Equity-Based Compensation (France) - ISS proposals

http://www.issgovernance.com/policy/2012comment/EquityFrance

Background and Overview

ISS' European policy on equity-based compensation contains
stipulations on the allowable volume of shares that a company may
reserve for equity plans (the respective limits are 5 percent of fully
diluted share capital for mature companies, and 10 percent of fully
diluted share capital for growth companies). In France, equity plan
volumes typically exceed 5 percent of a company's share capital: the
average equity plan volume at SBF 120 companies was 6 percent in 2011,
with 47.3 percent of the companies with an outstanding volume of greater
than 5 percent. This is primarily attributable to a combination of
market-specific legal requirements and tax incentives that result in
equity plans with broad employee participation levels and award blocking
periods of four to six years.

The resulting overhang level has been a major factor leading ISS to
recommend against a high number of management-proposed plans over the
past years. However, according to ISS' 2010 policy survey, performance
criteria were cited by 68 percent of investor respondents as the largest
concerns when evaluating long-term incentive plans.   Moreover, the
AFEP-MEDEF and Middlenext corporate governance codes currently recommend
that all or a portion of equity awards to executives be subject to
performance vesting criteria or premium pricing, and ISS has observed a
broader use of performance criteria following the AFEP-MEDEF
recommendations on remuneration published in 2008. However, this
positive trend had little impact on ISS' vote recommendations due to the
current policy's stipulations on volume.

Key Changes Under Consideration

In line with the current situation in the French market, ISS is
considering the following changes to its policy on equity-based
compensation for France:

• Increasing focus on performance criteria in line with local best practice. This
  would mean that for companies that refer to the AFEP-MEDEF Code, ISS
  would expect that all awards granted to executives would be subject to
  challenging performance criteria or premium pricing. For companies that
  refer to the Middlenext Code or no code at all, ISS would expect at
  least a portion of awards to executives to be subject to challenging
  performance criteria or premium pricing. In all cases, free shares shall
  remain subject to performance criteria for all beneficiaries. 

• Raising the allowable volume ceiling to 10 percent of share capital for all companies. This new level is better aligned with the generally accepted standard in France and consistent with the AFG recommendations.

• Introducing a burn rate criterion to measure use of capital.The
  proposed policy would state that the company's unadjusted three-year
  burn rate (or, if lower, the maximum volume per year implied by the
  proposal made at the general meeting) must not exceed the mean plus one
  standard deviation of the average unadjusted three-year burn rate of its
  sector group, but not more than one percentage point above the prior
  year sector cap.

Intent and Impact

The introduction of higher expectations on performance criteria in
France would align ISS policy with local best practice recommendations,
and the increased focus on performance criteria reflects investor views.
 We further note that the introduction of the burn rate criterion would
provide for focus on the actual transfer of equity to employees. ISS
already applies similar burn rate policies for other markets (such as
the US, Canada, and in the ABI guidelines for the UK), and a majority of
institutional respondents to the 2011 policy survey supported the
inclusion of burn rate criteria in the equity compensation policy. Other
provisions of the ISS European Compensation Guidelines (including
vesting periods, administration body, and so forth) would continue to
apply to French companies and remain sufficient reasons to recommend
against any proposal.

At the same time, introducing new volume and sector-based burn rate
stipulations for the French market is expected to reduce the number of
companies not in line with ISS guidelines on this particular issue.
Nevertheless, the requirement for challenging performance criteria or
premium pricing will mean that a large majority of plans, including
those with performance criteria, may not satisfy the proposed ISS policy
provisions (based on current practices and levels of disclosure).

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