KEY POINTS:
The gold-plated share scheme that the NZX board wanted to dish out to chief executive Mark Weldon appears to been structured to get around tax.
Many chief executives, and other top-flight executives from listed companies that are much bigger than the NZX in terms of market capitalisation, share price performance and overall revenue and profit, would envy the deal the board was prepared to give its CEO.
The NZX board has now pulled the scheme rather than face the embarrassment of a strong negative vote at the AGM in Wellington it has scheduled for next Friday afternoon.
But the resulting furore has focused attention not just on the share scheme but also on whether Weldon's overall remuneration package is too generous.
Instead of a best-practice share option scheme, funded by the CEO after the company achieves average above-market performance over five years, the stock exchange wanted to bankroll Weldon's share scheme with an interest-free loan and let him start picking up benefits after just two years.
Basically, Weldon's employers were proposing to award their CEO $1.5 million of shares - a deal roughly equivalent to 1,066,345 NZX shares according to a Deloitte Corporate Finance calculation - if the NZX achieved a total shareholder return of 10.5 per cent per annum, compounding over three years.
That should be a breeze.
Under the scheme, Weldon would have bought the shares at the beginning of June using an interest-free loan from NZX.
The issue price, based on the market price for the 20 working days up to June 3, would not increase.
The shares would have been tucked into an NZX subsidiary, Tane Nominees, as loan security.
The Tane Nominee shares would attract dividends and take part in bonus issues. Weldon would have had to pay for any rights issues on the same basis as other shareholders.
But the critical point is that when the shares were transferred to Weldon - after he repaid the NZX's interest-free loan - all accumulated benefits, such as dividends, would also pass to his pocket.
At that point Weldon would have had to pay relevant tax on the distributions.
There is a 6 per cent difference between the fully imputed company rate of 33 per cent and Weldon's tax rate of 39 per cent.
It was a pretty nifty deal when stacked up against best-practice share options deals that top-flight companies use as financial incentive for managers.
These days most options deals carry a share price escalator.
Once CEOs exercise their options package they are immediately liable for a tax payment of 39 per cent of the profit between the issue price and the share price on the day the options are exercised. On the surface, it appears Weldon's deal meant he would avoid having to pay such tax.
Most executives who are responsible for much bigger revenue streams than Weldon's mere $25 million operating revenue (last year's figure) would no doubt wish their boards would offer them such a beneficial deal.
And one would expect the NZX, wearing its other hat as market regulator and setting the standard in terms of ethics and integrity, would not have a bar of this.
The NZX's intention to hold its AGM at 4.30pm on Friday - the close of the business week - just makes it look shifty.
Weldon tried to pull off a small PR coup by announcing late on Friday that he had encouraged his board to withdraw the controversial scheme, which would have seen him emerge with 10 per cent of the company in three years.
"For me, NZX is more than just a job," he said. "I believe in NZX as a company, its staff and the New Zealand market.
"The debate surrounding the CEO share scheme was becoming destructive. Thinking of the big picture and how to move the market forward is what matters."
The NZX should ensure its chief executive has to meet some stiff commercial targets.
Some of the key performance indicators in his bonus package are at the soft qualitative end of the spectrum.
The NZX's result last year indicates such performance should be easy to achieve.
"The external policy environment is promising results for New Zealand capital markets," it said. "Proposed tax changes for investments, the new portfolio investment entity tax regime and the introduction of KiwiSaver, in particular, will have a positive impact on 2007 and beyond."
The NZX board has taken a credibility bath on this one. Better to follow best practice rather than raise suspicions it is trying to ease Weldon's personal tax bill.
