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Win or lose, share option rules must apply to executives and shareholders

When it comes to share ownership by Irish company bosses, the undisputed champion is Ryanair's Michael O'Leary. His 51 million shares in the budget airline have a market value of €215m. In December he sold 4 million shares at €3.75 a pop to raise another €15m.

Mr O'Leary's only rival in the share ownership stakes is Tullow's Aidan Heavey. Mr Heavey's 6.4 million Tullow shares are worth €111m.

Unlike Mr O'Leary, who holds no options over Ryanair shares, Mr Heavy holds options over a further 530,000 Tullow shares with a total value of up to €92m.

Messrs Heavey and O'Leary are unique among the ranks of Ireland's top company bosses. Mr Heavey's large Tullow shareholding is largely due to the fact that he was one of the founders of the company in 1985 while Mr O'Leary received his Ryanair shares when he joined what was then a virtually bankrupt carrier in 1991.

The only other Irish company boss with a shareholding whose value even approaches that of the Big Two is Grafton chairman Michael Chadwick.

His 19.6 million shares in the builders' merchanting and DIY group are worth almost €66m. Mr Chadwick, who in 2011 retired as Grafton's executive chairman to become its non-executive chairman, owes his shareholding to the fact that the company was founded by his grand-father in 1909.

Eugene Murtagh, the co-founder and current chairman of insulation manufacturer Kingspan, has also built up an extremely valuable shareholding. His 35.1 million shares are worth a hefty €280m.

If Mr Murtagh, who stepped down as Kingspan chief executive in 2005, were still running the company he would have by far the most valuable shareholding of any Irish quoted company boss.

He was succeeded by his son Gene whose 1.12 million Kingspan shares are worth almost €9m.

Another former Irish company boss with an extremely valuable shareholding is John Climax the co-founder and former chairman of drug testing company Icon.

His 1.6 million shares are worth €25m, while he retains options over a further 108,000 shares worth up to €1.68m. Former Icon chief executive Peter Gray's 376,000 shares are worth €5.8m while options and grants of restricted stock give him the right to acquire up to another 388,000 shares worth as much as €6.05m.

Drinks company

C&C boss John Dunsmore, who quit the drinks company at the end of last year, had 5.12 million shares worth €19.7m at the current market price as well as options that are in the money to the tune of a further €1.24m.

Paddy Power boss Patrick Kennedy's shareholding, almost 265,000 shares, in the quoted bookie, is now worth €12m. He also has options over a further 290,000 shares which are in-the-money to the tune of almost €7m.

The shareholdings of other big company bosses, while not in the Dunsmore or Kennedy league, are still substantial. Surging demand has pushed up food commodity prices. This in turn has been good news for the share prices of the quoted Irish food companies and their bosses.

Kerry Group boss Stan McCarthy owns 40,600 shares in the company with a current market value of €1.37m. He has also been awarded a further 93,000 shares with a market value of €2.75m under the company's long term incentive plan.

Over at Glanbia chief executive John Moloney owns 104,000 shares which are worth €620,000.

Between share options and shares which he has been awarded under Glanbia's long term incentive plan, a total of 994,000 shares, Mr Moloney is in-the-money to the tune of another €3.23m.

However, when it comes to the shareholdings of Irish food company bosses, Aryzta's Owen Killian is very much the cat who got the cream.

He owns 523,000 shares in the baked goods company worth €14.5m. He also has the right to purchase up to another 600,000 Aryzta shares with a total value of up to €21.6m under the company's share option scheme and other executive incentives.

By comparison Richie Boucher's 83,000 Bank of Ireland shares are worth a mere €11,000 at the current share price of 13 cent, while his options, some of which have strike prices of over €17 a share, aren't going to be in-the-money any time soon.

With his salary capped at €500,000 by government diktat, Mr Boucher will have to wait a long time before his net worth will approach that of some of the other quoted company bosses.

Mr Boucher isn't the only Irish company boss who has seen the value of his options savaged by a fall in the share price.

Paper and packaging group Smurfit Kappa was floated on the Stock Exchange five years ago this month at a price of €16.50 per share before briefly touching €21 in May of that year. However, the share price quickly went into reverse falling as low €1.09 in October 2008.

While the Smurfit Kappa share price has since recovered to €7.28 many of chief executive Gary McGann's share options remain out-of-the-money.

However, he retains in-the-money share options worth approximately €800,000 as well as owning 326,000 shares with a value of €3.27m.

CRH boss Myles Lee has also suffered from the fall in his company's share price. Although his 348,000 CRH shares are worth a not inconsiderable €5.5m, virtually all of his share options are out-of-the-money.

Only one tranche of Mr Lee's options are, just about, in-the-money to the tune of just under €140,000.

Wide disparity

Is this wide disparity in the value of the shareholdings of the bosses of Irish quoted companies reflected in the performance of the businesses they lead? What correlation, if any, is there between the level of executive share ownership and the share price?

Over the past five years the Tullow share price has risen by a staggering 221pc. With a market capitalisation of €15.75bn it is now by far the most valuable Irish-listed company.

Over the same period the index of non-financial Irish shares has fallen by a third.

So how much of Tullow's outstanding share price performance over the past five years is due to the fact that Mr Heavey has such a large shareholding in the company and how much to the fact that, in both East and West Africa, the company was simply in the right place at the right time?

Compare the performance of the Tullow share price over the past five years with that of Ryanair over the same period. Shares in the budget carrier have fallen by 27pc since March 2007, only marginally better than the average for all non-financial shares traded on the Dublin market.

The contrasting fortunes of the Tullow and Ryanair share prices demonstrate that the link between large management shareholdings and share price performance, if one exists at all, is at best tenuous.

Executive holding

The Grafton share price has also failed to benefit from a large executive shareholding with the price falling by 74pc over the past five years. It was a similar story at Icon, where Dr Climax was executive chairman until the end of 2009, with the share price down 50pc since March 2007.

While the link between large executive shareholding and share price performance is at best unproven, the link between options and share performance would appear to be, at least superficially, considerably stronger.

It is not just the €92m of options held by Tullow boss Aidan Heavey, but the €2.75m worth of shares Stan McCarthy of Kerry (share price up 53pc over the past five years) stands to receive under the company's long term incentive plan and the €3.23m which John Moloney of Glanbia (share price up 65pc) which would seem to indicate that options to incentivise managers do deliver.

The €7m of options enjoyed by Paddy Power's Mr Kennedy would also seem to support this contention.

Again the link is almost certainly weaker than widely imagined with Owen Killian of Aryzta, the most lavishly optioned food industry boss with an entitlement of up to €21.6m, presiding over a share price increase of just 6pc since 2007.

And then there were the bank bosses, whose average share price has fallen by 99pc since 2007.

The fact that all of these gentlemen were lavishly optioned didn't prevent them from running their companies into the ground.

Indeed there is a school of thought that options, which give company bosses exposure to a rising share price but not to a falling one, encourage bosses to take excessive risks.

"You do not always see a direct link between options and share price performance", says Robert Kirk, associate professor of accounting and finance at the University of Ulster.

"With options there is a tremendous temptation to maximise earnings", says Professor Kirk. Given the experience of the past five years it is clear that options, a heads-I-win, tails-you-lose "incentive", are seriously flawed.

If chief executives' interests are to be fully aligned with those of other shareholders then bosses must also be exposed to falling as well as rising share prices.

"When it comes to share ownership by Irish company bosses the undisputed champion is Ryanair's Michael O'Leary"

"'You do not always see a direct link between options and share price performance.'"

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