Greenbury rejects ban on use of share options

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The Independent Online
The Greenbury committee on top pay will approve the use of share options in stock market flotations, and for executives of smaller quoted companies.

It has also rejected proposals for a complete ban on the use of share options to reward executive of large companies, contrary to recent reports.

But the committee plans to recommend tighter conditions for options granted in flotations.

This will include a year's extension of the three-year waiting period before profits qualify for capital gains tax treatment rather than income tax.

The latest draft of the report, to be discussed at the committee's final meeting on 3 July, strongly criticises the regional electricity companies and the generators for the way executives have made windfall profits on share options.

It will lambast the utilities for failing to devise remuneration strategies that give directors a long-term interest in their companies, by sharing the same risks as shareholders.

The committee has nevertheless resisted pressure to recommend a complete block on the use of options for executives in large firms.

At least one of the committee members, Sir Michael Angus, chairman of Whitbread, favoured the idea of restricting large firms to long-term incentive schemes and banning options.

But the draft drawn up for the final meeting of the committee is understood simply to state a preference for long-term incentive schemes over share options where large companies are concerned. It has drawn back from a general condemnation, leaving its main criticism to their past use by utilities.

The draft also says the exercise price of options in a flotation should not be set until a year after trading starts, though other periods considered were six months and 18 months. It will say the exercise price should be based on an average market price over a period.

The committee wants to encourage what it will describe as an existing trend towards long-term incentive schemes and away from the windfall profits available from traditional option schemes. It will also dwell heavily on the need to avoid rewards for failure. Even the new type of long-term scheme, already used by as many as half of Britain's biggest companies, could still include the award of shares as an incentive.

But they would be handed over on the basis that directors will keep them.

The draft, 40 pages long but being shortened, recommends that the Government should legislate to allow more disclosure of information about directors' earnings in annual reports, which will require an amendment to the Companies Act.

Changes are needed to allow disclosure of named directors' pay because the Act states that reports should show no more than the bands into which directors' pay falls, but without naming them. One decision to be taken on 3 July is whether pensions should be accounted for as the cost to the company or - more likely - as the value to the individual.

The meeting is likely to decide that the centrepiece of the report, a code of practice for directors' remuneration, should be incorporated in the Stock Exchange's listing rules, as the Cadbury corporate governance rules are now.

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