ISS Issues New Equity Guidelines

Institutional Shareholder Services (ISS), the influential proxy advice organization, has changed its guidelines for voting on equity compensation plans to make them somewhat more flexible. Under current procedures, ISS recommends voting against any company whose "burn rate" for equity awards (burn rate is the percentage of total shares made available each year in options or other grants) is currently not more than one standard deviation from its industry norm, provided that is still within 2% of the norm. A company could still get a yes vote if it committed to reducing its burn rate to the industry mean. The new policy allows a company not meeting the standard to get a yes vote if it commits to being within one standard deviation from the mean, provided that is not more 2% above that mean. Current mean burn rates in larger public companies range from 1.5% to 5.0% and in smaller public companies from 2.03% to 6.02%. In any case in which the mean is 2% or less, the "one standard deviation above" rule is trumped by the "not more than 2% above rule," so that the maximum would be 8.03%, for instance, in the highest mean dilution group.

If a company uses full value awards, rather than stock options or stock appreciation rights, the ISS adds an adjustment factor. In low volatility companies, each full-value award would count as four options, ranging down to 1.5 for the highest volatility companies.

ISS is also recommending that one-time transferable options programs, such as those used by Microsoft and Comcast to provide a market for underwater options by allowing employees to sell them to a third party, should be approved under certain conditions, such as that the offer does not include officers and top executives, is properly valued and purchased at a discount, and requires a two-year holding period for sale proceeds for participants. Ongoing programs could be incorporated into plan design subject to shareholder approval.

Details of the proposal, and mean burn rates and standard deviations, can be found here (PDF format).