Corporations are warming to the concept of mandated stock ownership as a way to motivate key managers.
Within the plastics industry, Cleveland-based M.A. Hanna Co. began a program at the beginning of 1995, and Clayton, Mo.-based Spartech Corp. started in late 1996.
The programs differ on guidelines for years to meet requirements and number of management levels.
Both deal in dollar value of stock rather than number of shares. And both require individuals to convert stock options to count the shares toward meeting the guideline.
Market appreciation has made the programs easy for managers to accept, but a drop in stock price would require participants to buy more shares.
Compounder and distributor Hanna identified its top 65 managers for the stock ownership program. The first deadline for 1995 participants to comply arrives Dec. 31.
Hanna set three-year stock ownership guidelines: three times base salary for the chief executive officer; two times for senior vice presidents and the chief financial officer and chief operating officer; one time for other officers; and one-half times base salary for nonofficer participants in a long-term incentive plan. If promoted to another level, an employee's three-year clock begins running at the new guideline.
Sixty-five percent of the managers had reached targeted ownership goals at the end of 1995, and 77 percent had topped three-year targets at the end of 1996.
``We are not there yet, [but] we are making steady progress,'' Lani Beach, vice president of human resources, said in a telephone interview. ``I sent out a letter to all managers in the first quarter of this year, asking if they had any questions.''
He asked those well below their guidelines if they ``plan to be in the market this year.'' For some, it was a matter of converting stock options to ownership.
He said Hanna's top officer ``is well beyond'' his ownership guideline.
Douglas J. McGregor became chief executive officer Jan. 1 and chairman July 1. His 1996 base salary in his former position as Hanna's president and chief operating officer was $450,000, giving him a guideline to own stock with a value of $1.35 million.
Any manager missing the guideline after three years will have as much as one-half of any annual incentive compensation award paid in shares of Hanna common stock until the expected stock ownership value is achieved.
Hanna monitors surveys on management stock ownership programs at Fortune 100 companies. In conjunction with the compensation committee of the board of directors, Hanna leaders will review the numbers later this year. Program adjustments may follow.
Hanna employs 6,100, produces custom plastic and rubber compounds and custom formulated colorants and additives and distributes thermoplastic and thermoset resins and engineered plastic shapes.
Hanna reported profit of $32.3 million on sales of $1.1 billion for the six months ended June 30. The company had profit of $23.7 million on sales of $1 billion for the comparable 1996 period.
Management quality is the most important attribute in Hanna's business, said Allan Cohen, managing director of First Analysis Securities Corp., a Chicago investment banking firm.
``I prefer that management's interest overlap as much as possible with'' that of investors, and ``direct stock ownership is a meaningful way of accomplishing it.''
In June, First Analysis boosted its recommendation on Hanna stock to the highest level, ``strong buy,'' from ``accumulate.''
The move ``was driven by my attendance at NPE and the observation of excitement and customer response'' at the Hanna exhibit, Cohen said. ``All the business units were at one booth, and they were passing along people among the divisions.''
Also, Cohen likes Hanna's program to install ``wide-ranging information technology that allows them both to communicate more effectively and to manage manufacturing and the distribution process.''
``My premise is that those positives are not adequately addressed in the current stock price,'' he said.
Hanna's stock closed at $26.63 July 28 in trading on the New York Stock Exchange.
Separately, First Analysis has rated Spartech's stock as a ``strong buy'' since the firm initiated coverage in February.
At sheet-rollstock extruder, compounder and injection molder Spartech, the subject of management stock ownership came up ``several times in the process of our road show'' for a September 1996 secondary public offering, said Bradley B. Buechler, president and CEO.
Security analysts asked about management's stock ownership, and Spartech took the message to heart. The new board policy encourages about 75 managers to establish or increase Spartech stock ownership to as much as four times their annual base salaries within four years.
Buechler said the program asks participants to focus on ``the success of Spartech in total rather than just their own site.'' The policy affects one to five managers in each of 16 facilities in the United States and six facilities in Canada.
As CEO, Buechler is expected to hold stock equal to four times his base salary. Based on his fiscal 1996 salary of $359,423, his guideline is stock with a value of slightly less than $1.44 million. As of July 21, he owned stock worth nearly $1.49 million.
David Mueller, Spartech COO, executive vice president and secretary, had a base salary of $223,078 in fiscal 1996. His three-times-base-salary guideline is about $696,000, and he held stock with a value of $552,000. Other key managers face a two times' requirement before Nov. 1, 2000.
Spartech employs 1,850 and reported profit of $12.2 million on sales of $243.2 million for the six months ended May 3. The comparable 1995-96 period showed profit of $8.6 million on sales of $185.8 million.
The stock plan encourages a couple Spartech analysts.
``We are very much in favor of having that kind of program and will only look at companies in which managers own a big share of stock,'' said Gary Prestopino, research director for Chicago-based Mesirow Financial Inc.
``They are going to maximize business, and it will be reflected in their shares,'' he said.
He likes Spartech's idea of charging the cost of capital to operating divisions as ``a nice set of guidelines for enhancing shareholder value.''
Since Mesirow Financial began reporting on Spartech in March 1996, the stock has appreciated 91 percent, from $8.25 a share to $15.75 as of July 17, when Prestopino was interviewed. Value of the Standard & Poor's stock index has increased 42.7 percent during the same period. The stock closed July 28 at $14.69 in NYSE trading.
Brian Langenberg, an analyst in the Chicago office of Credit Suisse First Boston Corp., said the Spartech program ``ties managers to operating performance, which ties them to the value-creation of having a higher stock price. People respond differently if they have an ownership stake.''
Langenberg noted that both Buechler and Mueller hold significant amounts of stock, and this program ``drives the concept further down into the organization.''
Langenberg rates Spartech stock as a ``buy,'' citing continued positive trends, improved cash flow and creative acquisitions.
Another analyst takes a contrary view.
``I don't find investment value or merit in who owns the stock,'' said L. Michael Braig, vice president of A.G. Edwards & Sons Inc., a St. Louis brokerage firm.
``It may be nice to confirm a level of interest in the company,'' Braig said, ``but it is not a confirming statement if a company must mandate'' that managers own certain amounts of stock. He rates Spartech's stock as a ``buy,'' largely on the merits of its strong internal growth plan.