ISS Publishes Equity Plan Scorecard FAQs
ISS recently published FAQs for its new Equity Plan Scorecard (EPSC) approach for evaluating equity plan proposals. The methodology is effective for all U.S. companies with annual meetings on or after February 1, 2015.
Equity Plan Scorecard Methodology
The EPSC considers a range of positive and negative factors related to a company’s equity plan. ISS voting recommendations are based on a company’s total EPSC score. A score of 53 (out of 100 maximum total points) is required to receive a positive voting recommendation. However, ISS maintains the ability to recommend against a company, even in instances where it passes the EPSC tests, if any of the following apply:
- Awards may vest in connection with a liberal change in control definition
- The plan permits repricing or cash buyout of underwater options without shareholder approval
- The plan is a vehicle for problematic pay practices or a pay-for-performance disconnect
- The plan contains any other features that are determined to have a significant negative impact on shareholder interests, such features may include:
- Tax gross-ups on equity awards
- Provisions for reload options
As we noted in our November Client Alert, EPSC factors fall into three categories: Plan Cost, Grant Practices, and Plan Features. Individual company scorecards and factor weightings have been developed for index groups based on a company’s membership in one of the following groups: S&P 500, Russell 3000 (excluding S&P 500), Non-Russell 3000 and IPO/Bankruptcy. IPO/Bankruptcy companies will not be subject to factors in the Grant Practices category for three fiscal years.
ISS has not disclosed the weightings for individual factors, but we know EPSC factors are not equally weighted. ISS provided the following EPSC factors and basis for scoring in the recently released FAQs:
We believe that a well-designed and well-communicated equity plan is vital for all public companies and advise companies to seek timely shareholder input and support as part of the process in developing the equity plan proposal. It is crucial that companies develop a strategic shareholder outreach program that includes not only talking to major shareholders to highlight the objectives and rationale of the program, but listening to shareholders’ feedback and potentially adjusting the plan design to reflect any concerns that are raised.
While ISS views can be an important consideration in long-term incentive plan design, these considerations should not trump the selection of design features which, when thoughtfully considered, result in a program aligned with the long-term strategic objectives of the organization and supportive of the responsible growth of shareholder value.
With the adoption of the new EPSC approach, ISS has added additional flexibility, as well as complexity and nuance, to its equity plan evaluations. Plan cost, as measured by SVT benchmarks that are not disclosed, remains the most influential factor in determining ISS’ voting recommendation. However, with the likelihood that most companies will not be able to maximize their score in the Plan Cost category, it is critical that companies review plan documents, three-year burn rates and historical CEO grant practices.
We are disappointed that ISS has not disclosed the weighting of individual factors. We continue to urge ISS to provide full transparency, similar to the levels they expect from companies. As companies consider whether or not to modify their plans to secure full credit under the EPSC, we believe they are entitled to understand the impact these changes will have on their score.
While ISS will now consider a range of factors under the EPSC, it is also our understanding that SVT and burn rate levels in excess of pre-determined (but undisclosed) thresholds will be deemed egregious practices which could be sufficient, in and of themselves, to trigger an “Against” recommendation.
We also note that due to the addition of the new S&P 500 category, 2015 burn rate benchmarks for most S&P 500 companies will be significantly lower than the applicable 2014 caps. This change will likely make it extremely difficult for many S&P 500 companies to receive the maximum points on the burn rate factor.
Please do not hesitate to contact your SH&P representative or Joseph Sorrentino to discuss further.
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