
This article serves as the final installment in our in-depth exploration of equity-based compensation.
We will dive into the vital aspects publicly-traded companies should bear in mind while launching equity awards.
Topics of discussion include the role of proxy advisory firms in shaping compensation plans, strategies for timing grants, compliance with Section 16 of the Securities Exchange Act of 1934, and the intricacies of SEC registration.
Crafting Effective Compensation Plans
For publicly-held companies, obtaining shareholder approval is often a prerequisite for establishing a new equity compensation plan, increasing share allocations within an existing program, or making significant changes to ongoing plans.
This requirement aligns with the listing standards imposed by stock exchanges.
To navigate this landscape effectively, many organizations consult proxy advisory firms, such as Institutional Shareholder Services (ISS) and Glass Lewis, as they guide shareholders in their voting choices.
Consequently, corporations frequently tailor their equity plans to align with the suggestions put forth by these advisory entities.
Key Points from ISS for 2025
In assessing equity plans, ISS employs a rigorous scorecard emphasizing three primary factors: (1) the plan’s overall cost, (2) its specific features, and (3) the historical grant practices of the company.
A favorable performance in the features and practices categories can enable a business to secure a larger share reserve while achieving ISS’s endorsement.
Each December, ISS refreshes its scorecard, and for 2025, it has announced that the evaluation criteria from 2024 will remain unchanged.
The plan characteristics and grant practices that will be evaluated in 2025 are as follows:
- Plan Characteristics:
- Transparency During Changes in Control: Full scores are only awarded to plans that clearly outline the vesting treatment applicable to both time-vesting and performance-based awards during a change in control. Plans allowing discretionary vesting fall short in this regard.
- Accelerated Vesting Authority: Plans that grant the administrator the ability to accelerate vesting solely due to death or disability receive full points. If acceleration is possible in other circumstances, the plan does not qualify for points.
- Policies on Share Recycling: ISS defines “liberal share recycling” as the practice of reallocating vested or exercised shares back into the reserve. Plans that prohibit this practice earn full points, whereas those that permit it receive none.
- Minimum Vesting Period Requirement: A minimum vesting period of at least one year from the grant date is necessary for plans to garner full points. Plans lacking a minimum vesting requirement or allowing exceptions will not be scored.
- Dividends on Unvested Awards: To earn points, plans must explicitly forbid dividend payments on unvested awards; otherwise, they receive no points.
- Historical Grant Practices:
- Burn Rate Assessment: ISS evaluates a company’s three-year average burn rate against industry and index standards.
- Projected Plan Duration: ISS estimates how long the proposed share reserve will last based on the burn rate.
- Vesting Periods and Award Types for CEOs: These elements assess the duration of vesting and the proportion of performance-based equity in the CEO’s total awards over the past three years.
- Clawback Policies: Companies must establish a clawback policy that mandates the recovery of both time- and performance-based equity awards to qualify for scoring.
Glass Lewis Principles for 2025
Unlike ISS, Glass Lewis utilizes a more holistic framework without adhering strictly to a scorecard model.
Their evaluations are guided by several foundational principles that inform their recommendations:
- Companies should only request additional shares when absolutely necessary.
- Any requested share pools should remain conservative, necessitating shareholder approval every three to four years.
- Plans should aim to minimize dilution of the annual net share count and reduce the “overhang” created by incentive programs.
- Annual costs associated with the plan should be reasonable, especially in relation to financial performance, peer benchmarks, and the company’s market capitalization.
- Companies should avoid repricing stock options without gaining shareholder consent.
- Plans must strive to maintain clear and straightforward administrative and payment protocols.
- The methods for counting shares must accurately reflect potential dilution for shareholders.
- Transparency around equity programs is essential for shareholders’ understanding.
Insights from Major Institutional Investors
Prominent institutional investors like BlackRock and Vanguard often have their own voting policies, which may conflict with the guidelines established by ISS or Glass Lewis.
Thus, it is advisable for companies to familiarize themselves with these policies prior to soliciting shareholder approval for equity plans.
While there are no strict rules governing when to issue grants, companies must be aware of the increased scrutiny surrounding equity awards that may appear strategically timed to utilize insider information.
Executives who fall under Section 16 are generally required to report equity grants via Form 4.
Key reporting considerations include:
- Restricted Stock: Must be reported in Table I within two trading days of the award date.
- RSUs: Non-performance conditioned restricted stock units also require reporting within two trading days.
- Options and SARs: These should be reported in Table II within two trading days following the grant experience.
- Performance Share Units: Reporting for PSUs typically occurs within two trading days once performance criteria are achieved.
Generally, equity incentives offered to employees must be registered with the SEC using Form S-8.
When a publicly-traded company initiates a new equity compensation program, filing an S-8 registration statement for a specified number of shares is usually necessary.
Companies should establish a tracking system to monitor share utilization to determine when additional registration for their equity compensation plans is required.
By keeping these considerations in mind, publicly-traded companies can effectively harness the benefits of equity-based incentive compensation while ensuring compliance and shareholder alignment.
Source: Natlawreview.com