Everyone agrees that directors and officers should own common stock of their employer. But how much?
Nearly a century ago a retired Dupont executive suggested that the target for stock ownership should not be expressed as a percentage of outstanding shares, but instead as a multiple of an executive's annual compensation. Five times annual pay for officers. Ten times annual fees for non-employee directors.
Crawford Greenewalt believed that ownership at these levels would encourage executives to act with an "owner's eye." He anticipated more than an incentive to maximize profits-for who wouldn't work nights and weekends with five years of pay at risk?
Mr. Greenewalt's multiples guide many of today's Fortune 500 companies, as well as many banks.
A 1995 blue ribbon commission of the National Association of Corporate Directors examined director compensation and recommended that boards set a substantial target for stock ownership by each director and a time period during which this target is to be met.
The report questioned five times annual fees plus retainer as too low a target for stock ownership by non-employee directors. Without mention of Mr. Greenewalt, it suggested that his multiple of 10 might be a better practice for corporate boards.
None of the community bank boards that we surveyed have adopted such guidelines for directors.
Typically, the share subject to stock options does not count toward the targets for directors or officers, because they do not present the downside, out-of-pocket risk associated with actual stock ownership. On the other hand, most guidelines will take into account shares acquired through benefit plans. These typically include restricted stock, shares held in ESOPs, 401(k) plans, and deferred compensation that has a rate of return measured by the employer's common stock or is converted into phantom stock units.
Compensation committees would be well advised to act affirmatively where actual stock ownership falls short of targeted levels. For example:
Stock grants could replace some or all cash bonuses for officers, as well as be substituted for cash fees or retainers otherwise paid to directors.
Minimum holding periods could discourage subversion of the award's purpose, as could a limitation on transfer that is tied to satisfaction of the targeted ownership level for the executive.
Supplemental executive retirement plans (SERPs) could be carried out through phantom stock awards instead of life insurance.
Overall, stockholders and investors can be expected to value more highly those banks that act to build significant stock interests among officers and directors. An ownership guideline is a solid place to begin, and would be received favorably in the marketplace. But that should merely be the first step toward better-conceived compensation structures.
