Institutional Shareholder Services (“ISS”) is one the most powerful voices in how companies and their investors view executive compensation. In the never-ending quest to properly evaluate, value and measure the impact of equity compensation, ISS has once again changed its policies. Elizabeth Ising and Ronald Mueller of Gibson Dunn have summarized the proposed changes in an excellent article. A quick summary: what was once a beautifully simple and critically flawed up or down vote is now a beautifully complex and differently flawed scorecard with a super-cool new acronym (the Equity Plan Scorecard (“EPSC”).
On the bright side, ISS has heard the calls and complaints from both companies and shareholders. They have gone back to the drawing board to design something better. The bad news is that “something better” is much like the various attempts at building “flying machines” before they were actually perfected. While the effort is valiant, the finished product is probably not something you would use as your preferred resource over the long haul.
The EPSC incorporates three main elements (please refer to the Gibson Dunn article for more details.)
Cost: Determined using ISS’s proprietary Shareholder Value Transfer (“SVT”) calculation. SVT is now to be calculated two ways. 1) Shares approved but unused plus any new shares requested. 2) The prior plus any unvested or unexercised equity currently outstanding.
In theory, this will be a welcome change as it looks both forward and backward to some extent.
Plan Features: Includes key vesting provisions and how a company reuses shares from awards that were cancelled or expired.
None of these considerations will feel new to public companies.
Grant Practices: Includes actual 3-year burn rate, more vesting considerations specifically for CEO equity, clawback provisions, holding periods and estimated duration of the plan.
Good news is companies no longer have to commit to a future burn rate. Bad news is that some of these considerations will be somewhat subjective.
The ISS will mix the results of these into some sort of equity compensation slurry and come up with a “For” or “Against” vote.
Overall, the better aspect is that the approach is less didactic than it has recently been. This means a bit more wiggle room to shape your company's approach to suit your objectives. Frustratingly, the things that make this better also make it worse.
When all is said and done, most boards want their executive compensation professional to provide them with a solid answer of "this will work." The new approach once again will leave many saying “I think this will work, but it will depend on how some people I don't know (and who don't really know us) interpret and evaluate the information we put in our filings. What is the best way to balance cost, plan features and grant practices for your company and investors? I have no idea right now."
But, here’s where there is a fantastic opportunity! The ISS wants to know what you think about this new approach. You have until October 29, 2014 to submit your comments to firstname.lastname@example.org.
Here’s the interesting thing about comment periods. Most of us don't turn in comments. We wait until the approach is final then complain when things aren't how we’d like them. So, take a few moments TODAY and reach out to your executive compensation consultant and get their thoughts (if they don’t have any, you may want to take that into consideration). Then, TOMORROW, ask your legal counsel, CEO and CFO where they might have problems with the new approach. On WEDNESDAY, write a short email expressing your concerns or issues where you have more questions than answers. Finally, THURSDAY, stop thinking about this until the final version is released.
If every executive compensation person who reads this also sends in a comment it will likely be the most original statements ISS has ever received on equity and executive compensation.
Dan Walter is the President and CEO of Performensation a firm committed to aligning pay with corporate strategy and culture. You know compensation communication can always be better so get your copy of the new book: “Everything You Do in COMPENSATION IS COMMUNICATION.” Written by Ann Bares, Margaret O’Hanlon and Dan Walter. Dan has also co-authored of several other books you may be interested in including “The Decision Makers Guide to Equity Compensation”, “If I’d Only Known That”, and “Equity Alternatives.” Please connect with him on LinkedIn and follow him on Twitter at @Performensation and @SayOnPay.