Risk & Compliance

Executives Forced to Own More Company Stock

Investors press companies to use stock-ownership guidelines to motivate CEO and CFO performance.
David McCannMarch 19, 2015
Executives Forced to Own More Company Stock

Bowing to pressure from investors to make top executives more accountable for their performance, large companies are gradually requiring CEOs and CFOs to own more of their employer’s stock.

In 2014, among the 90% of Fortune 500 companies that had stock-ownership guidelines, 92% had guidelines for CEOs to accumulate company stock until its value reached at least five times their base salary, according to a report from Towers Watson.

In a 2007 study by the consulting firm that looked at the S&P 500, the corresponding figure was 78%. (There is broad overlap in companies listed in the two indices. The Fortune 500 consists of the largest companies by revenue, while the S&P 500 ranks them by market capitalization.)

TW Stock ChartThe most notable change over the last seven years is an ongoing shift in CEO requirements from a salary multiple of five to a multiple of six. In the 2007 study, 60% of companies in the sample required a multiple of five, while just 7% had a six-times-salary standard. By last year that gap had almost completely vanished, with 41% adhering to the five multiple and 40% to the six multiple.

For CFOs, the trend is directionally similar but far less pronounced. In 2007, 28% of companies with stock-ownership guidelines for finance chiefs required them to accumulate stock until its value reached less than three times their base salary. By 2014, that figure had dwindled to 18%.

A salary multiple of three was and remains the most common guideline for CFOs (54% in 2007 and 62% last year), but the proportion of companies requiring a four multiple rose from 9% to 15%.

A number of years ago, companies established executive stock-ownership guidelines to differentiate themselves from those that didn’t. Now, though, says Towers Watson, such standards “have become so ubiquitous that more rigorous guidelines are increasingly required to create a meaningful link between shareholder and executive interests that stands apart from competitors and peers.”

Companies don’t want to cross up executives by changing these guidelines too frequently, so when they do make a change, they try to make sure they’re in keeping with common practice or setting guidelines that are a bit above the norm, says Robert Newbury, director of executive compensation resources at Towers Watson. “A certain set of companies want to be viewed as exceeding their peers or ahead of the curve in their practices,” he says.

That suggests the trend toward stricter stock-ownership guidelines may continue. Towers Watson is wondering whether the changes to date are sufficient to move the needle on executives’ motivation, according to Newbury. Speaking of practices with regard to CEOs, he says, “There may be a call to increase the requirement even higher than multiples of five- and six-times salary in order to make it meaningful.”

Companies do provide mechanisms to help executives reach the guideline levels, including increased long-term incentive grants, liberal counting of shares and derivatives (such as by including share-based awards that remain outstanding or unearned), and a relatively generous time period (from the date of an executive’s hiring or promotion to a position eligible for equity awards) in which to achieve compliance.

A majority (54%) of Fortune 500 companies with stock-ownership guidelines allow five years to reach the threshold.

On the other hand, 47% of Fortune 500 companies have policies stipulating whether and for how long executives must hold their stock, compared with 24% of S&P 500 companies in 2007. However, more than two-thirds (69%) of such policies require executives to retain shares only until ownership guidelines are met.

Thirty percent of Fortune 500 companies have made changes to their stock-ownership or retention policies just within the past two years, according to Towers Watson. Among those firms, increasing the amount of stock required to be held or retained was by far the most common change (see chart above).