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Analyst Alert

Where do CEO's stockholdings come from?
By Paul Hodgson, Senior Research Associate
May 22, 2006

Earlier research in a press release announcing the launch of Executive Comp Analyst (ECA) showed strong compliance with minimum stock ownership guidelines by CEOs of S&P 500 companies. But there is stockholding and there is stockholding. There are CEOs who purchase stock in their company using their own funds - like Fred Hassan, the CEO of Schering-Plough (SGP) - and there are those who build up stockholdings by exercising stock options and retaining the resulting shares. Other CEOs become stockholders by being one of the company's founders, or by being descended from a founder. And still others receive stock gratis. In an effort to understand where stockholdings have come from, an examination was conducted of the ten CEOs in the S&P 500 with the greatest stake in their company, excluding owner managers like Steven Ballmer, CEO of Microsoft (MSFT). To balance this, the ten CEOs with the smallest stockholding were also looked at, excluding new hires, to try to understand why the holdings were at such a low level. Proxy filings from the last three fiscal years were reviewed.

The research from the ECA press release that was noted above found that, across the 200 CEOs in the S&P 500 who are subject to minimum ownership requirements, the median requirement was 5 times salary and the average was 5.31 times salary. In contrast, actual median stock ownership among CEOs covered by ownership guidelines was valued at 11.4 times salary. The fact that CEOs in general own more than twice the required amount of stock can be taken to indicate that the stock ownership guidelines are functioning extremely well. On the other hand, data from ECA also showed that among CEOs not subject to stockholding requirements, actual stockholding is higher, at a median of 14.1 times salary. This suggests either that there may be a tendency to nominally exceed any requirements imposed, or that CEOs not bound by stockholding guidelines may make a greater effort to appear to hold significant amounts of stock as a matter of conscience.

In the table below, data is given on tenure, stockholding as a multiple of base salary, the actual stockholding and the market value of the stockholding, as well as notes from the investigation of the source of such stock. Tenure among the Top 10 CEOs, for example, is generally considerable. Only those CEOs of the newer IPOs show a shorter time in office, though this may be because these tenure figures reflect years in the CEO position only since the company has been public. Henry Paulson's association with Goldman Sachs, for example, predates, of course, his appointment as CEO when the company went public.

Stockholding as a multiple of base salary is calculated using the fiscal year end stock price from the latest proxy filing and the reported base salary. Stockholding figures are also taken from the proxy but exclude stock options and any stock that is disclaimed or not properly attributed to the officer. The market value of the stockholding again uses the fiscal year end stock price.

Among the Top 10, there is a wide range of reasons for the substantial stockholdings. The modal reason would seem to be 'being at the right IPO at the right time'. For Paulson, the partnership shares must account for a large portion of his holding, though neither Goldman Sachs (GS), nor Bear Stearns (BSC) has been reticent in awarding further shares to their respective CEOs. There are two CEOs, also, who might be assumed to be substantial stockholders because of the laws of descent. Daniel Amos, CEO of AFLAC (AFL), and Richard Manoogian, CEO of Masco (MAS), are both sons of the original founders of their respective companies, yet their stockholdings have largely been built up from regular equity grants. It is further worth noting that Manoogian, in particular, has divested himself of much of this stock. On the other hand, and very unusually, two CEOs have gained stock through the exercise of properly performance-related stock options - Reuben Mark of Colgate-Palmolive (CL) and Michael Eisner, formerly of Walt Disney (DIS).

Questions could be asked about the efficacy of awarding yet more stock to incentivize executives whose interests are already so closely tied to those of other stockholders, yet none of the compensation committees involved ever seem to have considered making such an inquiry. Indeed, in the majority of cases, the amount of equity being delivered - and its continued lack of relation to performance, with notable exceptions - does not appear even to have moderated.

As for the Bottom 10, tenure as CEO is generally shorter, though not by much in some cases. In many cases, the poor stockholding is due to CEOs cashing out their options and other equity awards. In other words, large amounts of equity have been awarded, but this stock has not been retained. Perhaps the worst example of this is the CEO of Hilton Hotels (HLT). In the last two years, Stephen Bollenbach has realized $45MM in stock option gains. During the latest fiscal year, for example, on 16 November 2004, he exercised 4MM options and immediately sold 4.725 MM shares. Other CEOs have a large amount of stock exposure - vested and unvested stock options, for example - but have simply not exercised any. Figures in the table reflect only those shares that are owned, and do not include either vested or unvested stock options. This is true of Robert Nardelli at Home Depot (HD) - who has been receiving plentiful compensation from other sources - and Robert Benmosche at MetLife (MET). At Ciena (CIEN), the lack of stockholding would appear to be the result of there being no incentive to exercise any of the underwater stock options held. What is obvious, however, is that not even the small amounts of stock actually owned by these CEOs were purchased using their own funds. See Principal Financial (PFG) and Tektronix (TEK) for examples.

The aggregate figures on stockholdings at the head of this article, therefore, predictably mask some very wide extremes, and would indicate that the adoption of formal stockholding requirements - particularly those requiring executives to utilize some of their own funds in stock purchases - are and should be an effective corporate governance policy. Indeed, given the net worth of many CEOs of the largest organizations, it would not be too onerous to require that these guidelines be met on appointment with an upfront purchase of stock.

Where the Stock Comes from 2005/2006:
(Source: Executive Comp Analyst/Company Filings)

Top 10

Company name: eBay Inc.
CEO name: Margaret C. "Meg" Whitman
Tenure: 7
Stockholding as a multiple of base salary: 1537.09
Stock holding: 26,266,934
Market value of stock holding: $1,527,947,551
The majority, if not all, of CEO's stockholding comes from shares granted in connection with the company's IPO. The 7,110,000 shares originally held would equal 170,640,000 shares today, suggesting that a considerable number of shares have been sold since 1999.

Company name: Bear Stearns Companies Inc. (The)
CEO name: James E. Cayne
Tenure: 12
Stockholding as a multiple of base salary: 3084.32
Stock holding: 6,321,624
Market value of stock holding: $616,864,070
The majority of the stockholding comes from the conversion of partnership interests into shares at the time of the IPO and the vesting of restricted stock units granted since then.

Company name: Goldman Sachs Group, Inc. (The)
CEO name: Henry M. Paulson
Tenure: 6
Stockholding as a multiple of base salary: 757.90
Stock holding: 4,326,105
Market value of stock holding: $454,738,527
The majority of the stockholding comes from the conversion of partnership interests into shares at the time of the IPO and the vesting of restricted stock units granted since then.

Company name: Lehman Brothers Holdings Inc.
CEO name: Richard S. Fuld
Tenure: 12
Stockholding as a multiple of base salary: 497.62
Stock holding: 4,454,693
Market value of stock holding: $373,214,180
The majority, if not all, of CEO's stockholding appears to come from vested restricted stock units and the exercise and retention of stock options.

Company name: Walt Disney Company (The)
CEO name: Michael D. Eisner
Tenure: 21
Stockholding as a multiple of base salary: 344.46
Stock holding: 14,239,863
Market value of stock holding: $344,462,286
The majority of CEO's stockholding appears to have originated from the exercise of very substantial grants of stock options, though not all the resulting stock was retained.

Company name: AFLAC Incorporated
CEO name: Daniel P. Amos
Tenure: 15
Stockholding as a multiple of base salary: 242.29
Stock holding: 7,264,229
Market value of stock holding: $290,750,766
Despite being the son of the company's founder, almost all of the CEO's stockholding comes from the exercise of stock option grants, though not all of the resulting stock was retained.

Company name: Colgate-Palmolive Company
CEO name: Reuben Mark
Tenure: 21
Stockholding as a multiple of base salary: 167.52
Stock holding: 5,664,469
Market value of stock holding: $289,341,077
The majority of the stockholding comes from the exercise of stock options and awards of restricted stock, most of which have been retained.

Company name: Reebok International Ltd.
CEO name: Paul B. Fireman
Tenure: 26
Stockholding as a multiple of base salary: 213.94
Stock holding: 6,180,632
Market value of stock holding: $271,947,808
It appears as though the majority of CEO's stockholding comes from the exercise and retention of stock options.

Company name: American Power Conversion Corporation
CEO name: Rodger B. Dowdell
Tenure: 20
Stockholding as a multiple of base salary: 363.48
Stock holding: 12,699,526
Market value of stock holding: $271,769,856
It appears as though around one third of CEO's stockholding comes from the exercise and retention of stock options in recent years.

Company name: Masco Corporation
CEO name: Richard A. Manoogian
Tenure: 20
Stockholding as a multiple of base salary: 176.26
Stock holding: 7,237,678
Market value of stock holding: $264,392,377
Despite being the son of a co-founder of the company, it would appear that the majority of CEO's stockholding comes from stock option grants that have been exercised and vested restricted stock awards, though substantial amounts of the resulting shares have been sold.

Bottom 10

Company name: Tektronix, Inc.
CEO name: Richard H. "Rick" Wills
Tenure: 5
Stockholding as a multiple of base salary: 3.07
Stock holding: 83,373
Market value of stock holding: $1,912,577
CEO has been with the Company since 1979 and CEO for five years. The stockholding would appear to be the result of vested restricted stock grants.

Company name: Principal Financial Group, Inc.
CEO name: J. Barry Griswell
Tenure: 4
Stockholding as a multiple of base salary: 1.54
Stock holding: 38,952
Market value of stock holding: $1,594,695
CEO has not exercised any stock options since demutualization. It would appear that the only shares the CEO has are the result of restricted stock unit awards.

Company name: BMC Software, Inc.
CEO name: Robert E. Beauchamp
Tenure: 4
Stockholding as a multiple of base salary: 2.19
Stock holding: 101,330
Market value of stock holding: $1,519,950
CEO has been employed by BMC Software since 1988, and the relatively low stockholding is despite fairly large option grants in the last three fiscal years. An additional LTIP pays out in cash.

Company name: AES Corporation (The)
CEO name: Paul T. Hanrahan
Tenure: 4
Stockholding as a multiple of base salary: 1.59
Stock holding: 97,510
Market value of stock holding: $1,332,962
The poor stockholding is despite having exercised options for more than 1,000,000 shares during his tenure as CEO.

Company name: Analog Devices, Inc.
CEO name: Jerald G. Fishman
Tenure: 9
Stockholding as a multiple of base salary: 1.43
Stock holding: 33,091
Market value of stock holding: $1,332,244
CEO has been receiving stock option grants, and exercising and disposing of these shares for the last decade, realizing millions in gains. After 9 years as CEO, he only owns 33,091 shares. CEO has been in a variety of management positions at the Company since 1971.

Company name: MetLife, Inc.
CEO name: Robert H. Benmosche
Tenure: 6
Stockholding as a multiple of base salary: 1.15
Stock holding: 30,981
Market value of stock holding: $1,262,166
CEO has been in executive management positions since 1997 and CEO since 1999. He has both exercisable and unexercisable stock options but has not realized any of these in recent years. Another LTIP is settled in cash.

Company name: Hilton Hotels Corporation
CEO name: Stephen F. Bollenbach
Tenure: 9
Stockholding as a multiple of base salary: 0.91
Stock holding: 40,000
Market value of stock holding: $909,600
In the last two years, CEO has realized $45MM in stock option gains. For example, on 11/16/04, he exercised 4MM options and immediately sold 4.725 MM shares for a gross gain of $96,311,000. Thus, after nine years as CEO, he only has 40,000 shares.

Company name: QLogic Corporation
CEO name: H. K. Desai
Tenure: 9
Stockholding as a multiple of base salary: 0.72
Stock holding: 12,180
Market value of stock holding: $491,098
Mr. Desai joined QLogic Corporation in August 1995 as President and Chief Technical Officer. He has served as CEO since 1999. His stock ownership levels have been steadily decreasing since 2002.

Company name: Home Depot, Inc. (The)
CEO name: Robert L. Nardelli
Tenure: 5
Stockholding as a multiple of base salary: 0.00
Stock holding: 1,866
Market value of stock holding: $76,450
Nardelli has been CEO of Home Depot since 2000, and Chairman since 2002. He has in excess of 4MM stock options but has not exercised any of these. The 1,866 he owns appear to come from his directorship at the company.

Company name: Gap, Inc. (The)
CEO name: Paul S. Pressler
Tenure: 4
Stockholding as a multiple of base salary: 0.04
Stock holding: 2,882
Market value of stock holding: $62,568
CEO has not exercised any of the 5.6MM stock options awarded to him since his appointment.

Company name: Ciena Corporation
CEO name: Gary B. Smith
Tenure: 4
Stockholding as a multiple of base salary: 0.07
Stock holding: 18,075
Market value of stock holding: $44,645
CEO has been in senior roles at CIENA since 1997, and CEO since May of 2001. In that time he has received large stock option grants, and, in the most recent fiscal year, an award of 60,000 restricted stock units which are unvested. Some 665,000 out-of-the-money stock options have been cancelled. All stock options were out-of-the-money at the end of last fiscal year.

Company name: Apollo Group, Inc.
CEO name: Todd S. Nelson
Tenure: 4
Stockholding as a multiple of base salary: 0.00
Stock holding: 0
Market value of stock holding: $0
Despite exercising 212,651 stock options over Class A shares for $7,173,923 on 8/31/04, the only stockholding at last fiscal year end is 2,085 Class B shares.