Should CEOs be forced to buy company shares when they get the top job?
Imagine starting a new job and being told you are expected to invest 300% of your basic salary in company shares. That’s exactly what’s happened with the new chief executive (CEO) of BT (BT.A), Philip Jansen.
He has already committed to investing £2m of his own money by late November, plus he is being granted nearly £1m of BT shares as compensation for having to forfeit stock on leaving his current employer, payments group Worldpay (WPY).
One could argue the scale of Jansen’s investment expectations by the BT board is not representative of every CEO of a plc company. After all, he is taking the hot seat at one of the country’s biggest businesses and receiving an annual pay packet, including bonuses and incentives, worth £3.9m.
It certainly looks like he can afford the investment, particularly as he owns a lot of shares in Worldpay and would have benefited financially from its flotation in 2015 and its subsequent takeover by Vantiv last year.
However, it does raise the question whether new laws should be introduced that force a chief executive to invest their own money in company stock if a business is above a certain size. That might not be a bad idea.
SKIN IN THE GAME
Director share ownership is known as ‘skin in the game’ and means their interests are aligned with shareholders’. Theoretically, if a CEO has a lot of their own money tied up in stock, they may not make reckless decisions which could endanger the business. They enjoy the rewards of good business performance and are punished – alongside normal shareholders – if events turn sour.
It is fairly traditional for CEOs to amass personal wealth through share options or shares as part of bonus payments, rather than buying stock in the market. These awards can be triggered by hitting certain performance targets such as a rise in earnings per share – which can be easily manipulated through accounting trickery.
Buying shares upfront would mean a director shares the rewards and pain from day one.
Director dealings can be sporadic. Profit warnings or extended periods of price weakness often trigger buying by directors as a show of support; other occasions may include directors taking part in a company share placing to raise new cash, or directors buying off the back of very good financial results.
Many investors watch these transactions closely, in the belief that directors know a business inside out and wouldn’t be buying unless they were convinced the company’s prospects were good. The same applies to directors selling, where investors assume that’s a sign of bad things to come.
Chief executives are still human beings and may have situations in their life such as paying for their parents’ care, or funding a messy divorce, which mean they may not have spare cash to invest in stock when they start a new job.
In these circumstances, and assuming CEOs were forced to invest at the point of their appointment, one could imagine them making a pledge to buy stock over a certain time period rather than all upfront, perhaps committing a certain percentage of their monthly salary.
Being the boss of a listed company comes with great responsibility and so it makes sense they are on a level pegging with other shareholders. (DC)