Incentives died when managers opted to take the cash.
Last year, directors of Asda, Unigate, Logica, Mirror Group, WPP, Vickers and Michael Page - to name just a few headline deals - converted their share options into six-or seven-figure cash amounts that were significantly greater than any shareholdings they retained. What should be made of managements which would rather take the money than become serious shareholders?
In the Thatcher revolution executive share option schemes were no less important than privatisation. They would both reward success and turn managers into owners. Often the mediocre were rewarded too, since the soaring stock market lifted even corporate also-rans. But although the prizes may have been distributed too widely, at least they promised to make managers into shareholders. However this aim, too, was off target. Post Thatcher, post utilities excesses and post Greenbury - and post the equalisation of capital gains and income tax rates - the option scheme is making an exit. Its place is being taken by the long-term incentive plan (LTIP), less generous to the mediocre and heavily tilted towards retention of equity. Meanwhile plenty of old style options are outstanding. It will be interesting to see how many of these are shortly exercised into cash.
'You have to have some sympathy for the eggs in one basket argument,' says Tony Solomons, chairman of Singer & Friedlander. 'It doesn't necessarily make sense to have what's likely to be most of your capital assets committed to the same enterprise that's responsible for your income.' David Page, chief executive of PizzaExpress, observes that, 'A free market is a free market - making people do something can be exactly the wrong sort of incentive'.
Nevertheless Page's company has introduced a deferred share scheme 'which involves our people putting their money at risk'.
At RMC Group, chief executive Peter Young adopts a self-righteous tone: 'We never did have one of those very extravagant schemes.
We simply never deemed it appropriate. And in fact people tended to retain those shares they did get. Our share price was always going up.' Former Confederation of British Industry chief Sir John Banham is equally firmly in the 'encourage to retain' camp.
'I am very committed to these schemes and I like them to go right through the company,' says Banham. 'I personally designed a scheme at Westcountry Television that was open to everybody on the same basis, involving them putting money in at the outset. It made Westcountry overwhelmingly the most productive TV station in the land. Carlton's bid made those people 10 times their money inside four years. National Power (where Banham chairs the remuneration committee) is moving in the LTIP direction from an old style option scheme. Wanting beneficiaries to retain the shares is a key part of that.'
Wealthy managers who are shunted into holding equity rather than taking cash, may well turn out to be better managers. For this reason LTIPs look like a good idea. One only wonders what unexpected problems will unfold once they mature.