KEY POINTS:
The hullabaloo and subsequent withdrawal of NZX chief executive Mark Weldon's proposed share scheme demonstrates that there is considerable confusion and disagreement on this topic.
The decision is a major embarrassment to Simon Allen and the NZX board. It clearly shows that boards need to consult stakeholders before,
rather than after, they issue a notice of meeting outlining a scheme.
Executive share schemes are contentious and there is no consensus, here or overseas, on the best approach.
Five other NZX-listed companies have produced proposals this year. All of them are different and, arguably, more generous than the Weldon one.
On February 2, Plus SMS shareholders approved the issue of 49 million shares for nil payment to senior executives and 42.9 million options at an exercise price of 10c a share. These shares and options represent 16.7 per cent of the company's fully diluted capital.
Chief executive Chris Tiensch will receive 24.5 million ordinary shares for zero consideration with the remaining 24.5 million free shares going to him and other executives subject to performance criteria that had not been determined at the time of the meeting.
The deal was extremely generous as Plus SMS's share price was 17.9c when the notice of meeting was published and 17c on the day of the meeting. The proposal was passed without shareholder dissent or media comment.
On February 15, Kirkcaldie & Stains shareholders approved the issue of 250,000 options, representing 2.5 per cent of capital, to managing director John Milford. Milford can exercise the options at $2.75 a share in March 2010, compared with a share price of $2.61 on the day the notice of meeting was published. The options have no performance criteria.
Allied Farmers' shareholders recently approved a scheme whereby executives will receive 1.3 million options, representing 8.2 per cent of the company, to be exercised at $2.25 a share compared with the pre-meeting price of $2.12. The options can be exercised only if the ordinary shares reach $2.75, a share price growth target of 29.7 per cent over the three-year term of the options.
Only a dozen or so shareholders were at yesterday's meeting of The Warehouse that approved the market purchase and distribution of up to eight million shares for nil consideration. At today's market price this represents a potential issue of more than $50 million of free shares to executives.
The shares are subject to performance criteria that have not been disclosed and the 30-plus-page notice of meeting was far too complicated for most shareholders to understand.
Finally, Skellerup will hold a special meeting on April 26 to approve the issue of three million redeemable ordinary shares, paid up to 1c, to senior executives. The redeemable shares can be converted into ordinary shares at a price equal to the share price on the date before directors invite executives to participate in the scheme.
Skellerup executives will be able to buy shares in five years at $1.29, based on yesterday's share price, compared with the mid-2002 IPO price of $1.15 a share. What kind of incentive is that, particularly as the group has extensive overseas activities and a fall in the kiwi will automatically boost its share price?
Weldon's package was the only one subject to shareholder and media criticism, even though his performance has been far superior, particularly in terms of shareholder wealth creation, and his proposed scheme was probably less generous, with the possible exception of the Allied Farmers one.
His package was put under the microscope for a number of reasons including the belief that he is paid too much; is being offered too many shares; the performance hurdle is too low; and the scheme's three-year duration is too short.
Weldon has a base salary of $450,000 a year plus the ability to earn an additional $450,000 in bonuses for a maximum cash remuneration of $900,000.
By comparison, Tony Gibbs of Guinness Peat Group, one of the fiercest critics of Weldon's package, had total cash remuneration of $4,880,000 for the December 2005 year, comprising base pay of $1,410,000 plus a bonus of $3,470,000. (GPG's 2006 annual report is not yet available.).
All four GPG executive directors, who have majority control of the group's remuneration committee, were paid well in excess of $3.5 million in 2005.
Under the abandoned proposal, the NZX CEO was being offered up to a maximum of 1.1 million shares payable at the volume-weighted average price over the 20 business days up to June 4, 2007. The 1.1 million shares would have cost Weldon $10.1 million at an estimated issue price of $9.15. The purchase price would have been funded by an NZX loan with two-thirds of the shares available after two years and the remaining third after three years.
Weldon's shareholding could have reached 9.9 per cent, which was probably too high for an employee share scheme. The directors should have consulted major shareholders before issuing the notice of meeting.
Weldon's voting rights would have been capped at 5.3 per cent, his current holding, while Sir Ron Brierley, Tony Gibbs and the other executive directors own 10.5 per cent of GPG without any voting cap.
The biggest criticism of Weldon's scheme was that the TSR performance target (total shareholder returns) of 10.5 per cent a year was too low. A number of points are worth noting in relation to this target:
* Most recent New Zealand executive share schemes have NO performance hurdle.
* The Warehouse doesn't disclose its performance criteria and the shares to be issued under the scheme approved yesterday will be free in the hands of executives.
* Tony Gibbs and his fellow GPG executive directors were issued a further one million options each on March 9 with no performance hurdle and no premium to be paid on exercise. Sir Ron and the four executive directors have a total of 51.2 million GPG options without any performance hurdles.
* The NZX is on a historic P/E in excess of 30, indicating that investors have huge expectations of Weldon and his executive team. If Weldon doesn't meet these expectations, his share price will lag and his proposed share scheme would have been worthless.
* Weldon doesn't have the opportunity to achieve a windfall profit from a takeover offer because the NZX has a 10 per cent cap on shareholdings.
A number of shareholders complained the two-to-three-year time scale was too short with five years being more appropriate. The three-year time scale is the most common in New Zealand and GPG, which has one of the most generous executive share schemes, has a three-year term before its options can be exercised.
No employee share scheme is perfect, including the latest NZX proposal. But when stacked up against Plus SMS, The Warehouse, Skellerup, GPG and most other New Zealand companies, the Weldon deal was not particularly generous.
Weldon's scheme was put under the spotlight because the NZX board made a huge hash of the process.
Let's hope this scrutiny is not a one-off event because a number of executive share schemes need to be put under the blowtorch, particularly the one Tony Gibbs and his fellow GPG executive directors operate under.
* Disclosure of interest: Brian Gaynor is an investment strategist and analyst at Milford Asset Management.
