Gerry Harvey has been one of Australia’s best-performing businessman over the past three decades, creating two leading retailers. First, the Norman Ross chain (which was sold in the 1980s to Alan Bond) and then the eponymous Harvey Normal electronic and furniture retailer, which catapulted Harvey into the realms of Australia’s billionaires. Despite his enormous wealth, which last BRW estimated to be $1.2 billion (2008: $1.62 billion), Harvey is demanding shareholders give him and other Harvey Norman executives millions of dollars worth of new options to replace “out of the money” options granted in 2007.

The 2007 options had an exercise price of $7.15. With Harvey Norman shares are currently trading at about $3.60, for the options to have any intrinsic value, Harvey Norman shares would need to double. Instead of relying on actual share price appreciation, Harvey Norman felt it more appropriate to simply issue a new bunch of options with a far lower exercise price.

Recipients of the new options include Harvey, his wife (and the CEO of Harvey Norman) Katie Page, and other senior executives including CFO Chris Mentis and chief operating officer John Slack-Smith.

In total, Harvey Norman is seeking shareholder approval for the grant of 17.5 million options, which are exercisable from 2013 (for the first tranche) until 2017 (for the third tranche). The new options have an exercise price of only $3.75 — this is convenient for Harvey Norman executives given the company’s share price was $4.85 less than six months ago. Should Harvey Norman achieve the relatively unchallenging earning per share growth hurdle (of 5-10%), Harvey’s options could potentially be worth millions.

(The EPS hurdle is also helpful for Harvey and his fellow executives because it considers 2009 as the “base year” for calculating earnings per share growth. Conveniently for the executives, Harvey Norman’s earnings per share slumped by 40.2% in 2009, meaning they only need to recover partially what they lost last year and the hurdle will easily be met.)

This isn’t the first time Gerry Harvey has sought shareholder approval for a change in option terms. In 2003, Harvey sought to re-price 14.5 million options, but the company pulled the plan after shareholder anger. However, Harvey told The Australian Financial Review that he didn’t expect such opposition to the 2010 plan, noting that “I can’t see how they can not approve it. It seems fair to me”.

Harvey attempted to further defend the generous option grant by claiming that “in the last seven or eight years, Katie, me and other directors have not made any money on these options”.

Harvey’s claims will probably not garner an enormous degree of sympathy from shareholders given that Harvey Norman shares are currently trading at the same level as they were in 2003. This means that in the past “seven or eight years” Harvey Norman has under-performed the market by 50%.

Harvey is clearly a better retailer than he is at comprehending basic principles of alignment. The entire point of providing options or incentive shares is to ensure that executives only benefit if shareholders benefit. When shareholders don’t make any money for almost a decade, neither should the executives from their incentive instruments.

Further, one wouldn’t expect that Harvey and Page need much incentive to perform in their roles — they already own hundreds of millions of dollars worth of Harvey Norman shares, plus, Page was paid almost $1 million in fixed pay in 2009 (rising to $1.5 million this year).

Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed is it bookstores now and available on-line from The Nile and Booktopia