The UK’s largest companies are moving away from the use of share options as the sole form of share based pay for executive directors, according to research by consultants Watson Wyatt.
Only 28% of new executive share plans put to shareholders for approval by FTSE-350 companies have been option plans, compared with 46% in the previous year and 63% the year before that – reflecting the awareness that granting options alone may not produce the desired alignment between the interests of companies and shareholders.
The analysis highlights a significant move to performance-linked restricted share plans – where the executive will receive the whole value of the share, (rather than just the share price increase under an option), provided corporate performance targets are achieved over typically a three-year period. Half of all new executive plans have taken this form, compared with 37% in the previous year and 19% the year before that.
Findings also reveal that more companies are seeking the approval of their shareholders to operate a portfolio of more than one share plan, including options, restricted shares and co-investment plans (where the company matches the purchase of shares by an executive).
Peter Mitchell, a senior consultant at Watson Wyatt, said: “Share grants under a portfolio of different types of plan will become a central part of executive reward going forward…now that there is an increased focus on a greater alignment of pay and corporate performance.”
He added: “With stringent new limits on executive pensions being imposed by the Inland Revenue in April 2005, and a requirement to account for share based remuneration coming in as early as 2004, companies are having to give much more thought to the design of their executive remuneration packages.”
