ISS

Maximum Tax Withholding and Liberal Share Counting – NOT So Deadly A Combination – UPDATE

Note: This is an update to my post of December 19, 2106  (available here) to reflect information I learned from a discussion with ISS Research personnel on January 4, 2017. Changes have been highlighted using italics.

This past week I learned that ISS will be issuing a set of equity compensation plan FAQs that will address a new combination of share provisions in equity plans: a plan having both liberal share counting (including the adding back of shares withheld to satisfy taxes) and permitting the withholding of shares at the maximum tax rate (as the change in accounting rules now permits).

As ISS stated in its proxy report for Coach, Inc., “Moving to a maximum withholding rate would be problematic for a plan with liberal share recycling, as this would exacerbate concerns regarding diminished transparency of share usage.” [emphasis added]

So what is the consequence of this being classified as a problematic?  Well, under ISS’s Equity Plan Scorecard policy, there are certain overriding features that would cause ISS to recommend against a plan proposal.  These overriding features include:

  • Ability to reprice underwater equity awards without shareholder approval
  • Ability to conduct a cash buyout of underwater equity awards without shareholder approval
  • Liberal Change-In-Control Vesting Risk (e.g., a CIC definition that could be triggered short of consummation of the deal)
  • Equity-related pay-for-performance (P4P) disconnect, i.e., ISS finds a P4P disconnect to exist and it is mainly attributed to equity awards to the CEO and the proposed plan permits the CEO to participate
  • Equity-related problematic pay practices, which include:

The above issues act as complete overrides.  If the plan has one of these issues/features then regardless of whether the plan scores above the ISS threshold (currently 53 points), ISS will recommend against the plan.

ISS issued new FAQs regarding equity compensation plans on December 19, 2016.  FAQ #32 deals with the issue of withholding at the maximum tax rate coupled with liberal share counting which permits shares withheld to be added back to the plan’s share authorization. The FAQ does not flat out state that such a combination of provisions would be viewed as a problematic pay practice that would cause ISS to recommend against a plan proposal. The full set of the Equity Compensation Plan FAQs can be found at: https://www.issgovernance.com/file/policy/1_u.s.-equity-compensation-plans-faq-dec-2016.pdfAt that time, after discussions with ISS Corporate Solutions, I believed that ISS Research would view such a combination of features as warranting an override and causing ISS Research to recommend against a proposed plan with both such features.

Since my initial blog post, ISS Research clarified that “amending a plan to provide for withholding above the minimum tax rate will not be considered an “equity-related problematic pay practice” egregious factor that would trigger the overriding factors policy — even if the plan in question has a liberal share recycling (LSR) feature.” The language from the Coach ISS Report was intended to convey that ISS would view amending a plan to the maximum withholding rate as a negative amendment if that plan had a LSR (if the plan did not have a LSR, then such an amendment would be viewed as administrative in nature and neutral for shareholders). While such an amendment would not be an overriding factor, it would be a factor considered under the policy framework applicable to equity plan amendments proposals (see FAQ #28 for a description of that policy framework: https://www.issgovernance.com/file/policy/1_u.s.-equity-compensation-plans-faq-dec-2016.pdf)

This is good news for companies putting equity plans to shareholders that have a LSR and want to increase the withholding rate to the maximum statutory rate, as it means that this combination of features alone will not cause ISS to recommend against the proposed plan.  Rather, the proposed plan will be evaluated using the Equity Plan Scorecard policy, with significant weight placed on whether the proposed plan scores above the threshold level of points. If a plan does, and the other plan amendments are not viewed negatively and no other ISS policy is implicated (such as the pay for performance evaluation), a company should then expect ISS Research to issue a favorable vote recommendation.

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Yule Logs and Burn Rates!

It is that time of year again when folks are either frantically trying to finish things up before the holidays hit or year-end.  To add to the pandemonium (or usual stress levels this time of year), ISS this morning released its Burn Rate Benchmarks for 2017.  These benchmark rates will apply to companies with meeting on or after February 1, 2017.

As in the past, below is a 2017 Burn Rate Calculator that I programmed to help folks figure out what their Burn Rate might be under these new benchmarks. You will have to have an estimate of your volatility and information about your equity grants (or, for performance-based awards, shares earned, assuming your disclosures are up to ISS-snuff – see ISS’ Equity Compensation Plan FAQs #19) over the past 3 years.

Exequity_Burn_Rate_Calculator_2017

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Maximum Tax Withholding and Liberal Share Counting – A Deadly Combination

Note: The conclusions reached in this post are no longer valid given a clarification from ISS Research. See my blog post of January 5, 2017, Maximum Tax Withholding and Liberal Share Counting – NOT So Deadly A Combination – UPDATE,  for full details.

This past week I learned that ISS will be issuing a set of equity compensation plan FAQs that will address a new combination of share provisions in equity plans: a plan having both liberal share counting (including the adding back of shares withheld to satisfy taxes) and permitting the withholding of shares at the maximum tax rate (as the change in accounting rules now permits).

As ISS stated in its proxy report for Coach, Inc., “Moving to a maximum withholding rate would be problematic for a plan with liberal share recycling, as this would exacerbate concerns regarding diminished transparency of share usage.” [emphasis added]  So what is the consequence of this being classified as a problematic?  Well, under ISS’s Equity Plan Scorecard policy, there are certain overriding features that would cause ISS to recommend against a plan proposal.  These overriding features include:

  • Ability to reprice underwater equity awards without shareholder approval
  • Ability to conduct a cash buyout of underwater equity awards without shareholder approval
  • Liberal Change-In-Control Vesting Risk (e.g., a CIC definition that could be triggered short of consummation of the deal)
  • Equity-related pay-for-performance (P4P) disconnect, i.e., ISS finds a P4P disconnect to exist and it is mainly attributed to equity awards to the CEO and the proposed plan permits the CEO to participate
  • Equity-related problematic pay practices, which include:
    • Excise tax gross-ups in the plan
    • Reload stock options permitted by the plan
    • Ability to transfer awards for value to a third-party (see Caution on Transferable Equity Plan Provisions), and now
    • Ability to withhold taxes at the maximum tax withholding rate coupled with liberal share counting which would add back shares withheld at the maximum tax rate to the plan’s share authorization

The odd thing is that it is a complete override.  If the plan has the ability to withhold at the maximum tax rate and liberal share counting to add back shares withheld at the maximum tax rate, then regardless of whether the plan scores above the ISS threshold (currently 53 points), ISS will recommend against the plan.

So everyone that thought they could simply amend their equity plans to take advantage of the ability to withhold at the maximum tax rate and gain a little benefit from their liberal share counting provision (which would add back those shares to the plan’s share authorization) are in for a shock.  Right now, without seeing what the specific ISS FAQs say, there appears to be only two alternatives for companies to address this issue:

  • Completely remove the liberal share counting with respect to adding back shares withheld for taxes, or, slightly better,
  • Revise the liberal share counting provision to only add back shares withheld to satisfy taxes but only up to the minimum tax withholding rate– the plan could still permit withholding at the higher rate, but the shares withheld in excess of the minimum tax withholding rate could not be added back to the share authorization.

UPDATE: ISS issued its new FAQs regarding equity compensation plans this morning (December 19, 2016).  FAQ #32 deals with the issue of withholding at the maximum tax rate coupled with liberal share counting which permits shares withheld to be added back to the plan’s share authorization. The FAQ confirms the details provided above, but does not flat out state that such a combination of provisions would be viewed as a problematic pay practice that would cause ISS to recommend against a plan proposal. But, when I take FAQ #32 along with the ISS statement from its Coach proxy report (along with comments I have received from ISS Corporate Solutions),  I come to the consluion that this combination will cause ISS to recommend against a plan proposal. Hopefully ISS will clarify this portion of its Equity Plan Sscorecard policy in an update to the policies and/or the Equity Compensation FAQs. The full set of the Equity Compensation Plan FAQs can be found at: https://www.issgovernance.com/file/policy/1_u.s.-equity-compensation-plans-faq-dec-2016.pdf

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ISS Posts Peer Group Selection FAQs

ISS recently posted its Peer Group Selection facts on its Policy Gateway web page (https://www.issgovernance.com/policy-gateway/2017-policy-information/). These FAQs deal with questions regarding how ISS goes about establishing its peer groups used in evaluating companies, how a company’s own peer group is factored into the construction of the ISS peer group among other issues.

The full set of FAQs can be downloaded at: https://www.issgovernance.com/file/policy/uspeergroupfaq_nov2016.pdf

 

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ISS Peer Group Submission Window Open Until 8 pm Eastern on Dec. 9

ISS announced that the window period for public companies to submit updates for their peer groups is open and will close at 8 pm Eastern on December 9, 2016.

The peer group submissions are now handled through ISS Corporate Solutions’ Governance Analytics website.  Only companies (issuers) may submit their peer groups to ISS.

What peer companies is ISS seeking?  Those that were used to set pay that is required to be covered in the next proxy to be filed. For example, for calendar-year companies, their 2017 proxies will cover 2016 pay and pay decisions. Therefore, ISS is seeking the peer group used for setting/considering 2016 pay, not the peer group used for setting/considering 2017 pay (which would be required to be disclosed in the 2018 proxy). If a company has not made any changes to its 2016 peer group compared to its 2015 peer group, it does not have to submit anything to ISS.  If a company has made changes to its 2016 peer group, it should seriously consider submitting this peer group to ISS during the window period to ensure that the 2017 ISS proxy report accurately reflects the company’s 2016 peer group as disclosed in the proxy.  Failure to submit an updated peer group for 2016 will mean that ISS will likely use the company’s 2015 peer group in its 2017 proxy report.

For more information about the peer group submission process, companies can visit this ISS website:

https://www.issgovernance.com/company-peer-group-feedback

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