Equilar recently released further analysis of its data on stock ownership guidelines and the use of total shareholder return as a modifier among large companies. The following discusses their findings.
Stock Ownership Guidelines. Among Fortune 100 companies that use a multiple of salary stock ownership guideline, a multiple of 6 times base salary is now the most common, according to Equilar. The report, which reviewed stock ownership guidelines for Fortune 100 companies from 2012 to 2014, found that the number of companies disclosing both ownership and holding requirements has grown from 50% to 61%, with about 84% of companies using a multiple of base salary approach.
Although the use of a "multiple of salary" guideline predominates, the survey noted that this approach is affected by the volatility of the stock market. Given the increasingly large requirements for executives at large companies, however, this may be less of an issue than it once was. The survey found that almost no companies have ownership requirements less than 5 times base salary, and over 12% of companies have requirements equal to or exceeding 10 times base salary. More than two-thirds (67%) of companies also have a holding requirement until guidelines are met.
TSR As a Modifier. Although TSR is now by far the most prevalent long-term incentive metric among the S&P 1500, with nearly 50% of companies using it in some form, the debate continues as to whether it is well suited as a performance measure given its lack of line of sight with executives and the importance of other financial or operational measures to company strategy. An Equilar study of 25 S&P 500 companies using relative TSR as a "secondary metric" to modify other metrics in their incentive plans found that:
- The majority (84%) of companies used TSR as a "multiplier" modifier, where the primary payout factor is multiplied by the TSR modifier to result in the final payout.
- A much smaller number of companies (two each, or 8%) used one of the following two approaches:
- An "additive" multiplier approach, which adds the primary payout factor to the TSR factor (instead of multiplying it).
- The "capped payment" approach, where payouts based on primary metrics are capped at a certain percentage (such as 100% of target) if relative TSR thresholds aren't met.