Stay Ahead of Shrinking Equity Pools: Compensation Committee Considerations

The Center’s President and CEO, Ani Huang, was quoted in a recent Agenda piece reporting that 22.6% of the Russell 3000 have put forth equity plan proposals in their proxy ballots, a significant increase over 2022. Global uncertainty, stock market volatility and tight talent pools have played a role, with companies experiencing increased burn rates as organizations feel pressure to keep levels around similar values during stock downturns or compelled to grant special retention and new hire awards.

Management and compensation committees should both be aware of long-term equity plan strategies and grant practices to address low share reserves and avoid seeking additional shares sooner than expected. As Ms. Huang noted in the interview, “The compensation committee needs to be asking management, ‘Where do we stand on our share pool and can we see some modeling with different scenarios for stock price and grants?”’ Also, review how different approaches to managing share awards impact new hires, who have accumulated less company stock, and if high potential/performers should be carved out. Talent acquisition and rewards teams should work together on grant decisions so they are not caught off guard by sharp share pool reductions.

Meanwhile, the 2022 NASPP  Equity Administration survey found growing use of multi-day or trailing stock price averages to calculate share awards (instead of a single day price) to help manage volatility and better predict share utilization. This tactic rose from 27% prevalence in 2019 to 42% in 2022. However, averaging stock price longer than 30 days could “lead to a material disconnect between the grant a compensation committee thinks they’ve approved and the value that someone receives” and have communication and accounting considerations, according to a WTW expert.

Interestingly, while shareholders overwhelmingly approve requests for new share plans, ISS raised the bar with their equity plan scorecard earlier this year as well as changed methodology on how they view burn rates. Since these changes took effect, ISS has recommended against two S&P 500 company equity plan proposals, resulting in the companies ultimately failing to receive shareholder approval of the equity plan. Both plans were cited to have high plan costs and accelerated vesting features.