Dividend and Dividend Equivalent Plan Provisions

One important change in the 2017 ISS policy updates with respect to ISS’ Equity Plan Scorecard (EPSC) policy is with respect to dividend and dividend equivalent provisions.  Until the 2017 policy updates, ISS policy had been to recommend against equity plans that permitted the current payment of dividends or dividend equivalents on performance-based awards prior to the vesting of such awards.  The policy permitted companies to accrue such dividends and dividend equivalents and pay them out when the performance-based award vested.

Now under the 2017 ISS policies (effective for shareholder meetings occurring on or after February 1, 2017), ISS will include a new factor under the Plan Features portion of its EPSC policy that will look to see whether dividends or dividend equivalents can be paid on any award under the plan prior to the vesting of the underlying shares/award. Companies that do not prohibit the payment of dividend and dividend equivalents on all plan awards before the awards vest, will receive no points under this factor. Companies that prohibit the payment of dividends and dividend equivalents until the awards vest (and can allow for accrual of such dividends/dividend equivalents), will receive full points under this factor. Because the ISS policy permit for the accrual of dividends and payment when the award vests, many companies will view complying with this prohibition to gain the points under the EPSC policy will make sense, and may enable them to gain a few additional shares in their request everything else being equal.

ISS has not yet released its FAQs on the new EPSC policy, but I expect that the FAQs will indicate that the old dividend/dividend equivalent policy with respect to performance-based awards has been supplanted by the new EPSC factor and anything less than a complete prohibition of the payment of dividend/dividend equivalents on all unvested awards will not provide any points under the EPSC policy.

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