Marconi angers City with scheme to slash price of executive share options

Marconi, the telecom equipment maker, sparked a City row yesterday when it announced plans to reprice its share option schemes to take account of the dramatic fall in its shares.

Marconi is asking shareholders to approve a plan to cut in half the exercise price of key executive options. It is also halving the exercise price of a wider scheme in which 34,400 Marconi staff participate.

The new schemes will replace the existing option packages, which are worthless because of the collapse in Marconi's shares. The company will present the new plans to shareholders at Marconi's annual meeting on 18 July.

The repricing angered corporate governance bodies and fuelled fears that if Marconi is successful it will open the floodgates to a wave of copycat schemes, particularly from companies whose share prices have been hardest hit by the dot.com fallout.

The National Association of Pension Funds, said: "NAPF members are extremely reluctant to see the repricing of options because shareholder funds have already dropped, and this represents a further committal of funds."

The Association of British Insurers (ABI) said: "In principle, we don't like the rebasing of options. But there is a floor price [in the new scheme] which is at a substantial premium to the current share price. That makes some difference."

Marconi was understood to have been originally pushing for an even more generous scheme but modified the terms after discussions with the ABI.

Some of Marconi's biggest institutional shareholders were furious about the repricing. One senior fund manager said: "What this does is draw attention to management under-performance. A company has to be in a pretty bad way to come back to its shareholders and ask for the share options to be rebased. This is a bold enterprise in the re-direction of a company which does not appear to have succeeded."

The terms of the original Marconi option scheme were devised in 1999, when the company was born out of the old GEC defence empire. The executive scheme granted options at prices ranging from £6.70 to £10.98.

At the end of 1999, Marconi's shares soared on the back of the dot.com boom, from about 500p in Autumn 1999 to a peak of £12.50p last summer. The surge was worth millions to Lord Simpson, Marconi's chief executive, and its finance director John Mayo. Lord Simpson held 1.4 million options priced at 311p and a further 1.5 million at 801.5p. Mr Mayo held 1.1 million at 331p and 1.7 million at 801p.

But the stock subsequently crashed to just 266p after the market turned on telecoms and technology companies and a string of broker downgrades.

The exercise price under the new scheme has been cut to a flat rate of 400p, or a 10 per cent premium to the market price, whichever is highest. The number of options has also been cut in half. The exercise price for the wider scheme that involves 34,400 staff has been cut from £16.03 to £8.

Marconi sought to justify the changes by saying: "Having undertaken a detailed financial review the renumeration, [the] committee believes that these changes are essential if Marconi is to remain internationally competitive and motivate its key people."