Outlook: Share options

SHAREHOLDER VALUE has long been a priority at Boots, and it rarely tires of lecturing all-comers on the subject - just don't mention Ward White, now eradicated from the record as if this destruction of value never happened. To this end, the company has scrapped share options for directors and replaced them with long-term bonuses based on total shareholder return. And at every results meeting Lord Blyth, the Boots chairman, gleefully flashes up a little table showing just how well Boots is performing against its peer group on this measure (share price performance plus dividend payments).

To boot (forgive the pun), Boots has undertaken pounds 800m of share buy- backs in the past three years and paid out a special dividend of pounds 400m. Now it has pushed out the envelope a little further.

Yesterday's announcement that Boots will satisfy its obligations on staff share options by buying existing shares in the market rather than issuing new ones is the kind of subject only an accountant can get excited about. The main benefit is that buying in existing shares rather than issuing new ones means the value of current shares is not diluted. It also means that the scheme is consistent with Boots' policy of reducing the number of shares in circulation and thereby enhancing earnings. And it recognises that share options as a form of remuneration carry a real cost. They should not be treated as manna from heaven.

Boots will as a consequence take a pounds 63m hit to the bottom line this year and pounds 20m a year thereafter. The real cost of share options thus becomes disclosed and transparent. In most other schemes the cost of option payments is passed straight to the reserves and nobody bats an eyelid. This is seen as acceptable in the UK where the amount of staff compensation paid out in the form of options is fairly low.

The situation is very different in the US, where nothing is done by halves. Many tech companies pay a high proportion of their wage bill in stock options, prompting growing concern about a potentially vast corporate liability which goes almost entirely unrecognised in accounting terms. The most oft-quoted example is Microsoft, which has created hundreds of Microsoft millionaires through the issue of options. The story goes that if Microsoft had recorded those as a cost to the profit and loss account, or paid them as salary, the business would have made a loss only a few years ago.

On this side of the Atlantic, the problem doesn't exist on anything like the same scale. That, of course, makes it a much easier one to deal with. Even so, full marks to Boots in grasping the nettle in this way.