On October 15, 2014, ISS released its draft 2015 policies. These included two draft policies applicable to U.S. companies:
- Equity Plan Proposal Policy–ISS is proposing to implement an Equity Plan Scorecard for analyzing equity plan proposals; and
- Independent Chair Shareholder Proposal Policy– ISS is proposing a more holistic policy to analyze such shareholder proposals.
Now, I think it is a bit generous to call these draft “policies” as they lack many of the important details that would enable institutional shareholders and issuers to properly analyze and comment on these “drafts.” The draft policies raise many questions and offer few details on how they would actually be applied in practice. So it is nearly impossible to determine with complete accuracy how ISS Research will apply these draft policies.
Equity Plan Proposal Policy Update
ISS is proposing to use an equity plan scorecard composed of three categories: Plan Cost; Plan Features; and, Grant Practices. In some respects, it appears that ISS is simply reshuffling some of the existing components of its equity plan proposal policy.
Plan Cost will look at the Shareholder Value Transfer (SVT) just like the current policy does. However, the draft policy does not indicate what the consequence would be of a proposed plan’s SVT coming in above its ISS company-specific allowable cap. Given that the three categories will be weighted in some fashion, it may make sense to no longer have a hard and fast line for SVT cost for the proposal, but I expect that will be too great of a change for ISS. So we’ll have to wait and see how ISS will weight the three categories as well as how it will score within each category and what the consequence of being above or below the SVT allowable cap will be for an equity plan proposal.
Plan Features will look to the following plan features:
- Automatic single-triggered award vesting upon a CIC;
- Discretionary vesting authority;
- Liberal share recycling on various award types; and
- Minimum vesting period for grans made under the plan.
This list is from the draft policy and doesn’t necessarily correspond to the plan features that cause ISS to currently recommend against a proposed equity plan. Again, the draft policy does not indicate the consequence of a plan having any of these features. It could be that a company loses possible points for this category for every one of these features that the plan contains. Of course, there is also no indication of how these features would be weighted, i.e., equally weighted or disproportionately weighted to penalize for those features which ISS has identified as being more egregious. So, we will have to wait for the final policy to see exactly what ISS has in mind for the plan features category.
Grant Practices will incorporate ISS’s current Burn Rate analysis, but then include a couple of other items, including:
- Vesting requirements in most recent CEO equity grants;
- The estimated duration of the proposed 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; and
- Whether the company has established post exercise/vesting share-holding requirements.
Again, as with the other categories, ISS has not let us know how all these items will be counted and what weight each will hold in determining the overall Grant Practices category score. So, once again we’ll have to wait until the final policy to know what ISS is thinking here.
ISS also indicated that the Equity Plan Scorecard would have its factors and weightings keyed to company size and status: S&P 500, Russell 3000 (excludes S&P 500), Non-Russell 3000, and Recent IPOs or Bankruptcy Emergent companies. Again, ISS does not offer even a hint of what factors and weightings it would use for each of these groups nor how things would differ between groups.
ISS also indicates that its options overhang carve-out policy would no longer be available. Likewise, companies would no longer be able to make a burn rate commitment as they had in the past to avoid a negative ISS vote recommendation when their burn rate exceeded their industry burn rate cap.
ISS has requested comments on the new draft equity plan proposal policy, specifically:
- Whether there are certain factors in the scorecard approach that should be more heavily weighted when evaluating equity plan proposals?
- Any unintended consequences from shifting to a scorecard approach?
Independent Chair Shareholder Proposal Policy Update
ISS is proposing to revise its policy with respect to shareholder proposals for independent chairs to add new governance, board leadership, and performance factors that it will analyze when coming up with its vote recommendation on such proposals. ISS has identified the following as new factors that will be weighed (but there is no indication whether this is an exhaustive list):
- Absence/presence of an executive chair,
- Recent board and executive leadership transitions at the company,
- Director/CEO tenure, and
- A longer (five-year) TSR performance period.
Again, ISS does not offer a comprehensive list of factors that it will now apply and instead, asks for comments on what factors are considered important when reviewing such proposals. Additionally, like with the Equity Plan Proposal Policy, ISS has not indicated the weightings for these factors.
Comments on ISS Draft 2015 Policies
ISS will accept comments on its draft 2015 policies through 6:00 p.m. EDT on October 29, 2014. Comments can be submitted by sending them to email@example.com
ISS announcement of Draft 2015 Policies: http://www.issgovernance.com/policy-gateway/2015-benchmark-policy-consultation/
Equity Plan Scorecard (Equity Plan Proposal Policy): http://www.issgovernance.com/file/publications/equity-plan-scorecard-us.pdf
Independent Chair Shareholder Proposals (U.S.): http://www.issgovernance.com/file/publications/independent-chair-shareholder-proposals-us.pdf
On September 29, 2014, ISS released the results of its 2014-2015 Policy Survey. ISS highlighted several survey results related to compensation matters, including:
- Responses regarding pay for performance; and
- Equity plans.
Pay for Performance (P4P)
ISS highlighted the responses to several survey questions that dealt with P4P. ISS indicates that investors liked the idea of having CEO pay limits relative to company performance (27% of investors supported, while only 12% of issuers agreed). The magnitude of CEO pay was considered when evaluating pay practices by 24% of investors and 50% of issuers. Based on these responses, and the additional follow-up questions, ISS may propose a refinement to its P4P policy that does more to evaluate the CEO pay versus both absolute and relative measures. Currently, the ISS P4P policy compares a CEO’s pay to that of the median CEO pay of the ISS peer group for the company. So, we’ll have to see if this means ISS will add two components to the CEO pay evaluation–both a relative and absolute analysis–and how these will factor into the overall quantitative concern level.
ISS indicates in the survey results that it will be revising its equity plan policy for the 2015 proxy season (i.e., for shareholder meeting held on or after February 1, 2015). According to the narrative, ISS will implement a “balanced scorecard” approach for evaluating equity compensation plans that will evaluate the proposal under three categories:
- Plan Features; and
- Company Grant Practices.
ISS indicates that issuers supported a weighting of these categories as follows:
- 70% of investors supported weighting of 30% to 50% for Cost, with 40% being cited most often;
- 62% of investors supported weighting of 25% to 35% for Plan Features; and
- 64% of investors supported weighting of 20% to 35% for Grant Practices.
ISS has given no indication of what the final weighting will be, but they could be 40/30/30. Additionally, ISS did not necessarily explain what was included in each fo these broad categories. While I assume “Cost” refers to the ISS Cost calculated for an equity plan proposal using ISS’s ISSue Compass model, it is not absolutely certain that ISS won’t introduce some additional factors into the Cost category. The same holds true for the other categories, Plan Features and Grant Practices, which, conceivably, ISS already addresses in its proxy reports on equity plan proposals. However, there is no indication if there will be additional features (such as liberal share counting) that might cause a proposal to lose all the points under the Plan Features category. Likewise, while Grant Practices probably includes the ISS Burn Rate evaluation, it is by no means absolutely certain that is all it will include. It also isn’t clear to me what will happen if a company exceeds the ISS Burn Rate Cap but makes a public commitment, will that still be viewed as an override and cause a company to not lose points under the Grant Practices category?
The possibilities are numerous and, unfortunately, not touched upon in these survey results. However, they do indicate a significant reorganization to the ISS equity plan proposal policy and all companies should keep an eye out to see what the actual draft policy looks like and try to understand what differences exist from the current policy and how that might impact share requests.
A copy of the ISS Press Release announcing the survey results can be found here:
The actual 2014-2015 Policy Survey results can be found here:
Since ISS released its updated Burn Rate Caps table for 2014 on December 19, 2013, I have updated the Burn Rate Calculator to reflect the caps for 2014. The calculator will enable you to calculate your ISS burn rate and traditional run rate for 2014 with just a few inputs. The Burn Rate Calculator is kept under Reference Materials / Excel Tools and can be accessed at:
On November 21, 2013, ISS posted its final policy updates for the 2014 proxy season. While the updates were not as numerous as prior year’s updates, they were significant. The updates impact ISS’s vote recommendations on directors and say-on-pay (SOP) proposals.
Director Vote Recommendations
On the Director Vote Recommendations policy update, ISS basically implemented the policy it announced for 2014 as part of its 2013 policy updates, but with a few revisions to account for feedback it received. ISS will make director vote recommendations on a case-by-case basis after considering a number of factors. For 2014, if a board fails to act upon a shareholder proposal that received majority support during the prior year’s vote, ISS will consider:
- The board’s outreach efforts to shareholders in the wake of the vote disclosed in the proxy;
- The board’s rationale for the level of implementation of the proposal;
- The subject matter of the shareholder proposal;
- The level of support for and opposition to the proposal and the board’s/company’s engagement with shareholders;
- The continuation of the underlying issue as a voting item on the ballot either as a shareholder or management proposal; and
- Other factors, as appropriate.
Say-on-Pay Vote Recommendations
With regards to ISS quantitative tests to assess a company’s pay-for-performance (P4P) alignment with respect to developing the ISS vote recommendation on say-on-pay proposals, ISS only revised one of the three quantitative tests, Relative Degree of Alignment (RDA). ISS introduced RDA for in 2012. Under the old RDA formula, ISS took a weighted look at the company’s percentile rank of total shareholder return (TSR) and CEO pay against the ISS-selected peers on a 1- and 3-year basis. The old RDA formula weighted 1-year TSR and pay ranks at 40% and 3-year TSR and pay ranks at 60%, which effectively caused the most recent year to have a disproportionate impact on a company’s overall RDA score. For 2014, ISS is eliminating this weighted approach and will look solely to 3-year TSR and pay ranks. However, ISS will utilize an annualized 3-year TSR to determine TSR rank and 3-year average CEO pay to establish pay rank. This shift in the policy can hurt or help companies depending on where their recent performance has been relative to the prior two year’s performance.
ISS did not address whether the concern thresholds for the RDA test would remain the same or be revised for 2014. Given that ISS appears to be trying to grade companies on a curve, I would not be surprised to see the concerns levels for RDA be revised for 2014.
Effective Date for 2014 Policy Updates
ISS will apply the 2014 Policy Updates to shareholder meetings on or after February 1, 2014. ISS will release a complete set of updated policies in December 2013 (likely to include the Burn Rate Caps for the 2014 proxy season as well as other revisions, perhaps even updates to the RDA concern levels).
 Institutional Shareholder Services Inc., ISS’s U.S. Corporate Governance Policy, 2014 Updates, November 21, 2013, available at: http://www.issgovernance.com/policy/2014/policy_information