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ISS Changes Stock Plan Methodology

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October 21, 2014 | Barbara Baksa

ISS Changes Stock Plan Methodology

I had planned to blog about some pretty big and exciting news from the FASB, but on October 15, ISS announced their new methodogy for analysing stock plan proposals. You only have until October 29 to submit commits, so this anouncement trumps the FASB announcement.

We've included a more complete summary of the new methodoligy in the NASPP Alert "ISS Proposes Significant Changes to Equity Plan Analysis." For today's blog entry, I have a few thoughts on specific aspects of it.

Seriously? Only 14 Days?

My first thought upon reading the ISS announcement was "Seriously? People only have 14 days to read this and comment on it?" I don't know, it kind of makes me think they don't care about your comments.

Balanced Scorecard

Historically, ISS has employed a number of mechanisms to evaluate stock plan proposals, including 1) plan cost (e.g.' the Shareholder Value Transfer test), 2) historical burn rates, and 3) a review of specific plan features. Each of these factors were evaluated as a series of pass/fail tests and a plan had to pass all three to receive a positive recommendation.

The proposed approach will still consider the three areas noted above (with a number of significant changes), but will look at them on a holistic basis, rather than as a series of separate tests. So plans that fail one test may still receive a favorable recommendation if the results of the other analyses are positive enough to outweigh the failure. I also suspect that means that plans that pass all three tests but with a low score on each could end up receiving a negative recommendation.

SVT Test Gets an Update

The SVT test will be performed not just on the shares requested for the plan but instead on 1) shares requested, shares currently available for grant, and shares outstanding, and 2) shares requested and shares currently available for grant.

Bad News for RSUs

Historically, allowing shares withheld for taxes to return to the plan just caused the award to be treated as a full value award in the SVT test. Which meant that it didn't matter if you allowed this for full value awards becauuse they were already counted as full value awards in the SVT test.

Now "liberal" share counting features (e.g., returning shares withheld for taxes to the plan reserve) will no longer be part of the SVT test but will instead be considered separately as a plan feature. So it could be a problem to do this for both RSUs.

Burn Rate Commitments Are a Defunct

My understanding is that up until now, companies didn't really worry about the burn rate test because if they failed it, they could fix the failure by simply making a burn rate commitment for the future. But the new methodology eliminates the ability to correct burn rate failures by committing to a burn rate cap.

Now, if you fail the burn rate test, you'll have to hope that the plan cost is low enough and you have enough positive plan features (e.g., clawbacks, ownership guidelines) to outweigh the failure.

Be sure to tune in next week for my big FASB announcement (see the alert on the NASPP home page for a preview).

- Barbara

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