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ISS Burn Rate Caps

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January 21, 2015 | Barbara Baksa

ISS Burn Rate Caps

Last week, I discussed ISS's new Equity Plan Scorecard. If you were hoping that the scorecard gave you a free pass on your burn rate, I have some disappointing news.  The scorecard doesn't eliminate the burn rate caps—the caps are a component of a plan's overall scorecard rating.

The Word "Cap" Is So Limiting

One interesting change I noticed is that ISS is no longer calling them "caps"; now they are "benchmarks." I'm not sure if this is to make them seem less restrictive or to make companies feel worse about exceeding them because the caps aren't an arbitrary limit but a benchmark established by their peers.

According to ISS's FAQ on the Scorecard, a plan gets max points when the company's burn rate is 50% or less of the benchmark for its industry.  The FAQs say that the burn rate score is "scaled," so I assume this means that partial credit is available if the company's burn rate is more than 50% of the benchmark but still below it. (If burn rates follow the pattern established in other areas, companies will get half credit if they are in this range. But don't quote me on that; I didn't find anything in the FAQs about this--I'm totally guessing).  I'm also guessing that if you are over the benchmark, no points for you.

Good News for (Most) Russell 3000 Companies; Not So Good News for S&P 500 Companies

The most significant change is that ISS has broken out S&P 500 companies from other Russell 3000 companies for purposes of determining the burn rate benchmarks.  For S&P 500 companies, this results in significantly lower burn rate benchmarks.  In a number of industries (energy, commercial & professional services, health care equipment & services, pharmaceuticals & biotechnology, diversified financials, software & services, and telecommunication services), the benchmark dropped more than two points below the cap that S&P 500 companies in these industries were subject to last year.

For most of the Russell 3000 companies that aren't in the S&P 500, ISS increased the burn rate benchmark slightly. For non-Russell 3000 companies, burn rate benchmarks dropped for the most part (only seven out of 22 industries didn't see a drop), so I'm guessing that the benchmarks for the Russell 3000 would be lower if the S&P 500 companies hadn't been removed.

How Does This Play Into the Scorecard?

Burn rate is just one part of one pillar in the scorecard, the grant practices pillar, which is worth 35 points for S&P 500/Russell 3000 companies (25 points for non-Russell 3000 companies). All three types of companies can also earn points in this pillar for the duration of their plan (shorter duration=more points). S&P 500/Russell 3000 companies also earn points in this pillar for specified grant practices. Thus, even if a company completely blows their burn rate benchmark, the plan can still earn partial credit in the grant practices pillar.

In a worst-case scenario, where a plan receives no points at all for grant practices, there's still hope in the form of the plan cost and plan features pillars.  For S&P 500/Russell 3000 companies, plan cost is worth 45 points and the plan features pillar is worth 20 points. That's a potential 65 points, well over the 53 required to receive a favorable recommendation.

- Barbara

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