If the proposed changes to the taxation provisions for employee share schemes are implemented (such that options are generally taxed when they are exercised rather than when the employee is able to receive them), options are likely to become a more popular tool to use in incentive plans.
Egan Associates has conducted research to examine the current proportion of companies granting options compared to the proportion that were granting options in 2009 when the former Labor government introduced the current taxation rules.
We examined the top 200 Australian companies as of 31 December 2013 based on market capitalisation, looking at whether they had granted a long term incentive to CEOs and executives during the 2013 and 2009 financial years (or requested permission to make a grant at their AGM) and what form the incentive took. (The 2013 year was chosen as not all companies have released 2014 reports.)
Some of the top 200 Australian companies were not listed in 2009, and not all provide data on executive remuneration, reducing the sample size marginally in 2013 and by about 10% in 2009. Of those where information is available, not all companies granted long term incentives to their CEOs. The proportion that did is provided in the table below.
Proportion of Companies that Disclosed Grants in the Annual Report
Proportion of Companies that Sought Approval for Grants at their AGM
Of those which disclosed grants/requested approval for grants, the proportion of companies granting various instruments are disclosed in the following tables.
Top 100: Grants Disclosed or Requested for CEOs
Top 200: Grants Disclosed or Requested for CEOs
Top 100: Grants Disclosed or Requested for All Executives (including the CEO)
Top 200: Grants Disclosed or Requested for All Executives (including the CEO)
As can be seen, the prevalence of companies using options as an incentive instrument declined significantly between 2009 and 2013. This was not solely due to their taxation treatment. Concerns over dilution and large gains for executives with rising markets were also contributing to a move towards share rights.
Comparing AGM grants to Annual Report disclosure of grants provides an indication of the direction of incentive based plans – it appears that the use of options has hit an inflection point and may already be on the rise.
It will be interesting to conduct a similar analysis in the first year after the introduction of the proposed taxation changes to see how much taxation, rather than concerns over dilution and incentive value, affect companies’ choice of incentive instrument.