their jobs for the duration of the training. No ideal medium - Going forward, the role of the electronic medium is likely increase and grow in prominence.

35. BATSA example General reward communication on standard policies, procedures and practices. Ideally issue resolution 50% to 60 % Reward CoE to provide framework and content of interventions to ensure all stakeholders have access to appropriate information and support. This will include strategy, policies, procedures, appropriate guidelines and applicable training, education and information material. Line manager education and issue resolution up to 70% HR SC & BP - issue resolution 80% to 90% Reward CoE - issue resolution up to 100%

36. BATSA example

37. Road show – “Meet & greet”

38. Road show – “Meet & greet”

39. Road show – “It’s my life Movie 1 ”

40. Road show – “It’s my life Movie 1 ”

42. Road show – “Board game 2”

43. British American Tobacco Category Scores Ranked By Difference From Benchmark SOUTH AFRICA END MARKET (1603) vs. ISR SOUTH AFRICA NATIONAL NORM (38582) Favourable Scores Differences From Benchmark Pay and Benefits 50 4 Information and Communication 75 0 Structure 63 0 Learning 66 -1 Alignment 85 -3 Culture 77 -3 Corporate Responsibility 76 -3 Team Working 71 -4 Survey Follow Up 61 -4 Enterprising Spirit 54 -4 Respect for our Employees 60 -5 Talent 50 -5 Freedom through Responsibility 58 -6 Open Minded 50 -8 Leadership 61 -10 Strength from Diversity Insufficient Items for Category Score Computation Supplementary items AME Insufficient Items for Category Score Computation Supplementary items South Africa Insufficient Items for Category Score Computation 0 25 50 75 100 -20 -10 0 10 20 Coloured Difference Bars indicate a statistically significant difference

44. British American Tobacco SOUTH AFRICA 2007 (1343) vs. TP-ISR SOUTH AFRICA NATIONAL NORM (36274) Category Scores Ranked By Difference From Benchmark Favourable Scores Differences From Benchmark Pay and Benefits 56 10 Enterprising Spirit 52 5 Information and Communication 80 4 Alignment 90 3 Culture 81 3 Learning 69 3 Corporate Responsibility 79 2 Leadership 70 1 Team Working 69 1 Respect for our Employees 66 1 Talent 60 1 Structure 70 0 Freedom through Responsibility 63 -1 Open Minded 60 -2 Strength from Diversity Insufficient Items for Category Score Computation Survey Follow Up Insufficient Items for Category Score Computation AME Supplementary Items Insufficient Items for Category Score Computation 0 25 50 75 100 -20 -10 0 10 20 Coloured Difference Bars indicate a statistically significant difference

45. agenda • reward foundation • job profiling and evaluation • market & pay • market surveys • pay levels • variable pay • organisational processes • employee benefits • non-monetary benefits • performance management & employee development • pay for performance Total Reward

46. PRODUCTIVITY RESPONSIBILITY Leadership & Development Opportunities B E H A V I O U R GROWTH REWARDS PROPOSITION H I G H P E R F O R M A N C E WINNING ORGANISATION EMPLOYEE Freedom Through Responsibility Fair & Competitive N O N M O N E T A R Y Open Minded M O N E T A R Y Empowering & Flexible Organization Culture Remuneration & Benefits Enterprising Spirit Great Place to Work with Outstanding People Transparent & Delivered Effectively Strength from Diversity Training & Development Opportunities Career Management People & Strategic Leadership Coaching & Mentoring total rewardBATSA example

47. BATSA example – reward architecture Governance Enabler BCC Footprint - governs reward strategy & policy Control Environment - governs reward practice Reward Channel Objectives Benchmarking Enabler Survey Footprint Delivers market intelligence & facilitates reward insights Job Evaluation Enables internal & external reward comparisons Engagement Enabler Communication Delivers internal feedback on reward & facilitates buy-in on reward strategy, policies & practices Training Builds reward capability where required Rewarding Individual Performance Rewarding Group Performance Rewarding Organisational Membership & Individual Performance Rewarding Bahaviour Reward Channels Battle Field Bonus Benefits Non-monetary recognition Salary Incentives Technology Enabler Facilitates flawless execution

48. questions ?????????