Remuneration report

INTRODUCTION

To ensure optimal performance – operational, financial and sustainable – and that our business objectives are responsibly met, it is imperative that employees and directors of the company are fairly rewarded.

A competitive and balanced remuneration strategy supports the company’s business strategy and is important in gaining the goodwill of all employees. Our remuneration policy is allied to and supports our material issue of meeting our business targets and objectives.

REMUNERATION COMMITTEE

The remuneration committee is the custodian of Harmony’s remuneration policy and its implementation. See the corporate governance section for information on this committee’s primary functions and its more important activities and actions during 2014.

In determining remuneration, the committee takes into account shareholders’ interests and the financial health of the company. No member of the remuneration committee has a personal interest in the outcome of decisions made and the majority of its six members are independent non-executive directors.

HARMONY’S REMUNERATION POLICY

Our remuneration policy has as its primary objectives the attraction and retention of high calibre individuals – as directors, senior management and employees – and their motivation to deliver superior performance and to achieve our key business goals. This policy is based on the following:

• That our remuneration structure is competitive and justifiable within our sector
• That it is aligned with our business strategy, the management of risk and shareholders’ interests
• That the performance-based portion of remuneration is balanced between the achievement of long-term and short-term goals
• That the remuneration of executive directors takes into account remuneration and employment conditions elsewhere within the company so that remuneration principles are consistently applied within the company
• That the diverse needs of employees are embraced in the building of the Harmony culture

BENCHMARKING REMUNERATION

An assessment of executive remuneration, long- and short-term incentives and non-executive director fees was undertaken during FY14. This assessment serves to benchmark Harmony remuneration and align this with prevailing market conditions. The survey was conducted by an independent external service provider.

BOARD REMUNERATION

Harmony’s philosophy regarding the remuneration of non-executive directors is to ensure that they are fairly rewarded for their individual contributions to the company’s overall performance. Non-executive directors' fees are reviewed annually to ensure it remains competitive.

Non-executive directors’ retainer fees are paid monthly. Non-executive directors, including the chairman, do not receive options or other incentive awards correlated with the share price or group performance, as these may impair their ability to provide impartial oversight and advice.

The board has considered the King III recommendation that non-executive directors’ fees should consist of a base fee and will make a proposal to the shareholders at the upcoming annual general meeting to include a per board meeting attendance fee. We consider this fair and transparent and in the best interests of the company.

REMUNERATION MIX AT HARMONY

Harmony’s total cost of employment is structured as follows:

The remuneration committee ensures that the mix of guaranteed and variable pay meets the company’s needs and that incentives are based on targets that are challenging, verifiable and relevant.

KEY ELEMENTS OF HARMONY’S REMUNERATION STRUCTURE

All-inclusive guaranteed pay

In reviewing and approving levels of guaranteed pay, the committee ensures these reflect the market sector in which we operate and the contribution of employees, particularly senior executives (including executive directors and prescribed officers).

To compete effectively for skills in a challenging employment market, we identify the target market, those organisations or companies from which skills are acquired, or to which skills are lost.

Operational and technical comparisons are made predominantly to the mining and resources market. More general comparisons are made to the national market and, at executive level, to top executive surveys.

For all positions other than those for which specific premiums are deemed appropriate due to scarcity or criticality of skills, Harmony aims for guaranteed pay levels relative to the median of the target market.

In the context of guaranteed pay, all other benefits including pensions, benefitsin- kind and other financial arrangements are scrutinised to ensure they are justified, appropriately valued and suitably disclosed. Additionally, Harmony ensures guaranteed pay is a sufficient proportion of total remuneration to allow a fully flexible incentive scheme to operate.

Short-term incentives

The short-term incentive scheme provides for bonus payments:

• Twice a year for all management employees in corporate, central services, medical services and central operations; and
• Quarterly for designated shaft management team members and regional operations management teams

Bonuses are based on performance against annual targets that are reviewed each year. For executive management the targets will, in the new financial year, be based on:

• Safety (applied as a modifier)
• Gold produced (kg) (40% weighting)
• Underground grade (30% weighting)
• Total cost R/Kg (30% weighting)

As a pre-requisite for participants to qualify for any bonus, Harmony must achieve more than 90% of set targets, capped at 110% of set targets.

On-target incentive bonus percentages applied to total cost to company are based on achieving strategic targets, as shown below:

	On-target incentive reward (%)	Maximum incentive reward (%)
Chief executive officer	50	100
Executives and prescribed officers	50	100
General managers	30/50*	50/70

• ^* The on-target incentive bonus percentage of 30% is generally applied to all corporate and support positions, with the 50% applied to all shaft operational positions

When external factors beyond the control of participants affect performance or when changes are made to the business plans, we may reconsider criteria and targets for short-term incentives.

The remuneration committee has risk-based oversight of bonuses payable to eliminate behaviours contrary to our risk management strategy.

With regard to executive management bonuses, achievement against set targets for the year ending June 2014 was as follows:

1 July 2013 to 31 December 2013 =   25% of 6-month cost to company
1 January 2014 to 30 June 2014 =   10% of 6-month cost to company

Long-term (share-based) incentives

The Harmony 2006 share plan:

• Share appreciation rights (share appreciation rights)
• Performance shares
• Restricted shares

Executives and senior managers are awarded rights to receive shares in Harmony, when time and performance conditions have been met (below), awards have vested and, in the case of share appreciation rights, rights have been exercised.

Annual allocations, awards and grants are governed by our reward strategy with the ‘expected value’ of long-term incentives set for defined categories of executive and senior management. Participation is restricted to full-time employees and executive directors, with appropriate limits for individual participation.

The expected value of the total share reward as a percentage of total cost to company is:

• 70% for the chief executive officer
• 50% for the executives and prescribed officers
• 35% for the general managers

There is no repricing or surrender and regrant of any offers. Share awards are not granted in a closed period and no backdating of awards is allowed. Rewards are settled in shares, although participants may receive, via our share scheme administrators, cash from the sale of these shares, less tax payable.

Performance conditions are challenging but achievable. They are linked to Harmony’s medium-term business plan over three-year performance periods and include:

• Targeted operational performance
• Comparative financial/share performance against a peer group or index

The main elements of the share plan and performance conditions are summarised below.

Share appreciation rights

Share appreciation rights are rights to receive shares equal to the value of the difference between the exercise and allocation prices, less tax on the difference. Eligible employees receive annual allocations, which vest in equal thirds on the third, fourth and fifth anniversary of such allocation. The value or reward that accrues is only offered based on the positive appreciation of the share price over time.

Performance shares

Eligible employees receive annual conditional awards of a maximum number of performance shares. These vest after three years if performance conditions have been met.

Performance criteria for senior management, with criteria for management in brackets:

• 50% (70%) of the number awarded linked to Harmony’s annual gold production against targets set each year
• 50% (30%) linked to a South African gold mining comparison

Performance is assessed annually and locked in for three discrete and equal segments of each award. Awards that do not vest at the end of the three-year period lapse.

At the end of 2013, 33.3% of the performance shares vested.

Restricted shares

Periodically, eligible employees may be granted restricted shares and matching performance shares at the discretion of the board, based on individual performance in the prior year or future value to Harmony. The board determines the quantum and balance between restricted shares and matching performance shares.

Restricted shares vest three years from the grant date. If the grant is not exercised, partially or fully, at that time these shares remain restricted for a further three years, but are supplemented by a matching grant of restricted shares. All restricted shares are then only settled after the end of a further three-year period.

No restricted shares were granted during FY14.

Tlhakanelo Employee Share Trust

Administered in terms of the Tlhakanelo trust, this share-based incentive scheme ensures that current and future qualifying employees participate in Harmony’s growth:

• Each award is split in the ratio of 2 share appreciation rights for each ordinary share, and
• These vest annually in equal tranches on each anniversary of the allocation date

When share appreciation rights vest, participants receive ordinary Harmony shares (entitlement shares) and/ or a cash bonus. The number of entitlement shares is determined by the appreciation in the share price between offer and vesting dates, subject to a maximum appreciation value of R32. To accommodate market fluctuations between offer and vesting dates, if the share price:

• Appreciates between zero and R18: participants receive entitlement shares and a cash bonus equal to the difference between R18 and the appreciation of each vested SAR
• Depreciates: participants receive no entitlement shares but do receive a cash bonus of R18 per vested SAR

Prior to vesting, participants can elect to receive their shares or have these sold on their behalf.

Below is a summary of the status of the scheme:

CONTRACTS, SEVERANCE, TERMINATION

Contracts do not commit Harmony to pay on termination due to an executive’s failure to meet agreed performance standards. There are no balloon payments on termination, or automatic entitlement to bonuses or share-based payments. If an executive is dismissed after a disciplinary procedure, a shorter notice period applies.

Contracts do not compensate executives for severance after change of control; however, this does not preclude payments to retain key executives during a period of uncertainty. Where individuals leave voluntarily before the end of the service period, or are dismissed for good cause, unvested share-based awards lapse.

In other cases when employment ends, early vesting of long-term incentives is apportioned subject to the rules of the plan.

DIRECTORS’ EMOLUMENTS

1. ¹Appointed as prescribed officer on 7 March 2014. Amounts represent remuneration until 30 June 2014. Remuneration for the eight months prior to this is included in the Executive Management line
2. ²In addition, R7.1 million was paid upon resignation - effective 7 March 2014
3. ³Salary is paid in a Australian dollar and is influenced by the movement in the exchange rate
4. ⁴Prescribed officer until February 2013
5. ^**Included in the executive management line

Executive directors and management share incentives