This week I look at a section of the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte) that came as a big surprise to me–the design and usage of stock ownership guidelines.
Trends in Stock Ownership Guidelines Maybe I haven’t been paying attention, but the significant increase in companies that have ownership guidelines was a big surprise for me. 73% of respondents in the 2011 survey report having ownership guidelines, up from only 54% of respondents in the 2007 Domestic Stock Plan Design and Administration Survey (also co-sponsored by Deloitte), a 35% increase. Back in 2007, we also asked how many respondents were considering implementing ownership guidelines in the next two years. Based on the responses to that question, I would have expected around 65% of respondents in the 2011 survey to have ownership guidelines, quite a bit less than 73%.
In case you are wondering, 25% of respondents to the 2011 survey that don’t currently have ownership guidelines said they are considering implementing them in the next three years. That would add around 35 companies to those that have guidelines, so I’d expect the percentage of respondents with ownership guidelines in 2014 (the next year the survey is planned for) to be close to 80%. All the cool kids are doing it, is your company one of them?
What Counts?
Everyone counts shares owned outright, whether purchased on the open market or through some type of compensatory or private arrangement. Of the respondents that offer the following types of arrangements, here’s the percentage that count them toward their guidelines:
70% count unvested restricted stock
60% count unvested phantom stock and RSUs
93% count vested phantom stock and deferred RSUs
Only 31% count unvested performance shares
72% of respondents indicated that they offer stock options but don’t count them toward the guidelines.
We asked about a bunch of other types of arrangements in the survey, but the ones I list above are the most interesting.
Who Counts?
Ownership guidelines are largely applied only to top executives–98% of respondents said that the guidelines apply to their CEO and CFO and 95% apply the guidelines to their other NEOs. Only 71% apply the guidelines to other senior executives. From there, application of the guidelines drops off sharply, with only 12% applying the guidelines to other management.
How and When to Count
Most, or 78%, of respondents base required ownership levels on a multiple or percent of compensation. 68% allow up to five years to meet the guidelines; another 13% percent require guidelines to be met in three years.
How Much to Count
For CEOs, required ownership levels are pretty high. 74% of respondents require the CEO to own stock equal in value to five or more times his/her compensation (49% of respondents require exactly five times compensation). That is perhaps reflective of how much CEOs get paid in stock. For the CFO and other NEOs, the requirement is a little lower, with 78% of respondents indicating that their requirement for these positions falls in the range of two to four times their compensation.
See You in San Francisco in Two Weeks! It’s hard to believe, but the 19th Annual NASPP Conference is just two weeks away! I hope to see all of my readers at the Conference, which is scheduled for November 1-4 in San Francisco. The last Conference in San Francisco sold out a month in advance–and that was without the reality of Dodd-Frank and mandatory Say-on-Pay hanging over our heads. With Conference registrations going strong–on track to reach nearly 2,000 attendees–this year’s event promises to be just as exciting; register today to ensure you don’t miss out (and make your hotel reservations, because the hotel is close to selling out).
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
October 20 is a popular day for local NASPP chapter meetings; the Chicago, Los Angeles, Phoenix, and Twin Cities chapters are all meeting on this day (separately, not one big meeting). Make sure you attend your local meeting!
A Sensible Approach to Stock Ownership Guidelines By Doreen Lilienfeld of Shearman and Sterling
In recent years, there has been significant discussion concerning the terms of stock ownership guidelines and stock retention requirements for directors and executive officers. Shareholders want to know that directors and executive officers adhere to a philosophy of investing in the company for the long-term.
With the passage of mandatory say-on-pay, companies have become even more attuned to the views of shareholder activists on these issues. ISS considers three categories relating to stock options guidelines and stock retention requirements in its Governance Risk Indicators (“GRId”) score. Up to three points can be added and five points can be subtracted from a company’s GRId score in each category. These points can make the difference between a positive or negative vote on say-on-pay, director elections and other proposals.
There is standard approach to ownership and retention guidelines. For boards that are designing or revising director and executive stock ownership programs, the myriad of possible design structures can be daunting. It is not always clear what is the most effective means to ensure that the company’s decision makers build and retain a substantial stake in the company at a level sufficient to properly align their interests with those shareholders.
With preparations for the 2012 proxy season underway at many companies, now is the time to begin thinking about your guidelines and retention requirements. In our panel, we will walk you through the decision process analyzing the important design features and let you know what other companies are doing now. Drilling down, we will explore the questions:
Should you adopt ownership guidelines, retention requirements or both? How will they interact with each other?
How deep in the ranks should these programs go?
What will be the consequences for noncompliance?
For Ownership Guidelines
What are the ownership requirements? A percentage of base salary/annual retainer? A fixed dollar amount? A fixed number of shares?
How high should you set the ownership requirements? Do they differ by position?
How much time should directors and executives be given to reach the guidelines?
Which holdings should count towards satisfying the guidelines–vested vs. unvested awards, stock options, 401(k) and deferred compensation holdings?
What happens if there is a change in the stock price leading to falling out of compliance with the guidelines?
For Retention Requirements
How many shares should be retained–50% or more of “net shares”, all equity awards?
How long should they last? Until ownership guidelines are satisfied? A specified number of years following vesting or exercise? Until retirement? Following retirement?
For answers to these questions and more, please Doreen Lilienfeld, John Cannon, and Kenneth Laverriere of Shearman & Sterling for their session, “A Sensible Approach to Stock Ownership Guidelines,” at the 19th Annual NASPP Conference.
Ownership guidelines (i.e., policies that place requirements on how many or how long shares of company stock are held by executives) are a way of ensuring that executives have an adequate amount of “skin in the game” when it comes to the long-term success of the company. Equity compensation for executives inherently boosts a personal interest in the company’s growth–the higher the stock price, the higher the reward. However, it can also come with the risk that executives may be prone to more high-stakes behavior that results in short-term returns instead of long-term growth.
Much of the legislation and regulations that has been introduced or finalized over the past year has incorporated some component of risk management and/or “Say-on-Pay.” I suspect that this will result in not only more companies that initiate some form of stock ownership guidelines, but also change the type of policies that we see. Companies must disclose any existing stock ownership policies–shareholders are likely to be on the look for them as they prepare to vote for or against executive compensation.
Types of Ownership Policies
There are basically two ways in which a company can regulate share ownership: how much and how long. This study, published on the 13th by Frederic W. Cook & Co, shows that the most popular policy to be a straight-forward “how much” approach: requiring the executive to hold a minimum amount of shares based a value equal to a multiple of cash salary, a specific number of shares, or a percentage of net profit shares. Unfortunately, this “traditional” ownership policy alone doesn’t necessarily provide the long-term focus that shareholders are looking for, especially if executives may simply leave the company and cash out.
Imposing a holding period on exercised/vested shares extends the amount of time executives are impacted by strategic decisions they make today. Holding periods are typically placed on a percentage of the net shares from transactions. They may range from one year from the transaction date to a period after retirement/termination. (The most popular holding period found in the Frederic W. Cook & Co. study was one year–I’m curious to see what next year’s study will show.)
RiskMetrics Group
The RiskMetrics Group launched its Governance Risk Indicators TM (GRId) in March of this year. The rating system in the GRId supports both types of ownership policy, with the highest score going to policies that require a value of shares at 6x salary to be held and a holding period on at least 50% of net profit shares that goes to or beyond retirement/termination.
7th Annual Executive Compensation Conference
If you’ll be in Chicago next week for our 18th Annual NASPP Conference, you’ll have plenty of opportunities to take in great sessions on risk management & “Say-on-Pay”. Also, don’t forget that your registration to the NASPP Conference includes access to the 7th Annual Executive Compensation Conference, which boasts a special “Say-on-Pay” track of panels and sessions addressing executive and director share ownership policies.
If you can’t make the Conferences in person, or you find that you are torn between multiple sessions, don’t forget that we will be recording all the sessions. You will be able to purchase the recorded webcasts individually, as a custom package of five sessions, or get access to the entire set. Even better, it’s not too late to take advantage of the 10% discount!