Some Eircom executives could receive free shares

Some Eircom executives could get free shares if the share option and share award scheme, to be presented to shareholders at the company's annual meeting on September 13th, is approved. Under its proposed long-term incentive plan, approved by the Irish Association of Investment Managers, Eircom would grant share options and conditional share awards to up to 400 company executives.

While Eircom executives would have to pay for any shares they buy if they exercised options they had received, the share awards plan would involve the issuing of free shares to executives.

Industry sources said share awards were becoming more common in executive incentive plans. There was an emerging trend, one source said, that where incentive plans include share awards these free shares would be granted to top executives while share options - where executives can buy shares in the future at prices agreed now - would be granted to lower-rank executives.

An Eircom spokesman said that the share award plan was in keeping with IAIM rules and was a normal incentive used in the industry. The Eircom board has made no decision yet "on whether, how or if" Eircom would implement a share award plan. "We are simply providing for emerging best practice in the industry," he said.

Share awards rather than options could be used in a situation where Eircom wanted to recruit an executive with particular capabilities, he said, adding that the ability to attract and retain capable managers was a big issue for companies in the sector. Information sent to Eircom shareholders proposed an incentive scheme based on a combination of share options and conditional share awards. "This will enable the relative simplicity of options to be combined with the additional ability to retain key employees that share awards will provide," the company told shareholders.

However, the circular gave no details of the proposed breakdown of the total number of shares involved between share options and share awards or of how it would be decided which incentives would be granted to which executives. The "conditional" element of the share awards plan was not disclosed. The Eircom spokesman said this would be the same performance condition that applies to the granting of share options - options can only be granted if the company's earnings per share increases in line with the increase in the consumer price index plus 5 per cent per annum compound.

Share awards are much more attractive to executives because since they do not have to make any payments for their shares, they can make greater gains when they sell them.

Eircom shareholders have not yet been told the price at which the company proposes to grant share options if the scheme is approved by shareholders. Most market sources expect the option price will be set at the market price when the options are granted. This would comply with IAIM rules. But it would anger many of the shareholders who bought Eircom shares at the flotation price of €3.90 or at higher post-flotation prices - the shares touched €5 before collapsing to current levels.

The Eircom board was conscious of the share price issue and sensitive to shareholder sentiment, the spokesman said. It had yet to decide on the option price and on how and when the options would be granted, he said.

Eircom shares closed at €2.54, staging a tentative recovery from last week's all-time low of €2.40. If the share options are issued around that price, executives would be able to buy the shares at say, €2.54 in the future and then sell them at the market price at that time. If, for example, the share price had increased to its flotation level, an executive would make a gain of €1.36 for every share acquired through the option plan. But the gain for an executive granted a share award at the same time would be €3.90 per share.