Share-option schemes for executive directors cause consternation

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The often lavish share-option schemes for the executive directors of listed companies provoked Dutch legislators to take action in May 1998. Meanwhile, voices are being heard seeking to extend the options for employees to acquire shares in their own company. Representatives of trade unions for civil servants and employees in the healthcare sector, who do not qualify for these schemes, are demanding that these employees also profit from increasing profits and share prices.

The number of share-option schemes is still on the rise in the Netherlands. In mid-1998, the board of Philips is studying the possibility of introducing a share plan for all its 260,000 employees worldwide. Two-thirds of the listed financial companies and more than half of the listed information technology companies have option schemes for all their employees. At the same time, however, 75% of all listed companies exclude the majority of their employees from participating in these schemes.

Although option schemes are usually associated with large, listed companies, MKB (the employers' organisation for small and medium-sized companies in the Netherlands) recently drew attention to the advantages of such schemes in tieing employees financially to their company. The MKB memorandum, issued in March 1998, cites the increased commitment of employees and the extra amount of risk capital as the major advantages.

A majority in Parliament's Second Chamber (still a majority after the May 1998 elections) recently argued for new fiscal arrangements to encourage employees to acquire shares in their own company. The existing savings plan arrangements should be expanded to cover shares as well. Employees should be allowed to purchase a certain amount of shares each year. The employer should then match this amount tax-free. An important condition for this arrangement - just as with the current savings plans - is that employees keep the shares for at least four years.

Management share-option schemes cause an uproar

The sometimes extremely lavish share-option schemes for executive directors of listed companies (NL9801154F) have created quite a stir in the last few months.

On 1 May 1998, the coordinator for terms of employment at the largest trade union federation, FNV, once again criticised the current arrangements for top executives. He pointed out that the outcome of the collective bargaining rounds for 1998 hover around 3.5%, while the value of the share options of the members of the board of the financial giant ING increased to NLG 90 million. The same figure for the top executives of Aegon reached NLG 145 million. According to the FNV, these arrangements result in a situation where management is concerned primarily with short-term share price increases (shareholder value) while neglecting continuity and long-term employment.

Criticism also came from a majority in the Second Chamber, while Prime Minister Wim Kok used the words "exhibitionistic enrichment". At present, a bill is being discussed to increase the taxation of share-option schemes. According to the existing rules, owners of personal options are taxed only when they acquire the options. They then have to add 7.5% of the value of the underlying share to their income. The bill introduces a sliding tax scale, ranging from 4% for options with a one-year duration to 50% for options with a duration of 20 years or more. Furthermore, the outgoing State Secretary of Finance has proposed that shareholders should be granted the right to restrict the awarding of share options to upper-level management.

Mixed feelings among top-level managers

No unanimity exists among top executives about the abovementioned criticisms. On 7 May 1998, ING announced that it will drastically cut existing arrangements. The eight members of the board now have approximately NLG 90 million in shares, but in 1998 top executives at ING will be limited to a maximum of 25,000 options. The chair of the board wants to create a more modest image for the company. One board member, Rinnooy Kan, used to head the largest employers' organization VNO-NCW where he continually argued for wage moderation. Another large financial company, the bank ABN/Amro, announced that it will also cap its share-option schemes. On the other hand, the chief executive of Unilever scoffed at the "hypocritical debate" on share options. He opposes regulation, feeling that the remuneration of top management is a matter for shareholders and members of the supervisory board.

The head of VNO-NCW was positive about ING's self-imposed restriction. At the same time, he criticised the unions for their reluctance to introduce flexible, performance-based pay (NL9712149F). According to VNO-NCW, the unions are prepared only to introduce flexible pay in addition to increases in basic pay.

Fragmented employee interests

In the meantime, the growing popularity of share-option schemes could create a divide between employees in the market sector and civil servants and employees in the non-profit sector. The largest union for civil servants and employees in health care, the FNV-affiliated AbvaKabo, is demanding that these employees receive some form of compensation for the fact that they do not qualify for shares and share options. At present, the healthcare sector is particularly prone to labour disputes because of increased workloads and salaries that have lagged behind the market sector for years.

Commentary

Share-option schemes remain a hot topic in Dutch politics and industrial relations. The unions seem to have a point when they say that the present system promotes short-term thinking by managers. On average, top management exercises about 50% of the options within three years. However, whether the average employee would act much differently remains to be seen. Insofar as strengthening employee involvement in the affairs of companies is concerned, wider share ownership by employees might prove a better way. Research has shown that employee ownership of at least 4% of the shares, combined with participating management, increases motivation as well as profits.

The statement by AbvaKabo regarding the impossibility of granting shares or options to civil servants and employees in the non-profit sector deserves serious attention. The demand that these employees should in one way or another receive financial compensation is understandable. Recently, Rabobank developed an interesting alternative that might show a way out of this problem. This bank, which has the legal status of a cooperative society and so does not have the chance to issue shares or options, announced on 8 May 1998 that it will grant three months' paid leave every five years to its top-level executives. In addition, all employees will be granted a generous education and training package. (Robbert van het Kaar, HSI)