Hold-Til-Retirement Provisions

1. What are "Hold-Til-Retirement" Provisions?
2. Hold-Til-Retirement Provisions
3. Companies with Hold-Til-Retirement Provisions
4. Investor Policies
5. Other Guidance
6. Stock Ownership Guidelines Monitoring Chart

1. What are "Hold-Til-Retirement" Provisions? One way to address the situation at many companies where CEOs and top executives have received options over the years which now have such high values is to require them to hold the equity underlying all exercised options (as well as other equity grants) until retirement. An increasing number of companies have followed the lead of saavy banks and brokerages which have used this practice for some time.

   Fortunately, there should be ample opportunity for compensation committees to change and renegotiate a past practice. These opportunities exist each time any aspect or component of a CEO’s compensation is considered. For example, to be awarded a new option or restricted stock grant, the CEO could agree to fixes to past and outstanding awards. This could be accomplished by new retention provisions that require the executive to hold the stock until retirement.
    

2. Hold-Til-Retirement Provisions

   As noted in the September-October 2005 issue of The Corporate Counsel, an important step that has already taken hold at a number of the savviest financial institutions—and other companies that have gotten concerned that they had delivered so much wealth through previous equity grants that their key executives and top producers could now cash out and leave (or even go to a competitor)—is the hold-til-retirement provision.

   We have posted a growing list of the companies that have added provisions requiring their CEO and their top executives to hold 75% or more of the stock received from their equity grants until they reach retirement age. These provisions generally also apply retroactively to all outstanding past grants. (Companies have had little difficulty in persuading top executives to do so, for example, as a precondition to the receipt of another grant or a bonus.)

   Make Necessary Fixes to Restricted Stock. For those companies that are now making restricted stock grants, where the amounts from prior stock options and other equity grants are already large, in some instances (as with stock options), the board must say “enough is enough.” In other instances, where the board sees that it has already granted too much, it may well be appropriate to come to an agreement with the CEO to change the vesting schedule so that those prior restricted stock grants will not vest until reaching retirement age.

   Space does not permit our delving into the problems and pitfalls that compensation committees (and some advisors) have unwittingly gotten themselves into in connection with switching to restricted stock from stock options (and the potential problems that many are now sitting on). In this connection, please reread what we said in our September-October 2004 issue (at pg 3) and what Fred Cook said in his talk “A Warning About Restricted Stock.” We should also mention one very important aspect of restricted stock that often gets buried and overlooked by boards tallying up current compensation or considering retirement and severance payments: the annual dividends from previous restricted stock grants. We recently saw one company where the CEO’s dividend income from restricted stock is already over $1.5 million a year and growing. (Again, this unintended outcome can be avoided, if grants do not vest, and dividends do not accrue, until retirement.)
    

3. Companies with Hold-Til-Retirement Provisions

   Here is a list of companies that have "hold 'til retirement" provisions that we have identified.
    

4. Investor Policies — Here is what the Council of Institutional Investors included in its recently updated policy on executive compensation regarding stock ownership:

   Structure

   • Stock ownership: Executives and directors should own, after a reasonable period of time, a meaningful position in the company’s common stock.  Executives should be required to own stock—excluding unexercised options and unvested stock awards—equal to a multiple of salary, scaled based on position, such as two times salary for lower-level executives and up to six times salary for the CEO.

   Limitations

   • Stock sales: Executives should be required to sell stock through pre-announced program sales or by providing a minimum 30-day advance notice of any stock sales.
      
   • Post-retirement holdings: Executives should be required to continue to satisfy the minimum stock holding requirements for at least six months after leaving the company. 

   Proxy Statement Disclosure

   • Transparency: Companies should disclose stock ownership requirements and whether any members of the executive oversight group are not in compliance." 
      
5. Other Guidance — Here is information on other ways to deal with rolling back compensation:
    
   • Compensation Variables Gain Influence in New CGQ Release
     —Towers Perin
      
   • Rolling Back Compensation Practice Area
      
   • Internal Pay Equity Methodologies Practice Area
      
   • Clawback Provisions Practice Area
      
   • Caps on Pay Elements & Total Compensation Practice Area
      
6. Stock Ownership Guidelines Monitoring Chart