Share option perk targeted

Government considers regulating the private-sector `one-way bet' that takes too little account of high-earners' individual performance

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The Government is considering legislation to regulate controversial executive share option schemes in the wake of protests at their use in private-sector top- salary packages.

Ministers on the industrial sub-committee of the Cabinet under the chairmanship of David Hunt, the public service minister, who have been looking at top private-sector salaries, have already all but ruled out action to tackle their growth.

ut contingency planning is under way to allay criticism that the system of Inland Revenue approved share option schemes is not transparent enough, takes too little account of the performance of the company or the executives benefiting from the schemes and, in some cases, is unfair to other employees.

Ministers are considering three broad options for reform of the discretionary share option scheme. At present beneficiaries do not have to pay tax on the benefit of being given an option, or any increase in the value of the shares between the date it is awarded and the date on which it is exercised. They are:

nA requirement for all shareholders to be given full details of the nature and scale of company option schemes.

nAn obligation on all companies operating executive share option schemes also to offer all employees an approved profit sharing or savings-related scheme.

nA new method of awarding options that avoids rewarding directors merely for share price increases brought about by a general stock market rise. A survey last year found that while some companies run sophisticated schemes linking reward to individual and corporate performance, two-thirds of listed ritish companies operate schemes without performance targets.

No ministerial decisions have been taken on whether to go ahead with reforms. ut one possibility would be for the Government to introduce an amendment of its own to the finance ill going through its Commons committee stage.

Existing share option packages came under fire from leaders of industry and business yesterday. Tim Melville-Ross, director general of the Institute of Directors, agreed at a hearing of the employment select committee that they were "a one-way bet" and should be curbed. A member of the CI's Greenbury committee, which is producing guidelines on how directors' pay should be set, he said it would be better if they owned actual shares so rewards were linked to company performance.

Howard Davies, CI director-general, said that directors could do well even where a company under-performed against the market. Share options were appropriate for small, growing companies that were short of cash but could attract talent by the promise of a share in future success and he would not want to see them outlawed.

The two business leaders accepted there was serious public concern about boardroom pay, both admitting morale could be damaged within companies and pay claims triggered by boardroom excesses.