Institutional Shareholder Services Inc. (“ISS”), a leading proxy advisory firm, recently proposed a new “scorecard” approach to evaluating public company equity plans (the “Equity Plan Scorecard”). Under the new approach, ISS will recommend a “for” or “against” vote based on a company’s Equity Plan Scorecard. Pursuant to the proposal, a company’s Equity Plan Scorecard score will be based on factors related to the following three categories:
• The total potential cost of the company’s equity plan relative to industry/market cap peers, measured using ISS’ proprietary “shareholder value transfer” or “SVT” model.
• Plan features including automatic single trigger vesting on change in control, discretionary vesting authority, liberal share recycling, and minimum vesting periods for grants made under the plan.
• Grant practices including three-year burn rates, vesting requirements in recent CEO equity grants, the estimated duration of a plan, the proportion of the CEO’s most recent awards subject to performance-based vesting (vs. timed-based vesting), the existence of a company clawback policy, and whether the company has established post exercise and vesting share-holding requirements.
Even though certain plan features that ISS considers “egregious” will still result in an “against” vote regardless of a company’s Equity Plan Scorecard score (e.g., the ability to reprice stock options without shareholder approval), ISS has indicated that recommendations under the new “scorecard” approach will largely be based on a combination of factors related to three categories described in the bullets above.
A company that is seeking shareholder approval of an equity plan proposal at its 2015 annual meeting may wish to consider incorporating the Equity Plan Scorecard factors into its plan if it wants ISS to recommend a vote in favor of the plan proposal. More information on the Equity Plan Scorecard can be found here.