Unlocking the Secrets of Stock Ownership Guidelines: 5 Must-Know Tips for Public Company Executives

Written By: Geoff Hammel

Stock ownership guidelines (SOGs) are a crucial part of corporate governance for public companies. These guidelines outline the minimum amount of stock executives and directors are required to own to align their interests with those of shareholders. 

While proxy advisors and regulators do not mandate a universal SOG design or administrative approach, leading practices have emerged. Below, we highlight five best practices and key points every public company executive should know when it comes to SOGs.

5 Must-Know SOG Tips for Public Company Executives

1. Investors Love SOGs

SOGs are highly valued by investors as one of the most effective methods for aligning the interests of key employees with those of shareholders. 

By requiring corporate insiders to own a certain amount of company stock, these guidelines effectively reduce risk by ensuring decision makers have a personal stake in the outcome of their decisions. 

This, in turn, motivates them to make decisions that will benefit the company and its shareholders in the long-term.

2. Unvested RSUs Likely Count 

The treatment of Restricted Stock Units (RSUs) in SOGs can vary among companies. RSUs are a form of equity-based compensation that give employees the right to receive company shares at a later date, subject to a vesting period. 

Most companies include unvested service-based RSUs in an executive’s ownership stake – either in full or at a reduced percentage to reflect the after-tax value. However, some do not because the executive’s ultimate retention of these shares is uncertain. Similar uncertainty means stock options and performance units are often excluded, as well. 

To determine your company’s approach on the inclusion of unvested RSUs and other stock awards, executives should review their company policies. 

3. Penalties Can Limit Cash Flow

Stock ownership guidelines impose a range of penalties for non-compliance. “Net retention” is far and away the most common one. 

A net retention penalty prevents executives from selling all, or a specified percentage of shares obtained through options, RSUs or other equity vehicles.

If an executive hasn’t met their ownership target, a net retention requirement could severely limit or eliminate their ability to sell stock for cash.

4. Grace Periods Provide a Runway

Executives are typically given a set timeframe, usually between 3 to 5 years, to acquire a specific level of ownership. Some programs even require executives to hit incremental targets annually. 

For example, if an executive has a $500,000 ownership target in a program with a five-year grace period, the company will require $100,000 in holdings after year 1, $200,000 in year 2, etc. 

These periods are generally sufficient for executives to meet stock ownership guidelines, which are typically set to allow gradual acquisition of the required stock over time.

5. Hardship Exemptions Offer Temporary Relief 

Stock ownership guidelines establish meaningful ownership levels for executives and directors while also being fair. 

These guidelines often express ownership targets as a multiple of salary, with targets in the millions of dollars not being uncommon. But if an executive faces financial hardship, exemptions can provide relief. 

Requirements vary, but generally the individual must prove severe difficulties that can only be alleviated by selling stock. Exemptions aren’t guaranteed, but instead offer a last resort if the executive needs to meet obligations while maintaining compliance.

Bottom Line (Plus: One Last Bonus Tip)

In short: SOGs are a vital corporate governance practice. While designs can vary across companies, understanding key considerations around unvested equity awards, penalties, grace periods, and hardship exemptions can help executives develop a plan to meet their individual ownership targets responsibly. 

With the right approach, executives can view stock ownership not just as an obligation, but as a prized opportunity to share in their company’s future success.

One final tip for improving your path to compliance is to consider using purpose-built software to manage your company’s SOGs. That’s where our trusted partner solution, Equity Abacus, comes in. This cloud-based platform offers a comprehensive solution to track, measure, and communicate SOGs. Enjoy personalized compliance statements, decision-based modeling, and user-friendly ownership surveys. 

Remove guesswork and ensure compliance with this next-generation SaaS solution. Click here to learn more or request your free trial today.

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