Share options: Directors bail out to land on their feet

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The Independent Online

BSkyB, the satellite television broadcaster, is this week expected to report worsening underlying losses of more than £210m, compared with last year's £150m.

As the losses have mounted, the share price has slumped, down 40 per cent since the beginning of the year, but you could never tell this from looking at the share options and perks available to the chief executive, Tony Ball, and his senior directors. Last November, the shareholders agreed to let several directors exercise their options after just one year, instead of the usual three, and limits on how many options they can receive have been removed.

BSkyB was fortunate to have "gone early". The case is an example of how leading British companies are trying to protect the pay packages of their top directors from the effects of collapsing share prices and falling profits through "bailing out", as it is known in the trade. This strategy works by allowing directors to introduce new share option schemes. Outstanding options that are "underwater" – worth less than the option price – can be disregarded and more share issues can be issued at a substantially lower price.

The hope in the City was that this would prove more acceptable than the straight repricing of options that ran into so much shareholder opposition at Marconi. That scheme had to be dropped in the midst of a bigger row about the suspension of the shares and the departure of chief executive-elect John Mayo. But the "bailing out" device now seems to be arousing just as much controversy.

On Friday, the telecommunications group Cable & Wireless faced opposition from its shareholders. Its investors forced C&W to take a poll vote on the company's proposed new executive share scheme, which will allow new shares to be issued without taking account of existing shares. The scheme was eventually voted through by 71 per cent of shareholders.

And this week, the high-street retailer Boots is attempting to persuade investors to vote through a share option scheme that could allow awards of up to 200 per cent of salary. According to the Local Authority Pension Fund Forum (LAPFF), which is made up of 24 pension funds and has assets of more than £40bn, the plan is that Boots executives would qualify if the company achieves earnings per share growth of just 3 per cent a year over three years.

The new scheme would come on top of an existing long-term incentive plan, which already awards shares worth up to 125 per cent of salary. But the plan is unlikely to be nodded through as easily as the BSkyB scheme. The retailer is already facing pressure from local authority pension funds, who are planning to vote against the Boots scheme at the annual meeting this Thursday, because of its "unchallenging" performance targets.

"Growth of 3 per cent a year is hardly an ambitious target," says Councillor Bob Sowman, chair of the £5bn West Yorkshire Pension Fund. "We in the Forum want to see companies setting stretching performance targets which reward executives only for superior performance."

But a spokesperson for Boots said the funds had misunderstood the scheme, and the target would actually be the rate of inflation plus 3 per cent. Individual employees would receive more than 100 per cent of salary only in exceptional circumstances.

Despite the economic slowdown, the levels of pay awarded to top executives have continued to rise. One recent survey shows that chief executives of FTSE 100 companies were paid £1.7m on average last year. David Tankel, managing partner of New Bridge Street Consultants, a remuneration company, says executives can still, despite current economic woes, expect generous packages. These include a market competitive salary, an annual bonus of up to 60 per cent of basic salary, a generous pension scheme, significant share option grants each year and fringe benefits, such as a car.

Yvonne Stevens, research director at Manifest, a corporate governance research agency, points out that the number of share options being awarded has increased dramatically over the past two years. A couple of years ago, listed companies would usually award up to 100 per cent of salary in share options; now the figure now could be as high as 400 per cent. Tension arises because the return to investors has not risen with the levels of executive perks, and share- holders have no equivalent way of limiting their losses.

"There has to be a balance between executive perks and delivering value to shareholders," Ms Stevens adds. "There is no evidence of an alignment between the rewards the executives are getting and [the interests of] shareholders."

John Rogers, director of corporate governance at the National Association of Pension Funds, accepts that lucrative pay packages may be necessary to keep key executives but is against rewarding people for failure. "The problem is," says Mr Rogers, who is pressing hard for one-year rolling contracts for senior executives, "that there is no real tightening of performance criteria and yet salaries and potential awards from bonus schemes are increasing."

Dick Hawkes, chief executive of head hunter Alexander Hughes, which specialises in finding top-level business leaders for its clients, says that pay is increasing despite the negative economic situation because there is more demand than ever before for high-performing directors. "The need for top executives is greater because life is tougher and companies need to change and to have good executives to survive."

So it seems that when it comes to executive pay, you get more if things go well – and more if things go badly.