By Barbara Baksa, National Association of Stock Plan Professionals (NASPP)

Stock ownership guidelines for executives are now de rigueur at publicly held companies, as a result of considerable pressure from investors, proxy advisory firms, and the media. But there are many nuances in how stock ownership guidelines can be implemented. For today’s blog entry, I discuss trends in stock ownership guidelines from the NASPP/Deloitte Consulting 2020 Domestic Stock Plan Design Survey as well as the impact of market volatility on enforcement of ownership guidelines.

Check out the latest episode of the NASPP’s Equity Expert podcast series, “Trends in Stock Ownership Guidelines” in which Jenn Namazi and I chat about the survey’s findings on this topic.

1. The Prevalence of Stock Ownership Guidelines Continues to Grow

Eighty-five percent of respondents to the 2020 survey currently impose ownership guidelines on executives. In the 2007 survey, only 54% of companies imposed ownership guidelines on executives. By 2011, this percentage had jumped by 35%. Since then, the use of ownership guidelines has steadily increased in each successive survey.

Among the remaining 15% of companies that don’t currently impose ownership guidelines, 42% are considering implementing guidelines in the next three years (up from 30% in 2017). If these companies were to implement ownership guidelines, that would increase the percentage of companies that have ownership guidelines to 91%.

2.  Ownership Guidelines Typically Apply to Executives

Not surprisingly, ownership guidelines typically apply to high-ranking executives; at 95% or more of respondents, the CEO, CFO, and other NEOs are subject to ownership guidelines. Seventy-seven percent of respondents impose ownership guidelines on other senior executives, and 72% subject nonemployee directors to ownership guidelines. But only 21% of respondents apply ownership guidelines to other management employees.

3.  Executives Typically Must Own a Multiple of Salary

Nearly 90% of respondents stipulate the amount of stock that must be owned in terms of a percentage of compensation, typically base salary:

  • CEOs are typically required to own 5 to 6 times their annual salary (83% of respondents).
  • CFOs and other NEOs are typically required to own 2 to 4 times their annual salary (84% of respondents).
  • Lower-ranking executives are typically required to own 1 to 2.5 times their annual salary (89% of respondents).

4.  Stock Price Volatility Makes Compliance with Ownership Guidelines a Challenge

A sudden decline in stock price can quickly cause executives to fall out of compliance with stock ownership guidelines. Particularly when the decline is a result of overall market conditions, rather than company performance, companies may be understandably reluctant to insist that executives rush to buy more shares.

I’ve read a few articles that suggest approaches companies can take to treat executives fairly in the event of a price decline and to mitigate the impact of stock price volatility on ownership guidelines (see “What Will COVID-19 Market Upheaval Mean for Executive Compensation Programs?” by Towers Watson and “Stock Ownership Guideline Administration“ by Pay Governance). Here is a summary of the suggestions I found:

  • Average Price: Calculate the value of executive holdings for purposes of the guidelines using a multiday average price, rather than a spot price. This approach works to mitigate the impact of stock price volatility on grant sizes (see my blog entry “2 Reasons Multiday Averages Make Sense for Grant Sizing”) and it can also work for ownership guidelines.
  • Higher of Cost or Market: Value executive holdings at the higher of 1) their current value, or 2) the executive’s cost basis in the shares.
  • Fixed Share Requirement: Instead of expressing the requirement as a multiple of compensation, establish a fixed number of shares that executives must own. The number could initially be based on executive compensation levels and stock value. Another approach is to require that executives own the lesser of a multiple of salary or a fixed number of shares.
  • Once in Compliance, Always in Compliance: Once executives have met the guidelines, treat them as in compliance so long as they maintain the same ownership level.
  • Temporary Suspension: Suspend the requirement to comply with ownership guidelines, e.g., for a specified period or until the company’s stock price stabilizes.

5.  Generally Only Vested Shares Count Towards Ownership Levels

It’s clear that any stock executives own outright should count towards meeting ownership guidelines. But what about all the other arrangements in which they have an equity interest in the company—should those count? In general, companies count vested arrangements (other than stock options) but not unvested arrangements.

Among companies that offer the following arrangements, 90% count vested phantom stock or deferred stock units that have not yet been paid out, 91% count vested shares held in the company’s 401(k) plan, and 86% count vested shares in the company’s employee stock ownership plan (ESOP).

These percentages drop when it comes to unvested awards. Again, among companies that offer the following arrangements, only 77% count unvested restricted stock, only 68% count unvested phantom stock or RSUs, only 64% count unvested shares in the 401(k) plan, and only 44% count unvested shares in the ESOP. Lastly, only 35% count unvested performance shares.

The predominant practice (71% of respondents that offer stock options) is that unexercised stock options are not counted towards ownership guidelines.

– Barbara

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