executive share option scheme


Also found in: Acronyms.

executive share option scheme

an arrangement which involves the periodic grant of SHARES in a company to the company's executive directors as an incentive for them to improve the financial performance of the company and align their interests more closely with those of the company's SHAREHOLDERS. Options to buy shares are granted at a specified ‘exercise’ price which is normally the market price of the company's shares at the date of grant. The exercise of options typically can only occur between three and ten years after the date of grant. Most options can be exercised (that is ‘cashed-in’) only provided that certain pre-determined financial performance ‘targets’ are achieved over a specified time period, usually three years. Typically, option schemes require the company's earnings per share (profit after tax divided by the number of shares) to grow at a rate greater than the increase in the RETAIL PRICE INDEX over the same period or growth in total shareholder return (increase in share price with dividends reinvested) to exceed that of companies comprising some SHARE PRICE INDEX, such as the FTSE-100 share index. Compare LONG-TERM INCENTIVE PLAN. See PRINCIPAL-AGENT THEORY, BUSINESS OBJECTIVES, CORPORATE GOVERNANCE, EMPLOYEE SHARE OWNERSHIP PLAN.

executive share option scheme

an arrangement that involves the periodic grant of SHARES in a company to the company's executive directors as an incentive for them to improve the financial performance of the company and align their interests more closely with those of the company's SHAREHOLDERS. Options to buy shares are granted at a specified ‘exercise’ price, which is normally the market price of the company's shares at the date of grant. Most options can be exercised (i.e. ‘cashed in’) only provided that certain predetermined financial performance ‘targets’ are achieved over a specified time period, usually three years. Typically, option schemes require the company's earnings per share (profit after tax divided by the number of shares) to grow at a rate greater than the increase in the RETAIL PRICE INDEX over the same period or growth in total shareholder return (increase in share price with dividends reinvested) to exceed that of companies comprising some SHARE PRICE INDEX, such as the FTSE-100 share index.

For example, in the case of Legal and General (2004), the insurance company share options become exercisable if the growth in the company's total shareholder return (TSR) is greater than the average TSR growth of companies comprising the FTSE-100 share index over three years. For Barrett (2004), the house-building company, share options become exercisable if the growth in the company's earnings per share is greater than the increase in the RETAIL PRICE INDEX by at least 9% over three years. Compare LONG-TERM INCENTIVE PLAN. See PRINCIPAL-AGENT THEORY, FIRM OBJECTIVES, CORPORATE GOVERNANCE.

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