Recession pushes Scots stocks underwater

ALMOST three-quarters of listed Scottish companies have share option schemes which are "underwater" because of the recession, delivering a further blow to businesses and staff.

Research by accountancy firm Ernst & Young for Scotland on Sunday has revealed that 73 per cent of the 30 firms headquartered north of the Border and listed on the main London Stock Exchange have shares that have slipped underwater.

This means that the price employees have to pay to exercise their stock options is more than the market value of the stock. Buying their company's shares on the open market is cheaper than exercising their options. Companies with underwater shares do not get the reduction in corporate tax that comes with schemes which are above the surface.

They are not in a position to claim tax relief they would normally receive on the difference between the issue and sale price of shares.

Although markets are now recovering, Scottish companies, in common with other listed firms, have seen their share prices drop over the past year.

For example, Aberdeen Asset Management saw its share price close at 132.5p on Friday, down from a high for 2008 and 2009 of 145p. Dundee-based Alliance Trust closed at 294p, down from a high of 325p.

Lee Muter, an Ernst & Young director, said that underwater share schemes are a major issue for businesses. They have been widely used as a means of attracting, rewarding and incentivising employees.

He warned that when shares are underwater, they are effectively worthless, so companies are faced with having to come up with alternative employment packages or risk missing out on losing top talent.

He compared the growth of this issue to the problems faced by companies with spiralling pension deficits.

He said: "Businesses need to find ways to keep employees happy, as there is still a war for talent in the marketplace.

"They should consider re-launching share option schemes now as they could look great in two or three years' time."

Muter said businesses need to be more flexible about what benefits they offer employees.

For example, they should consider switching to a "green fleet" of company cars. This would allow companies to take advantage of green tax breaks introduced by the government.