Wanted: 'at risk' investment.

• Author: Meyer, Pearl
• Position: Stock ownership

A 1994 proxy survey reveals a proliferation of stock ownership guidelines for chief executives and other senior officers.

Just as the tempest surrounding executive pay has gathered force in the last several years, so has the response by forward-thinking corporations and their boards. Positive evidence of board and management "responsibility" has surfaced in close examination of early 1994 proxy filings by 150 major Fortune industrial and service companies.

In our view, the single most significant development observed this year is the proliferation of stock ownership guidelines for chief executives and other senior officers that require significant long-term "at risk" investment in their companies. Twenty-two percent of the survey group strongly declared the importance of top executive stock ownership by openly announcing the adoption and implementation of policies that range from strong encouragement to the expectation that executives retain shares, with many companies issuing formal guidelines that express ownership as a multiple of pay. Linkage of executive and shareholder interests has progressed from philosophical statement to "virtual reality" as one of the most important management trends witnessed in recent years.

Companies are taking a variety of approaches to achieving meaningful executive "at risk" equity participation within a reasonable time frame. At Northrop, (now Northrop-Grumman), executives have received strong written encouragement from the chairman to acquire and hold significant amounts of company stock. Companies stating that their executives are expected to retain or are encouraged to increase ownership include Bristol-Myers, Caterpillar, Coca-Cola, MCI, J.P. Morgan, and Union Pacific. J.P. Morgan's commitment to fostering stock ownership is being implemented by granting 50% to 60% of annual incentive awards in the form of restricted stock. Union Pacific requires executives to retain 100% of the profit realized on option exercise until their minimum ownership threshold is reached. Coca-Cola has already confirmed the success of its share ownership guidelines, stating that no executive has sold shares within the last three years. Other companies reporting share ownership requirements through formalized guidelines and other approaches are noted in Exhibit 1.

For chief executive officers, guidelines range from a low of two times salary to an all-time high of eight times salary, with half of the companies reporting a CEO...