Can executives own too much company stock? 

For public companies, a paramount guiding principle of executive compensation design is that pay should be directly linked to company stock price performance. Emphasizing equity-based compensation helps ensure that executive rewards are aligned with the investor experience. Also, a significant level of compulsory stock ownership by public company executives can promote a sustained focus on value creation and discourage undue risk-taking behavior.

But there are potential downsides for the company when executives own “too much” company stock, including some that may be counterintuitive: (i) increased retention risk and (ii) a decrease in executives’ appetite for appropriate risk-taking to grow the company. From an executive’s perspective, investment diversification is a critical facet of wealth management and it may be overly risky for executives to place the lion’s share of their net worth in a single security.

Perhaps a question corporate Boards should be asking is whether there is a level of executive stock ownership at which an organization should consider delivering compensation in a form other than company stock, i.e., does the law of diminishing returns suggest there is such a thing as owning too much stock? This article offers alternative incentive plan design ideas to balance levels of executive stock ownership so they are sufficient to create alignment with shareholder interests while allowing executives to appropriately diversify their stock holdings