Hermes Investment Management has joined opposition to Marconi's proposed repricing of employee stock options, saying that it will vote against the proposal at the company's July 16 AGM.
Hermes, which joins the UK’s National Association of Pension Funds (NAPF) and Clerical Medical in publicly opposing Marconi's repricing plan, said that by voting against the proposals it was making a clear statement of principle. According to Hermes, stock option schemes are fundamentally flawed and have a potentially demotivational effect on staff.
As they are usually structured, share option schemes are a one-way bet. Unlike shareholders, holders of employee options don't have their own money at risk, Michelle Edkins, Hermes corporate governance director, said.
Well-structured schemes reward executives handsomely when shareholder returns have been exceptional. Compensating executives when shareholders have suffered a loss in real value diminishes the credibility of incentive pay structures.
Hermes, which is owned by the British Telecom (BT) Pension Scheme, believes that employees should be granted shares rather than stock options, and that performance targets should be set against peer group companies.
Additionally, Hermes believes that the recent downturn in the stock market has left many executives holding options that may never be worth exercising. Repricing, according to Hermes, sends the wrong signal to employees in that incentive schemes will reward them regardless of the company's performance. It also sends an implicit signal to the market that the directors do not believe the share price will recover in the short term.
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