The NASPP Blog

ISS has released 104 additional FAQs on their corporate governance policy.  That’s 44 pages of FAQs but they still haven’t answered the question we all want to know, which is how many points each of the tests in the Equity plan Scorecard are worth. In fact, a lot of the FAQs provide information that I thought was already general knowledge or is so a granular as to be applicable to only a small number of companies (I think ISS must be using the term “frequently” very loosely).

For what it’s worth, here are a few highlights from the FAQs on equity plans.

Excluding Certain Grants from Burn Calculations

ISS will exclude assumed or substitute grants issued as a result of an acquisition as well as grants issued pursuant to a shareholder-approved repricing from the burn rate calculation if these grants are disclosed separately in the plan activity table in the company’s Form 10-K. This explains why I see companies do this.

Disclosing Performance Based Awards

ISS generally counts performance based awards in the burn rate calculation in the year they are earned, provided that the company has included disclosures sufficient for this purpose.  Separately report the number of performance awards granted and the number of performance awards earned when disclosing plan activity.  Be careful about this: if ISS can’t figure out your disclosures, they could end up counting performance awards twice.

Updating Disclosures After Year-End

If circumstances for your company have changed so significantly since the end of the year that you want ISS to base the SVT and (presumably) other tests on new numbers, ISS will do this if you update “ALL” of the disclosures required for their analysis in your proxy statement (or in another public filing that the proxy statement references). See the FAQs for list of disclosures that must be updated; it sounds like ISS is going to be a stickler about this (the use of all caps for the word “ALL” was their idea).

Fungible Share Reserves and SVT

ISS calculates the cost of plans with fungible share reserves by running the SVT test twice; once assuming all shares are issued as stock options/SARS and a second time assuming all shares are issued as full value awards.  The plan has to pass both tests.  It isn’t clear from the FAQ what happens if the plan passes both tests but scores better on one than the other (the SVT score is scaled; plans can earn partial credit for scores within a certain range).  Maybe the plan is assigned the lowest score.

Fungible Share Reserves and Plan Duration

The plan duration is calculated by adding the shares requested to the share available in the plan and dividing by the company’s burn rate multiplied by the company’s weighted shares outstanding.  For purposes of calculating the burn rate in this formula, for plans with a fungible share reserve, the FAQs state that ISS will apply the share multiplier in the plan to full value awards. Normally, ISS has its own multiplier that it uses for burn rate calculations that is based on the volatility of the company’s stock, so this is a little surprising to me.  I can only assume that it hurts companies in some way (not that I’m cynical); perhaps plan multipliers are typically lower than ISS’s multiplier, resulting in a lower burn rate, which would result in a longer plan duration.

Burn Rate Commitments

If you have made a burn rate commitment in the past three years, you aren’t off the hook. Even though these commitments are defunct under the scorecard, ISS expects companies to adhere to any commitments they’ve already made. If you don’t, they may take it out on your compensation committee members.

Fixing a Liberal Change-in-Control Definition

A liberal change-in-control definition is a deal-breaker; ISS will recommend against the plan regardless of how perfect the plan’s scorecard is.  A liberal change-in-control definition is one that provides for single-trigger acceleration of vesting upon a trigger that could occur even if the deal doesn’t close (e.g., shareholder approval of the deal) or other triggers that are suspect (e.g., acquisition of a low percentage of the company’s common stock).

But there’s good news—this is fixable.  You can modify the CIC provision in your plan (the FAQs provide suggested language). ISS is good with this, even if the modification only applies to new awards.

Other Matters

Most of the FAQs (75 of the 104 questions) relate to Say-on-Pay votes and other corporate governance considerations, rather than directly addressing equity plan matters. These are beyond the scope of things I care about, so I didn’t read them.  It’s possible they are more scintillating than the FAQs on equity plan matters.

– Barbara