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Overhaul sought for share option schemes

The Greenbury committee on executive pay has begun an in-depth study of how to improve directors' share option schemes, with the help of consultants Towers Perrin.

There is widespread agreement on the committee, chaired by Sir Richard Greenbury, chairman of Marks & Spencer, that share schemes should link rewards more closely to performance, to avoid the embarrassment of creating executive millionaires whenever the stock market rises sharply.

Tim Melville-Ross, director general of the Institute of Directors and a member of the committee, said the report in June may go as far as setting out the benefits and disadvantages of different types of share incentive scheme.

But in an interview with the Independent he rejected the idea of setting out a detailed prescription for the way companies structure their schemes. He expected that the report would recommend leaving boards to choose their own methods for awarding shares, because circumstances varied too much between companies.

Specialists have devised a range of new long-term performance-related schemes to overcome some of the disadvantages of traditional share options, which have the disadvantage that they reward executives for stock market booms.

Mr Melville-Ross rejected the idea of government legislation to back reform of share option schemes, which the Prime Minister indicated last week was a possibility if the Greenbury committee wanted it.

He also thinks it unlikely that the committee would recommend legislation of any kind. Some members are, however, thought to favour a change in company law to promote disclosure, and Mr Melville-Ross conceded that if there was a need for new top pay law, disclosure of directors' earnings was the most suitable area. "I don't want to come out as vehemently opposed to new legislation in this area [of disclosure]," he said.

In a clear indication of another disagreement on the Greenbury committee, Mr Melville-Ross said he was firmly against proposals for annual re-election of non-executive directors on board remuneration committees, or even of the committee chairman.

But he would accept a recommendation that the remuneration committee should present an annual report to shareholders.

Annual re-election is backed by an influential minority of committee members including Geoff Lindey, the National Association of Pension Funds representative.

Mr Melville-Ross said annual re-election would make it hard to build an experienced board and discourage non-executives from joining at a time when demand for their services was growing. Disclosure was the key to the independence and objectivity of the committee.

The work with Towers Perrin on the award of options would not be prescriptive: "What we will probably try to do is say: here are the different ways of doing it, here are the pros and cons - you get on and decide for yourselves."

He denied recent reports that he was against share options altogether- but admitted that his support was qualified because rewards could be boosted by a bull market rather than individual company performance.

"In the case of privatised utilities, because of low flotation prices the share option idea has had a much more highly geared result than in the case of all other PLCs where it has worked quite satisfactorily," he said.

The committee is also looking at whether there should be changes in stock exchange listing requirements or in accounting standards to improve disclosure, though Mr Melville-Ross believes the stock exchange route would not be as good as encouraging best practice. He believes there will be a sharp increase in the number of companies disclosing full details of directors' pay this year.

The IoD chief also rejected special measures for privatised utilities, which should be run like any other PLC. He favoured long-term incentive schemes, linked to performance, though he said "every one of these schemes has its disadvantage - you can't solve every problem at once."