ISS Guidance Affecting 2017 Equity and Incentive Plan Proposals
As we move into 2017, publicly-traded companies should take note of recent ISS guidance that could impact their equity and incentive compensation plan proposals submitted for approval at annual shareholders’ meetings held on or after February 1, 2017. This combined executive compensation and securities alert summarizes the recent guidance and steps you should consider if you are a company that is public or considering going public, or on the board of directors of such a company.
Equity-Based Compensation Plans
Institutional Shareholder Services, Inc. ("ISS") continues to use its equity plan scorecard ("EPSC") to determine its voting recommendations on equity-based compensation plans. Two material changes should be noted if you want to receive full points under EPSC:
- One-Year Minimum Vesting – a plan must specify a minimum vesting period of one year for all award types, with no ability to reduce or eliminate in individual award agreements (subject to a carve-out for up to 5% of awards).
- No Payment Of Dividends Before Award Vesting – a plan must expressly prohibit the payment of dividends before vesting of an award. Dividends may accrue and be paid upon vesting.
Reflecting the increasing focus by shareholder groups on excessive non-employee director compensation, ISS has adopted a new policy setting forth the factors that it will consider in evaluating non-employee director equity plans. These factors include vesting schedules, the cash versus equity mix, company stock ownership policies, other retirement benefits and perquisites, competitor comparisons, and the plan cost and burn rate benchmarks (after combining the company's employee plans), among other concerns. Features considered "egregious" include option repricing and liberal change in control vesting.
Special Evaluation Frameworks For Certain Proposals
ISS reorganized its "Incentive Bonus Plans and Tax Deductibility Proposals" policy to clarify that it will apply special rules (sometimes more streamlined, sometimes not) when considering proposals for the following:
- amendments to equity incentive plans to increase shares and/or that may potentially increase the transfer of shareholder value to employees,
- amendments to executive cash, stock, or cash and stock incentive plan that address only administrative features,
- proposals that seek approval for Code Section 162(m) purposes only (note that ISS encourages companies to unbundle plan amendments and present them in a separate proposal),
- initial presentation of equity incentive plan to shareholders following an IPO,
- amendments to equity incentive plans that do not request additional shares or potentially increase the transfer of shareholder value to employees, and
- new cash incentive plans and amendments thereto (where not limited solely to Code Section 162(m) approval).
Maximum Tax Withholding and Liberal Share Counting.
Recent changes to the FASB rules, effective December 15, 2016, permit companies to amend their equity-based compensation plans to withhold shares to cover tax at a rate up to the maximum marginal rate in a country. Previously, companies were forced to limit their net tax settlement on equity awards to not more than the minimum statutory rate in order to avoid liability-based ("variable") accounting. Many companies believe that this new opportunity to amend their equity incentive plans to allow higher withholding will simplify tax withholding practices for foreign equity awards (by allowing withholding at a single rate per country instead of individual marginal rates), and will allow U.S. executives to elect to have taxes withheld from their equity awards at a higher rate than would otherwise be required under supplemental withholding rules (by filing new Forms W-4).
The NYSE and Nasdaq have both advised that shareholder approval of such an amendment is not required, even where the plan contains liberal share recycling. Note, however, that if such an amendment is combined in the same proposal with amendments requiring shareholder approval, or if the plan is in the future submitted for shareholder approval for other reasons, then ISS review will be triggered. ISS has advised that such a change will generally be viewed as an administrative change not requiring extensive review, but has cautioned that if the plan also contains liberal share recycling this will be a negative factor under current ISS policies. To avoid a potential future issue, you may want to consider limiting any recycling (if applicable) to only shares withheld below the minimum statutory rate (ignoring those above).
If you are considering making changes that might fit within one of the above categories, you should carefully review the ISS guidance to identify whether your changes will create any potential ISS approval problems. To access the ISS guidance, please see the ISS 2017 U.S. Summary Proxy Voting Guidelines and the U.S. Equity Compensation Plan Frequently Asked Questions (FAQs) on the ISS website at: https://www.issgovernance.com/policy-gateway/2017-policy-information/
 Note, however, that it is unclear whether the NYSE limits this shareholder approval exemption to those amendments that cap withholding at each employee's maximum tax obligation, rather than the maximum statutory rate as permitted by the FASB change. Companies listed on the NYSE may want to limit their amendment if more clarity is not provided.
This Brief should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult a lawyer concerning your own situation and any specific legal questions you may have.
The articles published in this newsletter are intended only to provide general information on the subjects covered. The contents should not be construed as legal advice or a legal opinion. Readers should consult with legal counsel to obtain specific legal advice based on particular situations.