Share options fall out of favour as long-term incentives for European business leaders

The number of European companies using share options to reward their CEOs and other executive directors has dropped significantly in the past three years as companies look for new ways to offer long-term incentives to senior staff.

Research by Mercer Human Resource Consulting found that in 2004, 63% of companies offered share options compared to just 41% in 2006 – a reduction of more than one-third. The average grant of options as a proportion of the long-term incentives package also fell, from 45% in 2004 to 24% this year.

The survey, which covered 105 large companies across Europe, found that other long-term incentives have become more popular. In the UK and Ireland, the use of performance shares has increased, from 70% of companies three years ago to 84% in 2006. 

Richard Lamptey, principal at Mercer, said that since January 2005 companies were required to expense options in corporate accounts, which had reinforced a perception that share options are less cost-effective than other long-term incentives in providing executives with a real interest in the business.

“Companies need to think carefully about the relative merits of different long-term incentive vehicles, to support their business strategies and projections,” he said.

The UK and Ireland are stricter than continental Europe in attaching performance conditions to their long-term incentives. Almost all (94%) of companies attached performance conditions to their long-term incentives compared to a total of 85% in continental Europe.

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