More companies impose share ownership requirements on directors


More companies impose share ownership requirements on directors

Research by consultants William M Mercer has found that nearly a third of the top 100 businesses in the UK now require top executives to have a substantial shareholding in their company. Some directors must own as much as five times their salary in company shares.

The move is designed to improve corporate performance by aligning directors' interests more closely with those of company shareholders.

Mercer's survey shows that 32 of the top 100 companies now have a requirement for executive directors to own a minimum number of shares in their company.

Understandably, these policies have met with opposition from many executives on the grounds that it restricts their ability to hold a diversified investment portfolio and exposes them to greater risks, said Belinda Hudson, European principal at William M Mercer. In reality, the blow is often softened by more generous awards under long-term incentive plans.

Key findings of research

  • The policies apply to executive board members, although in at least half the companies they also extend to senior executives below that level.

  • Both BP and United Business Media have imposed a minimum level of five times salary. The norm for other executive directors is in the range of one to three times salary.

  • The common practice is for companies to allow directors to build up their shareholding over three to five years.

US-style pay packages

UK organisation have often looked to their American counterparts for inspiration when overhauling their remuneration arrangements. Indeed, much of the impetus for change in the UK often comes from across the Atlantic

This emerging trend reflects what has been typical practice in large US companies for a number of years. Recent research by Mercer found that over two-fifths of the top 350 US industrial and service companies imposed share ownership requirements. The median level disclosed was a holding worth five times salary. Three-quarters of the companies disclosing a time period within which to reach the target reported five years as the compliance period.

A number of factors apply in designing and implementing a shareholding policy:

To what extent is the policy to be mandatory?

Practice here varies, with several companies stating that a holding is required. The sanctions that would be applied if the director does not acquire or retain the shares are a further issue.

A number of companies have stated that participation in future share option grants and performance-related awards, or even the exercise of options or awards, will be dependent on how many shares an executive holds.

Over what period can the executive build up the required shareholding?

Practice for policies adopted (or considered for adoption) and where the information is disclosed in the last year, allow the guidelines to be met over a period of between three and five years. This is consistent with prevailing practice.

What level of shareholding will be required?

For policies where the shareholding targets are disclosed:

  • median requirement for chief executives is a multiple of two times salary

  • lower quartile figure is one times salary
  • upper quartile is shares worth three times salary.

Corresponding figures for other directors are a median of 1.5 times salary and one times and three times for lower and upper quartiles respectively.

How is the shareholding amount to be calculated? If the share price should fall, will a director be expected to acquire further shares to make up the shortfall caused by the share price decline?

Disclosures by the FTSE 100 contain no details on this issue.

What shares will count towards the guidelines?

Not all companies disclose details but, clearly, shares beneficially owned by a director will count. Where disclosed, it appears to be common practice to include shares held within deferred bonus plans and shares in long-term incentive awards which have vested (that is, the executive is or will be entitled to the shares) but not yet been released. A method used by several of the FTSE 100 using share ownership guidelines is to require some proportion of long- term share incentive awards and share option gains to be retained.

Companies and remuneration committees need to consider the policy where share options and share awards in the share incentive schemes are not exercisable because performance conditions have not been met or because the company’ s share price is below the exercise price of options.

In these circumstances, the directors and executives will not be accumulating shares from the incentive schemes. This issue appears to have been addressed by permitting directors and other executives to accumulate their shareholdings over periods of up to three or five years.

Source: William M Mercer.


A final word

Shareholding policies help counter the claims that option plans are a one-way bet and that executives can't lose. Indeed, the recent fall in share prices has hit many directors quite hard. Not only has the value of their personal shareholding fallen, but some if not all their options are now worthless, with limited prospect of a recovery in the near future. — Belinda Hudson, European principal at William M Mercer.

Want to know more?

For further information contact Belinda Hudson, European principal at William M Mercer, tel: 020 7488 4949.

William M. Mercer is the UKs largest human resource and employee benefits consultancy, employing over 3,700 staff in 19 offices . . .

Posted 20 September 2001