Last Thursday, ISS released its final 2015 proxy voting policy updates. The only significant change in the executive compensation area relates to equity plan proposals. ISS will now analyze these using a "Equity Plan Scorecard" with various factors and weightings that can have a positive or negative influence, similar to how ISS's Quickscore system works for executive compensation programs generally.
Plan cost (45%) and burn rate/grant practices (35%) are given the largest weightings under the new formula. The remaining category is for "plan features" (20%), which includes many of the same or similar problematic features as identified in prior guidelines, such as liberal change in control definition, option repricing, etc. However, one new feature that will be present for 2015 that was not previously identified as problematic is whether a plan authorizes discretionary vesting of awards in the absence of a change of control (COC).
In our experience, many companies do occassionally exercise discretion to accelerate the vesting of equity awards in non-COC situations, to address legitimate business concerns mainly in connection with employee departures. For example, a company may generally support pro-rata vesting of otherwise cliff-vested equity awards in involuntary termination situations, but may make this feature discretionary instead of mandatory, to give the company flexibility/leverage to address particular terminations on a case-by-case basis. The ISS policy updates appear to be saying, somewhat arbitarily, that while a mandatory vesting acceleration provision in this situation would be fine, discretion to accelerate vesting would be a problem.
With the ISS policy change, the common practice of exercising discretion to accelerate vesting of equity awards may now suddenly factor into negative vote recommendations on a company's future equity plan proposals. In fact, the mere authority to accelerate vesting outside of a COC context may now factor into a negative vote recommendation, suggesting that companies going forward may need to explicitly prohibit accelerated vesting outside of the COC context in their equity plan documents if they wish to be sure of receiving a favorable recommendation.
ISS is scheduled to issue FAQs addressing the 2015 policy updates later this year and may provide some additional guidance in this area.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
