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ISS, Burn Rates, and Performance Awards

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January 24, 2017 | Barbara Baksa

ISS, Burn Rates, and Performance Awards

ISS 2017 Equity Compensation Plan FAQ notes that where companies want ISS to include performance awards in their burn rate when the awards are earned, ISS now requires specific disclosures with respect to the performance awards.

A Quick Primer on ISS, Burn Rates, and Performance Awards

ISS includes performance awards in a company's burn rate when the awards are earned, if the company includes this information in the disclosures related to its stock plan. If this information isn't disclosed, ISS includes the performance awards in the burn rate calculation when they are granted.

The problem with including the performance awards when they are granted is that ISS doesn't reduce the burn rate for subsequent forfeitures (due to either termination of employment or failure to meet the performance goals). Consequently, it is generally preferable to have performance awards included in the burn rate when they are earned.  This will result in a more accurate (and possibly lower) burn rate, because only the shares that are actually earned and paid out will be included in the calculation.

What's Changed?

In the past, ISS simply required companies to clearly and consistently disclose how many shares were granted and earned under performance awards, without defining what the disclosure should have looked like. In its 2017 Equity Compensation Plans FAQ, however, ISS has stipulated the following requirements for the disclosure:

  • Table format
  • Separate from the disclosure for time-based awards
  • Aggregate of all performance awards granted to all employees (providing the disclosure only for awards held by NEOs is insufficient)
  • Covering three years
  • Included every year going forward, even if the plan will not be acted on in a particular year
  • Included even if no performance awards were granted or earned in a particular year

ISS has also said that they generally won't calculate the number of shares earned under performance awards, even if it would be possible for them to do this from information presented in narrative format.

The FAQs include a sample disclosure that looks remarkably like the old roll-forward tables companies used to include for all of their stock compensation under the original FAS 123.

Is This Legally Required?

The disclosure isn't legally required or required under ASC 718. But if you want ISS to include your performance awards in your burn rate when they are earned, rather than when they are granted, the disclosure is necessary.

- Barbara

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