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Executive Hardship: Meeting Ownership Guidelines in a Volatile Market
May 13, 2016
With the advent of Say on Pay and the influence of proxy advisory firms on votes, company stakeholders
increasingly scrutinize all aspects of corporate governance. Company ownership guidelines are one of these
commonly analyzed pay elements, which ensure that executive and director interests are aligned with shareholders
by requiring them to maintain a meaningful amount of equity ownership in their company. In addition to basic
ownership guideline structure, companies may incorporate other features, including holding requirements,
non-compliance penalties, compliance incentives, hardship provisions and restrictions on hedging.
According to data compiled for Equilar’s
Executive Stock Ownership Guidelines report, almost seven in eight Fortune 100 companies have a
restriction on hedging, and nearly two-thirds of have holding requirements. Other practices such as
hardship provisions, non-compliance incentives and even compliance incentives also have varying degrees
of inclusion.
Fortune 100 Prevalence of Executive Ownership Guideline Practices
Practice
|
Prevalence
|
Restriction on Hedging
|
87.6%
|
Holding Requirements
|
62.9%
|
Hardship Provisions
|
15.7%
|
Non-Compliance Penalties
|
13.3%
|
Compliance Incentives
|
1.2%
|
Source: Equilar’s 2016 Executive Ownership Guidelines Report
|
These other ownership guideline practices help executives or directors meet their ownership goals—the
exception being hardship provisions, which provide allowances or exemptions from ownership guidelines
in exceptional circumstances. These circumstances include but are not limited to financial burden,
divorce settlements, lawsuits and stock price decline. Although hardship provisions are relatively rare,
their inclusion merits consideration when preparing executives and directors for maintaining their equity
ownership in a volatile market.
Given last year’s market correction and the decline of the stock prices in the energy sector, companies
may find a need to implement a hardship provision policy to supplement their ownership guidelines. Some
hardship provisions implemented by companies include: 1) allowing the individual to count current equity
holdings as meeting guidelines, 2) suspending ownership guidelines, 3) giving the individual extra time
to meet guidelines or 4) exceptions given by committee discretion. A webinar hosted by Equilar, featuring
Semler Brossy and
Equity Methods, also explored
five different ways to approach stock ownership guidelines that may
help account for some of these scenarios.
In an environment where the current market outlook appears rocky, these companies decided to include hardship
provisions in proxy statements:
-
Altria Group (proxy filed 4/9/15, p. 43): “If the stock price declines, executives
may hold the fixed number of shares based on the stock price at program commencement.”
-
HollyFrontier Corp (proxy filed 3/26/15, p. 50): “If an officer attains compliance
with the stock ownership policy and subsequently falls below the requirement because of a decrease in the
price of our common stock, the officer will be deemed in compliance provided that the officer retains the
shares then held.”
-
World Fuel Services Corp
(proxy filed 4/14/15, p. 40): “Furthermore, the Committee, in its discretion, may
determine the appropriate hardship relief, if any, for non-compliance including: allowing named executive
officers additional time to regain compliance and suspending ownership requirements in the event of extreme
volatility in the Company's stock price.”
For more details on ownership guidelines, or to learn more about custom research available through
Equilar’s Research Services, please contact
the Equilar research team at research@equilar.com.
For more information on Equilar’s research and data analysis, please contact Dan Marcec, Director of Content &
Marketing Communications at dmarcec@equilar.com. Felicia Wong, Research
Services Project Manager, authored this post.