The number of European companies using share options to award their CEOs and other executive directors has dropped significantly in the last three years, while alternative long-term incentive (LTI) vehicles have increased in popularity, according to a new survey by Mercer Human Resource Consulting.   In 2004, 63% of companies offered share options compared to just 41% in 2006 - a reduction of more than a third.  The average grant of options as a proportion of the LTI package also fell, from 45% in 2004 to 24% this year.

The survey, which covered 105 large companies across Europe, found that other LTIs have become appreciably more popular.  In the UK and Ireland, the use of performance shares has increased, from 70% of companies three years ago to 84% in 2006.  Their weighting has also gone up, with the average allocation rising from 50% to 70% of the LTI mix.

Richard Lamptey, Principal at Mercer, commented: "The requirement since January 2005 to expense options in corporate accounts has reinforced a perception that share options are less cost-effective than other LTIs in providing executives with a real interest in the business.  In Mercer´s view, however, companies need to think carefully about the relative merits of different LTI vehicles, to support their business strategies and projections."

Performance Linkage

In Continental Europe, use of performance shares has remained relatively constant while restricted stock units, which are settled in either cash or stock after a specified time, and long-term cash plans have become more popular

Mr Lamptey commented: "In Continental Europe, the legal framework governing share-based incentives is generally not as permissive as in the UK and Ireland, so performance shares are used less frequently as an alternative to options."

Less onerous disclosure requirements in Continental Europe may allow employers to provide rewards to executives without the link to company performance that is standard in the UK. The survey found that 94% of companies in the UK and Ireland attach performance conditions to their LTIs and virtually all of these (94%) link them to the vesting of options or shares.  This is higher than in mainland Europe, where 85% of companies attach performance conditions to at least one of their LTIs.  Nearly two thirds of these (62%) apply them to the vesting of options or shares, while 59% attach them to the grant of options or award of shares.

Compensation Disclosure

Despite increasing pressure from shareholders, on average less than half the respondents (43%) plan to enhance compensation disclosure in their 2006 annual report.  However, among smaller companies (those with fewer than 1,000 employees), the figure rises to two-thirds (67%).  Of those companies that propose to enhance disclosure, the most common intention is to give more details about short and long-term incentive plans, followed by increased disclosure of individual pay details for top executives.

Notes:

Of the 105 European companies that participated in the survey, 86% were publicly traded.  Companies from 15 industries were represented, including manufacturing, finance/banking, chemicals/pharmaceuticals/biotech and insurance.  Fifty-three percent had over 20,000 employees and 74% generated more than €1 billion in revenue during 2005 (23% generated over €20bn).

Mercer Human Resource Consulting is a global leader for HR and related financial advice and services, with more than 15,000 employees serving clients in more than 190 cities and 40 countries and territories worldwide. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago, Pacific and London stock exchanges. For more information, visit mercerHR.com.

It is the largest consulting firm of its type in the UK, with some 3,000 staff in 19 office locations. Website: www.mercerHR.com/ukpress 

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