Survey Finds European Firms Flocking to Incentives

June 19, 2006 ( - A new study found that the number of European firms using long-term incentives (LTI) has increased while those offering share options to their executives has fallen off significantly in the last three years.

A news release from Mercer Human Resource Consulting said that its survey found 63% of companies offered share options in 2004 but that the figure had dropped to 41% by 2006 – a reduction of more than a third. The average grant of options as a proportion of the LTI package also fell from 45% in 2004 to 24% this year.

The survey, which covered 105 large companies across Europe, found that other LTI packages have become appreciably more popular. In the United K ingdom and Ireland the use of performance shares increased from 70% of companies three years ago to 84% this year.

“The requirement since January 2005 to expense options in corporate accounts has reinforced a perception that share options are less cost-effective than other LTIs in providing executives with a real interest in the business,” said Richard Lamptey, principal at Mercer, in the news release. “In Mercer’s view, however, companies need to think carefully about the relative merits of different LTI vehicles, to support their business strategies and projections.”

In continental Europe, use of performance shares has remained relatively constant while restricted stock units, which are settled in either cash or stock after a specified time, and long-term cash plans have become more popular, Mercer said.

Less onerous disclosure requirements in continental Europe may allow employers to provide rewards to executives without the link to company performance that is standard in the UK. The survey found that94% of companies in the UK and Ireland attach performance conditions to their LTIs and virtually all of these (94%) link them to the vesting of options or shares, according to the news release.

This is higher than in mainland Europe, where 85% of companies attach performance conditions to at least one of their LTIs. Almost two-thirds of these (62%) apply them to the vesting of options or shares, while 59% attach them to the grant of options or award of shares.

Despite increasing pressure from shareholders, on average less than half the respondents (43%) plan to enhance compensation disclosure in their 2006 annual report.

Of the 105 European companies that participated in the survey, 86% are publicly traded.