Are director share bonuses warranted?

Large, medium and small companies often use director share bonuses as a means of incentivising their staff to maximise returns for shareholders. This has been a controversial subject over the years because many directors have been left with enormous share option schemes with the potential of multi-million pound returns. Often this can be set against a difficult period for shareholders and perhaps volatile trading for the company itself. So, are director share bonuses warranted and a useful tool to help investors?

Regular bonuses

The idea that directors will receive regular share bonuses, whether free shares or the option to buy a certain amount at a certain level in the future, went out with the dinosaurs. The only way that directors and other members of staff should be incentivised is if they have individually and collectively delivered for the company. On countless times in years gone by we have seen directors receiving large bonuses or share options when perhaps the performance of the underlying company does not warrant the awards.

Director share bonuses
Are director share bonuses warranted?

Director share buying

A number of director share schemes will offer incentives for directors who buy shares openly in the marketplace. While this also has its downside, by effectively discounting the cost of shares overall, it is a better situation than simple regular bonuses. When any party is forced to put down cold hard cash to acquire shares you can pretty much guarantee they will do their upmost to improve performance going forward. A number of shareholders also monitor director share buying very closely as in the eyes of some investors it can be an indicative sign of underlying strength.

Performance driven bonuses

There are very few shareholders who would disagree with incentivising directors and other key members of staff with performance driven share bonuses. The fact is that an individual would benefit from performance driven bonuses but the underlying shareholders would benefit to a greater degree. This also ensures a lack of “Rewarded for failure” headlines which have hung over many companies like a dark cloud in years gone by. These types of share bonuses are also more likely to be voted through by large institutional shareholders because in theory they would benefit more than the individuals themselves.

Minimum holding period

How many times have we seen directors and key staff selling share options in the marketplace and banking multi-million pound returns? A number of share bonus schemes have no minimum holding period which basically means they can be sold as soon as the shares have been awarded. Some directors will hold their shares for many years in the hope of benefiting in the longer term but some will dispose of their free shares as soon as possible. Where relatively small companies are involved the sale of just a few hundred thousand shares can drag the share price down making many shareholders even more annoyed!

Conclusion

There is no doubt that any share bonuses to directors and key personnel should be directly linked to the underlying performance of not only the company but the share price. When you bear in mind that shareholders effectively own the company and directors are “temporarily” in charge as a proxy for shareholders, then surely shareholders should benefit as much if not more than underlying individuals. Supporters of share bonus schemes suggest that these are required to keep the best and brightest personnel at companies while others suggest it is nothing than a “gravy train”.

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