1 / 16

GEO Debate

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?.

sarai
Download Presentation

GEO Debate

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


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

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

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

  4. 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

  5. Do they have value? Source: FT 29 November 2000

  6. 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

  7. 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

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

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

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

  11. 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?

  12. 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?

  13. 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

  14. 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

  15. 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

  16. 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

More Related