As I blogged earlier this week, ISS has published 20 FAQs on its New Equity Plan Scorecard (EPSC), effective for stock incentive plans for which a company seeks shareholder approval on or after February 1, 2015. In the FAQs, ISS elaborates on each of the three categories of factors it considers under the EPSC model (referring to the three categories as “pillars”): Plan Cost, Plan Features, and Grant Practices.
The EPSC now will measure the company’s Shareholder Value Transfer (SVT) relative to two benchmark calculations that consider:
- New shares requested, plus shares remaining for future grants, plus outstanding unvested/unexercised grants, and
- Only new shares requested plus shares remaining for future grants. This new second measure should reduce the impact of grant overhang on the overall cost evaluation, which ISS recognizes as a sunk cost that the company has already expensed.
In 2015, the following factors may have a negative impact on EPSC results:
- Liberal share recycling on various award types;
- Single-triggered award vesting upon a change in control, which is automatic, even when other options (e.g., conversion or assumption of existing grants) are available;
- Absence of a minimum required vesting period (at least one year) for grants made under the plan; and
- Broad discretionary vesting authority that may result in “pay for failure” or other scenarios contrary to a pay-for-performance philosophy.
The following factors may have a positive impact on EPSC results, depending on the company’s size and circumstances:
- The company’s three-year average burn rate relative to its industry and index peers – this measure of average grant “flow” provides an additional check on plan cost per SVT. The EPSC compares a company’s burn rate relative to its index and industry (GICS groupings for S&P 500, Russell 3000 (ex-S&P 500), and non-Russell 3000 companies);
- Vesting schedule(s) that incentivize long-term retention under the CEO’s most recent equity grants during the prior three years;
- The plan’s estimated duration, based on the sum of shares remaining available and the new shares requested, divided by the three-year annual average of burn rate shares;
- The proportion of the CEO’s most recent equity grants/awards subject to performance conditions;
- A clawback policy that includes equity grants; and
- Post-exercise/post-vesting shareholding requirements
A company seeking shareholder approval of an equity plan generally must receive an EPSC score of 53 or higher (out of a total 100 possible points) to receive a positive recommendation from ISS. But wait, there’s more! Certain factors will result in a negative recommendation on an equity plan proposal, regardless of the score from all other EPSC factors (so-called “deal breakers”). The following egregious features will result in an “against” recommendation from ISS, regardless of other EPSC factors:
- A liberal change in control definition that could result in vesting of awards prior to consummation of (or regardless of) a transaction;
- If the plan would permit repricing or cash buyout of underwater options or SARs without shareholder approval (either by expressly permitting it for NYSE and Nasdaq listed companies or by not prohibiting it when the company has a history of repricing for non-listed companies);
- If the plan is a vehicle for problematic pay practices or a pay-for-performance disconnect; or
- If any other plan features or company practices are deemed detrimental to shareholder interests. Such features may include, on a case-by-case basis, tax gross-ups related to plan awards or provisions for reload options.
Given the potential effect of including a deal breaker provision, these last two descriptions seem to be extremely vague and open-ended. Let’s hope for additional guidance on the FAQ guidance.