Last month, ISS issued a set of updated FAQs for equity plans “U.S. Equity Compensation Plans, Frequently Asked Questions, Updated December 19, 2018.” New or changed information in the Equity Compensation Plans, FAQs included the following:

Changes to EPSC policy for 2019. ISS announced a few changes to the Employee Plans Scorecard (EPSC), effective for meetings as of February 1, 2019.

First, the change in control (CIC) vesting factor will be updated to provide points based on the quality of disclosure of CIC vesting provisions, rather than based on the actual vesting treatment of awards. Specifically, ISS will award full points for this factor where the company’s equity plan discloses with specificity the CIC vesting treatment for both performance- and time-based awards. If the plan is silent on the CIC vesting treatment for either type of award, or if the plan provides for merely discretionary vesting for either type of award, ISS will award no points for this factor.

Second, in light of the elimination of the feature of Section 162(m) that required frequent shareholder reapproval of equity plans, ISS has increased the weighting of the plan duration factor to encourage plan resubmission to shareholders more often than required by the stock exchanges.

Finally, ISS announced a new negative overriding factor relating to excessive dilution for the S&P 500 and Russell 3000 EPSC models. The new overriding factor will be triggered when a company’s equity compensation program is estimated to dilute shareholders’ holdings by more than 20% (for the S&P 500 model) or 25% (for the Russell 3000 model).

The passing scores for all U.S. EPSC models will remain the same as in effect for the 2018 proxy season (i.e., 55 points for S&P 500 companies and 53 points for Russell 3000 companies (not including S&P 500)).

Overriding Factors. The following “egregious” features may result in an “against” recommendation, regardless of other EPSC factors:

  • A liberal change-of-control definition that could result in vesting of awards by any trigger other than a full double trigger;
  • If the plan would permit repricing or cash buyout of underwater options or SARs without shareholder approval;
  • If the plan is a vehicle for problematic pay practices or a pay-for-performance misalignment;
  • If the plan is estimated to be excessively dilutive to shareholders’ holdings; or
  • Other plan features or company practices that could be detrimental to shareholder interests, including (but are not limited to), tax gross-ups related to plan awards, provision for reload options, or provision for transferability of stock options to third-party financial institutions without shareholder approval.

Amendments to Increase the Applicable Tax Withholding Rate. ISS generally will take a benign view of plan amendments to increase the tax withholding rate, unless the plan contains a liberal share recycling feature. This concern would be mitigated if the plan stipulates that only the number of shares withheld at the minimum statutory rate may be recycled.

Proposals only Seeking Approval in Order to Qualify Grants as “Performance-Based” under Section 162(m). Shareholder proposals that only seek approval to ensure tax deductibility of awards pursuant to the grandfather rule under Section 162(m) and that do not seek additional shares for grants or approval of any plan amendments, will generally receive a favorable recommendation regardless of EPSC factors, provided that the board’s compensation committee or other administrating committee is 100% independent according to ISS standards.

Other Changes for 162(m). ISS will view Plan changes that remove general references to 162(m) qualification, e.g., references to approved metrics, as neutral. However, would view negatively the removal of provision that ISS views as good governance practices, such as individual award limits.

Non-Employee Director Equity Plans. ISS will not evaluate stand-alone director equity plans under the EPSC model, but generally will recommend against a plan that contains egregious features, such as non-shareholder approved option repricing. However, in cases where the plan exceeds the SVT or burn rate benchmark when combined with employee equity compensation plans, ISS will supplement its analysis with a qualitative review of board compensation, which includes the following factors:

  • The relative magnitude of director compensation as compared to companies of a similar profile;
  • The presence of problematic pay practices relating to director compensation;
  • Director stock ownership guidelines and holding requirements;
  • Equity award vesting schedules;
  • The mix of cash and equity-based compensation;
  • Meaningful limits on director compensation;
  • The availability of retirement benefits or perquisites; and
  • The quality of disclosure surrounding director compensation.

Next up, ISS FAQs on Compensation Policies in General.