Waterford perks due updating

UNLIKE most other growing/recovering companies, Waterford Wedgwood, which on Wednesday will announce good results, has a share option scheme for its senior executives, that is not particularly attractive.

Consider the following: Mr Redmond O'Donoghue, Waterford Crystal's chief executive, had to allow an option over 262,000 shares in Waterford Wedgwood to lapse last year. The reason was simple. They had to be exercised by August 1995 at a price of 59.25p per share. As the price at the time was somewhat less, there was no point in taking them up.

Mr Brian Patterson, Wedgwood's chief executive, is the exception. He was granted an option (under a new scheme) over 350,000 shares last year at 53.5p per share compared with a current price of 75p - to be exercised before June 2005. That should reap a nice reward but other directors are not so fortunate with an option price varying between 73p and 128p.

The options scheme at Waterford Wedgwood contrasts with option schemes elsewhere. The Smurfit directors have potentially very attractive schemes with option prices varying between 91.66p and 154p, well below the market price of 167p. The options are only exercisable if certain targeted earnings are achieved.

The share option schemes at CRH are also potentially attractive. The option prices range from 128p to 265p, considerably below the market price of 613p. Here again they are only exercisable if certain growth in earnings is achieved.

The bulk of the share options in Waterford Crystal dates back to 1986 when it was riding high - with a share price of around 126p - and before it put its acquisition eye on Wedgwood. What happened subsequently has been well documented with the company going to the edge of insolvency, but a painful restructuring revamped the company.

Some smaller schemes have come into play but it is still surprising that the share option scheme was not zapped. Other companies, in similar circumstances have chopped schemes and put new schemes to shareholders.

But no one should start crying for the executive directors of Waterford Wedgwood. First, they are well remunerated with an average remuneration of around £200,000 (when the compensation of £343,000 to former group chief executive in Britain is excluded).

Second, and more importantly, the long term incentive plan for Waterford Crystal directors, comes into play on December 31st 1996. The five executive directors will benefit from a payment of £1.3 million which has already been provided for in the 1995 accounts and that is on top of annual bonuses.

The incentive figure will, of course, vary according to the performance of the group between the end of 1995 and the end of 1996. However, potentially it looks attractive and provides an incentive for the senior executives to keep their eyes on the ball.

The group appears to be on target to grow profits by at least 20 per cent for the full year. The second half provides the gravy, but the first half would need to grow at a faster rate. A 25 per cent growth rate would imply a rise in group pre tax profit from £7.4 million to a little over £9 million.

Sales are more difficult to evaluate as they are affected by currency movements while hedging has a smoothing impact on profits. Nevertheless it will be surprising if group sales have not grown by more than 7 per cent in the first half, so margins have improved again.

Waterford Wedgwood set itself demanding targets in April 1996 when chairman, Dr Tony O'Reilly, said sales were projected to double by the year 2000.

To keep the momentum up, the senior executives will need further incentives when the long term incentive plan runs out at the end of the year for Waterford Crystal (another exists in Wedgwood which runs out at the end of 1997). It will, therefore, not be surprising to see a new scheme being put the shareholders for approval next year.