Proposed ComBank ESOP to create disturbing trend

Letter to Editor

The objective of Employee Share Ownership Plans (ESOPs) is for managers to perform well and improve the company’s stock price so t hat t he shareholders will benefit from it. However, according to current international research, most stock option pricing is done by managers themselves and therefore the pricing is such that the targets are easily achievable and do not serve as true motivation for managers to perform. It appears that t he proposed Commercial Bank stock option for employees is no different despite outside consultants serving as gate keepers. It is to be approved at an EGM following the forthcoming AGM.

The Commercial Bank annual report does not disclose how the bank has performed against competition for the previous year’s using the proposed methodology for eligibility to exercise the ESOP.

If this was done, it would have made it possible for t he shareholders to judge the reasonableness of the criteria to exercise the ESOP. Stock options should be exercised only for exceptional performance and not mere above average performance as seems to be the case with the Commercial Bank ESOP.

This is because shareholders expect above average performance anyway. There must be no expectation by managers for additional compensation by way of ESOPs for above average performance but only for exceptional performance. If the performance of the managers is below average, then they must be replaced.

The annual report does not disclose the designations or the number of employees who are in the categories of Grade 1A and above presently and eligible for the ESOP. Such information must be disclosed.

The proposed ESOP by Commercial Bank seems to create a disturbing trend that may be followed by other corporates and therefore may not augur well for the development of the capital market.

ROHAN FERNANDO