ISS Releases 2015 Proposed Changes to Executive Compensation Evaluation Policy

ISS Releases 2015 Proposed Changes to Executive Compensation Evaluation Policy

October 16 2014

PDFISS has posted its 2015 Draft Policies for comment by institutional investors, companies and other members of the governance community.  Final policies will be released on November 7th, only nine days after the comment period ends (6:00 p.m. EDT on October 29), suggesting that comments are unlikely to result in material changes to these proposed policies.

The only compensation-related change proposed this year is the introduction of the Equity Plan Scorecard.  The scorecard replaces the past equity plan screening process, which focused on plan cost and the inclusion of egregious practices.  The new approach is intended to apply a more holistic approach to assessing new/modified equity plan proposals, by taking into account multiple factors, both positive and negative, related to plan features and historical grant practice.  Under the scorecard approach, equity plans will no longer receive an automatic negative recommendation by ISS if their cost is higher than the company’s allowable cap.  As ISS explains:

For example, a plan where cost is nominally higher than a company’s allowable cap may receive a favorable recommendation if sufficient positive factors are present. Conversely, a plan where cost is nominally lower than the allowable cap may ultimately receive a negative recommendation if a preponderance of scorecard factors is negative.

Steven Hall & Partners will be submitting our comments to this proposal and we welcome any thoughts, comments or concerns that you would like to share with us as we prepare our response.  We are also available to discuss how these proposed changes might affect your anticipated new/amended equity plan request this upcoming proxy season.  Please contact your regular SH&P contact or Joseph Sorrentino.

Below we have provided a summary of ISS’ proposed Equity Plan Scorecard.  It is important to note that ISS hasn’t disclosed the weightings of the scorecard at this time, so it is unclear how each factor will be judged.

  • Scorecard factors and weightings will be keyed to company size and status:
    • S&P 500
    • Russell 3000 (excludes S&P500)
    • Non-Russell 3000
    • Recent IPOs or Bankruptcy Emergent companies
  • The proposed approach incorporates multiple factors that will fall under three main categories:
    • Plan Cost
      • Shareholder Value Transfer (SVT) relative to industry and market cap peers for both
        • The sum of new shares requested, shares available for future grants and outstanding unvested/unexercised grants
        • Sum of new shares requested plus shares available for future grants
        • This approach eliminates ISS’ option overhang carve-out policy
    • Plan Features
      • Automatic single-triggered award vesting upon a CIC
      • Discretionary vesting authority
      • Liberal share recycling on various award types
        • Now evaluated as a plan feature rather than incorporated in SVT calculations
      • Minimum vesting period for grants made under the plan
    • Grant Practices
      • Three-year burn rate relative to industry/market cap peers
        • Burn rate evaluation based on a range relative to peers
          • Eliminates potential for commitments from companies to adhere to specific future burn rate caps
        • Burn rate benchmarks will be calibrated for respective index groups
          • S&P500
          • Russell 3000 (excluding S&P500)
          • Non-Russell 3000
          • GICS industry classification will be used within each index group
      • CEO grant practices
        • Vesting requirements in most recent CEO equity grants
        • Proportion of CEO’s most recent equity awards subject to performance conditions
      • Estimated duration of the plan
        • Sum of shares remaining available and the new shares requested, divided by the average annual shares granted in the prior three years
      • Existence of a claw-back policy
      • Post exercise/vesting share-holding requirements

ISS is seeking specific feedback on two questions:

  1. Are there certain factors outlined in the 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 link: http://www.issgovernance.com/policy-gateway/2015-benchmark-policy-consultation/

 

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