CEO share options becoming less popular

Jun 23 2006 by Nic Paton Print This Article

The number of European companies using share options to award their chief executives and other executive directors has dropped significantly in the past three years, new research has found.

But alternative long-term incentives have increased in popularity, the survey by HR company Mercer Human Resource Consulting has concluded.

In 2004, 63 per cent of companies offered share options, compared with just 41 per cent this year a reduction of more than a third.

The average grant of options as a proportion of the long-term incentive package also fell, from 45 per cent in 2004 to 24 cent this year, it said.

The survey, which covered 105 large companies across Europe, found that other long-term incentives have become appreciably more popular.

In the UK and Ireland, the use of performance shares has increased, from 70 per cent of companies three years ago to 84 per cent in 2006.

Their weighting had also gone up, with the average allocation rising from 50 per cent to 70 cent of the long-term incentive mix, it said.

Richard Lamptey, principal at Mercer, said: "The requirement since January 2005 to expense options in corporate accounts has reinforced a perception that share options are less cost-effective than other long-term incentives in providing executives with a real interest in the business.

"In Mercer's view, however, companies need to think carefully about the relative merits of different long-term incentive vehicles to support their business strategies and projections," he added.

In Continental Europe, use of performance shares had remained relatively constant while restricted stock units, which are settled in either cash or stock after a specified time, and long-term cash plans have become more popular.

"In Continental Europe, the legal framework governing share-based incentives is generally not as permissive as in the UK and Ireland, so performance shares are used less frequently as an alternative to options," said Lamptey.

Less onerous disclosure requirements in Continental Europe also could allow employers to provide rewards to executives without the link to company performance that is standard in the UK.

The survey found that 94 per cent of companies in the UK and Ireland attached performance conditions to their long-term incentives and virtually all of these (94 per cent) linked them to the vesting of options or shares.

This was higher than in mainland Europe, where 85 per cent of companies attached performance conditions.

Nearly two thirds of these applied them to the vesting of options or shares, while 59 per cent attached them to the grant of options or award of shares.

Despite increasing pressure from shareholders, on average fewer than half the respondents planned to enhance compensation disclosure in their 2006 annual report.

However, among smaller companies (those with fewer than 1,000 employees), the figure rose from two-thirds (67 per cent).

Of those companies that proposed to enhance disclosure, the most common intention was to give more details about short and long-term incentive plans, followed by increased disclosure of individual pay details for top executives.