ISS's New Equity Plan "Scorecard" Means Increased Uncertainty for Companies

October 17, 2014

ISS released several draft policy changes for 2015 this week, including a major overhaul of its process for evaluating company stock plans up for shareholder approval.  Under the new process for which it is seeking public comment, ISS will shift from a series of pass/fail standalone tests focused on the cost of the equity plan and so-called egregious practices to a scorecard approach that takes into account cost, plan features and grant practices under a qualitative evaluation.  Although ISS states the policy is not designed to increase negative recommendations, the new model incorporates evaluation of several factors which historically have been considered in the context of a non-binding say on pay vote.  Since equity plan votes are binding, a negative recommendation on an equity plan may carry more weight with companies and boards.  Key features of the new plan, which are expected to take effect for shareholder meetings occurring on or after February 1, 2015, include:

  • ISS recommendations will now consider factors other than cost more strongly; in practice, this means that even if a plan meets cost limits based on ISS's shareholder value transfer model, ISS may still recommend against it due to "unfavorable" plan features such as the ability for outstanding equity awards to vest automatically after a change in control.

  • Conversely, shareholder-friendly practices such as a higher proportion of performance-based awards may mitigate slightly higher plan costs.

  • Scorecard factors and weightings for cost, plan features and grant practices will be based on company size.

Although only a small number of the equity plans ISS has historically recommended against (on average, 30% of all plans) actually failed a shareholder vote, the binding nature of equity plan votes makes them particularly sensitive.  Whether or not the new policy results in increased negative vote recommendations, it is likely that ISS's consulting arm will benefit from increased numbers of companies anxious to understand the likelihood that their equity plans will be judged acceptable.  The Association's Center On Executive Compensation will be submitting comments to ISS on the draft policies; companies who wish to submit their own comments may do so by 6 p.m. EDT on October 29 by emailing policy@issgovernance.com.