Trends in Stock Ownership Guidelines

Most public companies have some form of stock ownership guidelines in place for their CEO and, in many cases, senior executives. Many companies also impose stock retention requirements on executives. In this blog entry, I look at how these requirements work and explore current practices identified in a recent WTW study (Stock Ownership Guidelines and Retention Requirements Among the S&P 100).

For more information, see the NASPP article “Understanding Stock Ownership Guidelines.”

Stock Ownership Guidelines vs. Retention Requirements

At first glance, these two terms might seem synonymous, but they refer to slightly different policies.

What are stock ownership guidelines?

Stock ownership guidelines oblige executives to hold a certain amount of stock indefinitely (i.e., while they remain in their executive position). Executives are free to sell a portion of their stock holdings, provided their aggregate ownership of company stock doesn’t fall below the specified threshold.  

WTW found that 96% of S&P 100 companies disclose that they have stock ownership guidelines.

What are stock retention requirements?

Stock retention requirements force executives to hold a portion or all of their stock holdings for a period of time. In many cases, retention requirements serve as an enforcement mechanism for stock ownership guidelines: executives are prohibited from selling any company stock that they acquire until they have met the ownership guidelines (in the case of stock acquired under equity awards, executives may be permitted to sell sufficient shares to cover the price and taxes due on their transactions).

Stock retention requirements are also sometimes imposed in the form of hold-til or hold-thru retirement provisions. These provisions prohibit executives from selling company stock until they retire (or until some time after their retirement). Here again, sales to cover the price and taxes due on equity awards might be permitted.

Lastly, stock retention requirements can be strictly time-based. For example, executives might be required to hold stock acquired under the company’s equity plans (exclusive of shares used to cover transaction costs) for a specified number of years.

WTW found that 68% of the S&P 100 disclosed that they have stock retention requirements, up from 60% in 2015. Most companies in the study (66%) disclosed that their retention requirements apply only until their stock ownership guidelines are achieved (another 17% of companies have both guideline-dependent and standalone retention requirements).

Which employees are subject to stock ownership guidelines and retention requirements?

Stock ownership and retention requirements typically apply to a company’s CEO, CFO, and other named executive officers. Many companies also extend these requirements to other senior management and to their directors. It is much less common for companies to extend ownership guidelines and retention requirements below the senior management rank.

How much stock do executives have to own?

WTW found that close to 90% of S&P 100 companies disclose that they use a value-based approach in their ownership guidelines, with required ownership levels set as a multiple of each executive’s salary.

• CEOs are typically required to own stock having a value of six or more times their salary.
• For other executives, the most common multiples are three to four times salary.

What stock is counted toward the ownership guidelines?

Any stock that an executive owns outright clearly should be counted toward the requisite ownership threshold. But there are a host of arrangements that fall into a gray area: executives are not record or beneficial owners of the stock, but changes in the company’s stock price will affect the value of the executives’ holdings in these arrangements. Examples include unexercised stock options, unvested awards (and vested awards that are subject to deferred payout), 401(k) holdings, and holdings by family members or in trusts.

It is common for companies to count vested but unpaid awards, as well as vested shares held in the 401(k) plan. Many companies also count unvested service-based awards, both restricted stock and units, in ownership levels, and shares held indirectly through family members or in a trust. ISS’s current policy (as of 2023) expressly permits unvested service-based restricted stock and units to be counted in ownership.

WTW found that 51% of S&P 100 companies disclosed that they count unvested restricted and unit awards. Note, however, that this is not a required disclosure; WTW does not report how many companies did not disclose this information.

It is less common for companies to count unvested performance-based awards or unexercised stock options (vested or unvested). In 2021, ISS announced that it will not give companies credit for having ownership guidelines if they count unvested performance awards or unexercised stock options in ownership levels.

WTW found that only 16% of the S&P 100 disclosed that they count unvested performance awards and only 8% disclosed that they count unvested stock options. Here again, WTW does not indicate what percentage of companies did not disclose this information. Given ISS’s position, companies that count these arrangements might be less inclined to disclose their policy.

Are outside directors subject to stock ownership and retention requirements?

It is very common for public companies to extend their stock ownership and/or retention requirements to outside directors. In FWCook's 2022 Director Compensation Report, 88% of the studied companies disclosed that they have ownership guidelines for directors and 37% disclosed retention requirements. The study analyzed the public filings of 300 companies of varying sizes. Ownership guidelines and retention requirements were most prevalent at large-cap companies, with only 3% of companies not disclosing one or both policies; conversely, nearly 20% of small-cap companies did not disclose either ownership or retention requirements for outside directors.

Most (85%) of the companies in the FWCook study disclosed that they use a multiple of retainer approach to establish the amount of stock directors are required to own, most commonly five times the retainer amount. Large cap companies are more likely to require this level of ownership than mid or small-cap companies.

Just over half of large-cap companies disclosed that directors are subject to a hold-til-retirement retention requirement. Mid and small-cap companies were much more likely to lift their retention requirement once directors achieve their required ownership level.