WASHINGTON -(Dow Jones)- Stock-market declines spell trouble for companies that require chief executives and board members to hold a fixed dollar amount of shares: Some are falling short of ownership targets.

While ownership targets aren't mandatory, they score points with investors and corporate-governance ratings firms and are common at large U.S. companies. Most ask executives and directors to hold company stock equal to five times their salary or retainer. Some aim higher, requiring CEOs to hold up to 25 times more in shares as they receive in annual pay.

"That's tough to maintain in this environment," notes Pearl Meyer, co-founder of Steven Hall & Partners, a New York compensation-consulting firm. "A number of companies have put compliance in limbo."

Irwin Financial Corp. (NYSE:IFC) (IFC) is among them. In April, its board approved a one-year suspension of guidelines for directors to hold $150,000 of shares, or five times pay, citing poor stock performance. The Columbus, Ohio, consumer- financial company's stock is down nearly 75% from last year. A spokesman didn't return a call seeking comment.

Others, including Merrill Lynch & Co. Inc. (NYSE:MER) (MER), are sticking with targets, which in Merrill's case require non-executive officers to hold shares equal to 10 times salary and the CEO to hold 15 times base salary. Steven Hall & Partners calculates that with a 52% drop in Merrill's stock, the CEO's target has more than doubled, to 256,732 shares.

Merrill spokesman William Halden said the firm's share-owning policy hasn't changed and that all executives and directors comply with it. Merrill executives and directors have five years to reach targets; CEO John Thain has been on the job less than a year. Targets Harder To Hit As Prices Slump

Stock ownership is intended to align the interests of corporate insiders with investors, ensuring they feel their joy when stock prices are rising and their pain when prices fall. Compensation experts applaud the goal, but question the wisdom of setting ownership levels as a fixed-dollar multiple of pay, which makes the targets harder to hit and hold amid falling prices.

"This issue comes up virtually every time we have a down market," said Paula Todd, a compensation consultant at Towers Perrin, in Stamford, Conn.

More firms than ever are faced with the issue. Nearly 80% of Fortune 250 firms set share-ownership requirements as a multiple of pay in fiscal 2006, up from about 75% the year before, according to Equilar Inc., a Redwood City, Calif., executive-compensation research firm.

Washington Mutual Inc. (NYSE:WM) (WM) shows the perils of fixed-dollar targets. CEO Kerry Killinger is expected to hold shares equal to 10 times pay; a 78% stock price decline has lifted the target to 1.06 million shares from 231,160 last year, Steven Hall & Partners calculates. The Seattle lender reported Killinger held 1.2 million shares in February; a spokeswoman had no additional comment.

Some firms are considering options, including doing nothing in hopes the market will rebound, and experts warn that not all of them will reveal they look the other way when insiders fall short of existing targets.

"It's just their dirty little secret," said Todd. She counsels companies to maintain ownership targets and give those who aren't hitting them a firm deadline, typically two years, to get back into compliance.

Forcing stock purchases isn't practical, according to Todd. She said she's not aware of any company handling the matter as "a margin call," requiring insiders to pony up as stock prices tumble.

"It's very awkward to go to a CEO and say: guess what, your net worth is shrinking and you need to sink a higher percentage into the stock, because its value is declining," agreed Carl Weinberg, a principal in the human-resource- services practice at PricewaterhouseCoopers, in Stamford, Conn.

Experts Favor Moving Away From Multiple Approach

Weinberg thinks the best solution is to scrap the pay-multiple approach and instead target a fixed number of shares or a fixed percentage of shares outstanding. Meyer also favors that idea, since targets remain constant whether markets move up or down.

Few companies use a market-neutral approach now. Just 13% of Fortune 250 firms set ownership targets at a fixed number of shares in fiscal 2006, the latest data available, down from 14.5% in fiscal 2005, said Equilar Research Director Alexander Cwirko-Godycki. But if stocks stay weak, he sees a good chance that more companies will use fixed-share targets.

Buy Co. (BBY) and Lear Corp. (NYSE:LEA) (LEA) both switched last year to targets based on a fixed number of shares rather than a multiple of pay. Best Buy (NYSE:BBY) shares are down about 3% from prior-year levels; Lear's stock has fallen almost 30%.

Based in Richfield, Minn., Best Buy (NYSE:BBY) said the change makes ownership targets less volatile and simplifies planning. Lear, based in Southfield, Mich., said it mitigates price volatility while retaining "significant stock ownership by senior management."

Provided fixed-share ownership targets are high enough, Cwirko-Godycki said they can be as effective as fixed-dollar targets in aligning insiders' interests with those of shareholders.

Share-retention plans, which can be used alone or in combination with ownership targets, are another shareholder-friendly option. The idea: have executives and directors hold onto a fixed percentage of stock and stock-option grants until they hit a share-ownership target or leave the firm.

"That's a nice approach because it isn't harsh on new executives," noted Todd. "The downside is, it's not fast."

In amassing shares, long-tenured executives have a big advantage over new hires, with some holding stock equal to 60 or 70 times pay, which Cwirko-Godycki said would withstand all but "a massive drop" in stock prices.

-By Judith Burns, Dow Jones Newswires, 202-862-6692; Judith.Burns@dowjones.com

    (END) Dow Jones Newswires   06-06-08 1231   Copyright (c) 2008 Dow Jones & Company, Inc.