Aiming for a fair share

By MARK STORY

So you'd like to trade in that Christmas bonus for a slice of equity ownership in your employer's company and share in the annual profits? At face value this sounds a reasonable request. After all, don't the efforts of every employee contribute to the company's overall success?

Well, they might. But unless you're one of the firm's real movers and shakers then that popular form of long-term employee incentive - shares in the company - are probably beyond your reach. But even if you're one of the chosen few, share options in New Zealand are still tantamount to the corporate Holy Grail.

Helene Higbee, a director with remuneration specialists Higbee-Schaffler, thinks that although the number of firms offering executive share options has doubled, they are offered to only 5 per cent of Kiwi executives.

Why are execs offered share options when you are not? Much of that decision depends on who you work for and your kudos within the firm.

Share options, considered as part of an executive's total remuneration, are in effect the right to buy shares in the company at a set price, subject to some conditions.

The most common conditions are that for a limited time you can exercise your right to buy your allocated options, but only when the share price reaches a certain level, the "strike price". This is designed to align your attitude with the interests of the shareholders.

As John McFarlane, the chief of ANZ in Australia, discovered, shareholder pressure for growth and share price appreciation is rewarded handsomely.

McFarlane raised a tidy booty of A$1.3 million ($1.4 million) by exercising his right to buy 750,000 options over shares dating from 2000 with a A$14.06 strike price, then selling 650,000 of them for A$18.21 each.

Higbee says the idea behind share options is that if execs have some of their own money on the line they are more likely to make better commercial decisions.

In an attempt to drill similar concepts of ownership deeper into the organisation, firms such as multinational Baxter Healthcare have introduced share purchase schemes.

Ups and downs of the share market aside, share purchase schemes are far less risky than share options.

For example, all New Zealand employees of US-based Baxter Healthcare can buy discounted shares on the New York Stock Exchange by way of pay deductions.

"By offering discounted shares to all employees we're trying to get them thinking like owners of the company, who understand the business better, treat customers right, and help manage costs," says HR manager Vanessa Joynt.

So, do the 30 per cent of Baxter Healthcare employees who hold shares in the company really behave any differently from employees who don't?

Joynt says if the excitement following one-off share options - given to everybody, from the cleaner to the chief executive two years ago - is any indication, they do make staff feel more valued.

"It's the firm's way of engaging extra commitment from the entire organisation," Joynt says.

"After waiting three years, employees have the following six years to exercise their options."

Despite the largesse of firms like Baxter, share options are usually reserved for senior management or indispensable gurus at technology companies. For example, 25 senior executives with Sky City Entertainment receive options as a component of their total remuneration.

The value of the share price when the options are issued is used to determine the starting point of the exercise price.

The options, designed to drive long-term executive commitment, give execs a three-year window to see improved company performance reflected in the share price.

Assume that an executive's options were issued when their value was $4 each. If they are sold for $5 each, then 80 per cent of the shares can be sold to pay the exercise price (which might be $4.50) and the rest retained debt free.

Casino corporate general manager Alistair Ryan thinks that if the board wasn't convinced that share options drive better executive attitudes then they wouldn't offer them.

But Higbee says share options are far from talent magnets.

If overseas research is any indication, the jury is still out on whether share options really motivate execs to deliver.

A United States survey by Theladders.com says 22 per of those surveyed thought share options were "gravy" but not a big motivator. And 25 per cent preferred cash, suggesting more execs are wising-up to the downsides of "option-heavy" packages. There is always the risk that effort and commitment will not be reflected in share price appreciation.

Based on shareholder concerns that the rewards have been too great for too many, Telecom has cut back its share option scheme eligibility. Head of remuneration Jan O'Neill says it now depends on the degree of impact an executive's decisions has on overall business.

Another major company, the Warehouse, has also concluded a share option deal is no magic bullet and is rethinking its share option scheme. Until now the "big red barns" have offered share options to about 350 staff, from store managers up.

Remuneration manager Paul Louis, says the objective is to encourage a focus on long-term decisions and retain key skills.

Any employee would be crazy to look a (share) gift horse in the mouth, but he can see why the more senior the executive, the more value they are likely to place on share options.

"Due to their more immediate need for cash, many store managers would rather have a $2000 cash bonus than $4000 in share options," says Louis. "Share options should help executives to focus on how to create the sort of value within the organisation that will ultimately be reflected in the share price."

10 THINGS YOU SHOULD KNOW ABOUT SHARE OPTIONS

* They're usually available only to big corporate decision-makers.

* If the shares don't exceed the minimum exercise price the options are worthless.

* They create a cultural divide between executives and non-participating staff.

* They don't deliver better operational performance.

* They're linked to the share price, not business fundamentals.

* They can demotivate executives who fail to achieve them.

* They're supposed to drive long-term executive commitment.

* Proving executives work harder because of them is problematical.

* Because of risks, executive indifference to them is rising.

* Many executives prefer a cash bonus instead.