Introduction

This report is prepared in accordance with schedule 7A to the Companies Act 1985 (the ‘Act’). This report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and the Combined Code on Corporate Governance (the ‘Code’). As required by the Act, a resolution to approve the report will be proposed at the annual general meeting of the Company to be held on 30 April 2009.

The Act requires the auditors to report to the Company’s members on certain parts of the directors’ remuneration report and to state whether in their opinion those parts of the report have been properly prepared in accordance with the Act. The report has therefore been divided into separate sections for unaudited and audited information.

Unaudited information

Remuneration committee

The members of the Remuneration Committee (the ‘committee’) during 2008 were Gill Barr (chair), Bernard Asher, Jon Walden and Geraldine Gallacher. Adrian Martin will join the committee when Bernard Asher retires at the forthcoming annual general meeting. All members are independent non-executive directors.

The committee is responsible for determining and agreeing with the Board the broad policy for the remuneration of the executive directors, including the executive chairman. It sets the salaries and remuneration packages for the executive directors and monitors the structure and level of remuneration for other senior executives. The terms of reference for the committee are available on the Company’s website and on request from the company secretary.

During the year the committee engaged Hewitt New Bridge Street (‘HNBS’) to assist in a review of the executive directors’ remuneration, the key results of which are summarised below. The committee also consulted the chief executive and the chairman, but in each case not in relation to their own remuneration. HNBS provided advice to the Company on accounting for share awards and on calculation of the total shareholder return performance condition for grants under the 1995 executive share option scheme but provided no other material services to the Company or the Group.

Policy on executive directors’ remuneration

As part of its review during the year, the committee considered the general principles underlying its approach to developing remuneration packages for the executive directors, originally adopted in 2004, and determined that the committee’s approach remained consistent with these principles. The principles are as follows:

• to attract, retain and motivate the best possible person for each position
• that the remuneration packages should be perceived as simple and fair and, therefore, valued by participants
• to ensure that the fixed element of remuneration (salary, pension and other benefits) is determined in line with market rates and that a significant proportion of the total remuneration package is determined by the Company’s performance
• to recognise the importance of rewarding over-performance (but not under-performance) in both the short and long-term
• to reward directors fairly for their contributions whilst remaining within the range of benefits offered by similar companies in the sector
• to align the interests of executives with those of the shareholders.

HNBS’s review for the committee reported on the extent to which the current remuneration arrangements were consistent with these principles as well as with market practice and best practice and advised the committee on potential changes to the arrangements appropriate to current economic conditions. The outcome of this exercise is reflected in the descriptions of the various elements of the remuneration package set out below.

In terms of the structure of the package, HNBS reported to the committee that the current remuneration package broadly satisfied the committee’s principles. It provided levels of fixed remuneration in line with or just below market benchmarks and an appropriate combination of fixed and performance-related remuneration. The performance-related element comprised a balanced mix of long-term and shortterm rewards to ensure that executives focus on sustained performance rather than just short-term performance. The committee decided, therefore, to retain the existing structure of the remuneration arrangements.

Base salary

The base salary of individual executive directors is determined by the committee prior to the beginning of each year and, if appropriate, in the event of a change in an individual’s position or responsibilities. A formal benchmarking exercise of executive directors’ remuneration is carried out periodically on behalf of the committee to ensure that the committee remains aware of relevant market data.

Salaries shown in the directors’ emoluments table were set by the committee in December 2007 and applied from 1 January 2008. In determining these salaries, the committee took into account the significantly increased size and complexity of the Group, in particular resulting from the acquisition of Amec’s design, construction, infrastructure and urban regeneration businesses. The committee also took into account the relatively low pension contributions and other benefits making up the overall fixed element of the remuneration package.

At its meeting in December 2008, the committee determined the salaries for executive directors that apply from 1 January 2009. In its deliberations, the committee took into account a number of factors, including levels of salary increases for 2009 agreed for other senior group employees in the Group as well as the importance of maintaining competitive levels of fixed pay that fairly reflect their skills and experience in order to retain key individuals. The committee also considered the market data provided by the HNBS review, which indicated that whilst the fixed pay of the chief executive was competitive with the market, that of both the finance director and commercial director was significantly below market benchmarks.

Accordingly, the committee agreed the following base salary levels for 2009:

Pension arrangements

The Company makes contributions equivalent to 10% of base salary, in the case of Paul Smith and David Mulligan to The Morgan Sindall Retirement Benefit Plan (the ‘Plan’) and, in the case of the other executive directors to their individual personal pension plans.

The Company has also introduced a salary-exchange process that allows all employees who are members of the Plan flexibility in setting the proportion in which salary and bonus is distributed between cash payments and additional pension contributions. Where additional pension contributions are made through the salary-exchange process, the Company enhances the contributions by 6.4% (representing half of the saved employer’s National Insurance contribution).

Other benefits

The executive directors receive certain other benefits, principally a car allowance, private medical insurance, permanent health insurance and life assurance.

Annual bonus

The maximum potential annual cash bonus for executive directors was 100% of base salary for the 2008 financial year. The performance criteria were based on performance relative to the Group profit before tax and amortisation ('PBTA') budget, with out-performance of budget required in order for the maximum bonus to be payable.

Following its review of remuneration, the committee decided to retain the maximum potential annual bonus at 100% of base salary for the 2009 financial year. It considered the introduction of alternative or additional performance conditions but preferred to retain a condition based on a challenging PBTA target range set relative to Group budget as this had the benefit of transparency and simplicity and would encourage the executive directors to focus on the overall financial picture of the Group.

In setting the target range for 2009, the committee has attempted to balance the need to ensure that targets are sufficiently challenging but also realistic and relevant given the economic environment in which the Company is operating. Accordingly, whilst the maximum bonus for 2009 will be payable for achieving a PBTA outturn lower than that required to trigger the maximum bonus in 2008, the bonus vesting structure has been tightened so that the maximum bonus for 2009 requires the achievement of greater outperformance of budget than in 2008, a smaller percentage of maximum bonus than in 2008 will be payable for achieving the PBTA budget and the percentage of the PBTA budget required before any bonus is payable has been set at a higher level than in 2008.

Long-term incentives

The Group’s current long-term incentive arrangement for senior executives is the Morgan Sindall Executive Remuneration Plan 2005 (the ‘2005 Plan’). The 2005 Plan was approved by shareholders in April 2005.

A summary of the 2005 Plan is set out below.

Award levels and structure

In normal circumstances the maximum annual award, which is subject to the achievement of testing performance targets, is performance shares worth 75% of base salary (100% of salary in exceptional circumstances). Executives may be given the choice at the time of grant of receiving their awards either in the form of performance shares or by electing to receive share options to replace some or all of their performance shares at a rate of 4 share options for every 1 performance share.

Following the HNBS review, the committee considered the structure of the 2005 Plan and how it had been operating since first introduced in 2005. It concluded that the normal maximum award level of performance shares at 75% of base salary remained appropriate and that the ability to choose between an award of performance shares or a grant of share options catered for individual attitudes to risk and was therefore valued by the executives. The 4:1 ratio of share options to performance shares was also considered and, in view of the additional share price risk attached to the value of the options and the tougher performance conditions which had been imposed on all previous awards of options, the committee determined that this ratio remained appropriate.

Performance conditions

The committee continues to believe that long-term incentives should be structured so as to incentivise growth in the Group’s earnings by use of a performance condition based on earnings per share before amortisation of intangible assets (‘adjusted EPS’), measured over a single three year period (with no opportunity to re-test performance), as this provides a clear linkage between performance and reward for senior executives and should be reflected over time in enhanced shareholder value.

For previous awards, the adjusted EPS performance condition has been structured as a growth target in excess of the Retail Prices Index ('RPI') with full vesting of awards for adjusted EPS growth of RPI + 10% p.a. reducing on a sliding scale to 25% vesting for growth of RPI + 4% p.a.(for performance shares) or RPI + 5% p.a. (for share options).

Given the record adjusted EPS achieved in 2008 and the highly challenging medium-term economic outlook, the committee does not believe that the continued use of these particular growth targets would be appropriate for awards in 2009. Accordingly, the committee has agreed upon revised absolute adjusted EPS targets for the financial year ending 31 December 2011 (set out below) which will apply for awards to be made in 2009. The committee is satisfied that these targets are materially at least as challenging in the circumstances as the previous growth targets were at the time when the 2005 Plan was introduced.

Adjusted EPS performance for the year ending 31 December 2011:

In order to ensure that the condition is appropriately challenging, the committee has reflected the reduced rate of adjusted EPS growth required to reach the threshold vesting point by a reduction in the vesting percentage for achieving this point from 25% to zero. In addition, the adjusted EPS performance required for the threshold vesting point for share options has been maintained at a more challenging level than for performance shares.

The committee will continue to set targets for future awards appropriate to the economic outlook prevailing at the time, ensuring that such targets remain challenging in the circumstances, whilst remaining realistic enough to motivate and incentivise management.

Other share plans

The Company currently operates two other share plans for its employees:

• the Morgan Sindall Sharesave Plan in which executive directors are permitted to participate on the same terms as other employees
• the Morgan Sindall Employee Share Option Plan 2007, under which executive directors do not receive awards.

Performance graph

The graph below shows a comparison of Total Shareholder Return (‘TSR’) for the Company’s shares over the last five financial years against TSR for the companies comprised in the FTSE 350 index excluding investment trusts. This is considered by the committee to be the most suitable comparable broad index against which the Company’s performance should be measured for this purpose.

Service contracts

It is the Company’s policy that executive directors’ service contracts should be terminable on one year’s notice. In circumstances of termination by notice (except in cases of removal for misconduct), compensation will be determined by the committee having regard to the particular circumstances of the case. The committee’s guidelines will be to determine an equitable compensation package while avoiding rewarding poor performance and having regard to the departing director’s obligations to mitigate his loss.

In ordinary circumstances, base salary and employer pension contributions for the full period of notice of one year would be paid together with accrued bonus entitlements and shares or share options granted under long-term incentive schemes where the relevant performance criteria had been satisfied. Other employee benefits would also be maintained for the notice period subject to the rules of the appropriate Group scheme.

The dates of the executive directors’ contracts are:

At the discretion of the Board, executive directors are allowed to act as non-executive directors of other companies and retain any fees relating to those posts. Currently John Morgan acts as interim chairman of Newfound N.V. for which he receives a fee of £15,000 per annum. Paul Smith is a non-executive director of Young Samuel Chambers (‘YSC’) Limited for which he receives a fee of £25,000 per annum.

Non-executive directors

The dates of the terms of engagement of the non-executive directors are:

All non-executive directors have specific terms of engagement being an initial period of three years which thereafter may be extended by mutual consent, subject always to the requirements for re-election and the Companies Acts. Their remuneration is determined by the Board within the limits set by the Articles and is based on surveys together with external advice as appropriate. Fees for non-executive directors remain constant for 2009, comprising a basic fee of £40,000 and, to reflect their additional responsibilities and time commitment, an additional fee of £7,500 and £5,000 to be paid to the chairs of the audit and remuneration committees respectively. Non-executive directors receive no other benefits and do not participate in short-term or long-term reward schemes.

Audited information

Aggregate directors’ remuneration

The total amounts for directors’ remuneration were as follows:

Directors’ emoluments

¹Group PBTA in 2008 of £71.4m was a record performance for the Company and was 15% higher than 2007. However, the committee had set a particularly challenging target to trigger maximum payment under the 2008 annual bonus and the executive directors, therefore, are only entitled to 37% of the maximum cash bonus.

²The Company operates a salary-exchange process for members of the Morgan Sindall Retirement Benefit Plan, which allows employees flexibility in setting the proportion in which salary and bonus is distributed between pay and additional pension. The figures shown for both 2007 and 2008 represent the salary and bonus entitlements before any salary-exchange has taken place.

³ Adrian Martin was appointed with effect from 1 December 2008.

Pensions

The Company contributes 10% of salary to The Morgan Sindall Retirement Benefits Plan (the ‘Plan’) in the case of Paul Smith and David Mulligan and to personal pension plans in the case of the other executive directors.

As explained in the pension arrangements in the unaudited section of this report and under Directors’ emoluments above, the Company operates a salary-exchange process for members of the Plan. Both Paul Smith and David Mulligan have participated in this process and the contributions set out below include the additional 6.4% enhancement to any salary or bonus exchanged (representing half of the saved employers’ National Insurance contribution), but exclude any other contributions made through the salary-exchange mechanism.

The contributions paid by the Company to these plans were as follows:

The 2005 Plan

The following long-term incentive awards have been made to executive directors under the 2005 Plan:

¹The rules of the 2005 Plan provide that if the committee so determine, executives are entitled to receive the value of dividends paid on performance shares during the three year performance period. In respect of the performance shares which vested in May 2008 this was satisfied by the transfer of additional shares. These additional shares are included in the Total no. of shares vested May 2008 column.

²Based on the Company’s share price on the date of vesting of £10.20.

Awards that vested during the year were granted on 20 May 2005 when the Company’s share price was £7.30.

 

Notes:

• the share options detailed above will lapse 10 years from the date of grant
• the market price of a share on 20 May 2005 was £7.30, on 5 April 2006 was £12.38, on 6 March 2007 was £12.32 and on 9 April 2008 was £10.34
• all the above awards of performance shares and share options are subject to an adjusted EPS performance condition measured over a three year period with full vesting of awards for average adjusted EPS growth of RPI + 10% per annum, reducing on a sliding scale to 25% vesting for average growth of RPI + 4% per annum (performance shares) or RPI + 5% per annum (share options)
• average adjusted EPS growth for the three financial years ended 31 December 2007 and 31 December 2008 has exceeded RPI + 10%. The options granted on 20 May 2005 are therefore fully exercisable and the performance shares awarded on 5 April 2006 will therefore vest in full and the options granted on that date will become exercisable on the 5 April 2009.
• the market price of a share on 31 December 2008 was £5.42 and the range during the year was £4.115 to £11.60.

Legacy plans

Long-term incentive plan (‘LTIP’)

Set out below are details of outstanding awards made to executive directors under the Company’s LTIP. No awards have been granted under the LTIP since 2003 and there is no intention to grant further awards. The awards were conditional upon the Group’s TSR performance over a three year period compared with a selected peer group. Shares were allocated to the executives after the three year performance period in accordance with the performance condition and, after a further two year period, vested fully and were transferred to the executives.

¹Awards that vested in the year were granted on 30 June 2003 when the Company’s share price was £2.825.

²Based on the Company’s share price on the date of vesting of £5.695.

Deferred share bonus awards

On 10 March 2008, the executive directors exercised nil-cost options over shares set out below. These were granted to the executive directors on 10 March 2005 and represented 25% of the annual bonus earned in respect of the year ended 31 December 2004. The market value of a share on the date of grant was £7.175 and on the date of exercise was £9.87.

On 5 April 2008 Paul Smith received 21,091 shares relating to a one-off bonus of 20,000 shares awarded on 5 April 2006 in respect of his and the Company’s performance in 2005. The award was deferred for two years and the shares held in trust by the Morgan Sindall Employee Benefit Trust (the ‘EBT’). Under the terms of the award, at the end of the two year period Paul Smith was entitled to receive the 20,000 shares together with the value of dividends paid thereon during the two year period, the latter being satisfied by the transfer of 1,091 additional shares from the EBT. The market price of a share on the date of grant was £12.38 and on the date of receipt of the shares was £10.26. The monetary value of these vested shares on the date of receipt was £216,394.

Share options

On 10 March 2008, Paul Smith exercised an option over 100,000 shares granted under the 1995 executive share option scheme (the ‘1995 scheme’) on 10 March 2003 as part of his initial employment package in 2003, for which the related performance condition had been satisfied as outlined in last year’s remuneration report. The exercise price of the option was £2.07 per share and the market value at the date of exercise was £9.87.

Following the exercise of this option, none of the executive directors has any options outstanding under the 1995 scheme.

Details of options granted under the 1995 scheme to other employees in the Group are shown in note 26 of the consolidated financial statements. No further options may be granted under the 1995 scheme.

This report was approved by the Board of directors and signed on its behalf by:

Gill Barr
Chair of the Remuneration Committee
24 February 2009