Equity Plan Scorecard Updates
Institutional Shareholder Services (ISS) implemented the Equity Plan Scorecard (“EPSC”) last year as a new means of evaluating and recommending votes in favor of or against equity plans submitted for shareholder approval. ISS evaluates a proposed equity plan under a number of different factors and assigns a score for each component, weighting components differently in accordance with its methodology. Plans that receive at least 53 points out of 100 possible will receive “for” recommendations.
For 2016, ISS has made certain adjustments to the EPSC, though the basic methodology remains unchanged.
“Special Cases” model: ISS has renamed the “IPO” model “Special Cases,” and has expanded the category to analyze all companies with fewer than three years of disclosed equity grant data, which will generally include bankruptcy emergent companies in addition to IPOs. ISS has also added a separate Special Cases model which will apply to Russell 3000/S&P 500 companies.
CIC Vesting: ISS has also renamed the “Automatic Single-Trigger Vesting” plan feature factor “CIC Vesting,” and has adjusted the possible scoring levels. Rather than the prior binary system where full points were awarded if the plan did not allow for automatic single-trigger vesting following a change in control, and no points were awarded if the plan did include such a provision, the revised provisions allow for the award of full, half or no points. Following the adjustments, full points are awarded if the plan provides for (i) with respect to time-based awards, either no accelerated vesting or accelerated vesting only if awards are not assumed/converted, and (ii) with respect to performance-based awards, either forfeiture or termination of outstanding awards, or vesting based on actual performance as of the change in control and/or on a pro-rata basis for time elapsed in ongoing performance period or periods. No points will be awarded if the plan provides for automatic accelerated vesting of time-based awards or payout of performance-based awards above target level, and half points are awarded if the plan provides for any other vesting terms related to a change in control.
Post-Vesting/Exercise Holding Period: The revised EPSC has extended the holding period required for full points from 12 months to 36 months, or until termination of employment. Half points are awarded for a holding period of only 12 months.
ISS also adjusted certain factor scores, although the maximum of 100 total points and the passing threshold of 53 points remains unchanged.
Peer Group Changes Since Last Year’s Proxy Statement? Notify ISS Now
Starting on Tuesday, November 24th, companies that have modified their self-selected executive compensation benchmarking peer group since last year’s proxy statement will have the opportunity to inform ISS of those changes. Each year, ISS constructs a peer group for each subject company for purposes of its quantitative pay-for-performance evaluations. That peer group is constructed based on the subject company’s self-selected peer group, as disclosed in its proxy statement, with certain additions or subtractions made by ISS in accordance with its published methodology. To the extent a company has made changes to that peer group since it released last year’s proxy statement, informing ISS of those changes now will ensure that ISS has updated data for use in its analysis and vote recommendations.
Russell 3000 and Russell MicroCap companies with annual meetings slated to be held between February 1 and September 15, 2016 may inform ISS of changes to their peer group by clicking on this link to begin the process. Companies submitting a new peer group will also be required to follow up with a confirmation letter to ISS on company letterhead, as further detailed on the ISS website.
The submission window will close on December 11, 2015.
Proxy Access: Still To Come
ISS generally supports shareholder and management proposals seeking a proxy access right for shareholders who have held at least 3% of the shares for at least 3 years to nominate directors representing 25% of the board, and it recommended votes in favor of all such proposals last year. ISS’s recently-released 2016 Policy Update indicates that this fundamental approach remains unchanged, but companies who have been waiting for further guidance about whether certain provisions of adopted proxy access bylaws will be considered overly restrictive will have to wait a little longer. ISS indicates that FAQs to be released in December will contain its views on overly restrictive bylaws. In its annual policy survey released in August, ISS asked if the inclusion of any of the following provisions in a bylaw adopted following an approved shareholder proxy access proposal should be considered overly restrictive such that its inclusion would warrant a “withhold” or “against” vote for directors:
- Ownership threshold above 5%
- Ownership duration longer than 3 years
- Aggregate limitation of fewer than 20 shareholders
- Cap on nominees set at less than 20% of the existing board
- More restrictive advance notice requirements
- Information disclosures that are more extensive than those required of the company’s nominees, or by the SEC or relevant exchanges
- Renomination restrictions in the event a proxy access nominee fails to receive a stipulated level of support or withdraws his/her nomination
- Restrictions on compensation of proxy access nominees by nominating shareholders
Companies can expect confirmation in December’s FAQs about which of these factors (and/or any others) would be viewed as overly restrictive by ISS and perhaps result in negative recommendations for directors.