RIP the executive share option. Died 2005 after a long decline. Much-loved and mourned by those who cashed theirs in during the bull market. Scorned by those whose dreams of lucre vanished with the bear.
Options as a form of executive reward may not be totally dead and pushing up the daisies but a report on Wednesday from consultants PwC is the latest in a line suggesting that they are rapidly on the way out. And they need little mourning.
Among FTSE 100 chief executives, options as a proportion of delivered long-term incentives declined from 36 per cent to 20 per cent over the past year and a similar trend is clear among medium-sized companies.
A significant catalyst is the new international accounting rule that requires options grants to be charged for the first time to the profit and loss account, thus removing the accounting advantage they had over the other main form of long-term pay – grants of shares that vest if certain performance conditions are met.
This has led many companies to reassess the value of their options programmes and find them wanting.
Investors tend not to like them because they may create a disincentive to distributing dividends; and giant awards are widely blamed for the US’s accounting scandals.
Companies close to their shareholder dilution limits can find them restrictive, since investor guidelines do not distinguish between options and performance shares, which have more economic value.
Nor are they flavour of the month with employees. The rise in the stock market means that many option grants are no longer under water but the memory lingers on. Research suggests that many employees ascribe a value to their options lower than their economic cost. Performance shares, by contrast, are never under water, retaining some value as long as the company does not go bust. And like options, they give staff incentives to improve the company’s long-term performance and share price.
Moreover, according to PwC’s research among medium-sized companies, the grant sizes of performance shares are only marginally lower than for share options, even though they are intrinsically more valuable. A full comparison needs a look at the vesting hurdles but it looks as if many companies are using the switch from options to performance shares quietly to push up long-term compensation. A phoenix – or maybe vulture – rises from the ashes.
Business as usual
Yes, the bomb attacks in London affected July passenger traffic figures; no, they were not the single dominant factor reflected in the numbers put out by BAA. The airports group was keen on Wednesday to point out the importance of underlying issues such as capacity constraints at Heathrow and the decline in European charter traffic at Gatwick in the monthly figures for its seven airports, including three in London.
The attacks appear to have contributed to a decline in the growth in domestic traffic to 1.4 per cent in the month, against a trend of 4 to 5 per cent growth. But BAA has kept its full-year targets unchanged, suggesting it expects the effect will be short-lived. Similarly, Mervyn King, governor of the Bank of England, used the phrase “business as usual” on Wednesday in expressing the view that the bombings had not had a lasting economic impact.
This analysis chimes with anecdotal evidence from the hotel and retailing sectors. Trading has undoubtedly been hit by the disruption associated with the attacks but a large-scale reluctance to come to the capital has not definitely emerged.
An important caveat is that the summer months are atypical in some respects, for example for business travel and conferences. Equally, retail sales were already depressed by interest rates and it is not yet apparent how they will respond to the cut.
A clearer picture should emerge in September. In the meantime, while the impact of the bombings may not have been financially severe, it has still been noticeable. After all, when business really is as usual, you don’t need to tell people so.
More fallout from the government’s questionably conceived Extradition Act, brought in following 9/11 to make the pursuit of terrorist suspects easier but in practice making it simpler for the US authorities to pursue alleged white-collar suspects.
Nigel Potter, the former chief executive of Wembley who has been found guilty of conspiracy and wire fraud in the US, blames the act for exacerbating his position.
He says the act was one reason he decided to co-operate with the US authorities rather than fight extradition. The act creates a “fast track”, removing the need for foreign authorities to make a detailed prima facie case for extradition.
Another businessman, Ian Norris, the former chief executive of Morgan Crucible, is fighting extradition to the US on price-fixing charges. He has been granted permission to seek a judicial review of the rules, which appear to lack reciprocity and may not adequately protect UK citizens. The issue needs a proper hearing.
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