Eircom wants to use Total Shareholder Return (TSR) as the measure of executive performance in the share option scheme it plans to present to shareholders for approval at its annual meeting on September 13th.
The scheme is being discussed with the Irish Association of Investment Managers (IAIM). But the IAIM has concerns that performance criteria proposed to assess senior Eircom executives are not demanding enough to warrant granting them potentially lucrative share options.
IAIM documentation on corporate governance and share option schemes says TSR is based on share price performance plus gross dividend per share. It considers that the formula to calculate TSR relies substantially on a measure outside the immediate control of the company - the performance of its shares on the stock market.
As one fund manager commented, a company's share price could rise strongly "purely due to market conditions and not anything management had done".
The IAIM therefore insists that TSR type share option plans be supported by "a secondary criterion providing a financial underpinning and linking the TSR measure to an underlying and sustained improvement in financial performance".
A TSR scheme tied to a minimum level of growth in earnings per share could, for example, be approved. But the IAIM would also require that the share price achieved should be averaged over the period to eradicate the influence of short-term market movements.
Eircom insisted yesterday that its proposed scheme includes company-specific operational and financial criteria which relate to the fundamental performance of the business as well as share price growth.
A spokesman said the company could not ask its shareholders to approve an incentive scheme which would not add value to the business. He said a share option plan was necessary as a catalyst for retaining skilled senior management but added that Eircom wanted to bring in a scheme which was in line with best industry practice.
Eircom said it wanted a scheme that would reward executives when the company performance achieved the median or greater than median performance compared to other companies in its industry. It insisted that this performance would be measured by a range of criteria including share price.
One telecoms industry source suggested the earnings per share growth criteria for performance measurement favoured by the IAIM may not be appropriate for developing telecoms companies. This is because these companies need to make significant capital investments for long term strength which could reduce earnings per share in the short to medium term.
But an experienced fund manager rejected this argument stating that the EPS measure could be adjusted for companies with heavy capital investment programmes.
"Earnings growth before interest and depreciation could be used to measure executive performance. The IAIM does not veto TSR but sees it as a measure which requires additional criteria to ensure it is fair to shareholders," he said.
Eircom shares were unchanged at €2.70 at the close yesterday having touched a low of €2.69 and a high of €2.72 on the day as shareholders await the intentions of 14 per cent shareholder, Telia.
