Risk & Compliance

More CEOs Must Retain Equity Awards Post-Vesting

If current trends hold, eventually stock-retention requirements for CEOs may be almost as universal as equity ownership requirements.
David McCannFebruary 3, 2020

The just-ended decade brought dramatic change to the way large companies compensate their CEOs, a new report shows.

In particular, today, far more companies require chief executives to retain equity earned through long-term incentives for a period of time beyond its vesting date.

In 2010, 35% of S&P 500 companies had such retention requirements, according to the report from Willis Towers Watson. By 2019, that figure had swelled to 64%.

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While virtually all large publicly held companies have guidelines for the amount of company stock CEOs should own, mandating that they retain equity post-vesting may be headed in that direction. “This dramatic growth suggests that stock retention requirements could become nearly as universal as ownership guidelines,” the report said.

A majority (52%) of S&P 500 companies in 2019 had stock retention policies prohibiting executives from selling equity until they have met their ownership guideline target.

Six percent of the companies had both (1) a policy tied to ownership guideline achievement, plus (2) a stand-alone policy under which executives must hold shares for a certain period after vesting regardless of their compliance status under the ownership guidelines. Another 6% of the companies had only such a stand-alone retention requirement.

What’s the case for the value of retention requirements? When executives can sell their shares as soon as the vesting period has ended, it can impair the long-term focus intended by a company’s incentive program, according to Willis Towers Watson. Retention requirements can strengthen these awards by encouraging strategies that produce results well beyond the vesting date.

A recent driver of this practice occurred in September 2019, when the Council of Institutional Investors suggested that ownership guidelines and retention policies should be included as part of an executive compensation program focused on building long-term shareholder value.

Previously, in 2015, proxy adviser Institutional Shareholder Services began to formally account for these policies in evaluating and scoring companies’ equity compensation plans.

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