Options are not extras

With stock options increasingly a key part of US executives’ salaries, Richard Staines asks how the idea translates on this side of the Atlantic

Many of the US’s senior IT professionals and board executives have got so used to stock options as part of their pay package that they raise cash to pay their weekly bills by selling on large amounts of their company’s shares.

US companies have taken the equity stakes one step further, with many of their top executives being paid solely in their company’s stock.

According to a report published last week by Manpower Services, this remuneration philosophy could be spreading to the UK and the rest of the world.

Manpower claims this strategy is taking off in the UK, with 34 per cent of the UK’s HR managers claiming their companies offered stock options to executives (Personnel Today, 11 July).

This finding means more UK companies than any other, including the US, offer the schemes – a viewpoint formed from interviews with more than 2,000 personnel professionals worldwide. The survey conducted in the UK, the US, Japan, France, Germany, Holland and Italy revealed companies in all the countries increasingly favour using profit sharing as an incentive.

It seems to recruit and retain people at the top level, companies are under increasing pressure to reward them with super-generous company share schemes.

But Rob Cooper, remuneration strategy expert at the consulting firm Bacon and Woodrow, denied Manpower’s claim that British companies are ahead of the US in their share strategies. He said the share-only pay schemes have become so popular Stateside that British IT companies are suffering as a result.


Legal obstacles


Because of legal obstacles, Cooper claimed British IT companies are unable to employ US staff who favour this radical if somewhat risky remuneration practice.

The Manpower research showed 22 per cent of US companies, 29 per cent of Japanese companies and 19 per cent of UK companies offered share schemes to employees.

Cooper said this kind of pay scheme was set to catch on in the UK, but disputed claims by Manpower that the schemes were more widespread this side of the Atlantic.

“It is more developed in the US and share ownership in European countries is far less widespread than in the UK – governments in many European countries don’t favour share options as much as the British Government does,” he said.

“Gordon Brown has taken on board the US way of doing things and is very heavily influenced by developments in the States.

“There is definitely an expectation among employees in the US that they will be given some sort of stock in the company they work for.

“It is particularly popular among start-up companies such as dotcoms, which may not have a lot of cash but can offer a stake in the success of their company in the future.”

Cliff Weight, principal executive in compensation practice at William M Mercer, also said share ownership was far more common in the US.


US pay set-ups


He said, “This is very much a trend. If you work in Silicon Valley, you would probably expect to be paid like this, and the whole pay set-up is very different in the US. As a result, more and more companies will be granting share options so they can get people on board.

“Internet companies in particular have very little cash when they are in the ‘ideas’ stage and tend to pay in share options as a result – even though a high percentage of these companies fail.

“Our research shows around 80 to 90 per cent of Internet companies fail – but people owning shares in those that do succeed can end up becoming multi-millionaires.”

Mark Childs, global head of compensation at Fidelity Investments, said, “This is a world-wide trend – but the UK lags behind the US by a considerable distance in this. The rise of dotcoms has raised the profile of directors who get paid solely through share option schemes.

“But some people are beginning to question the wisdom of stock options because of the risk involved – if your share price collapses then it is a short, sharp shock.”

What is certain is that the Government has been quick to respond to the trend, with Chancellor Gordon Brown apparently embracing share schemes with open arms.

Employees and directors can now receive shares with tax breaks under four schemes recognised by the Inland Revenue.

The profit-sharing scheme, which will be phased out in 2002, the saving-related share scheme, the company share option plan allowing a maximum of £30,000 of shares per year, and Gordon Brown’s new all-employee share plan allow shareholders to pay minimal tax on their earnings through share schemes.

www.inlandrevenue.gov.uk/shareschemes

www.manpower.co.uk

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