Following the recent publication of its U.S. Compensation Policy Frequently Asked Questions (FAQs), ISS just released FAQs containing new and materially updated questions for evaluating equity plans for the 2019 proxy season.
Effective for annual meetings as of Feb. 1, 2019, the following updates apply to Equity Plan Scorecard (EPSC) evaluations:
1. The change in control (CIC) vesting factor is updated to award points based on disclosure of CIC vesting provisions in the plan document, rather than previous policy that was based on the actual vesting treatment of awards. Full points will be earned if the plan discloses with specificity the CIC vesting treatment for both time- and performance-based awards. If the plan is silent on the CIC vesting treatment for either type of award, or if the plan provides for merely discretionary vesting for either type of award, then no points will be earned for this factor.
Note that ISS has removed any preferred CIC vesting approach. Full points are provided if the plan specifies treatment upon CIC in contrast with prior methodology where full points were only earned for certain vesting treatment (e.g. no automatic acceleration for time-based awards).
2. If an equity plan is deemed to be “excessively dilutive,” ISS may recommend Against regardless of the EPSC results. This overriding factor will be triggered when dilution is more than 20% for S&P 500 companies, or 25% for Russell 3000 (Non-S&P 500) companies. The new policy does not apply to Non-Russell 3000, recent IPOs/spins or bankruptcy emergent companies.
- Dilution is calculated as: (A + B + C) ÷ CSO, where: A = # new shares requested; B = # shares that remain available for issuance; C = # unexercised/unvested outstanding awards; and CSO = common shares outstanding.
This new overriding factor could negatively impact ISS recommendations for companies that maintain significant broad-based equity grant practices or have considerable unexercised/unvested equity outstanding.
3. While the number of EPSC points needed to receive a For recommendation has not changed, certain factor scores have been adjusted. Among the disclosed adjustments, weighting on the plan duration factor has increased to encourage plan resubmission to shareholders more often than required by listing exchanges or under prior Section 162(m) performance-based compensation tax deductibility rules.
- To receive full points for plan duration, proposed share reserve should last five years or less (estimate based on company’s three-year average burn rate as calculated by ISS).
- Maximum points under the Plan Features pillar has been reduced, with a corresponding positive adjustment in the Grant Practices pillar, likely due to the increased weighting of the plan duration factor.
4. Plan amendments that involve removal of general references to 162(m) qualification will be viewed as administrative/neutral. This includes references to approved metrics for use in performance plan-based awards. ISS encourages companies to maintain plan provisions that represent good governance practices, even if they are no longer required under 162(m).
- If a plan contains provisions representing good governance practices, even if no longer required under the revised 162(m), their removal may be viewed as a negative change in a plan amendment evaluation. ISS provides the example of removing individual award limits as a plan modification that would be viewed negatively.
Compensation Policy FAQs
UPDATE: “FAILURE TO ASSUME” NO LONGER AN ISS “PROBLEMATIC” GOOD REASON TRIGGER AND OTHER CLARIFICATIONS
As a follow-up to our recent post regarding the ISS 2019 Compensation Policy FAQs, ISS has indicated that “failure to assume” an agreement by a successor will not be treated as a “problematic” good reason trigger. However, problematic good reason definitions will remain on ISS’ list of problematic practices that will likely result in an adverse say-on-pay recommendation.
ISS also clarified that the absence of a materiality standard related to common good reason items (e.g., reduction in salary), in and of itself, does not constitute a problematic good reason definition. They also clarified that delisting is not intended to constitute a problematic good reason definition in the context of going private, but is intended to be problematic if it is because of a performance failure, such as failure to maintain a minimum stock price.
Although not highlighted as an update in the compensation policy FAQs, we note that ISS also supplemented its guidance on automatically renewing/extending contracts to spell out that an amendment is considered "material" if it involves any change that is not merely administrative or clarifying. Therefore, if any modification to an automatically renewing/extending contract is administrative in nature, its automatic extension will not on its own result in an adverse say-on-pay vote recommendation, even where the agreement contains a problematic pay practice.
Click here for the full EPSC FAQs. Note that the 2019 burn rate benchmarks are provided in the Appendix. More detail on ISS policy updates will be addressed in an FW Cook Alert letter to be published shortly after the new year. Best wishes to all for a healthy and prosperous new year!
Joe Sorrentino has over 20 years of executive compensation consulting experience. His client assignments have been with both public and privately-held companies in industries including: chemicals, consumer products, financial services, health care, manufacturing, pharmaceuticals, real estate/REITS and utilities. His consulting engagements often focus on the development of executive compensation strategy, design of annual and long-term incentive programs, and ISS equity plan modeling, compensation and governance policies.
Samantha Nussbaum has consulted on behalf of public and private companies, compensation committees, and senior management on all aspects of executive compensation. Samantha’s consulting and legal background includes advising on executive compensation in the context of mergers and acquisitions, spin-offs, and initial public offerings; executive employment, severance, and change in control agreements; equity incentive plans; deferred compensation; and securities laws, including reporting and disclosure implications.