When options are no longer an option - Industry Trend or Event

CommunicationsWeek International, July 16, 2001 by George Malim

Companies keep falling shares sweet by rebasing or regranting them.

Share options, once the jewel in the executive remuneration crown, are losing prominence as a means of attracting and retaining key staff. The unpredictability of the current technology market and shareholder reluctance to shore up the value of options has led to other share-based and cash-based benefits becoming more popular.

"Eighteen months ago, we would have had difficulty persuading employees to accept anything other than options, but options are now seen to work both ways," said Marcus Peaker, a founding member of MEIS, a London-based executive reward consultancy. "In the downturn, it's not a question of throwing money and shares at employees. It's about retailoring incentives to support business strategies."

But employees are concerned about the fall in valuation of their stock options, so companies are trying to find alternatives to bolster the value of share-based benefits. Peaker says the main choices are to grant new shares, to cancel existing options and regrant them or to rebase the share option value. Of these methods, rebasing options is the most challenging for businesses.

Rebasing means the exercise price of the options is decreased-- often to the current market price. British equipment manufacturer Marconi is one of the most recent companies to rebase its share options. But it has sparked a shareholder backlash, which Peaker finds understandable.

"Marconi made a big mistake in a lack of consulting with its shareholders before rebasing. Like a scorned woman, there's nothing as adamant as a scorned shareholder," he said. "There are some very difficult messages that come with rebasing. If Marconi shareholders believe the board is responsible for the company's fall in value, it's tactically naive to include those board members in the rebasing of stock options."

Peaker thinks that cancelling existing options and regranting them finds more favor with shareholders. It is a method that was recently applied by Nortel Networks: in June, the company announced an options exchange plan for employees when stock that had been offered at values ranging from $18 to $89 a share had plummeted to less than $14. Regranting options can tie employees to a company and also presents employees with a valuable benefit over a long period of time. "In the downturn, key people are more valuable because they're the chance of recovery for the business," said Peaker.

As businesses try to hold executives, cash bonuses are also becoming more prevalent. Chris Gent, chief executive of Vodafone plc, has faced shareholder outrage over his bonus package. He recently received 8 million share options as a bonus, cut from their original amount of 13 million shares in a bid to stave off another shareholder revolt. This is because When Gent received a [pound]10 million bonus after Vodafone's hostile take over of Mannesmann last year, shareholder protests spurred the chief executive to take half his bonus in cash and buy Vodafone shares with the other half.