Earlier this week, ISS proposed a new equity plan evaluation, the Equity Plan Scorecard. According to ISS, the new Scorecard will enable a “more nuanced consideration of equity plan proposals.” Under the proposed Scorecard approach ISS would base its recommendations primarily on a combination of three factors related to: (1) the Plan’s cost; (2) the Plan features; and (3) the Company’s grant practices. For example, ISS indicates that a plan where cost is nominally higher than a company’s allowable cap still may receive a favorable recommendation if sufficient positive factors are present (and vice versa).
1. Plan Cost: ISS will continue to evaluate the total potential Plan Cost of the company’s equity plans relative to industry/market cap peers, on the basis of its proprietary shareholder value transfer (SVT) measure, in relation to the company’s peers. However, under Scorecard, ISS would calculate SVT for both:
- New shares requested, plus shares remaining for future grants, plus outstanding unvested/unexercised grants, and
- Only on new shares requested plus shares remaining for future grants.
Under this dual cost measurement approach, ISS would no longer factor into its vote recommendations option overhang carve-outs or burn rate commitments. ISS would consider the company’s burn rate as part of the Scorecard evaluation, based on a range relative to its peers.
Under the proposed Scorecard approach, ISS would calibrate burn rate benchmarks separately for the equity plans of companies in four groups: (1) S&P 500; (2) Russell 3000 (excluding S&P 500); (3) Non-Russell 3000; and (4) Recent IPO/Bankruptcy Emergent companies. ISS still would use the relevant GICS industry classification within each index group.
2. Plan Features: ISS would continue to review a few key Plan Features under the proposed Scorecard. The presence of some of these features would result in negative recommendations, regardless of other factors, including the authority to reprice stock options without seeking shareholder approval. Other features the ISS calls out for special scrutiny include:
- Automatic single-triggered award vesting upon a CIC;
- Discretionary vesting authority;
- Liberal share recycling on various award types (previously, ISS included liberal share counting in its SVT calculations); and
- No minimum vesting period for grants made under the plan.
3. The Company’s Grant Practices: The third major factor ISS would consider under the proposed Scorecard is the company’s historical grant practices for equity awards. Again, the Scorecard proposal specifies a few key elements for ISS consideration:
- The company’s three-year burn rate relative to its industry/market cap peers;
- Vesting requirements in most recent CEO equity grants;
- The estimated duration of the plan based on the sum of shares remaining available and the new shares requested, divided by the average annual shares granted in the prior three years;
- The proportion of the CEO’s most recent equity grants/awards subject to performance conditions;
- Whether the company maintains a claw-back policy; and
- Whether the company has established post exercise/vesting share-holding requirements.
Pay-for-performance issues fueled by “excessive equity grants” also are likely to automatically trigger an ISS “against” recommendation.
If you are wondering what some of those bullet points mean you are not alone. The Scorecard proposal leaves many questions unanswered. ISS requested comments on the proposal and specifically asked for feedback on two issues. (1) Are there certain factors outlined above in our proposed scorecard approach that should be more heavily weighted when evaluating equity plan proposals? Please specify and explain. (2) Do you see any unintended consequences from shifting to a scorecard approach? If yes, please specify.
ISS expects to release final 2015 policies on or around November 7, consistent with its past practices. We will talk about the Scorecard proposal in more detail as information becomes available. Next week, we will talk about another important announcement ISS made this week.