Do Stock Incentives Make For Better Directors?

Pick a descriptive: stock, stock options, synthetic stock, phantom stock, stock appreciation rights and more.  All can serve the purpose of giving recipients a feeling of having some ‘skin in the game,’ be they employees or board members. From my experience, such programs, well architected, can be motivational.

Consider first, programs designed for employees, especially those in senior leadership positions; they can be inspirational. 

At inception, employee stock incentive programs are usually enthusiastically received; maintaining that enthusiasm is the challenge.

If the stock benefit is in a public company it’s fairly easy to determine stock price daily although it may not be quite as easy to determine the influence one’s leadership has on that price.  In closely controlled or privately owned companies it’s not quite that easy where valuations may only be computed annually even though the participant’s influence on the outcome is likely more frequent and direct.

While monitoring price on a daily basis can be overkill, finding out change in value only once a year is the opposite; not exactly the best way to keep a participant’s interest.  One workaround is to provide the enterprise’s financial statements on a regular basis, with focus on contributing factors including the participant’s influence on the outcome…all delivered with transparency! And, not to be overlooked is a view to the future; after all, isn’t that why investments are made?

Regardless of the valuation’s trend, keeping a stock incentive program front of mind will go far in inspiring participants to be fully engaged, motivated to influence their financial outcome. Not doing so risks branding the program as incidental, an entitlement or worse, of no value at all.

Equity for directors…a different perspective.

I’ve served on a number of boards and advised others and from these experiences am far less definitive as to whether directors’ compensation should include stock or stock appreciation rights in some form.

• A client invested over a million dollars in a company other than his own and worried that his money was at serious risk. He asked me to get involved and I did.  In short order, with good cause, we took control of the company, formed a new board on which I served and started on the road to recovery.  The company was public, though in the penny stock category, and as a gesture of good faith the client gifted each board member some of his shares.

• In another board experience, all outside directors had signed up to be compensated on a flat fee basis. Every two or three years, when board compensation was reviewed, one or two of the directors would campaign for a stock incentive in addition to their fee based compensation.  Discussions were not lengthy but did include each director’s voice, some louder than others.  Each time, the matter flamed out.

Directors have many significant duties and ranking high among those are governance, strategy and succession. In the first case of the penny stock company, no director became more motivated by the investor’s gift of stock in carrying out those duties. In the second case, no director’s commitment, especially mine, lessened when approval of a stock appreciation program failed to get traction.

And so the lingering question…do stock incentives make for better directors?  To me timing is everything. If they are in place when a director signs on – great!  If they are added with the expectation that they will enhance a board’s commitment to success I question their value; the duties of a director rise above his/her form and method of compensation.

Lesson learned.

Read more: Performance’s Pay Day Has Come

Fred Engelfried
Fred Engelfried is Director/Chair of Lewis Tree Service, Inc. He has been a member of the board of directors of Lewis for over 15 years, and for 10 years prior to that worked with the company intermittently in various consulting capacities. As a Lewis board member, he has served on all of its board committees and chaired several.