Brown Must Learn Lessons from US-Style Share Option Schemes News Analysis: In Today's Budget, the Chancellor Will Announce Plans to Double Employee Share Ownership in the UK. but There Are Pitfalls

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WHEN GORDON BROWN announces this afternoon a massive programme to double employee share ownership in Britain, he would do well to distance himself from US-style share option schemes.

While the idea of employee share ownership as an incentive for workforces and as a way of giving them a stake in their companies is all-American in origin, it seems to have gone off the rails in the US as far as stock options are concerned.

Just as Britain embraces more fervently than ever the dream of a shareholding democracy, there is the prospect that the US may be questioning, and even taking action against, the spiralling stock option deals that have created so many millionaires across the Atlantic. The irony is that the bloated stock option packages for fat cat directors, which have become a target for shareholder activists in America, were the direct result of calls a decade ago by exactly the same constituency for more performance-related pay. American investors are worried about the impact of share option schemes on share values. Twice as many share option schemes were vetoed in the US last year as in 1997. Critics charge that what started as an attempt to implement shareholder democracy has ended with a small number of top executives being set easy performance targets and receiving absurdly large rewards. There is also concern that if all these employees cash in their stock options at the same time, they will drain the company of cash and dilute existing shareholder stakes. The problem has been dubbed "the stock option overhang". How big the problem really is has provoked a huge row in the US, however. Some researchers claim that 13 per cent of all US shares are destined to be stock options, while others claim the figure is only 7 per cent. There are also worries that stock option schemes distort company accounts, making corporations impossible to value correctly. The accountancy firm Robson Rhodes published research last year which claimed that the full cost of Microsoft's options scheme, which represents around a fifth of all its shares, would have pushed the software giant into a $10bn loss for 1996 if they had been correctly accounted for. Annoyingly for the Chancellor, it is hi-tech success stories such as Microsoft that he wants to encourage, but obviously not in this way. The dilemma causes some grim amusement to UK accountants. John Whiting, a tax partner with PricewaterhouseCoopers in London, says: "I'm sure Gordon Brown would love to have a problem like Microsoft." Microsoft is, perhaps, the classic case of a company balancing low wages with the promise of riches to come from stock options. According to Michael Cusumano and Richard Selby's book Microsoft Secrets, published last year, overall compensation has been generous in the 12 years since the company came to the market due to the steady rise in the shares. …