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South Africa: JSE's Report Highlights Share Scheme Dangers
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Business Day (Johannesburg)
COLUMN
13 May 2008
Posted to the web 13 May 2008
Johannesburg
THE JSE's annual report provides evidence that long-term incentive schemes should not be linked to the share price.
This company has tried hard in the past to do the right thing, and has often been the first to act regarding good governance.
To retain and incentivise its staff, the JSE operates a cash-bonus system. It pays participants cash, based on participation in a long-term incentive scheme. This is calculated with reference to the growth in the JSE's share price on the date on which an employees' interest vests unconditionally.
But share-based schemes raise all sorts of problems, especially when the share price accelerates almost 300% in less than two years. Any gains executives then took off the back of this appreciation were going to look horribly large.
At the time that the JSE's stock rose phenomenally, the local economy was doing well, and supporting the exchange.
Although the executives at the JSE have certainly been innovative and hard working, measuring their performance through the appreciation of the share price does little to separate their performance from that of the economy.
Last year one shareholder voted against the scheme saying it was expensive.
This year it has paid out handsomely.
The JSE was between a rock and a hard place -- it wanted to incentivise staff and tried its best to design the right kind of scheme.
But it has already paid out so much that directors could easily afford to skip its next two payouts. This was probably not what the JSE intended, but it is the way share appreciation rights schemes tend to work, which is why they should be questioned altogether.
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The Bottom Line is Edited By Edward West
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