The NASPP Blog

December 15, 2009

RiskMetrics 2010 Policy Updates

This is my last blog of the year, so I thought I’d end on a upbeat note by discussing the RiskMetrics Corporate Governance Policy Updates for 2010.

RiskMetrics 2010 Policy Updates
The RiskMetrics Corporate Governance Policy for 2010 doesn’t really have much that is earth-shattering in terms of stock compensation, but I came up with a few tidbits to discuss here (you try to come up with blog topics every week–it’s harder than you think). Read more about the policy update in our alert “RiskMetrics 2010 Corporate Governance Policy Updates.”

Burn Rates

One policy that RiskMetrics changes every year is the acceptable burn rates for stock plans. There are a couple of exceptions, but, in general, if a company’s burn rate exceeds the greater of the acceptable burn rate for its industry or 2% of weighted common shares outstanding, RiskMetrics recommends that shareholders vote against the company’s stock plan.

This year’s acceptable burn rates are down in almost all industries. This was surprising to me, given what happened with the market last year. As far as I can tell, RiskMetrics’ acceptable burn rates are based on actual burn rates for each industry–the acceptable rate is the mean for the industry plus one standard deviation. We posted numerous alerts–too many to mention them all here, but they are posted in our Plan Design Portal–on how lower stock prices made it difficult for companies to maintain burn rates during this past year.  I guess companies were able to control their burn rates–maybe too well–because the rates are lower for next year.

If you weren’t worried about your burn rate before, you might well be now. Luckily we offered a great workshop on managing burn rates and share reserves at this years’ NASPP Conference–What To Do When the Well Runs Dry: Grant Guidelines in a Volatile Market.  Members can purchase the audio for just $65 and listen to it today.

Volatility

Readers will recall from last year’s alert that in 2009 RiskMetrics switched from a 200-day volatility calculation to a 400-day calculation, due to high market volatility. They have now switched back to the 200-day volatility, which is used in their burn rate and Shareholder Value Transfer analysis of stock plans.

Repricings

Public companies will be able to include fewer underwater options in exchange programs under the updated policy. In an FAQ issued with the policy updates, RiskMetrics says that, as a general rule, the exercise price of options eligible for exchange should be higher than the greater of:

  1. the 52-week high, or
  2. 1.5 times the current stock price (this is the new part of the policy, previously it was just the 52-week high).

They did indicate that a company’s specific circumstances–such as the timing of the exchange program and a sustained price decline beyond management’s control–are taken into consideration in their evaluation of exchange programs.

Underwater Options Voluntarily Surrendered by Execs

I’m not sure if this is new this year, but the FAQ also says that RiskMetrics might consider allowing executives to voluntarily surrender their underwater options as a “problematic pay practice” if the surrendered shares return to the plan. We blogged about this practice earlier this year–see “Newsworthy: 10b5-1 Plans and Getting Shareholder Approval.” The problem, as RiskMetrics sees it, is that those shares could later be granted to the same execs at a lower price, essentially “repricing” the options without shareholder approval (in RiskMetrics’ opinion–voluntary surrender of underwater options generally wouldn’t be viewed as a repricing for accounting, tax, or legal purposes unless there is an actual agreement to grant new awards in exchange for the cancellation).

I don’t think it would be sufficient to add the shares back to the plan with a promise that the shares won’t be regranted to execs. Unless the plan were just about out of shares altogether, using the influx of new shares for the rank-and-file just frees up the rest of the share reserve to be used for execs–not exactly what RiskMetrics is looking for with this policy.

“Problematic pay practices” can cause RiskMetrics to recommend that shareholders vote against management’s say-on-pay proposals, compensation committee members, or stock plans.

Happy Holidays
As I mentioned, this is my last blog until the new year. But don’t worry, you won’t have to go without your NASPP blog fix–Rachel Murillo and Robyn Shutak will be blogging through the holiday season, although they will only post one blog per week to encourage our readers to spend time with their family and friends. I’ve enjoyed writing the blog and I hope you enjoy reading it. Happy holidays and see in you 2010!

NASPP “To Do” List
One last To-Do List before we head into the new year: 

– Barbara