Telecom managers' hard option

Theresa Gattung

Telecom's dismal market run has forced the company to reinvent its share option scheme because the packages held by its top four executives - initially valued at $6 million - have been rendered worthless.

More than $3 billion has been wiped off Telecom's market value since the Government's unbundling decision in May.

Its shares - which have been as high as $6.05 this year - closed at $4.04 on Friday, well below the $4.70 needed to create any value on options held by senior managers.

That has fuelled speculation that key people will lack the incentive to stay with the company.

Chief executive Theresa Gattung holds options initially worth $2.1 million but which have a strike price of between $4.70 and $6.77.

Chief financial officer Marko Bogoievski has options that were initially worth $1.9 million, chief IT services officer Mark Ratcliffe had $670,000 worth and chief operating officer Simon Moutter had about $1 million in options.

On top of their option woes, the four executives are facing heavy losses on their personal parcels of Telecom shares.

Gattung holds 140,000 restricted shares which have reduced in value by about $270,000 since the start of the year. Bogoievski has lost $365,000 on his restricted shares, share rights and ordinary shares.

Ratcliffe is down $150,000 on his holding and Moutter has lost $210,000 on his.

Another 590 Telecom staff are involved in an equity-linked remuneration scheme which has suffered significant losses.

The losses would be a huge disincentive for executives to stay with the company, said Australian-based ABN Amro analyst Ian Martin.

"Telecom should provide more targeted incentive programmes to ensure performance of senior executives as the company undergoes separation of its wholesale and retail arms," he said.

Telecom spokesman John Goulter confirmed that a new option scheme would appear in the company's annual report to be released on August 4, and that it would discuss performance incentives for the wholesale arm of Telecom with the industry and stakeholders. Losses like these were a fact of life for the top executives, Goulter said.

It was a widely held principle that senior managers should have incentives which meant they shared with shareholders both the gains and the pains associated with the company's performance, he said.

"It is inevitable that they are affected by a drop in the share price. That is why their remuneration is structured like it is to maximise their incentives, to add long-term value to the company's performance."

Most market analysts now have 12 month target valuations of less than $4.70 on Telecom shares, suggesting Gattung has a struggle ahead to save any options. Valuations range from $3.91 to $5.90.

Telecom's share price woes began in February when the company announced a $466 million loss and the share price fell below $4.70.

It was accelerated by the Government's decision to break Telecom's monopoly over the phone network in May.

The share price is now sitting at a 13-year low.

Telecom's share option scheme began in 1994 and senior managers are part of the scheme if they meet satisfactory performance standards.

OUT OF POCKET

Theresa Gattung
* Holds options originally worth $2.1 million (now worth nothing). The value of her personal shareholding has dropped by $270,000

Marko Bogoievski
* Options originally worth $1.9 million. Shareholding is down by $365,000

Mark Ratcliffe
* Options were worth $670,000. Shareholding down by $150,000

Simon Moutter
* Has options originally worth $1 million. Shareholding is down by $210,000

THE RIGHT OPTION

* Executive options are the right to buy shares in the company at some point in the future at a price that is likely to be favourable to the holder.

* In theory they provide an incentive for executives to maximise the market performance of a listed company to the benefit of all shareholders.

* However, after corporate scandals such as the Enron collapse questions have been raised about the possibility that they can tempt executives to exaggerate a company's successes to drive up the share price.