This year marks the second proxy season under ISS’ Equity Plan Scorecard, which was introduced during the 2015 proxy season. And, as we all know, the key to obtaining a favorable vote recommendation for an equity-based incentive plan proposal is securing a score of at least 53 points (out of a total 100 possible points). Generally, this means being sensitive to the three “pillars” – plan cost, plan features, and grant practices – that ISS uses to “score” a plan. Further, as set forth in ISS’ materials describing its methodology, there are a few plan provisions or actions that may result in an unfavorable vote recommendation on a plan proposal regardless of the overall EPSC score (the so-called “deal-breakers”). These provisions or actions are:- The plan provides for excise tax “gross-ups”;
- The plan provides for “reload” options;
- A liberal change-of-control definition that could result in vesting of awards by any trigger other than a full “double trigger”;
- A plan that permits repricing or the cash buyout of underwater options or SARs without shareholder approval; and
- A “pay for performance” disconnect or problematic pay practice has been identified at the company and the equity plan has been identified as a vehicle for said disconnect.
Recently, we’ve learned that ISS views this as a “flexible” list that can be expanded as it its sees fit, even if a company has no reason to believe that its equity-based incentive plan contains a problematic feature. Last month, a company proposing a series of amendments to its existing omnibus incentive plan received an unfavorable vote recommendation on its plan proposal from ISS, notwithstanding that (i) it received an overall positive score under the Equity Plan Scorecard methodology (80+ points) and (ii) its plan contained none of the “deal breaker” provisions specified in the ISS literature.
The reason? ISS objected to a plan amendment that would reduce the minimum time-based vesting period for equity awards granted to the members of the company’s board of directors from three years to one year.
Not only was the company blind-sided by the voting recommendation, it was flummoxed by the explanation for the decision. Not only was the proposed amendment consistent with the Plan Features “pillar” (which states that “[i]n order to receive EPSC points for a minimum vesting requirement, the plan should mandate a vesting period of at least one year which should apply to no less than 95 percent of the shares authorized for grant”), but, as the company pointed out, had it been submitting a new omnibus incentive plan for shareholder approval with a one-year vesting requirement – rather than amending an existing plan – the issue would not have arisen in the first place.
Nonetheless, the company was put in the unenviable position of having to scramble for shareholder support for its plan proposal at the 11th hour over an issue that it didn’t know existed.
It’s a sober reminder for all of us that, apparently, ISS doesn’t consider itself to be bound by its published guidance when reviewing an equity-based incentive plan proposal and that it may take inconsistent positions with respect to an issue if it believes that a plan feature is not in the best interests of shareholders. We should keep this in mind when evaluating the likelihood of a favorable vote recommendation under the Equity Plan Scorecard.
