Post Vesting Holding Restrictions From Concept to Reality

By Robyn Shutak posted 03-28-2016 19:46


It is rare that everything comes together nicely. But that’s what appears to be happening with post vesting holding restrictions in the US.  This sleeper plan design lever came out of relative obscurity and is now the talk of the town. It’s no wonder… Post vest holding restrictions can deliver a lot of benefits, including better corporate governance, expediting ownership requirements, facilitating clawbacks, and delivering accounting benefits.

First, a primer... What is a post vesting holding restriction?  Mandatory holding periods can be baked into the grant terms and prevent executives from selling vested equity until additional requirements are met— usually “owning” shares for one, two or three years following the original vesting date. In some cases, holding periods can stretch until retirement. Most often, these are applied to restricted or performance shares… and, generally to an executive population, C-Suite and possibly one level down.

By virtue of requiring executives to hold vested equity, companies can achieve a number of benefits, including:

Improve Governance Ratings with Proxy Advisory Firms
ISS updated its equity plan evaluation methodology to include positive scoring for mandatory holding periods. Additionally, ISS views holding periods as a risk-mitigating pay practice for its say-on-pay evaluations. Glass Lewis & Co. also rates holding periods positively in their equity plan evaluation framework.

Explicitly Define a Pathway for Meeting Ownership Guidelines Most C-level executives are required to maintain corporate equity holdings between 2x and 5x of annual base salary. Mandatory post-vest holding requirements, when designed correctly, can directly contribute to and accelerate the achievement of required ownership levels. Once the ownership guidelines have been met, older shares can be sold for liquidity if newer ones are subject to the hold.

Mechanism for the Recovery of Awards via a Claw-back In light of forthcoming Dodd-Frank requirements, the adoption of claw-back policies, designed to recover compensation in the event of governance or financial failings, is on the rise. Post-vest holding requirements for vested equity awards provide one of the few practical mechanisms to recover incentive payouts in the event of a claw-back.

All of these points are great news for companies… and here’s the kicker… holding periods also carry significant additional value that companies may not fully realize… these post-vest holding periods can reduce expense under ASC 718.  Mandatory holding periods lower the value of an award, with the degree of the discount varying based on the length of the restriction period, a company’s volatility assumption, and prevailing interest rates. A moderately volatile company (40% to 50%) with a one-year holding restriction could take a discount of approximately 10% to 15% from the fair value.

What’s the catch? Sure, it might sound too good to be true. Benefits notwithstanding, companies may be concerned with executive reaction.  After all.. it could be a perceived take away to add a holding restriction where one didn’t exist.  However, the data shows that 80% of Section 16 officers are already holding the shares voluntarily.  And where grant value drives award amounts, the illiquidity discount can be used to deliver more shares to executive.

To learn more about this golden opportunity, join the “Rolling Out Restrictions: Post Vesting Holding Restrictions From Concept to Reality” session at GEO's 17th Annual Conference in Boston next month. Here we will dig deep in the mechanics of post vesting holding restrictions and hear first-hand from The Coca-Cola Company, Danaher, and Genworth how these companies incorporated holding requirements for their executives.

Register for the event here!

1 comment



03-30-2016 07:30

Hi Robyn - interesting post. Post vesting holding restrictions have been market practice in Australia for some time. Companies typically either have this or a minimum shareholding requirement.