There has been criticism that executive share options have been given away too cheaply.  We tested this recently, and the answer is a categorical “no”. 

There were many aspects to our analysis.  In fact, too many to report here in a newsletter format.  However, we can report as to whether boards were indeed giving away too many options and share rights at a discount. Because there is no disclosed information before 2005-2006, we opted to compare the exercise price of an executive share option at the grant date against the market price of the shares at the same date.

Extracting options remuneration data from 2005-2006, we opted to compare the exercise price of an executive share option at the grant date against the market price of the shares at the same date.

Extracting options remuneration data from GuerdonData™, we examined 781 tranches of executive options. In 53.01% of the cases, the exercise price of the option was higher than the market price at the time of the grant. 3.46% of the cases had the market price being equal to the exercise price, while the remaining 43.53% of the cases had the exercise price being lower than the current market price.

While the figures given above may not prove conclusive, a better picture is drawn when we examine the extent of the “exercise price premium” – the difference between the exercise price and the market price. Calculating the ratio of exercise price against the market price, the table below summarises the results:

Table: Option Extercise Price % of Market Price At Grant

         Statistic              Exercise/Market Price Ratio
         Average                             109%
         25th Percentile                     96%
         50th Percentile                    100%
         75th Percentile                    106%

A ratio of 100% would indicate that the exercise price is equivalent to the market price, while a higher ratio would indicate a higher exercise price, and a lower ratio a lower exercise price. From the results, we can see that options tend to be issued with higher exercise prices.  

In addition, the interquartile range (that is, the difference between the lower quartile and upper quartile) is narrow, indicating that differences from the market price may be the outcome of averaging the market price over a period prior to grant.

There is no evidence in our analysis to support the contention that there is a market wide and deliberate practice of providing executives with discounted options.

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