While normally ISS’ annual release of policy updates is a relatively exciting, blog-worthy event, this year’s release feels anti-climatic (at least with respect to their compensation policy–maybe there’s some really hot updates to their policies on, say, hydraulic fracturing and recycling–I wouldn’t know) because they previewed the changes several weeks ago (see my Nov 15 blog, “ISS Previews Policy Changes“).
As far as I can tell, the final policy doesn’t really differ much from the proposed policy. In fact, given the short comment period on the proposal and the quickness with which the final policy was released, I have to wonder if they received many, if any, comments and if they did much with the comments. Unlike the IRS, FASB, and the SEC, ISS doesn’t publish/summarize the comments they received or address how those comments were taken into consideration.
Policy Changes for Stock Compensation
As summarized in my previous blog, really the only policy change that directly impacts stock compensation is that when newly public companies first submit a stock plan for shareholder approval for Section 162(m) purposes, ISS will now conduct a full review of the plan. In the past, they basically rubber-stamped these proposals.
This might be big news for LinkedIn, Yelp, Groupon, Zynga, and other recent and anticipated IPOs (and their compensation consultants), but for most of my readers, who have been public for a while now, this isn’t that groundbreaking.
Pay-for-Performance
The changes with regards to how ISS evaluates pay for performance also seem to have been adopted largely as proposed. ISS will now determine peer groups based on market capitalization, revenue, and GICS codes, rather than just relying on GICS codes. This could make it difficult for companies to determine who is in their ISS peer group on their own, thus making it hard for companies to predict how they’ll compare against their peers.
ISS will compare a company’s TSR and CEO pay rankings in the peer group and the CEO’s total pay relative the peer group median. Where merited, ISS will also perform a qualitative analysis. This will include a number of factors, the most interesting of which to me is that ISS will look at the ratio of performance to time-based equity awards (I assume this is limited to awards issued to the CEO, but this isn’t completely clear to me from ISS’ summary of the updates). As my readers know, there were several companies this year that modified time-based awards held by their CEO’s to vest based on performance conditions (see my May 3 blog, “Eleven and Counting“). I have to believe these two developments are connected and we can expect ISS to push for more performance-based vesting–at least for CEOs–in the future.
Burn Rates
The updated burn rate tables are not included in the summary of the changes–last year ISS didn’t release these until mid-December so I guess that’s when we’ll get them this year. Is it just me, or does it seem like ISS is releasing these tables later and later?
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
On October 18, ISS issued a preview of some of the policy changes it is considering for the 2012 proxy season. In today’s blog, I take a look at proposed policy changes relating to how ISS evaluates CEO pay and stock plans submitted for shareholder approval for Section 162(m) purposes.
ISS, CEO Pay, and Company Performance
ISS currently evaluates CEO pay and company performance by comparing the company’s TSR to that of its GICS industry group to identify underperformance, then applying a qualitative analysis of various other factors that relate the CEO’s pay to TSR.
Under the newly proposed policy, ISS will apply a relative measure that compares the company’s TSR to that of its peers, which will be determined based on market capitalization, revenue, and GICS industry group. ISS will compare the company’s TSR ranking within the group to that of its CEO pay ranking. ISS will also consider the multiple of the CEO’s pay to the peer-group median.
In addition to the relative measure, ISS will apply an absolute measure that tracks changes in the company’s TSR against changes in its CEO’s pay.
The results of ISS’s pay-for-performance evaluation can impact recommendations ISS issues for the company’s Say-on-Pay proposal and stock plan proposals (if a significant portion of the CEO’s misaligned pay is in the form of equity), as well as individual director nominations.
ISS and Section 162(m)
In the past, when stock plans have been submitted for shareholder approval solely for the purpose of qualifying for exemption under Section 162(m), ISS has generally recommended that shareholders approve the plans. Under the newly proposed policy, however, ISS states that they will complete a full analysis of future plans submitted to shareholder vote for this purposes.This will include consideration of the total shareholder value transfer, burn rate analysis (if applicable), and specific plan features (such as repricing and change-in-control provisions).
This may particularly be a concern for newly public companies that wish to qualify performance unit awards for exemption under Section 162(m). Under recently proposed rules, the IRS clarified that the Section 162(m) exemption for post-IPO grants of stock options, SARs, and restricted stock made during a transition period does not apply to RSUs. Thus, newly public companies that wish to grant exempt performance unit awards will need to submit their plans for shareholder approval, triggering a full analysis of the plan by ISS.
Comments and More Information
ISS accepted comments on the policy through the end of October. (We posted an NASPP alert on the policy changes shortly after ISS issued the proposal. If you follow the NASPP on Twitter or Facebook, then you knew about our alert in time to submit comments to ISS.)
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Wondering what the hottest topics in stock compensation are today? You can find out at the 19th Annual NASPP Conference, with the session “Today’s Hottest Topics in Stock Compensation.” I happen to have caught a glimpse of the panel’s slide presentation, so, in today’s blog entry, I “leak” a few of the topics that will covered.
Today’s Hottest Topics in Stock Compensation I’ve been saying all year that performance-based awards are red-hot and I’m pleased to see that our expert panel agrees (it’s always nice to be right). The panel plans to discuss a number of tricky issues relating to performance-based pay that have emerged over the past year, including:
Setting long-term performance goals in today’s volatile economy without jeopardizing 162(m) deductibility.
Best approaches for disclosing in the CD&A the use of non-GAAP financials for performance awards.
Trends and emerging practices with respect to double-trigger CIC vesting of performance-based awards.
The panel also plans to discuss whether stock options will become more performance-based in light of ISS concerns.
Next year’s proxy season is also clearly on everyone’s minds these days. Here are the proxy-related topics that the panel plans on discussing:
Under what circumstances might a company defy ISS guidance and how should they prepare for the consequences?
Drafting the CD&A disclosure of the Compensation Committee’s response to Say-on-Pay votes.
How will ISS’s new policy (currently in draft form–see the NASPP alert “ISS Issues Draft of 2012 Policy for Comment“) regarding the evaluation of executive pay affect plan design, benchmarking, and support for management’s Say-on-Pay proposals?
What best practices have evolved for developing a strategy for shareholder Say-on-Pay?
The panel will also discuss clawback provisions (particularly what to do about them if the SEC doesn’t finalize rules before the 2012 proxy season).
Don’t miss “Today’s Hottest Topics in Stock Compensation” at this year’s NASPP Conference. The panel wil be moderated by Art Meyers of Choate Hall & Stewart (and of the NASPP Executive Advisory Committee). Art’s co-panelists will be Mike Melbinger of Winston & Strawn (and author of Melbinger’s Compensation Blog on CompensationStandards.com), Mark Borges of Compensia (and author of Borges’ Proxy Disclosure Blog on CompensationStandards.com), and Paula Todd of Towers Watson (and of the NASPP Advisory Board).
See You Next Week in San Francisco! It’s hard to believe, but the 19th Annual NASPP Conference is next week! I hope to see all of my readers at the Conference, which starts next Tuesday, November 1, in San Francisco. We expect to have around 2,000 attendees–it’s going to be a very exciting event; register today to ensure you don’t miss out (and make your hotel reservations, because the hotel is close to selling out).
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Say-on-Pay vote failures have picked up, with more failures last week than any other week so far this proxy season. Today I provide an update on the latest Say-on-Pay stats and comment on a couple of companies that recently modified options granted to their CEOs in response to shareholder feedback related to their Say-on-Pay votes.
Say-on-Pay: The Latest Data Broc Romanek and Mark Borges have been keeping track of Say-on-Pay votes in their respective blogs on TheCorporateCounsel.net and CompensationStandards.com. Last week, Navigant Consulting, Cogent Communications, MDC Holdings, and Janus Capital were the eighth, ninth, tenth, and eleventh companies to report that their Say-on-Pay proposals failed.
Say-on-Pay Frequency
Say-on-Pay Frequency votes seem to be primarily ending up in the annual camp; if my math is correct, of the companies that have held and reported votes thus far, 72% have reported that shareholders prefer annual votes. Many companies have put forth a recommendation for an annual vote, rather than risk the embarrassment of shareholders voting against managements’ recommendation.
Even so, a triennial vote is a possible outcome–Mark Borges reports that, of the 235 companies where the board has recommended a triennial vote (and the companies have reported vote results), only 43% have reported that shareholders indicated a preference for annual votes. Fascinatingly, at one company (Qualstar), management recommended an annual vote but shareholders preferred a triennial vote.
Options Modified in Response to Shareholder Feedback
I think it is also notable that, in the last two weeks, two companies, GE and Lockheed Martin, announced modifications to options held by their CEOs. The modifications added performance targets to options that were previously only service-based. In both cases, the modified options now vest based on two independent performance goals (50% of the options vest when one goal is met and 50% vest when the other goal is met). In Lockheed’s case, one goal is based on cash from operations and the other is based on ROIC. For GE, one goal is also based on cash-flow, but the other goal is tied to relative TSR–which adds a market condition to an option that was previously only service-based. I’m very intrigued by the accounting implications–or possible lack thereof–of these modifications and I hope to look at them at length in an upcoming issue of The Corporate Executive.
According to SEC filings submitted by both companies, the options were modified in response to conversations they had with shareholders (and ISS, we imagine). It seems likely that the modifications were necessary to ensure passage of their Say-on-Pay votes and are illustrative of the level of power Say-on-Pay has given shareholders.
Save Big on NASPP Conference by Completing Survey NASPP members that complete the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte) by May 13 can save 10% off the early-bird rate for the 19th Annual NASPP Conference (which is already a significant savings off the regular registration rate). Register to complete the survey today–so you don’t have to explain to your boss why you missed out on this rate.
Only Ten Days Left for NASPP Conference Early-Bird Rate It’s hard to believe how time flies, but the 19th Annual NASPP Conference early-bird rate expires next Friday, May 13. This deadline will not be extended–register for the Conference today, so you don’t miss out.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Register for 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the early-bird rate is only available until May 13.
Attend your local NASPP chapter meetings in San Diego and Wisconsin. Robyn Shutak, the NASPP’s Education Director, will be at the San Diego meeting–be sure to say hello!
I was thinking that we might be dealing with a shutdown government this, which, while otherwise not such a good thing, would have provided some interesting fodder for my blog. But it appears to be business as usual at the IRS and SEC, so today I blog about something completely different: burn rate guidelines.
Burning the Candle at Both Ends: Burn Rates and Stock Compensation “Burn rate,” also referred to as “run rate,” is a mechanism for measuring how much equity a company grants to employees on an annual basis as compared to the equity held by shareholders. It’s a way for shareholders to guage how much their equity is being diluted annually through stock programs in a worst-case scenario (i.e., ignoring any offsets to that dilution, such as forfeitures and repurchase programs).
There’s no legal definition of burn rate, so every investor, proxy advisor, and survey has their own calculation, but the basic formula is the number of shares granted during the year divided by the total shares of common stock outstanding.
Fidelity Investments Announces Use of Burn Rates
Fidelity Investments, a large institutional investor with holdings in many public companies, has announced that it will begin using a burn rate analysis in determining whether to vote for stock plan proposals. The policy establishes the following acceptable maximum burn rates:
1.5% for a large-cap company
2.5% for a small-cap company
3.5% for a micro-cap company
Fidelity will vote against new stock plans and share authorizations if a company’s three-year burn rate exceeds the relevant maximum, unless Fidelity believes there is a compelling justifcation for the high burn rate.
ISS (formerly RiskMetrics, formerly ISS–how many times can one company change their name) has used a burn rate analysis for as long as I can remember. (I confess, these days, that time period isn’t as long as it used to be, but, in this case at least, is many, many years. 10 points to anyone who knows when ISS first started using their burn rate analysis in evaluating stock plan proposals.)
There are a few key differences between the ISS burn rate analysis and Fidelity’s new policy:
ISS burn rates are published by industry and by whether or not the company is in the Russell 3000 index, so ISS has a more than just three burn rate categories.
ISS applies a multiplier to full value awards, so one award share granted counts as greater than one share in the burn rate calculation. The multiplier is based on the volatility of the company’s stock.
Where a company’s burn rate exceeds ISS’s guideline, the company can still get ISS to recommend voting for their stock plan proposal by making a commitment to keep their average burn rate for the next three years within the higher of: a) 2% of the company’s common shares outstanding or b) the mean plus one standard deviation of its applicable industry burn rate.
Higher Burn Rates Equals More Generous Grants? Not So Fast
ISS’s acceptable burn rates were generally higher this year than last year, so companies may be feeling like they can be a little more generous with this year’s grants. Keep in mind, however, that ISS uses a three-year average in its analysis. Granting more shares this year means that, three years down the road, your average will be higher and, by then, the ISS guidelines for burn rates may be lower.
Online Fundamentals Starts on Thursday–Don’t Miss It! The NASPP’s acclaimed online program, “Stock Plan Fundamentals,” begins this Thursday, April 14. This multi-webcast course covers the regulatory framework and administrative best practices that apply to stock compensation; it’s a great program for anyone new to the industry or anyone preparing for the CEP exam. Register today.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Register for 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the early-bird rate is only available until May 13.
Attend your local NASPP chapter meetings in Denver, NY/NJ, and San Francisco. I will be at the Denver and San Francisco chapter meetings (that’s two out of three this week); I hope to see you there!
ISS (formerly RiskMetrics, which was formerly ISS–how many times can one company change its name) released updates to its corporate governance policy in late November.
In the spirit of no news is good news, most of my readers will be relieved to hear that the policy doesn’t seem to change much with respect to stock compensation. ISS introduces a cap on the amount that burn rate maximums can change (up or down) from year to year; changes will be limited to a maximum of 2 percentage points difference from the prior year’s maximum burn rate. This is nice, but unless I’m missing something here, it doesn’t seem that significant.
Problematic Pay Practices and Say-on-Pay
ISS identifies a number of “problematic pay practices.” If a company employs these practices, in the past, ISS might have recommended voting against or withholding votes for compensation committee members or voting against a company’s stock compensation plan. Now, however, ISS has another weapon in its arsenal: Say-on-Pay. Problematic pay practices may now result in ISS recommending that shareholders vote against the company’s executive compensation proposal.
Stock compensation-related practices that ISS specifically identifies as problematic include:
Paying dividends on unvested performance awards
Multi-year guarantees for stock awards or other equity compensation
Repricing or otherwise exchanging underwater stock options without shareholder approval
Tax gross-ups on restricted stock
Past governance policy updates have specifically mentioned mega grants as problematic as well. While these grants aren’t mentioned this year, I expect that they are still a concern for ISS. I’m sure you all remember how I feel about mega grants.
In another significant change, where companies have problematic pay practices, ISS has revised its policy to no longer allow companies to avoid a negative recommendation by merely committing to eliminate them in the future.
Burn Rates–An Opportunity?
ISS has not released the maximum burn rate tables yet for 2011. Where a company’s average burn rate for the past three years exceeds the maximum allowable for its industry (or 2%, if higher), ISS will recommend against proposals for new stock plans or allocations to existing plans.
Once the burn rate tables are released (expected any day now), companies will know whether their three-year average is coming in low or high. If low, I wonder if this might be an opportunity to make some quick grants. For example, let’s say a company is planning to ask for more shares next year–enough that it doesn’t expect to have to request another allocation for at least three years. If the company realizes that its three-year average burn rate is low, would it make sense to accelerate some of next year’s grants into this year (assuming the company has enough shares available, of course), so the grants won’t be included in the average four years down the road, when the company might conceivably need to ask for more shares?
I’m just throwing the idea out there; I admit that, in practice, a lot of stars would have to align perfectly for this to make sense. It probably isn’t that realistic of a strategy for most companies.
Post Press Releases to the NASPP Website I’m excited to announce that we have enhanced the online NASPP vendor hall to allow our online exhibitors to post press releases. The press releases will appear on the NASPP home page and in the vendor hall. We already have our first press released posted by Morgan Stanley Smith Barney! For more information, contact naspp@naspp.com.
Just a Couple of Weeks Left to Get your Free Conference Session Audio All NASPP memberships expire on a calendar-year basis. Renew your membership by Dec 31 and you’ll qualify to receive the audio for one NASPP Conference session for free! Don’t wait any longer–the new year will be here before you know it!
This offer is also available to anyone the joins the NASPP before December 31–tell all your friends!
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Renew your NASPP membership for 2011 (if you aren’t an NASPP member, join today). Renew or join by Dec 31 to qualify to receive the audio of one NASPP Conference session for free.
A class-action lawsuit was recently filed against Novatel by two pension funds that had invested in Novatel stock alleging that several executives engaged in insider trading. Each executive named in the suit claims to have been trading exclusively under a Rule 10b5-1 trading plan, so what went wrong? Although there were Rule 10b5-1 trading plans in place, these plans were allegedly modified to increase the sale of shares prior to a public disclosure of the loss of Novatel’s contract with Sprint (which resulted in a sharp decline in share price).
Sound familiar? Last October, I blogged on Rule 10b5-1 trading plans. I stressed the fact that entering into a Rule 10b5-1 plan does not inherently protect an individual from the risk of prosecution for insider trading. The most prominent illustration of this at the time was the ongoing SEC investigation of Countrywide CEO, Angelo Mozilo, who is also accused of modifying his Rule 10b5-1 trading plan to increase sale amounts prior to a sharp decline in share price.
Remember that Rule 10b5-1 trading plans must be properly administered in order to provide protection to the individual. The top ways Rule 10b5-1 plans may be misused are:
1. Entering into a plan with transactions that take place immediately
2. Cancelling a plan to prevent a transaction from taking place
3. Modifying an existing plan to increase or decrease sales
Take some time now to review your company’s policy on Rule 10b5-1 trading plans.
Getting Shareholder Approval
In other news, the CEO of Keynote Systems, Umang Gupta agreed to cancel his 400,000 share option grant (currently underwater) in exchange for a ‘yes’ vote from shareholders to extend the expiration date for Keynote’s equity incentive plan. In the original appeal to shareholders, Gupta attempted to assuage misgivings stemming from the ISS/RiskMetrics recommendation against the extension. The main concern voiced by ISS/RiskMetrics was the high number of options outstanding. Gupta explained that the reason so many options remain outstanding is that 90% of the grants are currently underwater–and that the company cannot do an option exchange without shareholder approval. Shareholders originally took ISS/RiskMetrics’ advice and rejected the extension. However, after Gupta agreed to relinquish his grant, shareholders voted to extend the equity plan expiration date. Ultimately, the 400,000 share grant wasn’t the only option cancelled by Umang Gupta. He also cancelled an additional grant for 300,000 shares; one that was even more underwater than the negotiated grant. Obtaining this expiration extension from shareholders means that Keynote can continue to offer equity compensation to current (or potential) employees without having to ask for shareholder approval on a completely new plan.
If this down market finds your company courting shareholder approval for a new plan or additional shares under an existing plan, consider what you can do to improve your odds for shareholder approval. Maybe your CEO isn’t ready to cancel his or her outstanding grants, but you can still take steps to help garner shareholder approval. For the top ways to improve your stock plan proposal, check out this article by Compensia.com on the NASPP Practice Alerts, “Five Tips for a Successful Employee Stock Plan Proposal”.