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Skin in the Game

Why, on the whole, CFOs should buy more of their companies' stock.

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.


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