Skin in the Game

Why, on the whole, CFOs should buy more of their companies' stock.
Alix StuartMarch 1, 2008

When James Lawrence left General Mills to become CFO of Unilever last September, investors hoped he would help boost the Dutch consumer-products giant’s lagging stock price. What they probably didn’t expect was that he would use his own money to do so. In two transactions spanning four months, the 55-year-old executive quietly bought about $20 million worth of Unilever stock on the open market, giving the stock a 7 percent pop in the days following the announcement of the purchases.

“What a vote of confidence,” says RiskMetrics Group’s Patrick McGurn. “We don’t see that often enough.”

At this point, few of Lawrence’s peers are following suit. In 2007, CFOs bought a grand total of $108.4 million worth of stock in their own companies, a pittance compared with the $565.4 million that they sold, according to That doesn’t even include sales following options exercises, which add another $1.8 billion to the sales total. “There was a really nominal amount of buying by CFOs,” says Ben Silverman, research director for “Certainly CFOs face some restraints on when they can trade, but judging by the number of sells, they’re obviously not that constrained.”

CFO Insights on Inflation, Workforce Challenges, and Future Plans 

CFO Insights on Inflation, Workforce Challenges, and Future Plans 

Download our 2022 survey report for a high-level view of finance team projections and strategies, directly from our executive readers.

Sharing the Downside

More companies are waking up to the reality that investors expect executives to take downside risk — that is, suffer along with shareholders when the stock drops. In many companies, that translates into asking executives to hold more stock on the theory that they will work harder to preserve value in something they own compared with something they merely could own through stock options.

That theory is supported by a wealth of evidence that stock performance improves as executives increase shareholdings in the companies they run. According to an analysis of CFO shareholdings conducted by Watson Wyatt Worldwide for CFO magazine, companies whose CFOs held more shares generally showed higher stock returns and better operating performance. “Ownership makes people more prudent; they think harder about things like acquisitions, and how often to fly first-class,” says Ira Kay, global practice director of executive-compensation consulting at Watson Wyatt. He adds: “CFOs, more so than any other executive besides the CEO, should be encouraged to hold stock.”

For the group of 110 large companies that Watson Wyatt studied, for example, the high-performing half of the stocks returned an average of 52 percent to shareholders between 2003 and 2006, including stock-price gains and dividends, compared with the 39 percent the low-performing half returned. Among other differences in those groups was median CFO stock ownership: $13.9 million (excluding both vested and unvested stock options) for the top performers, only $2.8 million for the low performers.

Kay is convinced the correlation is not merely coincidental. “When you have downside risk, people behave differently,” he says. He has found similar evidence using a larger sample of companies and CEO data over a time frame of 10 years.

While big companies, including General Mills, have had policies on executive stock ownership in place for years, last year’s crop of CD&As (Compensation, Discussion, and Analysis Reports) shows that more are now implementing, or at least formalizing, policies about the minimum amounts of stock they expect executives to hold. According to consulting firm Frederic W. Cook & Co., 83 percent of 250 large companies had such guidelines in place as of last year, up from 57 percent in 2004.

How Much Is Enough?

The difficulty with setting guidelines is striking the right balance between creating accountability and making the goals attainable. “Companies need to really play this out and see if executives will be able to meet the guidelines,” says Jack Dolmat-Connell, head of executive-compensation consultancy DolmatConnell & Partners. “On the flip side, if they’re too low, they’re meaningless.”

Stock-ownership guidelines take various forms. The Frederic W. Cook survey found that about half of companies with a requirement asked executives to hold a multiple of their base salary — typically five times salary for CEOs, three times for CFOs and other executive vice president– level executives, and one time for others. The stability of salary multiples can be a boon in terms of keeping the dollar value relatively meaningful.

Other companies — including 11 percent of those surveyed — take a different approach, requiring executives to hold a fixed number of shares or dollar amount. Experts say any method can work, though each has its pitfalls. Yahoo, for example, requires its CEO to hold a minimum 5,000 shares and its other executives 3,000. For CFO Blake Jorgensen, that translates into about $86,000 at press-time share prices, a fraction of his $450,000 base salary. In most cases, if the requirement amounts to $100,000 or less, “that’s not really saying that much,” says Dolmat-Connell.

On the other hand, some say salary multiples often aren’t large enough to change executive behavior. “Today’s typical ownership guidelines of five times salary for CEOs and one-to-three-times salary for the senior executives are too low,” says George Paulin, chairman and CEO of Frederic W. Cook. He says they should be higher, in part because many companies put them in place when equity was a smaller component of pay, and when most of it was in stock options, which made ownership somewhat harder to attain. Now, “many companies are granting enough full-value restricted shares and performance shares to meet their guidelines in just a couple of years.”

Such low thresholds typically don’t require any active buy-in from executives, who generally have up to five years after joining a company to meet the requirements. Some companies also allow executives to count a broad array of stock instruments toward their ownership quota, such as unexercised stock options, shares held in their 401(k) plans, shares held by spouses or children, and restricted shares that will vest months after the proxy filing.

One way to help mitigate the possibility of an executive selling and running is to add a requirement that executives hold a certain percentage of restricted shares and options as they vest, rather than liquidate them. Such “stock-retention guidelines” complement the salary multiples, says RiskMetrics’s McGurn, because “if executives have been with a company for a long period of time, they’ve met the base [salary multiple] requirements, so that’s not motivating for them.” About 35 percent of companies have such holding ratios or required time horizons for holding the stock in addition to target salary multiples or shares, according to the Cook study.

Consultants Set the Bar

CFOs who have recently helped their companies craft guidelines say they simply follow consultants’ advice and available benchmarks. At Landauer Inc., an $84 million maker of radiation-detection monitors, the compensation committee decided last fall to require executives to hold twice their base salary in company stock. “That seemed to be a reasonable requirement” based on advice from Hay Group, says CFO Jonathon Singer. The fairly low multiple is due in part to the fact that executives now receive restricted shares rather than stock options, which means fewer shares overall are available through compensation.

With a base salary of $236,716 last year, Singer is required to hold just under $475,000 worth of stock, the equivalent of 9,442 shares at the February 4 trading price. Thanks in part to a grant of 2,350 restricted shares when he joined in October 2006, which will count even though all haven’t vested yet, Singer will likely fulfill his requirement this year, after less than two years at the company. However, he will still have to earn it, he says. Seventy percent of annual equity grants are awarded based on performance. “You have to look at it in the overall context of the compensation philosophy,” says Singer. “The trade-off is how much compensation is performance-driven versus retention-driven, how much is for short-term performance versus long-term.”

The Trade-Off

The biggest argument against making executives hold more stock, of course, is that in principle they, like all investors, should diversify their portfolios. “Any investor will tell you it’s smart to diversify,” says Jeffrey Jones, CFO of $828 million Vail Resorts Inc. “Managers should be able to do that without feeling they are hurting the company’s future prospects.” Pitney Bowes says explicitly in its proxy that it doesn’t want executives overly invested in the company. “While [an executive] is not discouraged from increasing the absolute level of holdings of Pitney Bowes stock, the company does not want its stock to comprise a disproportionate percentage of the executive’s net worth,” it reads.

What are the perils of overinvested executives? One is that they might become more risk-averse and more afraid to spend money as they strive to preserve value, says Kay. Asking for too much stock ownership can also subvert the retention aspect of the shares. A policy that says executives must hold a high percentage of their vested shares until they leave the company “could create an incentive for executives to leave a company in order to cash out shares, which you don’t want to do,” says McGurn. In the extreme, high executive share ownership may create an incentive for fraud — or at least irrational behavior. Conseco, for one, went bankrupt even as its executives were borrowing on the margin to buy its stock, as CFO reported in April 2000 (see “A Good Deal Too Much“).

In fact, some executives see the new guidelines as a desirable way to set boundaries on investor expectations. Having a preset expected level should “allow executives to sell and diversify at times” without the “angst” and “stigma” that can be attached to such sales, says Jones at Vail Resorts, which just last year implemented salary-multiple guidelines ranging from one to five times salary to conform to what its compensation consultant, Hewitt, said were best practices. As of last October, Jones held 88,801 shares (including vested options), about three times his requirement based on share prices at press time.

For the moment, investors don’t seem to be using level of stock ownership as a key litmus test for the quality of corporate governance. Many think the guidelines are a step in the right direction and don’t want to quibble about the numbers just yet. “It’s important, but we don’t necessarily maintain specific standard levels. You want to look at it on a company-by-company basis, and consider the tenure of executives,” says McGurn. Other big investors and investor advisers, including TIAA-CREF and The Corporate Library, say the same. After unsuccessfully mounting a proxy proposal to make Dell executives and directors hold 75 percent of the stock granted to them, the American Federation of State County and Municipal Employees has moved on to other aspects of executive compensation, namely lobbying for bans on tax gross-ups and proposing limits on insider sales during company stock buy-backs.

In the end, CFOs would do well to consider what message they send the market when they fail to buy their own stock. “Executives shouldn’t buy a stock because of guidelines, they should buy it because they have confidence in the company,” says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “If you don’t hold it, who should?”

Alix Stuart is a senior writer at CFO.

Sweetening the Buy-In

How Companies Make It Easier on Executives

Executive-compensation experts are hard-pressed to name a company that requires executives to buy stock, as Unilever CFO James Lawrence did last fall. However, more are offering to match whatever purchases an executive makes, says Ira Kay, global practice director of executive-compensation consulting at Watson Wyatt Worldwide. These days, Watson Wyatt is seeing more interest from companies in setting up programs where executives can use pretax dollars to buy the stock, often for a full or partial match. “That buying-in is a completely different psychology than getting a stock grant. No one ever washes a rented car,” says Kay. Such programs are also popular in the UK. Cadbury-Schweppes, for example, allows about 170 senior executives to invest their cash bonuses in shares, for up to a 100 percent match (depending on company performance).

Outside investors, of course, like the idea. TIAA-CREF rates executive stock purchases very highly, says head of corporate governance Hye-Won Choi, because it better aligns managers with shareholders. CFOs, however, say laying out cash isn’t as important as some think. “When you have stock that you could sell at any time, I don’t think there’s much difference between that and putting cash out,” says Jeffrey Jones, CFO of Vail Resorts Inc. “In either case, it’s cash.” — A.S.

Selling Out
Notable CFO stock-selling in recent times
Company CFO Buys Sells* Base Salary 2006 Last Transaction
Goldman Sachs David A. Viniar $0 $32.5m $600,000 10/30/07
Southwestern Energy Gregory D. Kerley $0 $26.2m $310,000 12/12/07
Valero Energy Michael S. Ciskowski $0 $22.9m $465,000 10/16/07
McDonald’s Matthew H. Paull
(now retired)
$0 $15.6m $683,333 12/13/07
Brink’s Robert T. Ritter $0 $11.6m $456,750 11/7/07
*Total sales from 1/1/07 to 1/31/08, including both open-market sales and sales following options exercises. Source:, company proxy statements

4 Powerful Communication Strategies for Your Next Board Meeting