Share options awarded to Eircom executives in the current financial year could be very limited if shareholders approve an executive share option scheme at the company's a.g.m. on September 13th.
This would happen because the company profits or earnings in the current financial year are expected to show some slippage from the outcome for the year to end March 2000. Eircom's remuneration committee is understood to have agreed to comply with the Irish Association of Investment Managers' (IAIM) guidelines and use earnings per share as the measure of executive performance for allocating shares under its proposed executive share option scheme.
Growth in earnings per share would then be the basis for awarding share options to executives with the amount of options allocated tied to the level of growth achieved. Executives will only be awarded options if earnings per share increase by the amount of the consumer price index plus 5 per cent.
But the amount of options to be allocated to executives would depend on which earnings per share measure is applied.
Analysts expect underlying or normalised (when non-recurring items are stripped out) earnings per share to fall in the current financial year but they expect some growth in reported earnings per share. This is because the reported figure last year was depressed by a large exceptional restructuring charge. Eircom warned earlier this year that profits were under pressure because of the need to invest for the future, increasing competition and the effect of new businesses on earnings.
ABN-Amro analyst Ms Jemma Houlihan is forecasting normalised earnings of 9.3 cents for the year to end March 2001, down from 12.2 cents. But applying the reported EPS measure, which can be increased or reduced by exceptional gains or charges, her forecast is a rise in earnings to 9.7 cents from 8.4 cents.
But Eircom shareholders are unlikely to be told the price at which shares will be issued to executives before they vote on the scheme at the Eircom a.g.m. Sources said the scheme, details of which will be sent to shareholders in coming weeks, will include "a formula of words" setting out how the price will be determined. Shareholders are concerned that executives may be issued options to buy shares at current market prices which is well below the €3.90 flotation level at which most shareholders bought into the company. Eircom shares closed at €2.63 yesterday, a fall of seven cents on the day.
The formula, which will be established by the remuneration committee and approved by the Eircom board, may state that the options will be issued at a price which reflects the market price on the day the options are issued.
While there is nothing to stop the remuneration committee outlining a formula which sets a price higher than the market price, market sources say this is unlikely to happen.
The Eircom remuneration committee, under chairman Mr Ray MacSharry, has to devise a scheme which will offer incentives to executives but also gain the approval of shareholders, who have seen the value of their shares fall sharply. In addition to deciding on the price or price formula at which options will be issued, the committee must also decide on the size of the annual flow of shares to the option scheme beneficiaries.
With the agreement to base the allocation of the shares on a strong financial underpin, such as the growth in earnings per share, the danger of executives getting valuable share options without producing a growth performance that would benefit shareholders has been reduced. But the price at which the shares are allocated will send an important signal to shareholders.
Eircom had sought to have a Total Shareholder Return criteria for executive performance which would have taken growth in the share price and in dividends as the basis for share options.
