Share awards wipe £4.6bn from profits of UK's biggest companies

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The Independent Online

Some £4.6bn was wiped off the profits of Britain's biggest listed companies last year as a result of new accounting rules which require staff share awards to be treated as expenses.

Research by the accountancy group PricewaterhouseCoopers also found the technology sector was hardest hit, with profits cut by an average of 12 per cent under the International Financial Reporting Standard 2 (IFRS2). At the other end of the scale, telecoms companies saw profits reduced by only 1 per cent.

Under the new rule, all options granted must be recorded as outgoings in company accounts, leading to an average cut in profits among FTSE 350 firms of 2 per cent. The 2005 annual reports, analysed by PwC, showed the impact of the change for the first time. The profit reduction was £600m for the FTSE 250 companies and some £4bn for companies in the FTSE 100.

The study found extreme examples, with charges for share awards amounting to 34 and 24 per cent of profits in two cases. In the case of another company, 44 per cent of losses were put down to the new charges. The incentive plans reward executives and less senior staff.

Graham Ward-Thompson, a partner at PwC, said: "The accounting standard IFRS2 means that having the right share scheme becomes even more important for businesses. Companies need to strike a balance between having a share plan that motivates their people, while minimising the impact on profits."

Given the high costs of employee incentive programmes, Mr Ward-Thompson suggested companies needed to use more effective schemes. He said share options were "expensive compared with the benefits they deliver". A share options scheme, now charged against profits, provides an incentive only if the share price of a company goes up, as the holder must exercise the option at the share price that it was granted at.

By contrast, performance share plans provide the share, for no payment, if certain criteria are met, ensuring there is some incentive, no mater how the shares do.

PwC found FTSE 100 companies make more use of equity-based incentives across their businesses, at key management and all employee levels. This is supported by a higher "per employee" IFRS 2 charge at £887 for FTSE 100 companies and £288 for the FTSE 250.

Separately, a report from another accountancy group, KPMG, predicted Britain's biggest companies will increasingly turn to tailor-made executive pay packages using a far wider range of performance measures. That is because the average level of payouts under current incentive schemes is approaching the maximum allowable level, "which puts a question mark over how stretching performance requirements have become".

The findings come at a time when investors are increasingly concerned that there is a widespread failure to link remuneration strategies and performance to the strategy of the business.