The number of Russell 3000 companies seeking shareholder approval to replenish stock in 2023 has reached a 10-year high (22%) after trending upward in recent years, with increased competition for talent and economic uncertainty the main drivers.
“Equity compensation continues to be used heavily to attract and retain top talent,” explains Voytek Sokolowski, principal at FW Cook. “In recent years, market turmoil has caused many issuers to experience significant declines in their share prices, leading to a faster decline in equity than originally planned.”
As equity pools have depleted faster than expected, companies are having to propose replenishment plans to shareholders more frequently, especially in industries with more volatile stock prices and a greater reliance on stock-based compensation, such as technology and biotechnology.
For companies adopting equity plan proposals, Institutional Shareholder Services (ISS) continues to be an influential voice. The increase in “Against” recommendations from ISS on equity plan proposals suggests that the bar for support is being raised and companies may be requesting more shares than ISS supports to meet their talent goals. In 2023, ISS recommended “Against” equity plan proposals for 30% of Russell 3000 companies and 13% of S&P 500 companies, up from 26% and 10%, respectively, in 2022. (See Prevalence of ISS “Against” Vote Recommendations below.)
Scoring Share Plan
Companies seeking insight into the likelihood of ISS backing can purchase access to an Equity Plan Scorecard (EPSC) model through the proxy advisory firm's consulting division to see how adjusting the number of shares requested or other elements of the plan would affect their score. “The only thing you can't switch is your company's past grant practices,” says Noah Kaplan, managing director at FW Cook, who says companies can use the EPSC model to explore how changes such as reducing the number of shares requested or adjusting the terms of their share plan would affect their score.
While a “FOR” vote recommendation by ISS strongly suggests that an equity plan proposal will receive significant shareholder support, an “AGAINST” recommendation does not signal the end: in 2023, shareholder support for Russell 3000 equity plan proposals recommended “AGAINST” by ISS averaged 74%, while shareholder support for equity plan proposals recommended “FOR” by ISS averaged 92%.
“Failed equity plan proposals remain extremely rare,” Sokolowski says. “On average over the past 10 years, only 0.5% of equity plan proposals at Russell 3000 companies have failed. [i.e., two to three companies each year]However, the failure rate rose to a 10-year high of 0.9% in 2023.”
Compete for votes
If ISS recommends “against” support for an equity plan proposal, the board may appeal directly to significant shareholders. Based on their published proxy voting guidelines, many large institutional investors focus on standard “best practice” provisions and overall dilution levels when evaluating equity plan requests. Some have specific criteria, such as a 10 percent or 20 percent dilution limit, while others have a more subjective approach.
Sokolowski advises boards that anticipate ISS opposition to their company's equity plan proposals to consider proactively reaching out to shareholders to foster support. “First, it's important to understand the company's investor profile before proceeding with the engagement process,” he says. “Identify key investors, find out their voting policies, and ensure the company isn't submitting equity plan requests that are deemed too costly.”
Boards should be prepared to help shareholders understand the rationale behind any proposals, including the role that stock-based compensation plays in attracting and retaining talent and incentivizing performance. “Shareholders are increasingly interested in stock-based compensation practices,” says Kaplan. “Outreach should be used as a forum to understand and answer any sensitivities investors may have about our approach to stock-based compensation and compensation more broadly.”
Finally, pressure from ISS and shareholders to stay within certain dilution limits may require companies to respond to requests for small shares more frequently. “There is a perception among some directors that asking too frequently could be problematic,” Kaplan says. “But there is no policy from ISS or large investors about how often a company can ask for additional stock plan shares, as long as the request is not deemed unduly costly from the large investor's perspective.”
Scrutiny of equity plan proposals by ISS and investors is likely to continue to intensify. As companies navigate this changing landscape, strategic shareholder engagement and a clear description of compensation strategies will be key to securing support for equity plan proposals.
