Another Burn Rate Commitment RiskMetrics Should Consider

Well, as expected, RiskMetrics Research Group is being a little flexible when it comes to companies’ burn rate commitments for 2010 (for the full details, read this blog entry). But, as I indicated, given the speculative nature of two of the new allowable options, I don’t think many companies will easily undertake such commitments.

After giving this some thought, it seems to me that what RiskMetrics needs to do is provide an interim commitment equal to their current 3-year average burn rate or the applicable cap for their GICS under the 2010 caps, which would apply until either (1) the 2011 Burn Rate caps are typically produced and released, or (2) the 2011 Burn Rates and caps are produced on an accelerated basis, say by June 30, 2010, or September 1, 2010. This would allow companies to commit to maintaining the burn rate at a reasonable level for a short period of time (no more than 1 year) until such time that RiskMetrics can pull, clean and assemble the 2011 Burn Rate Data.  At that point, companies could then commit to either (1) maintaining their Burn Rate for the remaining portion of the 3 year period to the new 2011 Burn Rate cap, or (2) one of the other alternatives already set forth. This would enable companies to be in a better position to evaluate what they were committing to before obligating themselves.  If not, and companies need RiskMetrics approval, I foresee a greater number of companies utilizing cash-settled equity vehicles such as cash-settled SARs and cash-settled RSUs, which don’t count towards burn rate as calculated by RiskMetrics.

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Changes to RiskMetrics Group’s Burn Rate Commitment Policy

RiskMetrics Group just announced that its Research Group is allowing companies some flexibility in their burn rate commitments for 2010. Companies that have a 3-year average burn rate that exceeds their GICS industry group cap must either publicly commit to maintaining their burn rate for the next three years at the burn rate cap for their GICS industry group as determined by RiskMetrics for that year or face a negative vote recommendation on their equity compensation plan proposals from RiskMetrics.

Some of the approaches that RiskMetrics’ Research Group has found acceptable include:

  1. Committing to the average between the 2009 and the 2010 RiskMetrics burn rate caps,
  2. Committing to the average between the 2010 and the 2011 RiskMetrics burn rate caps, and
  3. Committing to the 2010 cap for one year, the 2011 cap for one year, and the 2012 cap for the last year.

As a result of the significant declines in the RiskMetrics Burn Rate Caps for 2010 (discussed here), RiskMetrics had little choice other than to work with companies on this issue.  I’ve spoken to companies that were willing to let RiskMetrics recommend against their plans as a result of this policy and would then discuss with their shareholders how inflexible RiskMetrics was being on this issue given the dramatic shift in burn rate caps. It sounds like RiskMetrics’ Research Group heard this message and decided that some flexibility was warranted.

I think this will make the commitment a little easier for companies to swallow, but the last two options do present their own concerns. Yes, equity grants (# of awards granted) probably increased on average for 2009.  Yes, that data was not included in the burn rate caps that RiskMetrics came out with for 2010. Yes, when those 2009 grants get factored into the 2011 burn rate caps, the caps will likely rise from where they sit for 2010.  But by how much and to where exactly?  Good questions, with not very good answers at this time. Hence, the last two options are a little less certain for companies but offer an opportunity for an increase in the rate a company commits to, but the exact extent of it will be unknown until subsequent years, but they should be better than simply committing to the 2010 burn rate caps.

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NASPP Chicago Presentation – RiskMetrics’ 2010 Policy Updates and Implications

This presentation was used by Ed at a meeting of the National Association of Stock Plan Professionals’ Chicago Chapter on December 8, 2009.

Ed looks at the possible implications from the changes to the way RiskMetrics determines stock price and volatility as well as illustrates the significant changes for maximum burn rates under RiskMetrics’ Burn Rate Table for Russell 3000 companies.

Presentation (PDF click HERE)

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Launching 9/8/2009!

Thanks for visiting!

Only a few more days until I officially launch this blog.  Until then, feel free to wander around, but keep in mind that things are still “under construction.” Also, please take a look at my presentation on implementing new equity compensation plans and plan amendments (link below):

View more presentations from EHauder.

If you have any suggestions on how this site could be useful to folks interested in equity compensation plans, please let me know.

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Best regards,
Ed Hauder

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