The Advisors' Blog

Based on an analysis of Russell 3000 companies, this Semler Brossy article reports that “only 36% of companies that have been public for less than five years have implemented stock ownership guidelines for executives.” While common for mature public companies, new public companies – particularly EGCs that are not required to hold say-on-pay votes – often wait to adopt these guidelines until three to five years post-IPO when there is mounting pressure on them to do so.

That time is near for many companies that went public in 2020 or 2021, but recent market volatility makes this a challenging time to adopt new ownership guidelines. To that end, the article shares questions the compensation committee should ask when determining whether to adopt guidelines and principles to consider when adopting them. Here are two key points:

Are shareholders asking about your stock ownership policies? If shareholders aren’t asking about your stock ownership policies, it may still make sense to establish guidelines (per the two questions above). However, if shareholders are raising questions, it is important to understand why. It could simply indicate rising governance expectations. More alarming, investor interest could directly reflect specific concerns, such as frequent insider share sales and (or) low levels of executive or director ownership. Shareholder interest in these topics may be a key signal to determine how quickly — and how aggressively — the board should respond. […]

Is your goal to have company guidelines meet minimum governance expectations or to be best-in-class? (See Exhibit 1.) How aggressive or conservative you choose to be is typically reflected in the required ownership as a multiple of base salary. This point of view (as well as the underlying design of the compensation program) may also influence what counts toward the guideline. For example, do you include some portion of unexercised stock options in addition to shares owned outright?

The referenced exhibit describes “baseline” and “best-in-class” terms. The article also has this suggestion for dealing with volatility:

It may also be helpful to describe how market volatility could or should influence compliance with the guidelines. For volatile stocks, a fixed share requirement may be more appropriate than a dollar-based approach — some companies even define as a “lesser-of” a fixed share or dollar-based threshold. A retention requirement on vested shares can also help manage volatility so that if an individual no longer meets the guideline, they merely need to retain a portion of the shares from future vesting events (e.g., 50% of the net, after-tax shares) to remain compliant.

Check out our “Stock Ownership Guidelines” page on CompensationStandards.com for related resources.

– Meredith Ervine