Executive Compensation Forum

Most public companies have stock ownership guidelines.  These guidelines generally require executives and directors to acquire a specified amount of company stock within a set period of time and to maintain that level of stock ownership until the individual leaves the company.  The amount of stock required may be a specified number of shares or a specified dollar value. 

The terms of stock ownership guidelines vary company-to-company.  Besides differences in how the level of ownership may be specified, the period of time allowed to reach the specified level of ownership and the shares counted toward the specified level of ownership (e.g., unvested shares, vested but unexercised stock options) can differ.  In addition, to assist executives and directors in meeting these requirements, some companies may include a provision in their guidelines or their equity award agreements that prohibits the transfer of a portion of the shares from the exercise of options, the vesting of restricted stock and the payment of restricted stock units until the individual has met the specified level of stock ownership.

The recent pandemic has two implications that may affect a company’s stock ownership guidelines.  First, the company’s stock price might have significantly declined and remains well below its historical level.  Second, the continuing economic uncertainty may mean fewer shares will be received under performance incentives.  Given these implications, boards and compensation committees need to review their stock ownership policies to see if any changes are needed in light of COVID-19.

If the level of ownership required is specified as a dollar value and the price of the company’s stock remains significantly depressed, the company will need to consider changes to the stock ownership guidelines to take into consideration the depressed stock value.  One action the company may want to take is to suspend its stock ownership guidelines while the pandemic continues.  The company could require executives and directors to continue to hold the shares that they already own and the company may continue to prohibit the transfer of a portion of the shares from their equity incentives, but not require executives and directors to acquire additional shares in the marketplace in order to reach the specified level of ownership within the set period of time.

Another approach would be to adjust the specified level of ownership temporarily to reflect the percentage decline in the value of the company’s stock since the pandemic began.  For example, if the average stock price for the 90-day period since the start of the pandemic is 75% of the average stock price for the 90-day period preceding the pandemic, the company could temporarily reduce its specified stock ownership level by 25% until the pandemic ends or the company’s stock price rebounds.

Alternatively, the company may wish to extend the period of time in which executives and directors are required to reach the specified level of stock ownership.  This could be done by extending the period by a specified amount of additional time (e.g., one year) or by tolling the period of time while the pandemic continues.

If the specified level of stock ownership is based on a multiple of base salary or director compensation and a company has temporarily reduced executives’ base salaries or directors’ compensation, the company will need to consider whether the stock ownership requirements should take into consideration such reductions.  Unless the company has suspended its stock ownership guidelines or taken other mitigating actions, the company may want to temporarily take into account the reduced level of compensation for those executives and directors who have not yet reached the specified level of ownership.

If the specified level of ownership required is based on a dollar value and the stock ownership guidelines require individuals to continue to hold shares with the specified value, a company could consider amending its stock ownership guidelines so that those executives and directors who had reached the specified dollar value before the pandemic only had to continue holding the number of shares necessary to satisfy the specified dollar value using the stock price as of a specified date before the pandemic began.

Finally, if a company does take action to address the impact of the pandemic on its stock ownership guidelines, it should be ready to discuss the actions taken and the reasons for such actions in its annual proxy next year.


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