On December 7, 2021, ISS announced the release of its 2022 Policy updates (see Press Release). ISS’ 2022 Policy Updates generally take effect for shareholder meetings on and after February 1, 2022. The full details of these policy updates can be found at ISS’ policy gateway: https://www.issgovernance.com/policy-gateway/upcoming-policies/
For U.S. companies, there are no changes in ISS’ compensation policies for 2022. However, ISS announced it will change one of its compensation policies starting on and after February 1, 2023. Starting in 2023, ISS will revise its burn rate methodology used in analyzing equity plan proposals under its Equity Plan Scorecard policy to start using an average value of share awards granted rather than an average number of share awards granted.ISS refers to this new calculation as its Value-Adjusted Burn Rate. Value-Adjusted Burn Rate will be benchmarked against the greater of:
- an industry-specific threshold based on three-year burn rates within the company’s GICS group segmented by S&P 500, Russell 3000 index (less S&P 500) and non-Russell 3000 index; and
- a de minimis threshold established separately for each of the S&P 500, the Russell 3000 index less S&P 500, and the non-Russell 3000 index.
ISS defines “Value-Adjusted Burn Rate” as ((# of options x option’s dollar value using a Black-Scholes model) + (# of full-value awards x stock price)) / (Weighted average common shares x stock price)
ISS did not offer further details on this methodology, so we don’t know for certain whether ISS will use the stock price for each year when determining the value or the most recent lock-in date’s 200-day average stock price as the stock price in the calculations. In the rationale for the change, ISS indicates that this change is possible now that it has improved its data collection and technical resources, but ISS does not offer full details on the details for these calculations. Hopefully, ISS will offer additional guidance in its Equity Plan FAQs for 2023 that give full details on how it will calculate the option values for options granted each year during the three-year burn rate period and what stock price will be used in valuing full-value awards in each of the three one-year periods, as well as what stock price will determine the ‘market value’ of the company each year, i.e., weighted average common shares outstanding x stock price.