Proxy Recommendations Driving Equity Compensation
Many corporations adjust their equity compensation plans to match the targets set by proxy adviser Institutional Shareholder Services (, according to researchers who are affiliated with Harvard University and Stanford University. The study’s authors reached this conclusion after analyzing 4,230 company observations between 2004 and 2010. They found more than a third of proposed equity compensation plans were within 1% of the cap recommended by ISS.
Institutional Shareholder Services and competitors (which include Glass, Lewis & Co.) make recommendations on proxy ballot proposals. These advisory firms enable institutional investors to avoid bearing the full cost (both on a monetary and a resource basis) of analyzing the proxy ballots for each company they hold shares in.
ISS uses a proprietary metric called Shareholder Value Transferto determine if a company’s equity compensation plan is reasonable. These plans include stock options, restricted stock and performance-based share awards for executives and employees. The study’s authors say SVT measures the value of currently outstanding equity grants and the potential value of awards that could be made in the future under both current and proposed equity plans.
The combination of Institutional Shareholder Services’ influence and the essential lack of discretion in its equity plan recommendations give corporations an incentive to stay within the limits of the SVT cap. ISS does not share their proxy ballot recommendations with corporations in advance of the proxy ballot being sent to shareholders. What ISS does do, however, is sell early access to the SVT cap information through its ISS Corporate Services subsidiary.
The subsidiary offers a product called Compass, which allows corporations to enter the number of shares they wish to include in an equity compensation plan to determine if they will be over or under the SVT cap. The study’s authors believe many companies are using Compass to design compensation plans that fall just under the cap. The researchers call the number of corporations with equity compensation levels that are within 1% of the cap “highly improbable based on chance alone.”
Whether the reliance on proxy advisory firms is good or bad for investors, both institutional and individual, is debatable. The study’s authors say the SVT model has not been validated by independent research. They also cite research suggesting proxy advisory firms not only fail to necessarily increase shareholder value, such firms may actually decrease shareholder value.
“Sneak Preview: How ISS Dictates Equity Plan Design,” Ian Gow, David Larcker, Allan L. McCall and Brian Tayan, Stanford Closer Look Series, October 23, 2013.