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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?.

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geo debate
GEO Debate

Share-Based Payment

Speaking in favour of a charge for options

Presenter: Alan M Judes

Date: 5 December 2000

agenda
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
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
Example of how share options work

Market Price @ Exercise

SharePrice

£6

£6

£4

Gain = £4

£2

Option price: £2

10 Years

(Exercise Limit)

Grant Date

Exercise Period

TIMING

do they have value
Do they have value?

Source: FT 29 November 2000

do they have value1
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
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
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
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
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
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
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
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
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
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
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
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