First off, I must say that I was thrilled to see so many of you last week in sunny San Diego (and boy, was it sunny in a perfect kind of way) at our 23rd Annual Conference. The Conference was a wild success and our members helped make it so. Shortly before the Conference, several news outlets carried the story of Twitter’s CEO returning a significant number of his own shares of stock to the Company for use in employee equity programs. There wasn’t time to cover it then, but I wanted to take a moment to share the story now.
In the latter part of October, Twitter CEO Jack Dorsey tweeted (of course!) that he was giving one-third (wow!) of his own shares of Twitter stock, 1% of the Company, to the organization for use in the Company’s equity pool. The value of those shares is estimated to be $200 million. While the return of stock to a company from a CEO or founder is not unprecedented, the size of Dorsey’s stock contribution marks new territory. I am hard pressed to find a CEO that has surpassed that figure.
A Way to Avoid Dilution?
Mr. Dorsey’s gift seems to be a win on multiple fronts. It’s bound to boost employee morale, since the shares are going straight to the Company’s equity pool and will be used to incentivize employees. Shareholders are likely to be happy, since the shares will reward employees without affecting the Company’s dilution figures. And, CEO Dorsey seems excited about it, tweeting “I’d rather have a smaller part of something big than a bigger part of something small.” It can’t hurt that his other company, Square, recently filed for their IPO. Forbes highlights that in an earlier, similar move, Dorsey also returned 20% of his stake in Square to employees as well.
A New Trend?
The question now becomes, will other CEOs follow suit? According to the Washington Post, Dorsey isn’t the first CEO to give shares back to employees. In their coverage of this story, they shared that “The chief executive of a Turkish food delivery company paid out $27 million to 114 employees this summer after selling the firm. In July, Bobby Frist, the nephew of former U.S. Senate Majority Leader Bill Frist, gave $1.5 million of his own shares to 600 employees of the Nashville-based health care company he runs. Dan Price, the founder of Seattle-based Gravity Payments, made headlines for using his $1 million salary (as well as company profits) to fund raises for every employee in his company to at least $70,000. In 2013, Lenovo CEO Yang Yuanqing gave $3.25 million of his $4.23 million bonus to hourly employees.” The noticeable difference in Twitter’s case is the size of the gift – shares valued at $200 million – a huge step above the other recorded cases. I’m guessing that a gift of Dorsey’s magnitude is probably not going to start a wave of similar actions (though it certainly would be nice if it did). For one thing, not all CEOs have such a wealth of stock from which to pull such a sizable donation. Founder CEOs (or simply founders) may have the advantage here, as they are often likely to have a larger stake in the company than subsequent CEOs – which makes them more able to give away a large number of shares without making much of a dent in their own personal fortune. CEO Dorsey is a billionaire, so this is a smaller drop in the bucket for him. However, the gift is not likely to be small potatoes to the employees who will benefit from receiving stock awards.
Time will tell if Mr. Dorsey’s generosity and smart thinking (giving employees more equity without increasing dilution) inspires other founders or CEOs to take similar action.
Here are the results to my random questions in last week’s blog entry.
Terminated Employees & Black-out Periods
Two-thirds of respondents (37 out of 54) do not subject terminated employees to black-out periods.
For those respondents that do subject employees to black-out periods, the majority (11 out 16 respondents), don’t make any accommodation for them. The terminated employees are simply expected to finance their exercises in a way that doesn’t involve an open market sale.
Two respondents noted in the comments that they would automatically exercise the options if they aren’t exercised by the end of the exercise period. One person noted that their black-out period is shorter than their post-termination exercise period, so this hasn’t been a concern for them.
Evaluating Stock Plan Administration
The majority of respondents don’t have any specific metrics that they use to evaluate the performance of the stock plan administration team (which probably explains why no one has responded to this question in the NASPP Discussion Forum).
Of the metrics suggested in the question, the most popular choices were:
Accuracy of reports produced for tax/financial purposes (7 respondents)
Total time spend on various tasks (e.g., employee inquiries, processing transactions, reporting) (4 respondents)
One respondent indicated that they are evaluated on their average time to resolve employee inquires/escalations and one respondent indicated that they are evaluated on the processing and direct costs per participant.
Some of the metrics suggested in the other comments were:
Timeliness and accuracy of all transactions, participant communications, and tax/financial reporting
Demonstration of increasing knowledge and ability to take on more complex tasks
Quality of response to employee inquiries/escalations
ESPP participation
Responsiveness to plan managers and various company contacts in addition to participants
Personally, I think that having at least a rough idea of how much time you spend on various tasks is an important and valuable metric to be aware of. It can be very helpful when trying to prioritize various initiatives and projects. For example, if tax reporting takes a huge amount of time compared to everything else you are doing at year-end, that might be an indication that you need to invest in improving your tax reporting processes.
I’m also a big fan of the ESPP participation metric, but only if you have the proper tools and resources to impact this (e.g., education budget, attractive plan, etc.)
Grant Conversion
Close to 90% (38 out of 43 respondents) don’t convert grant values into foreign currency before determining grant sizes for non-US participants.
Now that the proxy season is winding down and I’ve had the chance to attend a couple of presentations on the new ISS Equity Plan Scorecard, I thought it would be a good time to provide an update on how the scorecard has worked out so far.
Most Plans Passed
Very few plans failed to obtain a favorable rating under the new EPSC. But I’m not sure this should come as a surprise. Of course, most plans passed; that’s why companies pay for the ISS Compass model and hire consultants certified in the use of this model—to ensure that they don’t undertake the expense of submitting a plan to a shareholder vote and not get the votes they need to pass. If a favorable ISS recommendation is key to ensuring the plan is approved, companies are going to do what it takes to get a favorable recommendation. But, how much did companies have to reduce their share requests (and how many of the scorecard factors did companies have to incorporate into their plans) to get favorable recommendations?
It’s Only Going to Get Harder
One thing that’s been clear from the beginning is that ISS is likely to tweak both the pass threshold and the points allotted to each test in the EPSC from year-to-year (this is how they operate scorecards they have created for other purposes). Ken Lockett of AST, Laura Wanlass of AON Hewitt, Scott McCloskey of Lincoln Financial, and Melinda Hanzel of D.F. King presented on the EPSC at the Philadephia/DC/VA/MD joint half-day meeting in June. Given that so few companies failed this year, they noted that they expect the EPSC to be harder to pass next year.
Negative Points Are Possible
Laura noted that on some of the tests, including the SVT, a company can score so poorly that the plan is awarded negative points. The Corporate Executive noted, in its January-February 2015 issue, that with the SVT worth 45% of the score for most companies, it is virtually impossible to achieve a favorable recommendation without earning at least some points for this test. Now it turns out that the plan could score so poorly on the SVT that it is actually impossible to make up enough points the elsewhere in the scorecard to pass.
Where companies need to make up points under the scorecard, there are several provisions they can remove from (e.g., liberal share recycling, discretion to accelerate vesting) or add to (e.g., post-vesting holding periods, minimum vesting requirement) their plan to earn additional points.
I’ve heard from several practitioners that post-vest holding periods are worth more than expected under the scorecard. This is a nice break, since post-vest holding requirements aren’t necessarily a takeaway for execs when the company already has stock ownership guidelines in place (and what public company doesn’t have these already). To learn more about post-vesting holding periods, check out our podcast with Terry Adamson or our March webcast.
Peter Kimball of ISS Corporate Services presented on the scorecard at the Phoenix NASPP chapter meeting in May and noted that many companies were reluctant to remove discretion to accelerate vesting or to stipulate a minimum vesting period under the plan. I can understand this—there are perfectly legitimate reasons to accelerate vesting. And minimum vesting periods are a disaster waiting to happen. I’ve already encountered one company that had a minimum vesting requirement, and then granted RSUs that vested in under that time frame and did not discover the error until after the RSUs had vested and been paid out. I’m not sure how you fix that mistake; the lawyers I asked about it did not want to touch that question with a ten-foot pole (or without an attorney-client relationship to protect everyone involved).
Learn More at the NASPP Conference
The session “Demystifying the ISS Equity Plan Scorecard” at the 23rd Annual NASPP Conference will provide a full analysis of how companies fared under the scorecard this year and includes a case study from one company that has already navigated it. The Conference will be held in San Diego from October 27 to 30; register by August 7 to save!
How many grant dates can one option have? The answer, as it turns out, is more than you might think. I was recently contacted by a reporter who was looking at the proxy disclosures for a public company and was convinced that the company was doing something dodgy with respect to a performance option granted to the CEO. The option was not reported in the SCT for the year in which it was granted, even though the company discussed the award in some detail in the CD&A, had reported the grant on a Form 4, and the option price was equal to the FMV on the date the board approved the grant. The reporter was convinced this was some clever new backdating scheme, or some way of getting around some sort of limit on the number of shares that could be granted (either the per-person limit in the plan for 162(m) purposes or the aggregate shares allocated to the plan).
Bifurcated Grant Dates
When I read through the proxy disclosures, I could see why the reporter was confused. The problem was that the option had several future performance periods and the compensation committee wasn’t planning to set the performance goals until the start of each period. The first performance period didn’t start until the following year.
Under ASC 718 the key terms of an award have to be mutually understood by both parties (company and award recipient) for the grant date to occur. I’m not sure why the standard requires this. I reviewed the “Basis for Conclusions” in FAS 123(R) and the FASB essentially said “because that’s the way we’ve always done it.” I’m paraphrasing—they didn’t actually say that, but that was the gist of it. Read it for yourself: paragraph B49 (in the original standard, the “Basis for Conclusions” wasn’t ported over to the Codification system).
The performance goals are most certainly a key metric. So even though the option was granted for purposes of Section 409A and any other tax purposes (the general standard to establish a grant date under the tax code is merely that the corporate action necessary to effect the grant, i.e., board approval, be completed), the option did not yet have a grant date for accounting purposes.
And the SCT looks to ASC 718 for purposes of determining the value of the option that should be reported therein. Without a grant date yet for ASC 718 purposes, the option also isn’t considered granted for purposes of the SCT. Thus, the company was right to discuss the grant in the CD&A but not report it in the SCT. (The company did explain why the grant wasn’t reported in the SCT and the explanation made perfect sense to me, but I spend an excessive amount of time thinking about accounting for stock compensation. To a layperson, who presumably has other things to do with his/her time, I could see how it was confusing and suspicious).
Trifurcated Grant Dates?
The option vested based on goals other than stock price targets, so it is interesting that the company chose to report the option on a Form 4 at the time the grant was approved by the compensation committee. Where a performance award (option or RSU) is subject to performance conditions other than a stock price target, the grant date for Section 16 purposes doesn’t occur until the performance goals are met. So the company could have waited until the options vested to file the Form 4.
If you are keeping score, that’s three different grant dates for one option:
Purpose
Grant Date
1. Tax
Approval date
2. Accounting / SCT
Date goals are determined
3. Form 4
Date goals are met
If the FASB is looking for other areas to simplify ASC 718, the determination of grant date is just about at the top of my list. While they are at it, it might nice if the SEC would take another look at the Form 4 reporting requirements, because I’m pretty sure just about everyone (other than Peter Romeo and Alan Dye, of course) is confused about them (I had to look them up).
Free lunches (not too mention breakfasts, dinners, and snacks), open offices, games and nap rooms, shuttle services for commuting employees—we all know Silicon Valley operates a little differently than the rest of corporate America. But just how different is the Valley when it comes to stock compensation?
Last week, I attended a presentation hosted by the Silicon Valley NASPP chapter on how Silicon Valley differs from the rest of the United States when it comes to stock compensation. Tara Tays of Deloitte Consulting ran special northern California cuts of the results of the NASPP’s 2013 and 2014 Domestic Stock Plan Design and Administration Surveys and compared them to the national results. She was joined by Sue Berry of Infoblox and Patti Hoffman-Friedes of Seagate Technology, who provided color commentary.
As it turns out, not as different as you might think. In many areas, the northern CA data aligned fairly closely with the national data. These areas included the use of full value and performance awards, overhang levels, timing of grants, termination and forfeiture provisions, and performance metrics. But here are five areas where Silicon Valley does its own thing:
Burn Rates
This probably isn’t a big surprise to anyone, but burn rates are higher in Silicon Valley. Nationally, 77% of respondents report a burn rate of less than 2.5%. In northern California, only 56% of respondents report burn rates below this level. Interestingly, however, the higher burn rates did not translate to higher overhang; in this area the northern California numbers align closely with the national data.
Clawbacks
In the national data, 60% of respondents report that equity awards are subject to a clawback provisions, representing an almost 90% increase in the use of these provisions since our 2010 survey. But this trend doesn’t appear to have taken hold yet in Silicon Valley; only 34% of companies in northern California report that their awards are subject to clawbacks.
RSUs
While usage of full value awards (vs. stock options) in northern California aligns with the national data, practices vary with respect to the type of award granted. Just over 90% of northern California respondents grant RSUs but, nationally, RSUs are granted by only 77% of respondents. Restricted stock is granted by only 26% of northern California respondents but 44% of national respondents.
Vesting Schedules
For full value awards, graded vesting is more common in northern California (88% of respondents) than it is nationally (65% of respondents). But vesting schedules for full value awards appear to be slightly longer in Silicon Valley. 57% of northern California respondents report a four-year schedule and 37% report a three-year schedule, whereas this trend is flipped at the national level. There, 60% of respondent report a three-year schedule and 30% report a four-year schedule.
For stock options, monthly vesting is far more common in Silicon Valley than nationally. 53% of northern California companies report that options vesting with a one-year cliff and monthly thereafter; only 11% of respondents report this in the national data (27% for high-tech companies).
ESPP Participation
When it comes to ESPP participation, Silicon Valley comes out on top. Close to 60% of northern California companies report that their participation rate is between 61% to 90% of employees; nationally only 20% of companies were able to achieve this. ESPPs are also more generous in northern California, with more companies reporting that their plans offer a look-back and 24-month offering than nationally. This may account for some of the increase in participation but I’m not sure it accounts for all of it (note to self: must do quick survey on this).
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.
Today I’m going to dissect a concept that’s existed in equity compensation for a long time. In fact, it’s nothing “new” per se. Yet, some recent trends, governance practices and changes in other industry areas have brought about new life to the idea. So much that I’m officially calling it the “buzz word” (okay, words) of the month. What is it? Post-vest holding periods. In this week’s blog I’ll explore why the renewed attention to this previously under-used practice. In a later installment we’ll get down to the more detailed mechanics.
What is a Post-Vest Holding Period?
Just to make sure we’re all on the same page, the post-vest holding period that I’m talking about is an additional holding requirement imposed on vested shares. Once vested, you must hold them for a period of time (1 year? 2 years?). This is different from holding the shares until they vest (aka the service or vesting period). Typically a company would include this type of holding period in the governing plan and agreement language, in addition to vesting details.
Participants Are Already Subject to Vesting – Why an Additional Holding Period?
This is where the old concept turned hot topic comes into play. While the idea of holding shares has been around for a long time, we are seeing recent and renewed interest in implementing post vesting holding requirements. There are a number of reasons why this may be attractive to a company, including:
Clawbacks: Having a holding period after vesting maintains a “reserve” of retrievable stock in the event the company needs to clawback income from an executive. After all, once an executive liquidates stock and spends the money, it’s next to impossible to recoup those shares or proceeds in their original form. Does the company really want to try and repossess the executive’s vacation home or new yacht?
ISS Scorecard: When ISS released their new Equity Plan Scorecard (see previous blog on this topic), it became clear that the existence of post-vest holding periods count for something. This is one of the items eligible for points on the scorecard.
Prevalence of Stock Ownership Guidelines: We’ve seen the steady rise of stock ownership guidelines over the past several years, with recent data showing more than 90% of public companies having some form of stock ownership guidelines. Post-vest holding periods can help an executive achieve their ownership targets.
In addition to the reasons outlined above, there are other interesting considerations emerging. In talking with Terry Adamson of Aon Hewitt, he pointed out that in addition to the above, companies may be able to reduce their ASC 718 accounting expense on awards with post vest holding periods. Why? Because the “lack of marketability” of the award deserves a discount.
The above only touches upon the surface. Questions I haven’t explored today include the types of equity that make the most sense to cover with a post-vest holding period and whether this makes sense to implement on a broad basis.
We’ve got some great resources in the works to provide you with those additional details. With Dodd-Frank requirements for clawbacks on the horizon, the new ISS Equity Plan Scorecard coming into play this proxy season, ongoing corporate governance changes and continued interest in minimizing accounting expense, we think the concept of post-vest holding periods may be more than just a passing trend.
For additional information now, check out our latest podcast episode “Hold After Vest” (featuring Terry Adamson of Aon Hewitt). For even deeper details, we’ve got a great team of presenters assembled to address all of the points raised in this blog (including the possibility of reducing accounting expense) in our next webcast: Post-Vest Holding Periods on March 11th.
In the coming weeks I’ll touch on more of the nuances that make this topic so interesting.
Last week, I discussed ISS’s new Equity Plan Scorecard. If you were hoping that the scorecard gave you a free pass on your burn rate, I have some disappointing news. The scorecard doesn’t eliminate the burn rate caps—the caps are a component of a plan’s overall scorecard rating.
The Word “Cap” Is So Limiting
One interesting change I noticed is that ISS is no longer calling them “caps”; now they are “benchmarks.” I’m not sure if this is to make them seem less restrictive or to make companies feel worse about exceeding them because the caps aren’t an arbitrary limit but a benchmark established by their peers.
According to ISS’s FAQ on the Scorecard, a plan gets max points when the company’s burn rate is 50% or less of the benchmark for its industry. The FAQs say that the burn rate score is “scaled,” so I assume this means that partial credit is available if the company’s burn rate is more than 50% of the benchmark but still below it. (If burn rates follow the pattern established in other areas, companies will get half credit if they are in this range. But don’t quote me on that; I didn’t find anything in the FAQs about this–I’m totally guessing). I’m also guessing that if you are over the benchmark, no points for you.
Good News for (Most) Russell 3000 Companies; Not So Good News for S&P 500 Companies
The most significant change is that ISS has broken out S&P 500 companies from other Russell 3000 companies for purposes of determining the burn rate benchmarks. For S&P 500 companies, this results in significantly lower burn rate benchmarks. In a number of industries (energy, commercial & professional services, health care equipment & services, pharmaceuticals & biotechnology, diversified financials, software & services, and telecommunication services), the benchmark dropped more than two points below the cap that S&P 500 companies in these industries were subject to last year.
For most of the Russell 3000 companies that aren’t in the S&P 500, ISS increased the burn rate benchmark slightly. For non-Russell 3000 companies, burn rate benchmarks dropped for the most part (only seven out of 22 industries didn’t see a drop), so I’m guessing that the benchmarks for the Russell 3000 would be lower if the S&P 500 companies hadn’t been removed.
How Does This Play Into the Scorecard?
Burn rate is just one part of one pillar in the scorecard, the grant practices pillar, which is worth 35 points for S&P 500/Russell 3000 companies (25 points for non-Russell 3000 companies). All three types of companies can also earn points in this pillar for the duration of their plan (shorter duration=more points). S&P 500/Russell 3000 companies also earn points in this pillar for specified grant practices. Thus, even if a company completely blows their burn rate benchmark, the plan can still earn partial credit in the grant practices pillar.
In a worst-case scenario, where a plan receives no points at all for grant practices, there’s still hope in the form of the plan cost and plan features pillars. For S&P 500/Russell 3000 companies, plan cost is worth 45 points and the plan features pillar is worth 20 points. That’s a potential 65 points, well over the 53 required to receive a favorable recommendation.
As I noted on October 21 (“ISS Changes Stock Plan Methodology“), ISS is changing how they evaluate stock plan proposals. Just before Christmas, ISS released additional information about their new Equity Plan Scorecard, including an FAQ. For today’s blog entry, I take a look at how the scorecard works.
What the Heck?
Historically, ISS has used a series of tests (Shareholder Value Transfer, burn rates, various plan features) to evaluate stock plan proposals. Many of these tests were deal-breakers. For example, fail the SVT test and ISS would recommend against the plan, regardless of how low your burn rate had been in the past or that fact that all the awards granted to your CEO vest based on performance.
Under the new Equity Plan Scorecard (known as “EPSC,” because what you need in your life right now is another acronym to remember), stock plans earn points in three areas (which ISS refers to as “pillars”): plan cost, grant practices, and plan features. Each pillar is worth a different amount of points, which vary based on how ISS categorizes your company. For example, S&P 500 and Russell 3000 companies can earn 45 points for the plan cost, 35 points for grant practices and 20 points for plan features. Plans need to score 53 points to receive a favorable recommendation. [I’m not sure how ISS came up with 53. Why not 42—the answer to life, the universe, and everything?] So an S&P 500 company could completely fail in the plan cost area and still squeak by with a passing score if the plan got close to 100% in both the grant practices and plan features area.
Plan Cost
Plan cost is our old friend, the SVT analysis but with a new twist. The SVT analysis is performed once with the shares requested, shares currently available under all plans, and awards outstanding, then performed a second time excluding the awards outstanding. Previously, ISS would carve out options that had been outstanding for longer than six years in certain circumstances. With the new SVT calculation that excludes outstanding options, this carve out is no longer necessary (at least, in ISS’s opinion–you might feel differently). The points awarded for the SVT analysis are scaled based on how the company scores against ISS’s benchmarks. Points are awarded for both analyses (with and without options outstanding), but the FAQ doesn’t say how many points you can get for each.
Grant Practices
The grant practices pillar includes our old friend, the burn rate analysis. But gone are the halcyon days when burn rates didn’t really matter because companies that failed the test could just make a burn rate commitment for the future. Now if companies fail the burn rate test, they have to hope they make the points up somewhere else. Burn rate scores are scaled, so partial credit is possible depending on how companies compare to the ISS’s benchmarks. This pillar also gives points for plan duration, which is how long the new share reserve is expected to last (full points for five years or less, no points for more than six years). S&P 500 and Russell 3000 companies can earn further points in this pillar for certain practices, such as clawback provisions, requiring shares to be held after exercise/vest, and making at least one-third of grants to the CEO subject to performance-based vesting).
Plan Features
This seems like the easiest pillar to accrue points in. Either a company/plan has the features specified, in which case the plan receives the full points, or it doesn’t, in which case, no points for you. There are also only four tests:
Not having single-trigger vesting upon a CIC
Not having liberal share counting
Not granting the administrator broad discretionary authority to accelerate vesting
Specifying a minimum vesting period of at least one year
That’s pretty simple. If willing to do all four of those things, S&P 500/Russell 3000 companies have an easy 20 points, non-Russell 3000 companies have an easy 30 points (more than halfway to the requisite 53 points), and IPO/bankruptcy companies have an easy 40 points (75% of the 53 points needed).
Alas, this does mean that companies no longer get a free pass on returning shares withheld for taxes on awards back to the plan. Previously, this practice simply caused the arrangement to be treated as a full value award in the SVT analysis. Since awards were already treated as full value awards in the SVT analysis, it didn’t matter what you did with the shares withheld for taxes. Now you need to be willing to forego full points in the plan features pillar if you want to return those shares to the plan.
Dealbreakers
Lastly, there are a few practices that result in a negative recommendation regardless of how many points the plan accrues under the various pillars. These include a liberal CIC definition, allowing repricing without shareholder approval, and a couple of catch-alls that boil down to essentially anything else that ISS doesn’t like.