Share Options in an Uncertain Market Judith Greaves

Existing share options On option holders -deeply underwater options and unrealistic performance targets remove any positive incentive; although -a tighter job market creates its own performance incentive On shareholders-major loss of value, reduced confidence The effect of a significant and sustained share price fall:

How concerned are companies? Percentage of UK quoted computing and software companies where underwater options exceed in the money options: –August % –November % FT 03/09/2001 “Half the companies in a survey of the UK’s technology, media and telecoms sector have already re-priced in-house share option schemes or plan to do so within 12 months”.

Repricing? Handle with care! Expect shareholders to be resistant ABI: “Re-pricing or surrender and re-grant of awards or “underwater” share options is not appropriate” Happy shareholders or happy employees? Both? Can you show that your company’s particular circumstances mean adjustment is in shareholders’ best interests?

Surrender and re-grant Listed company - shareholder approval may not be required but should be considered Disclosure requirements - directors visible: others “invisible”? Do surrendered options fall out of option plan headroom and salary multiple limits? EMI options released in last 3 years count towards £100,000 limit NIC status? Accounting impact

Inter X Options granted at 904p to 1,187.5p March share price 92.5p Choice –keep current options; or –exchange 1 for 1 - exercise price greater of market value and £3; or –exchange 2 for 3 - exercise price greater of market value and £2 New options - employee pays employer NICs Proposals made in the context of a Strategy Review Shareholder approval sought and obtained Current share price (9 January 2002) pence

Alternatives to re-pricing cash extending performance period? (care) parallel options? a share incentive plan using existing shares which excludes directors of the PLC does not require prior shareholder approval “one off” arrangements “in unusual circumstances” to retain a director do not require prior shareholder approval, but must be fully disclosed in next annual report “deferred bonus” i.e. an award of shares which are held conditional (only) upon the executive remaining employed for a further period

UK Proposals for shareholder vote on directors pay Consultation ends 15/03/02 aim to deliver proper transparency and accountability APs ending on or after 31/12/02 UK companies, “listed”, not AIM prospective (unaudited), preceding (audited) explanation of performance targets comparator graphs (5 years) default as TSR comparator

UK Proposals for shareholder vote on directors pay (cont’d) naming of “material influencers” (improper influence?) potential value, expected value, overall dilution advisory vote, result published