GEO Debate Share-Based Payment Speaking in favour of a charge for options Presenter:Alan M Judes Date:5 December 2000.

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Presentation transcript:

GEO Debate Share-Based Payment Speaking in favour of a charge for options Presenter:Alan M Judes Date:5 December 2000

Agenda what are options? how do they work? do they have value? how important a part of the remuneration package are they?

What are options? the right, but not obligation to acquire shares at a price fixed now at up to 10 years in the future

Example of how share options work Option price: £2 Grant DateExercise Period 10 Years (Exercise Limit) TIMING Market Exercise Share Price £6 £4 £2 Gain = £4 £6

Do they have value? Share Price Strike Price Value Abbey National BP Amoco587½60061 Pearson Reed Source: FT 29 November 2000

Do they have value? you bet they do they have enormous value even “underwater” options have value a company can sell them Citibank will buy them and make a market for executives millions of traded options are bought and sold every business day

Why do Companies grant options to employees? to attract to retain to reward to motivate to pay options are a payment of compensation in a slightly different currency to cash

How should companies account for the transfer of assets of value to employees? as remuneration? as though they do not exist?

Why does the taxman want income tax on options? back to basics Abbot v Philbin – grant of options is remuneration remuneration should be taxed

The current accounting position grant of option – nothing exercise of option debit: cash credit: share capital just balance sheet no profit and loss charge

What a company could do sell option to market maker for cash give cash to employee employee uses cash to buy option from market maker should cash payment to employee be ignored?

How important a part of the remuneration are they? very important some executives take no salary, they work for options can a company realistically employ an MD at no cost to it?

Lets stop pretending options are free Advantages employee appreciates their worth they don’t complain as much when “underwater” they understand the dynamics and gearing better

Example US company old system – cash bonus $10,000 new system cash bonus 80% of old, 20% of bonus “buys” option at Black Scholes value Black Scholes value 25% of market value so employee gets $8,000 in cash and $8,000 in options

Institutional Shareholder Services ISS Pay Model evaluates share schemes using binomial option pricing Pay Model is not a dilution based model, it measures monetary cost of plans

The choice facing companies bury heads in the sand and hope it will go away engage in the debate and shape a better future campaign for recognition at time of grant, not vesting