Time for fairer share options

Personal Finance

THE stable door on generous share options for senior executives of privatised monopolies may well be shut shortly, when the reports of the committees of the great and the good are all published (and the Prime Minister has convinced the laissez-faire members of the Cabinet that action is vital if the Government is to have any chance of winning the next election).

Interestingly, the Prime Minister appears to be more concerned about executive pay in general than Tony Blair, who has been careful to exempt executives in the rest of the private sector from criticism. But it is doubtful if anything the Greenbury Committee could recommend, or the Prime Minister could legislate for, would do much to counter the public view that options are a device to make the greedy richer, and that the executives of privatised companies have done more to ruin the Government's election prospects than the trade unions did for Labour in 1979.

Retrospective legislation is not the British way, and too many top executives have already grabbed the goodies and run for restrictive future legislation to meet the Government's objectives. There are two main problems with the present haphazard system. First, the terms of many option schemes are too generous and present pure money for old rope, especially when profits and share prices are rising for cyclical reasons.

Second, they are confined to a handful of executives, who achieve their targets by cutting costs rather than by growing the business.

The Government would be better advised not just to close the door on over-generous option terms for the future and insist on real targets being put in place, based on a genuine outperformance by the shares relative to the FT-SE All-Share index as a whole; but also to put pressure on companies to expand the incentives for employees lower down the scale to enjoy some of the fruits of increased profits - for which many of their colleagues have paid with their jobs.

And while it is about it, the Government could easily put a stick behind its long-time campaign to promote profit-related pay as an incentive for rank and file workers. Every year the Treasury proudly issues statistics showing an increased uptake. But the fact remains that too few companies have taken the entirely voluntary route of adopting PRP.

Even the banks that operate some of the most generous schemes spoil their case, as Barclays did last week, by using a large PRP payment as an excuse for cutting basic pay rises below the rate of inflation. Not surprisingly, that has alienated most of the workforce and undermined the value of the scheme. Properly used and linked to genuine increases in efficiency rather than cyclical profits, PRP could do more to motivate the rank and file, who are traditionally suspicious of share offers.

In the wake of the fiasco that followed the sale of the Government's remaining stake in National Power and PowerGen last week, the cause of shareholding for the small investor has been set back several years anyway. The cynical will say that privatisation has served its purpose. There is little left in the Government's portfolio that the small investor would want to buy now, and privatised companies will be treated much less favourably in future.

If that is genuinely the message the Government wants to convey by its clumsy handling of the National Power and PowerGen sale, there is every sign that investors are being quick to seize it. Certainly it is not just the small UK investor who is shocked by the sequence of events. Big institutions, especially those in the US, are equally angry and disinclined to hold privatised UK shares.