The Executive Compensation Controversy - Fondazione Rodolfo ...

THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSIScommittee made several recommendations regarding option plans applicable to all publiclytraded UK companies:• Executive options should be taxed as ordinary income upon exercised, and not as capitalgains when the stock is eventually sold.• All options should be subject to a “challenging performance criteria” so that the optioncannot be exercised unless the criteria are met. Executives should not be rewarded forincreases in share prices or other indicators which reflect general price inflation, generalmovements in the stock market, or movements in a particular sector of the market.• As a preferable alternative to stock options, companies should consider performanceshare plans, in which shares are awarded if “challenging performance criteria” arefulfilled, provided that the executives hold the shares for a substantial period.In response to the Greenbury report and the ongoing controversy, the governmenttightened the restrictions on approved option awards (i.e., those treated as capital gains ratherthan ordinary income), reducing the amount that could be awarded to executives (expressedas the aggregate exercise price) from the greater of £100,000 or four times cash emolumentsto only £30,000. In addition, the influential Association of British Insurers (ABI) issuedguidelines effectively constraining the issuing of options – approved and unapproved – tofour times cash compensation. 100100 See, for example, Association of British Insurers (1994); Association of British Insurers (1995).-87-