Capitol Health Ltd’s MD should knock back options offer

Capitol Health Ltd (ASX: CAJ) managing director (MD) John Conidi should immediately announce that he is unwilling to accept the 15 million options the board has proposed giving him today.

After the company announced that it was suspending its dividend, following a 52% fall in net profit after tax for the six months to end of December 2015, the board announced that it had agreed to issue 15 million employee options to Mr Conidi – after consideration of a remuneration benchmarking report, his substantial contribution to the group in recent years, and as an incentive to maintain his engagement for the foreseeable future.

For a start, Mr Conidi already owns 32.7 million shares, roughly 6.3% of the company – which ensures that his incentive to perform is already closely aligned with shareholders. He has felt the pain of the 81% fall in the share price over the past twelve months. As such, I see no need for the board to offer additional options to ‘maintain his engagement’. Has the board also considered the rising debt levels which makes the company a much riskier proposition, the tumbling share price and today’s massive fall in net profit as well? Clearly not.

The pricing of those options is based on the volume-weighted average price (VWAP) for the five trading days this week – perhaps a coincidence given the share price plunge of more than 20% today (although it was down 25% in early trading), and virtually ensuring the options will come with a cheap price, despite the 50% premium to VWAP. Perhaps the only positive is that the options will vest over a four year period.

As for his substantial contribution to the group in recent years, I also note that Mr Conidi was paid a short-term bonus of $87,500 in the 2015 financial year (FY15), $44,000 in FY14 and $27,500 in FY13, along with a substantial salary and other benefits.

If the short-term bonuses weren’t for his ‘substantial contribution’ in those years, then what were they for? Perhaps the board could explain that to shareholders.

Foolish takeaway

The offer of options to senior executives does not align their incentives with shareholders – particularly when they are priced at a time when the share price has fallen to levels not seen in almost three years. Options can and do dilute shareholders’ holdings by stealth – without them realising that their shareholding has gotten that little bit smaller every time options are exercised.

As such, I call on Mr Conidi to reject the board’s offer and follow the example of another smaller-cap company, 1300 Smiles Limited (ASX: ONT) CEO Darryl Holmes – who has outright rejected offering options to senior executives.

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Motley Fool writer/analyst Mike King owns shares in Capitol Health. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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