Say It Isn’t So! No Support for Share Authorizations That Last More Than 3 Years? - 7 Apr 2010
ECE Member Ed Hauder provides some insight to the RMG "3 Year Rule"
I
recently received the following question and thought it worth sharing
so folks can gain a little perspective on what is happening with equity
plan proposals.
Q.
A public company will need to submit its stock plan for shareholder
approval in the next few years. This company has a substantial amount
of stock allocated to its equity plans and has heard that RiskMetrics or
a similar organization is now recommending a “no” vote on plans that
have more than 2-3 years of stock allocated to them (based on current
burn rates).
A.
Technically, neither RiskMetrics nor any of the other proxy advisory
firms that I’m aware of have a proxy voting guideline that says they
will not support a proposed plan if the shares will last beyond 2-3
years. What the company probably heard was a statement by someone who’s
been working with companies on equity plans with the RiskMetrics model
that the share authorizations that are passing the model now typically
would only last 2-3 years. A subtle difference.
So a quick explanation may be in order. RiskMetrics applies a number
of policies (at least 7 at last count) when evaluating an equity plan
proposal. One of the more significant ones is its Shareholder Value
Transfer (SVT) Policy which compares the total percent of company market
value being transferred to employees by equity plans (in new shares
requested, outstanding equity awards, and shares available under
existing and continuing plans) against a company-specific allowable cap
(which is generated using the RiskMetrics’ black-box formulas that look
to the top quartile performers in the same GICS code group to develop a
regression formula that then gets applied to every company in that GICS
group). If the percent of the market value (the cost) is equal to or
below the company-specific allowable cap, the proposed plan will pass
the SVT Policy.
It just so happens that given the large amount of overhang at many
companies (outstanding equity awards that have not been exercised, in
the case of stock options or SARs) coupled with the general decline in
stock prices, the allowable caps being generated typically only permit
companies to request 2-3 years’ worth of additional shares in a new plan
proposal. However, I’ve worked with a number of companies during the
past 6 months where the RiskMetrics model would not even allow the
companies to have 1 years’ worth of shares.
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