Remuneration report

Introduction

Murray & Roberts believes that directors, senior executives and staff should be paid fair, competitive and appropriately structured remuneration in the best interests of shareholders. It also recognises that its remuneration philosophy has a direct effect on the behaviour of employees and that it has to align with the business strategy of the company.

The Group’s remuneration policy continues to be driven by the principles of developing a performance culture and motivating and retaining key and critical talent.

The Board and the remuneration & human resources committee (“remuneration committee”) present this remuneration report. It discloses the remuneration policy on executive remuneration and some aspects of remuneration below executive level with regard to fixed and variable components. Following a comprehensive review of the Company’s remuneration policy from a King III corporate governance best practice design perspective, various enhancements were made from last year. These are detailed in this report. On recommendation by the remuneration committee, the Board has approved the information in this report.

Remuneration committee

The remuneration committee is a committee of the Board and met four times during the year. Membership of this committee and attendance at committee meetings are provided. The committee’s terms of reference are included.

The key decisions taken during the year by this committee were:

	Approval of guaranteed pay increases for the Group
	Approval of executive director and prescribed officer guaranteed pay increases for 2013 financial year
	Review and approval of short term incentives design and related company financial performance conditions
	Approval of short term incentive payments in respect of 2012 financial year
	Approval of long term incentive awards made in financial year 2012 and their underlying performance conditions
	Based on best practice recommendations and input from shareholders, the design of a new long term incentive plan for approval by shareholders
	Review and approval of non-executive director fees for 2013 financial year, excluding approval of any recommendation on their own fees
	Review and approval of changes to the remuneration policy for the 2013 financial year
	Review and approval of the Company’s remuneration report and policy for inclusion in the 2012 annual integrated report

Remuneration policy

The Murray & Roberts remuneration policy is aligned to its strategic policy, namely recovery in the short term and sustainable growth into the future. Murray & Roberts recognises that its remuneration policy should be formalised across all the Group’s operating companies to drive synergies, however it needs to remain flexible enough to acknowledge differences across operating companies, with varying market conditions and external benchmarking, per operating platform.

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

	Remuneration consists of fixed and variable components, with emphasis on variable pay at higher levels to encourage performance and shareholder value add
	Remuneration structures support the development of a performance culture and the Group’s business strategy
	Remuneration components are set at a competitive level to motivate key talent and to attract the services of high calibre future employees
	The short term incentive plan aligns the interests of executives with those of shareholders in the short term as performance bonuses are subjected to company key financial performance and individual key performance indicators (“KPI”)
	The long term incentive plan and awards to participants are subject to the satisfaction of financial performance conditions supporting long term shareholder value creation

The remuneration committee ensures that the mix of remuneration, including short term and long term incentives, meets the Group’s strategic objectives.

Murray & Roberts has the following remuneration components:

	Guaranteed pay (consisting of salary, benefits and retirement fund contributions)
	Short term incentives (“STI”)
	Long term incentives (“LTI”).

The Company seeks to position guaranteed pay at the median against appropriate national benchmarks, however, for total pay the policy is to position earnings at the 75th percentile for executives, senior management and key talent and critical skills. This policy supports the underlying principle of paying for performance and the focus on variable pay.

In terms of optimal on-target remuneration mix for executives, an exercise was conducted in 2012 to benchmark all components of executives’ remuneration and to determine the on-target remuneration mix, which supports the Group’s business strategy and aligns with feedback provided by shareholders.

This optimal remuneration mix, which focuses on variable remuneration for particularly the Group chief executive and Group financial director, is depicted below, per level.

Overview of remuneration components

Guaranteed pay

Guaranteed pay is aimed at reflecting individual contribution to Murray & Roberts and the market value for role with internal equity and external equity being cornerstones for setting guaranteed pay.

Establishing internal equity entails a process of formal job matching to ensure greater internal alignment, particularly between operating companies within operating platforms. In terms of external equity, which is essential to compete for scarce talent, a benchmarking philosophy is adopted whereby benchmarking will be performed relative to peer companies for executive directors and prescribed officers against companies listed on the JSE which are of a similar size and nature, in terms of market capitalisation and sector, to Murray & Roberts.

Benchmarking for all roles is also performed against group comparator industries, where data from third party salary survey service providers is used.

The average remuneration adjustment for executive directors and prescribed officers in 2012 was 7.4%. The adjustments are aligned to the average Murray & Roberts increase awarded in March 2012 for other salaried employees. The payments made to executive directors and prescribed officers for the 2012 financial year are disclosed in note [42] to the consolidated annual financial statements.

Murray & Roberts operates a total fixed cost of employment to company (“TFCE”) remuneration structure for guaranteed pay. Therefore, benefits such as travel allowances, insurance policies relating to death in service and disability, group life benefits and medical aid are included in TFCE.

Salaried employees in South Africa contribute to the Murray & Roberts Retirement Fund, which is a defined contribution pension fund governed by the Pension Funds Act.

Employees of Murray & Roberts in the Middle East region are not required to belong to a retirement fund, while in Australia contributions are made, as part of TFCE, to a superannuation fund structured as a defined contribution fund. In Canada, contributions, as part of TFCE, are made to a registered retirement fund.

Short term incentives

The purpose of the STI scheme is to drive company and team financial performance as well as individual performance in order to deliver sustained shareholder value.

The STI scheme is designed to be self-funding. On-target bonus projections are used to ensure affordability and financial measures such as earnings before interest and tax and actual profit are used to calculate the bonus pool accrual.

As Murray & Roberts believes that all employees should be aligned with key business drivers and sustainable growth participation in the STI also includes middle management, junior management and general staff, subject to the meeting of individual KPIs.

Targets for earning STI payments for executives consist of both financial and individual targets. The Group chief executive, Group financial director and operating platform executives have a 70% weighting in favour of financial performance, while other prescribed officers have a 50% weighting.

The STI disbursement is based on bonus qualification levels as a percentage of TFCE, which is determined based on grade and performance against agreed financial and/or individual KPIs as per the individuals’ performance contracts and applied on a sliding scale between threshold, target and stretch performance. Performance below threshold attracts no STI payment for the specific component of the STI below threshold, where threshold for financial KPIs is 80% of target. The STI disbursement is capped at stretch performance or 120% of target. The potential maximum distribution to executive directors and prescribed officers is between 100% and 150% of TFCE.

Financial performance KPIs will be measured against audited annual financial performance. Individual performance KPIs will be based on a formal performance and development evaluation conducted by the executives’ direct manager.

The payments made to executive directors and prescribed officers for the 2012 financial year are disclosed in note 42 to the consolidated annual financial statements. The total STI payment to these executives is 50% of their aggregate TFCE and 44% of their potential stretch bonuses. The year to June 2012 was defined as the Group’s Recovery year and has been an exceptional one for the Group, in the context of the achievement of the Recovery objectives highlighted in this annual integrated report. It is within this context that the awards were made to the executive directors and prescribed officers.

Following input from shareholders, Murray & Roberts will implement, from the 2013 financial year, an automatic deferral of part of the calculated STI into forfeitable share awards as a long term share incentive to enhance alignment with shareholder’s interests.

The financial measures for executive directors and prescribed officers for the 2013 financial year STI will be Group EBIT, operating platform EBIT, net cash and return on invested capital employed. The individual measures of leadership, relationships, operational excellence, safety and risk are designed to maintain a sustainable, profitable business in the long term.

Long term incentives

The overall purpose of the Murray & Roberts LTI 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 value creation over the long term and it supports retention and attraction of executives.

Murray & Roberts has reviewed its LTI in great detail and proposes introducing a Forfeitable Share Plan in the 2013 financial year and the phasing out of its historic option type plan, namely the Murray & Roberts Holdings Limited Employee Share Incentive Scheme (“Share Option Scheme”).

Murray & Roberts Share Option Scheme

The Share Option Scheme will be phased out and no further awards will be made from financial year 2013.

However during the 2012 financial year, allocations were made in August 2011. The purpose of the allocation was to provide greater alignment between key executives and shareholders of the company, to contribute to the alignment with the Recovery & Growth strategic plan and sustainable value creation. Share options were allocated to some 33 key executives. Options granted were based on cliff vesting in year three subject to meeting a performance condition. The performance condition applied was growth in diluted HEPS for continuing operations of annual CPI + 5% cumulatively over the performance period. In order to support retention, approximately 30% of the awards allocated to certain executive directors and executive committee members during the August 2011 allocation comprised options with no performance condition attached to them.

As a result of the April 2012 rights issue, additional options were issued to all existing participants of the Share Option Scheme in the same proportion as the rights issue. This is in line with the scheme rules of ensuring that the participants are entitled to the same proportion of the equity capital as the participant was previously entitled. Participants will be obliged to exercise these additional options together with the options already held, resulting in a weighted average adjusted option price. The adjustment is not a re-pricing of the options.

Outstanding awards in terms of Share Option Scheme will continue to vest in participants, mostly subject to meeting performance conditions. Executive directors and senior management were eligible to participate in the Share Option Scheme. Non-executive directors were not eligible to participate in the Share Option Scheme.

A summary of the salient features are:

	Participants are granted options to acquire shares in Murray & Roberts at a future date
	No consideration is paid by participants for the option grant
	The purchase price for the shares is set at the date of grant and is the closing price of a share on the day of the grant
	At the end of the vesting periods, participants can exercise the option and pay the purchase price and acquire the specified number of shares in Murray & Roberts. It is only at this point that participants will become shareholders and will acquire shareholder rights
	Staggered vesting periods apply to options granted under the scheme after October 2009. All vested options must generally be exercised within six years from the date of grant, failing which they lapse
	Where a performance condition is imposed, it was based on an increase in the share price of CPI + 4% per annum compound growth

The outstanding option awards made in terms of the Share Option Scheme for executive directors and prescribed officers are disclosed in note 42 to the consolidated annual financial statements.

Murray & Roberts proposes to amend certain provisions of the Share Option Scheme to align with the introduction of the FSP and to effect enhancements to the drafting of the scheme in line with Schedule 14 of the JSE Listings Requirements. The salient features of the proposed amendments to the Share Option Scheme will be presented to shareholders at the annual general meeting of shareholders. In this regard, shareholders are referred to the special resolution number 5 of the annual general meeting of this report.

Murray & Roberts Forfeitable Share Plan

INTRODUCTION

Murray & Roberts, as an outcome of the remuneration policy review, proposes the introduction of a new long term incentive plan in financial year 2013, namely the Murray & Roberts Holdings Limited FSP. The rationale behind the introduction of the FSP is as follows:

	Best practice indicates a move away from the use of option-type plans only and the use thereof in conjunction with full share plans Full share plans, like the FSP, are less leveraged and have less upside than option type plans, but provide more certain outcomes
	Most importantly, share ownership by executives provides shareholder alignment which is essential for a LTI to succeed
	Furthermore, FSP instruments aid retention and provide more certainty as these instruments are less volatile than option type instruments
	This instrument also supports the Company’s policy of attracting and retaining the key talent and expertise required for its business strategy

AWARD LEVELS

Annual allocations of forfeitable shares under the FSP will be made on a consistent basis to ensure long term shareholder value creation. This ensures that executives are not faced with an “all or nothing” reward scenario and the impact of the cyclical nature of the business is smoothed. Annual allocations will be benchmarked and set to a market related level of remuneration.

The remuneration committee has discretion when making FSP awards and will make awards with reference to the individual performance of the executives. Annual allocation and aggregate caps will be applied, with the aggregate cap being between four and six times TFCE for executive directors and prescribed officers.

On an annual basis, the remuneration committee will review LTI allocations to ensure its continued contribution to shareholder value and adherence to best practice award guidelines. The remuneration committee is also responsible for the governance relating to all LTIs and will ensure that allocations are made consistently subject to stringent performance conditions.

PERFORMANCE CONDITIONS

For annual awards, all awards under the FSP will be subject to a mix of performance conditions, namely:

	Return on Invested Capital Employed (“ROICE”);
	Relative Total Shareholder Return (“TSR”); and
	Free Cash Flow per Share (“FCF”).

The FSP provides for retention allocations, however, retention allocations will only be used in very specific, ad hoc circumstances for retention of critical skills and will be approved by the remuneration committee in terms of the FSP rules.

The weighting for each of the performance conditions and vesting percentages for on-target performance for the FSP are as follows:

FSP PERFORMANCE CONDITIONS AND WEIGHTING

For each of the above performance conditions, targets will be set for on-target performance with commensurate linear vesting levels between threshold and on-target performance. Threshold will be set at 80% of target and will be evaluated at the end of the three year performance period.

The calculation and targets for the performance conditions are contained in the table below.

Peer companies to be used for the TSR performance measure are Aveng, Group 5, WBHO, Basil Read and Steffanuti Stocks.

The remuneration committee considers the performance targets to be stretching in the context of the company’s business strategy and the market conditions.

Due to the annual allocations cliff vesting will apply, subject to the performance conditions, three years from the award date.

FSP PERFORMANCE CONDITIONS CALCULATIONS AND TARGETS

SALIENT FEATURES FOR SHAREHOLDER RESOLUTION

The salient features of the FSP will be presented to shareholders at the annual general meeting of shareholders. In this regard shareholders are referred to the Special Resolution number 4 of the annual general meeting of this report.

Dilution

The aggregate number of shares at any one time which may be allocated under the Share Option Scheme and the FSP shall not exceed 33 189 262 (thirty three million one hundred and eighty nine thousand two hundred and sixty two) shares.

The maximum number of shares allocated to any participant in respect of all unvested awards under the FSP and the Share Option Scheme, shall not exceed 2 223 681 (two million two hundred and twenty three thousand six hundred and eighty one) shares. This currently represents 0,5% of the number of shares currently in issue.

LETSEMA VULINDLELA BLACK EXECUTIVE TRUST

In addition to the Share Option Scheme and the FSP, Murray & Roberts allocates shares to black executives through the Letsema Vulindlela Black Executives Trust (Letsema), which was established in December 2005 as part of the Group’s Broad-Based Black Economic Empowerment shareholding structure. The objective of Letsema is to give black executives the opportunity to become shareholders in Murray & Roberts and as an attraction and retention incentive. In addition, Letsema aims to align the interests of black executives with those of the shareholders.

The beneficiaries of Letsema are black (African, Coloured and Indian) South African citizens, who are employed on a permanent basis within the Group as top, senior and middle managers.

The August 2011 allocation was based on management band, performance and potential and the number of shares allocated was determined with reference to the expected value of shares to be allocated relative to the employee’s TFCE. Allocations ranged from 5% to 35% of TFCE for stretch performance.

This trust was extended to 2021 and continued allocation of shares will be made until 2016 with a five year vesting period.

Black executives who are top managers or are senior executives as members of operating company executive committees will be allocated shares under the FSP.

Retention payments

No retention or severance payments were made during the year to executive directors or prescribed officers.

Contracts of employment – executive directors and prescribed officers

Executive directors do not have fixed term contracts, but are subject to notice periods of between one and three months. Similarly, prescribed officers 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 prescribed officer. 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 prescribed officers 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 management is at age 63.

Shareholders’ non-binding advisory vote

In terms of King III and best practice principles the remuneration policy as contained in this remuneration report, will be put to a non-binding shareholders’ vote at the annual general meeting of shareholders. Shareholders are referred to ordinary resolution 6 of the Notice of annual general meeting in this regard.

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 at 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. 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.

Non-executive directors do not participate in the STI or any LTI and they do not receive any benefits other than those disclosed.

To the extent that a non-executive director does not attend a scheduled Board or committee meeting, an amount will be deducted from his or her fee. Where a director is required to attend a special Board meeting, he or she will receive an additional fee in respect of 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 and the chairman’s fee are reviewed annually. The fees are benchmarked against 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. Consideration is also given to any changes in the level of complexity of the roles when assessing fee recommendations and benchmarks.

In accordance with King III, the remuneration committee reviews, based on external benchmarks, and recommends fee structures to the Board for approval (excluding recommendation on their own fees) before submitting recommendations for approval by shareholders at the annual general meeting.

An increase to the non-executive directors’ and committee fees is proposed for 2013. This proposed increase is due to:

	External benchmarking indicating that Murray & Roberts is remunerating non-executive directors at levels lower than the company’s peer group
	The need to attract suitable, high quality non-executive directors
	An increase in time investment required by non-executive directors due to the global nature of the Group, its risk profile and an increase in general corporate governance requirements

In terms of section 66(8) of the Companies Act, shareholders are referred to special resolution number 1 in the Notice of the annual general meeting of this report regarding approval of the proposed non-executive director fee structure for 2013.