The chairman of the trust which manages the 14.9 per cent of shares owned by Eircom employees said they were in favour in principle of the introduction of a suitable incentive scheme for managers but the proposal was not fit for its intended purposes.
Mr Con Scanlon, of the so-called Eircom ESOP Trustee, said he represented the voters of 330 million shares, and the trust had decided not to support the resolution proposing the incentive package. The group favoured in principle the introduction of a suitable incentive scheme for managers but had difficulties with aspects of the long-term incentive plan. Despite additional information they received, the Eircom ESOP Trustee remained unconvinced that the proposal was fit for its intended purposes.
Mr Scanlon said the advisers were concerned about how achievable the scheme's performance targets were. Specifically, the scheme required an earnings per share performance 5 per cent ahead of the consumer price index, before the options would vest.
Mr Scanlon said Mr Alfie Kane, Eircom's chief executive, had said the pattern of proposed investments in new business developments were in fact earnings diluting. Trustee advisers forecast that as a result of such necessary investment, earnings per share would drop.
"Added to the requirement for EPS to be 5 per cent ahead of inflation, we forecast that this hurdle will not be cleared for the foreseeable future," Mr Scanlon said.
The firm said the performance period could be extended for nine years. Eircom's board had also said it would monitor the use of earnings per share as a performance measure over the plan's life and that it might seek shareholders' permission to introduce a different measure if appropriate.
"Despite these moves by the Eircom board, the fundamental issue about the achievability of the performance targets, within a reasonable period, has still not been addressed to our satisfaction," Mr Scanlon said.
A major concern for the trust was that vesting of shares under the plan may take place in full, or in part, even though the performance criteria had not been met.
"The CEO's recent comments, as reported in Business and Finance magazine, about the likelihood of a takeover or merger in the next two years, have certainly caused unease to the trust in this regard," he said.
It was the trust's view that the sole criteria for the vesting of shares in this context should be the criteria set out in the plan. The matter should not be discretionary.
It also had to query whether the scheme as proposed would align the interests of management and shareholders. The Eircom ESOP Trustee was a significant shareholder in the firm and believed it was in the best interests of all shareholders that the company should invest now in new technology to provide the foundation for strong long-term growth.
It was in shareholders' interests to see the incentive scheme related to investment and growth, not solely earnings per share. Indeed, the scheme as constructed would penalise management for having a proactive investment and growth policy.
The price at which the share options would be granted had also caused misgivings. Trustees were pleased the board had decided on the minimum price at which they would be granted between now and the next a.g.m. "However, this development does not address our concerns about the award of restricted shares, which are free shares. We have still not received sufficient clarity . . . on the mix of free shares and share options which the plan will contain," he said.