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Share Option Plans Worthless

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Share Option Plans Worthless

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									Share Option Plans Worthless
    Almost three quarters of employee share              “Performance rights plans provide at lease      on their ability to retain and motivate their key
options plans issued by the top 50 ASX-listed        some protection from sharp market falls             employees.”
companies since 2003 are now worthless,              because they have a nil exercise price and the          The exercise prices of options issued under
research by the law firm Deacons has found.          performance hurdle usually involves comparing       the plans of the top 50 listed companies are on
    For the companies listed in the bottom two-      the company’s total shareholder return against      average 4 per cent above their current share
thirds of the S&P/ASX 300 Index, almost 90 per       a group of similar companies,” said Andrew          price. But even that result is flattering because
cent of the plans are worthless.                     Spalding and Shane Bilardi, authors of the          of the strong performances of QBE,
    Executives at major listed companies             research undertaken last month.                     Woolworths, Fortescue Metals and Origin
including Macquarie Group, Toll Holdings,                “Provided that the company matches or           Energy and the fact that the worst performers –
Tabcorp and Babcock & Brown are just some of         outperforms its peers, the rights can still vest    Asciano, Centro and Babcock – have dropped
those who have watched millions of dollars in        even in a falling market.”                          out of the top 50.
share options disappear after the All Ordinaries         The average exercise price for Macquarie            The exercise prices of options issued under
had its worst calendar year on record in 2008,       options is $61.23, the company’s most recent        the plans of the companies in the bottom two
plummeting 43 per cent.                              annual report shows. At current levels, its         thirds of the top 300 are on average 49 per cent
    Yesterday, the share market fell to its lowest   share price would nee to more than double           above their share prices.
point this year, with the S&P/ASX 200 Index          before the option plans regain any value for            Remuneration Strategies Group director
losing another 5.2% for the year.                    executives.                                         Gary Fitton said that any gearing plans put in
    Employee share option schemes have been              Tabcorp options would also need to more         place before the crash were simply outdated.
embraced over recent years, especially by            than double, being on average 54 per cent out           “Companies tend to adopt a fairly copycat
smaller listed companies trying to compete with      of the money.                                       approach and some investors are now asking
their higher-paying rivals in the battle for             Timbercorp’s share price would need to          whether different performance hurdles should
executive talent.                                    increase 13 times, with options on average 92.5     be used, given the historically low watermark
    The plans set the share price at which           per cent out of the money.                          for the market.
executives can take up the options and usually           Fortunately for executives at the blue chips,       “You may see more internal performance
vest three years after being issued.                 many ASX top 50 companies have moved                measures being adopted and a return to more
    The schemes delivered big windfalls at the       exclusively to performance rights plans or use      earnings orientated measures.”
height of the boom, with options often being         them in a combination with option plans.
exercised at a fraction of the company’s rising          “It seems most of the top 50 companies                                            Patrick Durkin
share price.      But most of the windfalls          have learnt a lesson from the Dotcom crash                          The Australian Financial Review
executives thought they had pocketed have            and moved to performance rights schemes                                    Friday 16 January 2009
evaporated.                                          rather than employee option schemes to ensure
    Executives at Macquarie Group and Toll           that their incentive schemes continue to
Holdings have been hit particularly hard             motivate their employees during downturns in
because they are the only two companies in the       the market,” the authors said. “The same
top 50 which exclusively use option plans,           cannot be said for many companies outside the
rather than performance rights plans.                top 100, and this could have an adverse impact

								
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