Governance
Remuneration report

The tough market conditions experienced last year and the continued uncertainty likely to be faced by the Company in the medium-term have caused the Remuneration Committee to look carefully once more at its policies and the overall structure of the executive directors' remuneration. For the second year running neither the chief executive nor the executive chairman will receive an increase in base salary, nor will the other executive directors receive an increase this year, reflecting the rigorous cost-conscious approach adopted for other senior employees in the Group. The challenge for the committee has been to set appropriate targets for both short-term and long-term incentives in these uncertain times. The committee carried out a careful review of the annual bonus and long-term incentive arrangements and believes that the awards to be granted this year will prove sufficiently challenging whilst still realistic, relevant and therefore valued by the recipients.

Unaudited information

Members of the committee
The members of the committee during 2009 were Gill Barr (chair), Bernard Asher (until 30 April 2009), Jon Walden, Geraldine Gallacher, Adrian Martin (from 1 May 2009) and Patrick De Smedt (from 1 December 2009). All members during the year were independent non-executive directors.

Responsibilities of the committee
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 their salaries and remuneration packages and monitors the structure and level of remuneration for other senior executives.

External advice received
During the year the committee received advice from Hewitt New Bridge Street ('HNBS') in relation to executive directors’ remuneration, in particular in relation to its review of the annual bonus and long-term incentive structure referred to below. The committee also consulted the chief executive and the executive 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.

The committee’s approach to executive directors’ remuneration
The general principles underlying the committee’s approach to developing remuneration packages for the executive directors are:

• to attract, retain and motivate the best possible person for each position, without paying more than is necessary;
• 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, taking account of individual performance and experience, 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 focus the performance conditions for performance linked pay on the achievement of financial performance objectives, as this creates a clear line of sight for individuals between performance and reward and provides a focus on improving profitability (something which management can influence) rather than rewarding directly through share price performance (which management cannot influence directly);
• to ensure that financial performance metrics and associated sliding scale ranges are calibrated carefully to ensure that performance is incrementally rewarded and that executives are not incentivised inadvertently to take inappropriate business risks;
• to recognise that executives should be able to have different share-based incentive structures depending on their appetite for individual risk;
• to provide a significant proportion of performance linked pay in share-based form, providing an opportunity for executives to build significant shareholdings in the business; and
• to align the interests of executives with those of the Company's shareholders.

The committee has reviewed its policy

During the course of 2009, the committee reviewed its policy towards the annual bonus and long-term incentive arrangements. In particular, in light of the continuing uncertainty in the economy and the challenges facing the construction industry as a whole, the committee wished to consider whether the current long-term incentive arrangements, which had been in place since 2005, were still achieving their intended aim and whether a performance condition based solely on earnings per share remained appropriate.

After detailed analysis the committee concluded that none of the proposed changes that it had considered to the structure of the arrangements would represent a material improvement to the policy. Accordingly, the committee is satisfied that the current policy remains appropriate for the current financial year. It has, however, taken the opportunity to set out in greater detail above the principles underlying its approach to the performance related element of the executive directors’ remuneration package.

Fixed versus performance related

A significant proportion of the package is subject to performance related elements. The chart below shows that just under half of the value of the package at a broadly target level of performance comprises performance related elements, whilst at a maximum level of reward (assuming a maximum bonus and full vesting of the Executive Remuneration Plan awards) more than 60% of the total remuneration comprises performance related elements.

No increases to 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 it remains aware of relevant market data. The committee is aware, however, of the risk of an upward ratchet in remuneration levels through the use of comparative pay surveys.

At its meeting in December 2009, the committee determined that, in line with the policy adopted for other senior employees in the Group, there should be no salary increases for 2010 for any executive director.

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 Benefits Plan (‘the Plan’) and, in the case of the other executive directors, to their individual personal pension plans.

The Company operates 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 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.

Challenging targets for annual bonus

The maximum potential annual cash bonus for executive directors for 2009 was 100% of base salary. The performance criteria were based on performance relative to the Group profit before tax and amortisation (‘PBTA’) budget. Recognising that the maximum bonus for 2009 would be payable for achieving a PBTA outturn lower than that required to trigger the maximum bonus in 2008, the bonus vesting structure was tightened. The maximum bonus for 2009 required the achievement of greater outperformance of budget than in 2008, a smaller percentage of maximum bonus was payable for achieving the PBTA budget and the threshold before any bonus became payable was set at a higher level than in 2008.

Following its review of incentives in 2009, the committee decided to retain the maximum potential annual bonus at 100% of base salary for the 2010 financial year and decided to retain a condition based on a 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 performance of the Group. Other performance measures were considered but ultimately not adopted, as most of the Company's annual financial performance is reflected in its PBTA and the use of non-financial measures was considered inappropriate due to the additional complexity and potential lack of objectivity around target measurement.

In setting the target range for 2010, the committee has again attempted to balance challenge with realism and relevance given the economic environment in which the Company is continuing to operate. Accordingly, the PBTA target range has been set at a similarly challenging level by reference to Group budget to that of 2009.

Long-term incentives

The Group's current long-term incentive arrangements 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 remain appropriate

In normal circumstances the maximum annual award, which is subject to the achievement of testing performance targets, is for an award of performance shares worth (at face value as at the time of grant) 75% of base salary (100% of salary in exceptional circumstances). For a number of years executives have been given the choice at the time of grant of receiving their awards either in the form of performance shares or by electing to receive market price share options to replace some or all of their performance shares at a rate of 4 share options for every 1 performance share.

As part of its review during 2009, 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 are imposed, the committee determined that this ratio remained appropriate.

Adjusted EPS remains the basis of the performance conditions

The committee continues to believe that long-term incentives should be structured so as to focus executives on maximising profitability by use of a performance condition based on earnings per share before amortisation of intangible assets ('adjusted EPS') measured at the end of a single three year period, as this provides a clear linkage between performance and reward for senior executives and should be reflected over time in enhanced shareholder value.

For the awards granted in 2009, given the record adjusted EPS achieved in 2008 and the highly challenging medium-term economic outlook, the committee decided to move from an adjusted EPS performance condition based on growth in excess of the Retail Prices Index ('RPI') to an absolute adjusted EPS target for the financial year ended 31 December 2011.

The committee has decided to retain an absolute EPS performance condition for awards to be made in 2010 and the EPS target ranges required in respect of the financial year ended 2012 are set out below.

Targets remain challenging

Despite the fact that the lower end of the target range is lower than actual adjusted EPS for the year ended 31 December 2009, the committee is satisfied that the range is at least as challenging in the circumstances as targets that have been attached to prior years' awards. In particular, a significant proportion of the range is ahead of the actual adjusted EPS for the 2009 financial year and the top end of the range represents growth of circa 7.8% over the three year period. In highly challenging and uncertain market conditions, these targets are considered appropriate. In addition, the committee considers that the value of the award is considered relatively low compared to market norms and the structure of the sliding scale (with zero vesting at the EPS performance threshold) is tougher than market norms.

As mentioned above, in order to ensure that the condition is appropriately challenging, the committee has carried over for this award the decision to reduce the vesting percentage for achieving the vesting threshold 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. The committee will also bear in mind the need to avoid incentive arrangements which encourage management to take undue risk.

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; and
• the Morgan Sindall Employee Share Option Plan 2007, under which executive directors do not receive awards.

Five year performance continues to outperform relevant benchmark

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 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 whilst 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. There are no specific provisions for compensation on early termination or loss of office due to a takeover bid.

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. Paul Smith was a non-executive director of Young Samuel Chambers (‘YSC’) Limited until May 2009 for which he received a fee of £12,500 during the year.

Non-executive directors' terms of engagement

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 2010, 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

• (i) Group PBTA in 2009 of £51.5m resulted in the executive directors becoming entitled to 26.851% of the maximum cash bonus. The maximum cash bonus required PBTA of £60.75m and the threshold PBTA was £48.6m.
• (ii) The Company operates a salary exchange process for members of The Morgan Sindall Retirement Benefits 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 2008 and 2009 represent the salary and bonus entitlements before any salary exchange has taken place.
• (iii) Patrick De Smedt was appointed with effect from 1 December 2009.
• (iv) Bernard Asher ceased to be a director on 30 April 2009.

Pension contributions

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 employer’s National Insurance contribution), but exclude any other contributions made through the salary exchange mechanism.

The 2005 Plan

The following long-term incentive awards have been made to executive directors under the 2005 Plan during 2009:

• (i) The rules of the 2005 Plan provide that, if the committee so determines, 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 April 2009 this was satisfied by the transfer of additional shares. These additional shares are included in the Total no. of shares vested column.
• (ii) Based on the HMRC value on the date of vesting of £5.7975.

Awards that vested during the year were granted on 5 April 2006 when the Company’s share price was £12.38.

Notes:

• no options were exercised during the year;
• the share options detailed above will, if not exercised, lapse ten 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, on 9 April 2008 was £10.34 and on 30 March 2009 was £5.61;
• the awards of performance shares and share options made in 2007 and 2008 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). The awards of performance shares and share options made in 2009 are subject to an absolute adjusted EPS performance target with full vesting of awards for achieving adjusted EPS of 133.0p or more for the year ending 31 December 2011, reducing on a sliding scale to 0% vesting for achieving 103.0p (performance shares) or 115.0p (share options);
• average adjusted EPS growth for the three financial years ended 31 December 2007 and 31 December 2008 respectively exceeded RPI + 10% and the options granted on 20 May 2005 and 5 April 2006 are therefore fully exercisable. Average adjusted EPS growth for the three financial years ended 31 December 2009 was equal to RPI plus 4% per annum and therefore 25% of the performance share awards awarded on 6 March 2007 will vest but all of the options granted on that date will lapse; and
• the market price of a share on 31 December 2009 was £6.00 and the range during the year was £4.60 to £7.34.