Can't Program ATMEGA With ICSP
Yes that error is because there is no communication between the the board and your computer. Unfortunately this is difficult to debug as there is almost an infinite number of issues that can cause this. All I can recommended is this:

You need to troubleshoot both ends:

On the board:

1) Check your voltages. Are they correct? If possible do so with an oscilloscope. Not all programmers provide a voltage, your board may need to. Usually the STK500 does provide 5V. You should only provide voltage from one source; the programmer or the board - NOT BOTH. 

2) Check that your ICSP header is mating correctly with pin 1 on the header going to pin 1 on the programmer. In the past I have made mistakes by flipping a part or rotating it during layout in such a way that the pinout was reflected and no longer mater correctly. 

3) Where does your reset net go? I can't find a button or anything. If it's tied to GND your holding the MEGA in reset. 

4) Do you have the boot-loader loaded onto the ATMEGA? Arduino IDE will not work without it. 

5) The ICSP may be disabled on the board. You may have done this by accident, or it came from the factory with ICSP disabled. If you can upload software through it any other way, it's still possible that ICSP is disabled. So if ICSP is disabled, what can you do? We're going to need to reset the chip. Read more here

On the computer:

1) Is the correct Serial Port selected?

2) Is the correct driver installed?  

3) Can you program a regular Arduino using this method? If you can something is wrong with your board.