A guide for policies on stock ownership.

• Author: Aisenbrey, Beverly W.
• Position: Leadership in Environmental Initiatives

In recent years, many companies have established policies on expected levels of stock ownership for their executives. Examples include Chrysler, Gerber, Eastman Kodak, Hershey, Honeywell, and SuperValu. The policies communicate to the executives that these companies do not want them to treat their stock grants like any other element of compensation or like any other trading security. They want executives to make a commitment to the company by investing certain portions of their personal wealth in the stock.

This approach is a perfect counterbalance to the criticism that, at many companies, executive compensation is not tied to shareholder interests. And, recent research has shown that, in general, the stock price performance of companies with high employee stock ownership levels has been superior to that of other companies.

The business press and institutional shareholders have reacted very favorably to the presence of these programs. Now, many additional companies are considering share ownership guidelines for their executives. When initially presented, the adoption of these guidelines seems like a win-win approach. The view is that shareholders should be pleased to see such a program in place, and executives have been given a somewhat paternalistic capital accumulation opportunity. However, the company should consider all of the implications of these policies before adopting them.

Role of Stock: A primary consideration is whether or not the company's stock grants are used for long-term incentives or whether, as at many entrepreneurial companies, they are a substitute for cash compensation. If executives are being paid at competitive cash compensation levels, then it is reasonable to expect them to use some of their profit from stock gains to purchase shares or keep shares and meet their stock ownership guideline levels. If stock is a substitute for cash, it is not reasonable.

Employment Commitment: In today's environment, many companies are reorganizing, encouraging early retirements, and cutting back on their staffs. At others, a competitive environment may lead to substantial turnover. In these cases, encouraging long-term executive stock ownership is at odds with the company's human resources strategy. Only companies that are committed to having long-term employees would be candidates for stock ownership guidelines.

Personal Financial Situation: The question of establishing stock ownership guidelines intrudes into the executives'...