O'Rourke and Eircom chief diverge on share option scheme decision

The Minister for Public Enterprise has strongly defended her decision not to set up a share option scheme for senior Eircom executives when the company was floated last year.

A spokesman said Ms O'Rourke remained convinced that it would have been "inappropriate" to fund a share option scheme out of taxpayers' funds. "It was decided that it would be more appropriate for Eircom, as a public company, to deal with that matter," the spokesman said.

The Minister was responding to implicit criticism levelled at her by Eircom's chief executive, Mr Alfie Kane, in an interview on RTE's Marian Finucane show yesterday. Mr Kane, who was explaining the merits of the proposed share option scheme to incentivise senior management, said the issue would not have caused such a controversy had it been agreed at the time of the flotation. "It would have aligned management's interests and the company's interests with those of shareholders. We wouldn't be having this debate at all," he said.

Mr Kane was speaking ahead of what is expected to be a stormy first annual general meeting of Eircom on Wednesday. Shareholders, who include the Minister for Public Enterprise, will be asked to approve the share option scheme and the re-election of Mr Kane and other directors at the meeting. The Minister's spokesman refused to comment on how she would be voting at the meeting.

The bone of contention for shareholders is that directors may be offered an option to buy Eircom shares in the future at a price well below the €3.90 flotation price.

Mr Kane said the price of the share options would be decided by a remuneration committee made up of directors to be headed by chairman Mr Ray MacSharry.

He said the committee would be "sensitive" and "pragmatic" when making that decision.

When pressed, he conceded that that price was likely to be above the current low share price but not necessarily close to the flotation price.

"The option price has got to be not specifically the market price today but I also think it would be dysfunctional to strike it at a much higher price."

He contended that management would only be able to take up any share options which were allocated on achievement of very stretching and challenging targets.

Mr Kane attributed the fall in the share price to the negative sentiment towards telecom stocks, the overhang of the stock held by KPN (21 per cent) and Telia (14 per cent) and concerns about overheating in the economy.

He argued that Eircom's management was not responsible for poor sentiment towards the sector and should be rewarded for the progress made.

Mr Kane and Eircom finance director Mr Malcolm Fallen were awarded performance-related bonuses of £957,564 (€1.2 million) despite the collapse of the share price. Eircom shares are currently worth some 35 per cent less than when they were first issued. Mr Kane said he was aware of the "sensitivities" of this payment at a time when shareholders were nursing substantial losses on their investment in Eircom. He stressed the bonus related to bringing the company up to the point of flotation and did not cover the first year's trading as a public company.

"The company was brought from a £1 billion company to a £7 billion company. By any standard that is an incredible achievement," he said.

In the current year he said the company had performed in line with market expectations, meeting earnings and dividend targets.

Looking forward, Mr Kane believed market sentiment towards the telecoms sector would improve. Concerns about overheating in the Irish economy were also overdone and he believed this would eventually be proven and would help to market the company more positively internationally.

And he also hinted that an "effective sales process" may see KPN sell its shareholding in the near future. He also stated that Eircom was likely to become involved in the consolidation occurring throughout the telecoms sector, and would either become a takeover target or be part of a merger or acquisition. "I believe we are moving forward to a period where there will be less noise and less despondency around."