Share Incentive Schemes – A Statement Of Principles

Institutional shareholders support share incentive schemes which genuinely improve the competitiveness of companies and align the interests of participating directors and senior executives with the interests of long-term shareholders. It is a fundamental principle, recognised by Greenbury, that shareholders should vote on the adoption of long-term share-based incentive schemes and the commitment of shareholder funds or dilution of equity which this necessarily involves.

In evaluating incentive arrangements, institutional shareholders will have regard to the principles outlined below. These have been developed so that they can be applied to the share schemes of all companies. The NAPF also endorses these principles and the framework they provide for assessing share schemes.

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Grant Policy and Performance Conditions

* Challenging performance conditions should govern the vesting of awards or the exercise of options under any form of long-term share-based incentive scheme.

* The chosen criteria should demonstrate the achievement of a level of performance which is demanding in the context of the prospects for the company and the prevailing economic environment in which it operates.

* Performance conditions should be measured relative to an appropriate defined peer group or other relevant benchmark.

* The chosen performance conditions should be disclosed and the reasons for selecting these, together with the overall policy for granting conditional share or share option incentive awards, should be fully explained to shareholders.

Institutional shareholders generally expect participation under share incentive plans to be phased, with awards being made on an annual or otherwise regular basis. Companies adopting new schemes are, consequently, strongly encouraged to move away from the concept of "retesting", for example any 3 year period in 10, and towards a single pre-determined performance measurement period, particularly where there are annual grants. Repricing of "underwater" options in the event that the share price has fallen below the exercise price is not considered appropriate.

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Cost to Shareholders

The cost of share incentive schemes should be disclosed in order that shareholders can assess the likely benefits of the proposed scheme against the costs. In this regard, reference would generally be made to:-

* The potential value of awards due to individual scheme participants on full vesting.

* The expected value of the award at the outset, bearing in mind the probability of achieving the stipulated performance criteria.

* The maximum dilution which may arise through the issue of new shares to satisfy entitlements.

Institutional investors welcome efforts towards ensuring that accounting for share options awarded under incentive schemes fully reflects the true cost to shareholders.

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Conclusion

Remuneration committees and company boards should have regard to these principles in developing and implementing share incentive schemes and ensure that schemes form a coherent part of overall remuneration packages. Companies are encouraged to have a constructive dialogue about issues relating to share incentive schemes with their major shareholders and their representative bodies.

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Enquiries

Please Direct Enquiries to Peter Montagnon (020) 7216 7670 or Michael McKersie (020) 7216 7659.

Issued July 1999

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