ISS, Glass Lewis Release 2015 Proxy Voting Updates; Espouse Nuanced Review of Equity Compensation Practices
Proxy advisory firms Institutional Shareholder Services, or ISS, and Glass Lewis released their 2015 executive compensation proxy voting updates that may be particularly relevant for public companies that intend to submit new or amended equity compensation plans for stockholder approval in the coming proxy season. Overall, the updated guidelines suggest that ISS and Glass Lewis will engage in a more nuanced review of equity compensation plan design and grant practices than in prior years.
ISS 2015 Updates
As part of its 2015 United States Proxy Voting Guideline Updates (available here), ISS has adopted a multi-factor scorecard evaluation model in connection with equity compensation plan proposals. Under this Equity Compensation Scorecard, ISS will analyze equity compensation plan proposals using multiple factors, both positive and negative, related to three categories:
plan cost, relative to industry/market cap peers, under two Shareholder Value Transfer (SVT) measurements – one based on the sum of new shares requested, shares remaining for future grants and outstanding unvested/unexercised grants, the other based only on new shares requested plus shares remaining for future grants;
plan features, including the use of automatic single-trigger vesting upon a change in control, discretionary vesting authority, liberal share recycling and minimum vesting periods; and
grant practices, based on six factors: (i) three-year burn rate relative to industry/market cap peers; (ii) vesting requirements in CEO equity grants over the past three years; (iii) estimated plan duration based on sum of shares remaining and new shares requested, divided by the average annual shares granted over the prior three year period; (iv) proportion of recent CEO equity grants/awards that are subject to performance conditions; (v) whether the company has a clawback policy; and (vi) whether the company has post-exercise/vesting share retention requirements.
ISS will generally recommend voting against a new or amended equity plan if the combination of the foregoing factors indicates that the plan is “not, overall, in shareholders’ interests”. However, as in prior years, the presence of certain egregious practices (e.g., option repricing without shareholder approval, vesting in connection with a liberal change in control definition, a pay-for-performance disconnect and other problematic pay practices) standing alone generally will justify a negative vote recommendation. ISS’ 2015 policy updates are effective for meetings on or after February 1, 2015.
Glass Lewis 2015 Updates
In addition to providing additional detail on the factors it considers in assessing compensation committee performance, Glass Lewis’ 2015 United States Policy Guidelines (available here) contain a few notable updates related to its shareholder say-on-pay vote recommendation process.
First, Glass Lewis has introduced guidance on the impact of “one-off” equity compensation awards granted outside of the company’s regular equity compensation program. Reasoning that such awards can undermine both the pay-for-performance link and the integrity of the company’s equity program, Glass Lewis nonetheless acknowledges that a one-off award may be appropriate in certain circumstances. However, in assessing the appropriateness of a one-off award, Glass Lewis will look at whether the award is performance-based and whether the company disclosed a sufficient justification for the award, including why the award is necessary and the reasons that existing awards are insufficient.
Second, Glass Lewis notes that it will generally recommend approval of tax-qualified employee stock purchase plans based on the costs of the plan (taking into account the number of shares, discounts, participation levels and so on), except in “extreme” cases such as an ESPP with an evergreen provision that automatically increases the number of shares available for issuance each year.
Finally, Glass Lewis has made clear that qualitative factors, such as an effective overall incentive structure, relevance of selected metrics and reasonable long-term payout levels could result in a recommendation in favor of the say-on-pay proposal, even where the Glass Lewis quantitative-based models suggest a pay-for-performance disconnect.
Implications for 2015 Proxy Season
Although certain egregious pay practices will continue to justify negative vote recommendations, the 2015 updates to each of the ISS and Glass Lewis policies adopt a more multi-factored, nuanced approach to say on pay and equity compensation proposals than in prior years. As the analysis and assessment of executive compensation arrangements and equity plan practices continues to evolve from year to year, compensation committee members and their consultants and legal advisors should consider reviewing and adapting pay arrangements and processes that can best attract, retain and incentivize key personnel while at the same time, can pass muster with shareholders and proxy advisory firms.