Fortune 500 companies are asking their CEOs to tie their personal wealth more substantially to that of their shareholders. Although different CEO-shareholder dynamics might be at work at smaller companies, executive compensation trends of the Fortune 500 do not go unnoticed.
The trend of rising employer stock ownership targets for CEOs has not extended down the executive ranks to CFOs, COOs, VPs and division heads, however, suggests a new study from consulting firm Towers Watson, which based its analysis on 2014 proxy statements.
Nearly one-third (30%) of surveyed employers have modified their executive stock ownership programs over the past two years.
The last time Towers Watson examined stock ownership policies, in 2007, the CEO salary multiple used to set the stock ownership goal was five at 60% of the surveyed companies. By last year, that proportion had dropped to 41%, while use of a salary multiple of six leaped from only 7% of the Fortune 500 in 2007, to 40% last year.
The overwhelming majority (85%) of surveyed companies use a salary multiple to set the stock ownership goal; others use a fixed number of shares or a dollar value.
Because its not easy for CEOs (or, for that matter, anyone else) to come up with enough cash to accumulate assets whose value is six times their salary, public companies traditionally have created mechanisms to help executives reach targeted levels of stock ownership.
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As Towers Watson reports in its Executive Compensation Bulletin those include increasing long-term incentive [stock] grants, liberal counting of shares and derivatives, and a relatively generous time period in which to achieve compliance.
In addition to raising targeted stock ownership levels for CEOs, many companies are becoming less generous with those stock acquisition mechanisms. The following stock quasi-ownership vehicles are excluded when measuring a CEOs stock ownership:
- Unexercised stock options, excluded by 76% of surveyed companies;
- Unvested/unearned performance shares, 60% exclude; and
- Unvested restricted stock, 26% exclude.
Few companies (11%) disallow CEOs counting pledged shares towards their targeted ownership, and even fewer (2%) exclude employer stock held by CEOs in their retirement plans.
Stock retention requirements
Another increasingly popular approach Fortune 500 companies are taking to keep CEO and shareholder interests in alignment is a stock retention policy requiring CEOs to hang on to shares received by exercising stock options for stipulated time periods, instead of immediately liquidating it.
Nearly half (47%) of companies use retention policies today, versus only 24% seven years before.
The industry sectors which use stock ownership and where retention guidelines are most prevalent are food, beverage and tobacco, materials, pharmaceuticals, biotechnology and life sciences, technology hardware and equipment. In fact all of the companies in the study in these industries have such policies.
Richard Stolz is a freelance writer based in Rockville, Maryland.
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