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Thursday, 21 June, 2001, 06:32 GMT 07:32 UK
Are stock options on the way back?
What good are stock options when share prices are falling?
What good are stock options when share prices are falling?

By BBC News Online's Orla Ryan

What does it take to persuade a worker to get out of bed these days?

Whatever it is, it will not be the stock options that they have stuffed in their mattresses.

They probably provide more comfort at night than they do during the working day. workers have seen their paper fortunes crash with their companies' share prices in the past year.

Last year, these options became one of the most popular ways to get and keep staff at technology and telecoms companies.

Now, without these options, these companies are finding it difficult to hold on to key staff.

And telecoms company Marconi argues that the way forward is to re-price employee stock options - giving employees a second chance to make their fortune.

Other UK companies may follow their lead, in line with their US counterparts.

So much of the share price depends on things outside of employee control, such as sectoral changes, global markets

City consultant
There is however one snag. Surely - so the argument goes - the whole point of these kind of incentives is they do not pay out when companies perform badly?

Staff leaving

Telecoms and technology companies are among those hardest hit by fears of slowdown in the US, with business news flow in recent months dominated by profit warnings in these sectors.

However, the slowdown has yet to hit the jobs market and these same companies are still finding it difficult to get the specialist staff they need.

The new economy tradition was to woo employees with stock options.

The peaks and troughs of Marconi's share price
In Marconi's case, some employees received 1,000 free options to vest at 16.03.

Given that the share price now hovers at about 2.68, with little sign of near-term recovery, it is clear that these options provide little incentive to stay.

Under the new plan, nearly 40,000 employees around the world would receive 500 shares at an exercise price of 8.

Arguably, there isn't much chance of the shares tripling in value to reach this level either.

But at least it is not complete Utopia.

UK invasion

This kind of re-pricing is very unusual in the UK. Typically, fears exist of stock dilution, though the structure of the Marconi offer makes this less of an issue.

Falling US markets have encouraged some employers to re-price their options
Falling US markets have encouraged some employers to re-price their options
However, Marconi's share price fell on the news.

Convincing shareholders to back the proposal at an AGM on 18 July will be tough.

Marconi chief executive George Simpson said the decision was a "a big ask for our shareholders and we will have to work hard to get this through. There is some apprehension."

"Obviously, there are concerns about setting a precedent. But the alternative is doing nothing, which would tear the guts out of our business. I would be in dereliction of my duty to do nothing," he was quoted in the Financial Times.

Shareholder fears

Marconi hopes to win the confidence of the Association of British Insurers.

Insurance companies own an estimated one fifth of the equity of UK companies and the ABI provides them with information to guide their voting decisions.

However, an ABI spokeswoman said: "In principal, we don't like re-pricing, it breaks the link between performance and remuneration, which is one of the principal links of corporate governance."

The problem for shareholders generally, says Marcus Peaker at executive pay consultancy Meis, is that they are rewarding employees for failure.

"There is a feeling that if you do a deal, the terms of the deal have been changed half way through it," Peaker said.

Others point out that a lower share price cannot necessarily be attributed to employee actions.

"So much of the share price depends on things outside of employee control, such as sectoral changes, global markets," one consultant argued.

US leads

More companies in the UK are likely to face increasing pressure to follow Marconi's lead.

Each case will be viewed on an individual basis, the ABI spokeswoman said, though she does not necessarily anticipate a flood of stock option re-pricing.

It is uncertain what the reaction from shareholders will be.

By contrast, in the US and Canada, stock options re-pricing has become widespread in the past year and occurs almost without comment.

Marconi's Canadian rival Nortel Networks re-priced options last week.

"This is an extraordinary step that is essential so we may continue to attract, retain and reward our talent in a highly competitive labour market," John Roth, president and chief executive officer of Nortel Networks.

Cisco chief executive John Chambers also said it was necessary to re-price the company's stock options to encourage workers to stay.

Ultimately, it is the departure of staff, which could hurt the company more in the longer term than any dilution of stock, they argue.

"That is where we believe the interest of the shareholders are at risk. If company does not take right action, we will lose the talent you need and that will affect shareholders," a Marconi spokesman said.

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