ANALYSIS - Staff lose out on incentives

Newly floated companies follow best-practice guidance on executive pay and benefits more closely than longer-established listed companies, research by Arthur Andersen has found.

Top executives are more likely to have contracts limited to 12 months, in line with the Greenbury Code. Yet these companies should perhaps consider extending their concern over best practice to cover ordinary staff.

Incentive schemes remain the preserve of executives, with little attention apparently given to the need to incentivise all staff in the drive to maximise corporate performance.

Andersens based its research on the prospectuses of 66 companies that floated between March 1996 and April 1997. Of these 32 sought a full listing on the Stock Exchange and 34 headed for the Alternative Investment Market (AIM). Taking the two groups together, 68% of chief executives and 85% of finance directors had employment contracts lasting 12 months or less.

According to the report, Executive remuneration and equity incentives on flotation, basic pay for finance directors working in companies going for a full Exchange float outstrips that for their counterparts in AIM floaters, reflecting the generally larger size of Exchange companies.

The median basic pay for FDs within AIM companies was #58,000, while those in the upper quartile earned #71,500. FDs within companies floating on the Exchange proper received median salaries of #80,000 while the upper quartile received #95,100.

Share options were the most common form of equity incentive arrangements used for executives, with 90% of companies operating executive share schemes at float. Few companies operated other forms of long-term incentive plan.

‘Not a single company with a market capitalisation of less than #20m operated any other type of long-term incentive plan,’ said Bill Cohen, a partner in Andersen’s human capital services. ‘This suggests that smaller companies view option schemes as an effective mechanism for aligning the interests of directors and shareholders, provided that appropriate performance targets are set.’

Most newly floated companies use earnings per share as the specified performance target. The Association of British Insurers’ guidelines on equity incentives suggests a minimum target for executive share option schemes of eps increasing by at least 2% more than the rate of growth in the retail price index. More than a third of the companies surveyed appeared to have set more stringent targets.

However Andersens found that companies appeared to differentiate between executives and ordinary staff when considering the importance of incentives.

While executive share-option schemes were common within newly floated companies, it was rare for share schemes to extend to the entire workforce.

Just half the companies floating on the Stock Exchange ran all-employee share-save schemes, and only one AIM company had such a scheme. Cohen called this a ‘surprising’ trend.

The commitment and hard work of employees is key to ensuring the success of a company during and after flotation. But few companies seem to be giving all their employees the opportunity to participate in the business by acquiring an equity stake at flotation.’