By Jessica Tasman-Jones
This article is brought to you by Agenda, an FT Specialist publication that focuses on corporate boards
US companies are burning through equity plan share reserves faster than anticipated, and are asking investors to replenish their reserves at a higher rate than usual.
So far this year, 22.6 per cent of Russell 3000 companies have included equity plan proposals on their proxy ballots, compared with 18.3 per cent in all of 2022, according to data from ISS Corporate Solutions.
The increase over last year is significant and could surpass the previous high in 2020 of 23.6 per cent, said Chan Pedris, executive director in compensation and governance advisory at ISS Corporate Solutions.
During the AGM season to date, two US companies, Compass Minerals and United Natural Foods, have failed to get sufficient shareholder support to replenish their equity pools. UNF declined to comment and Compass Minerals did not respond to a request for comment.
“We think that some of the competing factors — the war for talent, the geopolitical economic status, as well as declining stock prices — have probably placed an unexpected burden on companies’ share pools,” Heather Marshall, senior director in consultancy WTW’s executive compensation and board advisory practice, told a recent webcast.
Pedris agreed that uncertainty and volatility in the stock market meant companies were going back to shareholders sooner than expected. They have been granting more equity because of depressed stock prices.
This comes with a risk as it could lead to a company having such a high burn rate that ISS recommends investors vote down equity plan proposals.
Indeed the proxy adviser this year tightened the requirements for its equity plan scorecard and how it calculates burn rates, which could lead to more investors voting against companies' requests for additional shares.
For boards, equity compensation governance is typically tracked by the general counsel and human resources staff.
Most equity plans pass muster with investors because they understand that if companies don’t have enough shares in their equity plans, they have to rely on cash, said Michael Biggane, a director in WTW’s executive compensation and board advisory practice. “Investors want executives to have equity at risk just like they do, so everybody is in the same rowboat,” he said.
Directors should ensure that those responsible for tracking available equity pools are working with those who oversee hiring and benefits. This will help companies avoid being surprised by a dwindling share pool or the need to seek approval from investors for additional shares sooner than expected, experts say.
If companies’ share reserves are lower than anticipated, benefits, HR and legal staff will need to determine a course of action, said Barbara Baksa, executive director of the National Association of Stock Plan Professionals.
That could mean reducing the size of awards, issuing awards to fewer people – or a combination of both. Cash-based incentives could also be an option, said Baksa.
Moving away from options and pivoting to restricted shares is one possibility, because some employees value these more, says Marshall.
The compensation committee will want to see models showing how share pools are affected by different stock price and grants scenarios, said Ani Huang, president and chief executive of the HR Policy Association’s Center on Executive Compensation.
The committee should also focus on new hires with less equity in the company, she added. A reduction in grant size will have the most negative impact on these employees. The committee should question how any possible course of action will affect them, and whether new hires and high-potential and high-performance talent should be exempt, Huang said.
Levels of equity issuance for compensation plans are much lower in the UK than in the US and it is rare for companies to go beyond what investors would support, says Tom Gosling, executive fellow at London Business School.
"Where I have seen it in the past it has tended to be in smaller companies where management compensation is more material to the value of the business, and especially in tech industries where human capital is essential."
This article is based on a story written for Agenda by Amanda Gerut.
