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. Last Updated: 07/27/2016

Fat Stock Options a Step Away For Execs

Hefty stock options are turning top Western executives into multimillionaires overnight as their companies’ shares shoot up on the stock market.

But a lack of legislation has forced Russian managers at those same companies to miss out on the bounty.

Maybe not for much longer.

After two years of hammering out a framework, Western consultants recently submitted proposals to the authorities under which Russians could also receive stock as part of their standard salary packages.

The filings, made to the Central Bank on behalf of two multinational companies, could pave the way for other foreign firms to offer stock options by setting a precedent of how the procedure should be done.

"Because of the total lack of legal basis and because it is an unknown concept, it took practically two years of meetings, discussions and correspondence to get to this stage," Natalya Milchakova, a partner with PricewaterhouseCoopers, said in an e-mail interview.

PwC is working on the project with the Landwell CIS law firm.

The Central Bank has given positive signs that the proposals will be accepted and that the two companies will be able to implement stock-option plans for Russian nationals, said a Landwell lawyer who wished to remain unidentified.

Landwell and PwC declined to name the two companies. Repeated calls to the Central Bank went unanswered Wednesday.

If the Central Bank gives the green light to the proposals, which PwC and Landwell declined to detail, it could mark a watershed for Russian executives. At present, Russians are forbidden from owning shares in foreign companies without a hard-to-get license from the Central Bank.

In the United States, directors have been raking in stock over the past decade. The 1 million Americans who held stock options in 1990 has shot up to at least 10 million this year, according to the California-based National Center for Employee Ownership.

The concept is also gaining in popularity in Asia and Europe.

Stock options give an employee the right to purchase a certain amount of the company’s stock at a fixed price over a set amount of years. Even if the stock price rises by the expiration date, the employee can buy the stock at the fixed price.

While senior Russian managers have been left in a bind, their companies have tried over the years to work around the lack of legislation, said Tim Carty, manager with Arthur Andersen.

"A company could deliver cash instead — the same level of cash had the person had real options," Carty said.

A multinational could also separate the individual from owning or buying shares by establishing discretionary trusts. Often, those trusts are located offshore.

Microsoft, for example, has a stock-option plan for its Russian executives, but they don’t ever legally own the stock, said Tatyana Reptevskaya, human resource manager for Microsoft. That arrangement allows the company to bypass any kind of Central Bank approval.

Many Russian executives don’t demand stock compensation because they don’t know that such deals even exist, said Artyom Denisuk, senior account manager with the Coleman Services Inc. recruiting firm.

"These options are useful as an incentive around the whole world, and they could also be beneficial in Russia," Denisuk said. "I can see this being popular in two or three years, and companies should be interested in having such a mechanism."

But in the fallout of the 1998 crisis, many multinationals that lost money were wondering whether stock-option plans would have made a difference in Russia, said Carty at Arthur Andersen.

"Many began to question whether their senior executives in Russia would have acted in a different way if they had been more closely aligned with the company’s share price and performance," Carty said. "For a senior executive, a material amount of built-up wealth in the value of the company is a constant, nagging reminder.

"He knows that if he makes a mess of it, then it’s going to hurt his pocket."

The global trend for stock-option plans suggests that Russians at domestic and foreign corporations will most likely gain similar deals in the next few years.

The process could be accelerated if Russia modifies its currency law to allow Russian employees to invest in their employer, Carty said.

Other countries like the Czech Republic maintain currency controls but make such an exception, he said.

"Stock-option plans are viewed as a very strong motivation tool," said PwC’s Milchakova. "Russian employees would appreciate not only an additional income opportunity but would also enjoy being part of a global team and getting the same treatment as their peers in other countries."