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Executive Share Options


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Anybody in receipt of Executive Share Options will tell you that they are a reward for success and an incentive to boost the business. Anybody not in receipt of Executive Share Options is likely to tell you that they are nothing more than a saucer of cream for fat cats!

The first statement is true. Sadly, there is a too much truth for comfort in the second statement as well. Executive share options are a way for a company to incentivise and retain key members of the management team.

How they work:

  • as part of their remuneration packages directors and/or senior management within a company will be given outright or given the opportunity to buy (usually at a deep discount) options to purchase shares in the company at a set date in the future.
  • a scheme ( a set of rules) may be set in place whereby if the company performs well according to a specific criteria (e.g the share price rises 50% over 3 years), the executive can exercise his/her options . The idea is that incentivised executives will work harder if they can see themselves owning a piece of the company they work for. Because executive options are usually priced at a discount to the existing share price, the executive tends not to need to make much of a cash outlay to buy into the scheme. Instead, all he or she needs is hard work or so the theory goes. However, too many times in practice it has appeared that executives have been rewarded for success but rewarded excessively for, at best, mediocrity. A succession of high profile manager after high profile manager appeared to be exercising share options and making a financial killing despite having failed conspicuously to add value to the business they were running. This 'abuse' of power came to be known as 'being paid to fail' and it created a political scandal that resulted in modest changes to the rules and tax regulations governing these schemes. See also: Save as you earn options (SAYE) Moneyextra's Guide to pensions

    • Last Updated: June 2007 © Moneyextra.com

     

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