ISS 2015 Policy Update: First Look at the Equity Plan Scorecard

ISS Releases 2015 Policy Update: First Look at the Equity Plan Scorecard

November 12 2014

PDFISS recently released its final policy guidelines for the 2015 proxy season.  As announced in the draft rules published last month, ISS is adopting an Equity Plan Scorecard model (“EPSC”) that considers a range of positive and negative factors, rather than a series of “pass” or “fail” tests, to evaluate equity incentive plan proposals. The total EPSC score will generally determine whether ISS recommends for or against the proposal. The updated guidelines will be effective for all companies with annual meetings on or after February 1, 2015.

Equity Plan Scorecard
The updated policy will evaluate a broader range of factors that investors may consider when determining whether an equity plan serves their long-term interests.  EPSC factors fall into three categories: Plan Cost, Grant Practices, and Plan Features.  Individual company scorecards and factor weightings will be 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 IPOs.  While detailed information on the factor categories has not been released at this time, the overall EPSC category weightings and factors reviewed are provided below.  We expect more detailed information to be provided in December when ISS releases its Compensation FAQ.

Plan Cost (45% of total EPSC weighting)

  • Plan Cost is measured by Shareholder Value Transfer (SVT). SVT is the total estimated cost of the company’s equity plans relative to industry/market cap peers.  SVT is evaluated in two ways:
    • New shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants
    • New shares requested plus shares remaining for future grants
      • Note this is a new evaluation factor and has led ISS to eliminate the option overhang “carve-outs” previously available under the SVT calculation

Grant Practices (35% of total EPSC weighting)

  • The following equity grant practices will be considered:
    • The company’s three year burn rate relative to its industry/market cap peers
      • Three index groups will be used to determine burn rate caps and factor weightings:
        • S&P500 (new for 2015)
        • Russell 3000 (excluding S&P 500, also new for 2015)
        • Non-Russell 3000
      • Note that the definition of the burn rate cap has not changed. Burn rate cap equals the index/industry mean and 1 standard deviation above mean, as well as a 2 percent de minimis benchmark
        • ISS has eliminated burn rate commitments previously available to companies and moved the burn rate analysis to the Grant Practices category
    • Vesting requirements in most recent CEO equity grants (3-year look-back)
    • 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
    • Whether the company has established post exercise/vesting share-holding requirements

Plan Features (20% of total EPSC weighting)

  • The following features within the equity plan document will be considered:
    • Automatic single-triggered award vesting upon a change in control
    • Discretionary vesting authority
    • Liberal share recycling on various award types
      • ISS has eliminated consideration of liberal share recycling provisions from the SVT cost calculations; instead, share recycling will now be scored as a negative plan feature
    • Minimum vesting period for grants made under the plan

ISS will maintain 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
  • Any other plan features are determined to have a significant negative impact on shareholder interests

Action Items
We advise companies that anticipate requesting additional shares during the 2015 proxy season to review and consider the implications of the new EPSC methodology as you draft the final plan documents. Unfortunately, many of the material details of the new EPSC methodology have not yet been provided, and will not be forthcoming until the December release of the Compensation FAQ.  We will follow up with supplementary analysis after the FAQ document is published.  In the meantime, do not hesitate to contact your SH&P contact or Joseph Sorrentino to discuss further.

About Steven Hall & Partners
Steven Hall & Partners is an independent executive compensation consulting firm, specializing exclusively in the areas of executive compensation, board remuneration, non-profit compensation and related governance issues.  By focusing solely on this critical and complex segment of the human resources arena, we are able to provide our clients with the highest quality expertise and best counsel available on a practical basis.  For more information, please visit www.shallpartners.com and follow us on Twitter @SHallPartners. 

Contacting Steven Hall & Partners
This publication is provided by SH&P as a service to clients and colleagues.  The information contained in this publication should not be construed as legal, tax or accounting advice.  Please call any of our consulting staff listed below, or any member of our staff with whom you have consulted in the past.  If you have not received this publication directly from us, you may obtain a copy of any past or future related publications from Kathie Mulroe (212-488-5400; kmulroe@shallpartners.com).

Contact
Joseph Sorrentino
212-488-5400
jsorrentino@shallpartners.com

 

Previous Client Alerts