An Post's 8,500 workers will gain more than £22 million (€27.93 million) in an employee share option plan (ESOP) as the State-owned company prepares itself for the arrival of competition in the letter-post market in 2002.

The agreement has been reached despite warnings from the company's senior executives that profit margins are still far too low and that it faces serious competition in the next three years.

Workers will be offered 5 per cent of the company for no consideration and a 9.9 per cent tranche will be "earned" through work practice changes. No money will be paid by employees for this stake either.

But while moves to conclude ESOPs of this magnitude are generally seen as a precursor to a stock market flotation, the company's chief executive, Mr John Hynes, denied yesterday that this was the case at An Post. "The ESOP is not in anticipation of an initial public offering," he said. "It is a special case. Our structure is quite different."

An Post is seeking major overtime savings as part of the plan, which values the State-owned company at £150 million.

The company's dependence on overtime has been blamed for keeping profits margins low. The issue is seen as crucial, as efforts to reduce overtime have led to industrial disputes in the past.

"The margins are completely inadequate to withstand competition, so clearly we're going to have a great deal of work to do," Mr Hynes said yesterday.

Current margins are running at 2 per cent and these had to be increased to 7 or 8 per cent as an "absolute minimum".

Draft proposals for the ESOP have been agreed by An Post's management, its trade unions and the Government, although the plan has yet to be put to the workforce. The approval of An Post's board and the Revenue Commissioners has also been sought.

While the company said yesterday that its "underlying margins remain insufficient to withstand the inevitable pressures of increased competition", a spokesman said it would not seek forced redundancies in the rationalisation programme.

Mr Hynes said An Post would seek 100 to 150 voluntary severances and early retirements in the current phase of the plan. "The future plan would be different obviously, but we still believe, the unions and ourselves, that this can be done on a voluntary basis," he said.

An Post has been given the go-ahead to seek a strategic alliance partner, although Mr Hynes declined to reveal whether it had entered negotiation with any specific partner. The company hoped to finalise its plans by the end of summer, he said.

Work practice changes would have to be implemented by mid-2002 as the company geared for the deregulation of the letter-post market at the beginning of 2003, Mr Hynes said.

The company reported a pre-tax profit of £117.8 million (€149.58 million) for 1999. Some £106 million of this was generated from the sale of its Internet subsidiary, PostGEM/Ireland On-Line, to Esat. Pre-tax profits from ordinary activities were £11.7 million, up from £8.29 million in 1998.

An Post's turnover rose last year to £424 million, up nine per cent on 1998, although the company said increases in revenue had been "largely consumed" by a £32.7 million rise in operating costs to £413.7 million.

At a briefing yesterday, Mr Hynes said the industrial relations adviser, Mr Phil Flynn, had been engaged to chair "urgent discussions" with the Irish Postmasters' Union to reach a "common understanding about the sustainable development of the post office network".

Asked whether An Post was seeking to close any of its rural post offices, Mr Hynes said the company would work according to Government policy, which was not to close post offices.

The company planned to invest some £200 million in the next two years, as it prepared for competition, Mr Hynes said.