Proxy advisory firm Institutional Shareholder Services (ISS) recently made changes to its US Equity Plan Score Card (EPSC), the ISS tool to evaluate equity plans, which will go into effect for meetings of shareholders held on or after February 1. The following is a brief summary of the changes to the EPSC methodology.
ISS made changes that affect the EPSC overall, including the introduction of an additional qualitative review where a prior plan is being amended or restated. ISS will evaluate whether the proposed changes on an aggregate basis are a detriment to shareholders. If determined to be detrimental, ISS may recommend against a plan that may otherwise have passed the EPSC criteria. Additionally, ISS has changed the EPSC to allow companies to be moved from the Special Cases models (for recent IPOs, spinoffs and bankruptcy emergent companies that do not disclose at least three years of grant data) into the model tied to the company’s index, if the company has been public for 33 to 36 months and has provided three years of burn rate data.
ISS also made two changes to its EPSC Plan Features Pillar. Under a new factor, full points will be earned if an equity plan expressly prohibits for all award types the payment of dividends before the vesting of the underlying award (although accrual of dividends payable upon vesting is acceptable). No points will be earned if this prohibition is absent or incomplete. A company’s general practice, not enumerated in the plan document, of not paying dividends until vesting will not suffice. In addition, an equity plan must specify a minimum vesting period of one year for all award types under the plan in order to receive full points for this factor, and no points will be earned if a plan allows for individual award agreements that reduce or eliminate the one-year vesting requirement.
Additionally, ISS made changes to the Grant Practices Pillar, including an increased emphasis on the granting of performance-based awards through reweighting CEO vesting and CEO equity pay mix factors, as well as a slight modification to the valuation methodology for full value awards. The modification will now value the number of time-based full value awards reported in the Grants of Plan-Based Awards table by using the closing stock price on the date of the grant.
A complete description of the EPSC changes for 2017 is available here.