Consulting firm Watson Wyatt has warned that the proposals for the accounting of share-based payments, which will see shares treated similarly to other forms of payment in the profit and loss accounts, contain two major anomalies that could have unexpected consequences.
The first anomaly concerns the performance conditions that must be met before an executive is entitled to a share package. Both earnings per share and total shareholder return (TSR) are likely to be heavily affected by the proposals, increasing volatility in EPS and causing a lower profit and loss charge in the first year under a TSR test.
Another concern is the different way options are treated depending on whether the option plans are paid out in shares or cash, with significant differences appearing in future years’ accounts.
‘It will be extremely unhelpful if these anomalies persist in the final version of the new accounting standard,’ said Watson Wyatt partner John Ball.
‘The design of performance conditions for executive share plans is a crucial area. Obtaining real alignment between executive pay and company performance is something that company remuneration committees should be paying greater attention to. It is vital that in doing so they take into account the impact of the new accounting rules.’
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