Remuneration report

Remuneration policy

To give effect to the general philosophy that directors, senior executives and staff should be paid fair, competitive and appropriately structured remuneration in the best interests of shareholders, the following broad principles are applied:

• remuneration consists of fixed and variable elements
• salary is set at a competitive level in order to attract and retain the services of high calibre employees
• the annual bonus plan aligns the interests of executives with those of shareholders in the short term through a focus on earnings growth and value creation and other key drivers reflected in key performance indicators (KPIs)
• the share incentive scheme offers share options to selected key executives so as to provide direct alignment with shareholders on long term value creation

The remuneration & human resources committee (committee) ensures that the mix of remuneration, including short term and long term incentives, meets the Group’s strategic objectives. The objective is to average guaranteed salary at the 50th percentile throughout the Group, while achieving at least the 75th percentile for total package remuneration (salary plus annual bonus) based on target performance as below:

The Group’s key business mission against which remuneration policy is aligned, is a non-negotiable commitment to sustainable earnings growth and value creation, zero harm and people development. This mission defines the key performance areas (KPAs) and KPIs applied to executive director and other senior executive remuneration. KPAs and KPIs are applied to executive gradings in determining individual remuneration packages. They are also used in determining eligibility for performance related remuneration (described later in this report) and the quantum of payments and awards made under these incentive schemes.

King Code of Governance Principles for South Africa 2009

The committee notes that King Code of Governance Principles for South Africa 2009 (King III) sets out principles and recommendations regarding executive remuneration, including disclosure in the company’s annual report of remuneration paid to directors and certain other senior employees. These disclosures are included in note 46 to the consolidated financial statements and have been prepared with regard to the requirements of King III.

In accordance with King III, details of remuneration paid to senior employees other than directors have been disclosed. The six senior executives listed are the highest paid permanent employees, three representing the Group’s South African operations and three representing its international operations, excluding Clough Limited (Refer to Clough annual report). Remuneration includes all cash payments, benefits and incentive awards received during the year under review. This information has been provided anonymously in this financial year.

A full review of the extent to which the Group’s remuneration policy and practices comply with King III will be conducted during the first half of the 2011 financial year and reported on in the integrated report for the 2011 financial year.

Executive director and senior executive remuneration

The Group employs the services of an independent consultant to advise on the profiling and appropriate remuneration levels of executive directors and senior executives relative to market trends, and reviews the Group’s remuneration policies and practices in light of this data. The committee is advised independently on remuneration matters.

The remuneration packages of executive directors and senior executives consist of the following:

• salary
• benefits
• retirement fund contributions
• annual bonus
• share incentive awards

There are no material payments made to executive directors and senior executives which are ex gratia in nature.

Salary

Salary levels are determined by reference to a job grade, set in accordance with an independently developed balanced scorecard.

Benchmarking is conducted bi-annually and referenced to updated online data to ensure that salary levels for each job grade are in line with the market. Data is collated for companies listed on the JSE which are of a similar size and nature, in terms of market capitalisation and sector, to Murray & Roberts. This includes companies in the construction, mining and industrial sectors. The objective is to set salary levels for executive directors and senior executives, on average, at the market median.

Benefits

Executive directors and senior executives are legally and contractually entitled to certain benefits in addition to base salary. These benefits include travel allowance, insurance policies relating to death in service and disability, and medical aid. In addition, executive directors and senior executives are covered under the terms and conditions of the Group’s personal accident policy.

Retirement fund contributions

A number of retirement funds operate within the Group. In South Africa these are registered as pension or provident funds and are accordingly governed by the Pension Funds Act. Although some funds are privately administered, the majority of funds are incorporated in outsourced umbrella schemes. The assets of the funds are independently controlled by boards of trustees which include representatives elected by the members. The Group makes employer contributions to the retirement fund of all salaried employees, including executive directors and senior executives.

Together, salary, benefits and retirement fund contributions are referred to as the total fixed cost of employment (TFCE).

TFCE packages of executive directors and members of the executive leadership team are reviewed by the committee annually. The committee approves any changes to the annual TFCE package of the group chief executive.

Annual bonus

Executive directors and senior executives are eligible to participate in an annual bonus plan. Non-executive directors are not eligible to participate in this plan. The annual bonus plan together with the share incentive scheme make up the variable component of the remuneration package. The overall purpose of the annual bonus plan is to incentivise and reward those executive directors and senior executives who contribute to the Group’s mission of sustainable earnings growth and value creation, zero harm and people development. Participants may receive a cash payment at the end of each financial year, the amount of which is dependant upon company and personal performance. No deferral is applied.

Because of the cyclical nature of the construction industry primarily as a result of external economic factors, the Group operates a bonus pool system which is available for distribution under the annual bonus plan to all employees and which is calculated by reference to Group EBIT and attributable earnings. The bonus pool is generally capped at 10% of Group EBIT in the year for general staff, while for executive directors and operating managing directors, the bonus pool is calculated at 2,5% of attributable earnings.

The bonus pool is distributed to participating executive directors and senior executives based on a number of factors:

• The seniority of the individual i.e. salary level
• The individual’s performance within their operation as tested against their KPIs

The earnings potential per salary level is benchmarked on an annual basis, collated by reference to companies listed on the JSE Limited of a similar size and nature to Murray & Roberts in terms of market capitalisation and other factors. This includes companies in the construction, mining and industrial sectors. The objective is to set the target annual earnings potential, as a percentage of TFCE, at the upper quartile of the market.

In respect of executive directors and senior executives, the target annual bonus earnings potential as a percentage of TFCE for the 2010 financial year is depicted below:

Measured against these performance benchmarks, the standard set for the 2010 financial year incentive framework was between the 25th and 50th percentiles of normal performance. There are individual achievements in the operations that commanded higher levels of reward.

The payments made to directors and senior executives for the 2010 financial year, calculated on the basis summarised above, are disclosed in tnote 46o the consolidated financial statements.

Each year, the committee sets the principles of the annual bonus plan for the following year and proposes the awards to be made to executive directors and senior executives. No significant changes to the structure of the annual bonus plan are proposed for the 2011 financial year.

Share incentive scheme

Selected senior employees including executive directors and senior executives are eligible to participate in the Murray & Roberts Holdings Limited Employee Share Incentive Scheme (Scheme). Non-executive directors are not eligible to participate in the Scheme. The overall purpose of the Scheme is to provide general alignment between the executives and shareholders of the company. It also motivates and rewards executives who have contributed to the Group’s real sustainable earnings growth and value creation over the long term.

Under the Scheme, participants are granted options to acquire shares in Murray & Roberts at a series of future dates. No consideration is paid by participants for the option grant but the purchase price for the shares is set at the date of grant and is the closing price of a share on the day immediately preceding the grant date.

At the end of each successive vesting period, participants can either defer exercising of the options or pay the purchase price and acquire the specified number of shares in Murray & Roberts and settle the taxation obligation that arises from the transaction. It is only at this point that participants become shareholders and acquire shareholder rights in respect of those shares.

The vesting period applicable to options granted under the Scheme after October 2004 is five years, with one third of shares vesting after three years, one third vesting after four years and the final one third vesting after five years, subject to the relevant conditions being met. All vested options must be exercised within six years from the date of grant, failing which they will lapse.

Historically, the committee granted some options under the Scheme subject to a performance condition, meaning they will vest only to the extent that the specific condition is satisfied. Where a performance condition is imposed, they are referred to as “hurdle” options. Where no performance condition has been imposed and vesting is subject to continued employment only, the options are referred to as “standard”. Where the vesting terms of the options vary from those summarised above, they are referred to as “special”.

Where a performance condition is imposed, it has been based on a target annual compound increase in share price, with prior conditions being 25% (for March 2002 and 2003 allocations) and CPI+4% (for all other allocations). This is considered to be an appropriate condition in that it supports the business strategy of value creation. In addition, it focuses on an increase in share price and aligns the interests of participants in the Scheme with those of shareholders.

Options are granted under the Scheme generally on an annual basis. However, to reflect the fact that special options were granted to certain executive directors and senior executives in March 2007 to secure their retention and performance through the Group’s executive succession and development program up to and beyond 2010, these individuals will not be granted additional options under the Scheme until after 4 March 2011. The options granted in March 2007 were calculated using the Black-Scholes formula for future value to March 2011 but not subject to a performance condition, as their primary purpose was to retain the services of these individuals during a crucial period for the Group. These options become exercisable on the fourth and fifth anniversaries of grant. Details are disclosed in note 46 to the consolidated financial statements.

The value of options granted to executive directors and senior executives is set after consideration of the following:

• the general allocation is limited to 0,5% of the market capitalisation of the Group, which amounts to a maximum of 1,66 million shares for financial year 2010
• under the rules of the Scheme, a participant cannot accumulate within the Scheme, more than 1,0% of the number of issued shares in the Group (currently 3 318 926 shares)
• the number, and value, of shares already held under option
• the factor applicable to the individual’s salary level. This ranges from 0,5 to 6 and relates to the value of unexercised options held by that individual as a percentage of TFCE as depicted below:

Shares required to satisfy options granted under the Scheme which are subsequently exercised, are provided by The Murray & Roberts Trust (Trust).

Under the rules of the Scheme, a maximum of 33 189 262 shares may be issued by The Murray & Roberts Trust (Trust). Under the rules of the Scheme, a maximum of 33 189 262 shares may be issued by Murray & Roberts under the Scheme. To date, the Trust has been funded through a policy approved by the committee to purchase Murray & Roberts shares in the market and the company has not issued shares to the Trust in order to satisfy options granted.

Details of the shares held by the Trust and the outstanding options granted under the Scheme as at 30 June 2010 are set out in note 12 to the consolidated financial statements.

On an annual basis, the committee reviews the share incentive scheme to ensure its continued contribution to shareholder value and proposes allocations for that year in accordance with the guidelines summarised above. The committee is also responsible for administering the Scheme.

Top, senior and mid-level Black executives of the Group’s South African operations are eligible to participate in the Letsema Vulindlela Black Executives Trust (Vulindlela) share incentive scheme. Vulindlela was established in December 2005 as part of the Group’s broad-based black economic empowerment share ownership scheme. Vulindlela aims to introduce Murray & Roberts Black executives as shareholders in Murray & Roberts, contribute to the attraction and retention of Black executives and align the interests of Black executives with all shareholders. Executive directors, senior executives and non-executive directors are not eligible to participate in Vulindlela.

Disclosure

The remuneration paid to executive directors and selected senior executives for the year ended 30 June 2010 is set out in to note 46 the consolidated financial statements.

Contracts of employment

Executive directors do not have fixed term contracts, but are subject to notice periods of between one and twelve months. Senior executives are subject to a notice period of between one and three months.

There is no material liability to the Group with respect to the termination of contract of any executive director or senior executive. The applicable contracts of employment do not include provisions entitling the individual to a specified payment on termination of employment or on a change of control of Murray & Roberts. Further, no agreements have been entered into with the executive directors or senior executives regarding restraint of trade.

The only provision in the contract of employment relating to a payment on termination of employment is to provide that where termination occurs during the first year of employment, any payment to which the individual is entitled by law will be limited to a maximum of 25% of annual TFCE.

Normal retirement of executive directors and senior executives is at age 63 with two further option periods at the discretion of the company to 65 years and finally, 67 years.

Non-executive directors

Non-executive directors are appointed for a period of three years and, following this period, may be available for re-election for a further three year period. They are required to retire on reaching age 70.

Non-executive directors receive a fee for their contribution to the Board and its committees of which they are members. The fee paid to the chairman includes his director’s fee as well as his committee fees. The fee is calculated on the basis of five board meetings per annum. In addition to a fee, non-executive directors are entitled to claim travelling and other expenses incurred in carrying out the business of the company and attending board and committee meetings.

To the extent that a non-executive director does not attend a scheduled board meeting, an amount will be deducted from his/her fee. Where a director is required to attend a special board meeting, he/she will receive an additional fee in respect of his/her attendance. This fee structure reflects the skill and experience brought to the company by each non-executive director, responsibilities undertaken, the time commitment involved and the importance of attendance at and contribution to board and committee meetings.

The level of fees for service as directors, additional fees for service on board committees, fees paid to independent advisors and the chairman’s fee are reviewed annually. The committee recommends fee structures to the Board following independent research into trends in director remuneration for approval by shareholders at the annual general meeting.

Non-executive directors do not participate in the annual bonus plan or the Scheme and do not receive any benefits other than those disclosed.

Details of the fees paid to non-executive directors for the year to 30 June 2010 are set out in note 46 to the consolidated financial statements and the proposed fee increases are set out on page 116.