Would ISS or the institutional shareholders take an adverse stance against us if we added shares to our stock plan two consecutive years?
At Alliance Advisors, we get this question a lot, and it was worth taking a closer look.
If a company losing support for its stock plan proposals after two consecutive years of stock buybacks, a company asking shareholders for approval of a new stock issue for six consecutive years is sure to see a significant increase in “no” votes over time.
The Alliance found that 12 Russell 3000 companies proposed new or revised equity incentive plans every year from 2018 through 2023. We analyzed each of those proposals and determined there was no evidence of a change in shareholder support.
The graph on the right shows that ISS recommendations of “against” did not increase over time, and the “average yes vote rate” did not show a significant decrease.
If your company plans to request replenishment of its share plan pool for multiple consecutive years, it is worth considering the following factors:
1. The assistance of a proxy advisor in relation to a proposed equity plan does not necessarily result in a deal being concluded, and approval is rarely dependent on the assistance of a proxy advisor. Investors often use the recommendations of proxy advisory firms ISS and Glass Lewis as inputs when evaluating equity plan proposals, but ultimately determine whether an equity plan proposal merits support based on dilution, burn rate, and the company's business rationale. Some large institutional investors have stricter standards for these factors than ISS and Glass Lewis' policies (e.g., lower dilution limits). Therefore, it is important to understand a company's shareholders and their specific policies before the plan is voted on. Alliance Advisors can provide equity plan forecasts to help determine likely voting outcomes.
2. The commitments required to secure ISS support in replacing existing stock plans. If a company seeks approval of a new stock plan and intends to terminate and cancel the remaining shares available in an existing stock plan, it must make this intent clear in its proxy disclosure. Otherwise, ISS may include the remaining shares available in the old plan in its calculation of plan expense (ISS calls this a Shareholder Value Transfer (SVT)), which will increase the cost of the plan and negatively impact its scoring on the Equity Plan Scorecard (EPSC), ISS's tool for analyzing employee stock incentive programs.
ISS has revised its policy to require an explicit commitment that (a) no more shares will be granted under the existing plan unless the successor plan is approved, or (b) the number of shares available under the successor plan will be reduced by the number of shares granted under the existing plan before the successor plan is approved.
3. If your company's equity compensation is heavily concentrated at the NEO level, review performance pay adjustments.1 In situations where a large proportion of equity compensation is concentrated at the C-level, some issuers are surprised to learn that having a performance-based pay (PFP) misalignment could negatively impact ISS' equity plan recommendation. This could indeed be the case even if the equity plan performs favorably on the ISS EPSC assessment if ISS determines that equity grant practices are the source of the misalignment. To avoid surprises, we recommend calculating CEO and NEO equity concentration ratios and running performance-based pay simulations to see if this could raise PFP concerns. Having a broad plan is also a positive feature.
There are many factors proxy advisors and institutional investors use in their evaluations, but the above factors are often overlooked considerations. Being aware of and prepared for these factors can go a long way in helping to ensure the success of your equity investment plan.
