Say It Isn’t So! No Support for Share Authorizations That Last More Than 3 Years?

I recently received the following question and thought it worth sharing so folks can gain a little perspective on what is happening with equity plan proposals.

Q.

A public company will need to submit its stock plan for shareholder approval in the next few years.  This company has a substantial amount of stock allocated to its equity plans and has heard that RiskMetrics or a similar organization is now recommending a “no” vote on plans that have more than 2-3 years of stock allocated to them (based on current burn rates).

A.

Technically, neither RiskMetrics nor any of the other proxy advisory firms that I’m aware of have a proxy voting guideline that says they will not support a proposed plan if the shares will last beyond 2-3 years.  What the company probably heard was a statement by someone who’s been working with companies on equity plans with the RiskMetrics model that the share authorizations that are passing the model now typically would only last 2-3 years.  A subtle difference.

So a quick explanation may be in order.  RiskMetrics applies a number of policies (at least 7 at last count) when evaluating an equity plan proposal.  One of the more significant ones is its Shareholder Value Transfer (SVT) Policy which compares the total percent of company market value being transferred to employees by equity plans (in new shares requested, outstanding equity awards, and shares available under existing and continuing plans) against a company-specific allowable cap (which is generated using the RiskMetrics’ black-box formulas that look to the top quartile performers in the same GICS code group to develop a regression formula that then gets applied to every company in that GICS group).  If the percent of the market value (the cost) is equal to or below the company-specific allowable cap, the proposed plan will pass the SVT Policy.

It just so happens that given the large amount of overhang at many companies (outstanding equity awards that have not been exercised, in the case of stock options or SARs) coupled with the general decline in stock prices, the allowable caps being generated typically only permit companies to request 2-3 years’ worth of additional shares in a new plan proposal.  However, I’ve worked with a number of companies during the past 6 months where the RiskMetrics model would not even allow the companies to have 1 years’ worth of shares.