본 기사는 주식 기반 보상 시리즈의 일곱 번째이자 마지막 편입니다. 상장 기업이 주식 보상 부여 시 고려해야 할 특별 사항을 개괄적으로 설명하며, 여기에는 대리권 자문 회사가 보상 계획 설계에 미치는 영향, 부여 시기 고려 사항, 1934년 증권거래법 제16조(Section 16) 준수, 그리고 증권거래위원회(SEC) 등록 요건 등이 포함됩니다.
If you missed any of the articles in our series, check them out via the links below:
- Article One: Overview of Equity-Based Compensation Alternatives
- Article Two: Stock Options and SARs
- Article Three: Incentive Stock Options
- Article Four: Restricted Stock, RSUs and PSUs
- Article Five: Profits Interests
- Article Six: Cash Settled Awards
Compensation Plan Design
Publicly-traded companies must generally get approval from their shareholders to establish a new equity compensation plan, increase the number of shares reserved under an existing plan, or make certain amendments to an existing equity plan, each as required by the listing standards of the exchange on which the company’s shares are traded. Proxy advisors (such as ISS and Glass Lewis) provide voting recommendations to investors on these proposals, so as a result, many publicly-traded companies design their equity plans with ISS and Glass Lewis’s voting guidelines in mind.
ISS 2025 Voting Recommendation Guidelines:
Institutional Shareholder Services, or “ISS,” scores equity plans using an “equity plan scorecard,” which weighs three factors: (1) plan cost (based on a proprietary ISS model considering the number of shares reserved under the plan), (2) plan features, and (3) historical grant practices. Generally, the more points that a company scores on the plan features and historical grant practices sections of the scorecard, the more shares that the company may reserve under its plan and still get a passing score from ISS.
ISS releases an updated scorecard each year, typically in December. For 2025, ISS has indicated that there are no changes from the 2024 scorecard (you can view the updated FAQs about the scorecard here). As a result, the plan features and grant practices that ISS will consider when making vote recommendations on equity compensation plans in 2025 will continue to be the following:
Plan features:
- Transparency Regarding Change in Control Treatment. Full points are awarded only if the plan provides specific change in control vesting treatment for both time-vesting and performance-based awards. Discretionary vesting will result in no points.
- Accelerated Vesting Authority. Full points are awarded if death and disability are the only circumstances where the plan administrator can accelerate the vesting of outstanding awards in its discretion. If the plan administrator can accelerate vesting in any other circumstances, then no points are awarded.
- Liberal Share Recycling. ISS defines liberal share recycling to mean when shares that are vested and/or exercised can be added back to the plan’s reserve, such as adding back shares withheld to cover taxes or to pay the option exercise price. No points are awarded if liberal share recycling is permitted; full points awarded if not permitted at all; and half points are awarded if permitted for full value awards, but not options or stock appreciation rights (SARs), or vice versa.
- Minimum Vesting Period. Full points are awarded on this factor if the plan prohibits vesting of any portion of an award until at least the first anniversary of grant; no points are awarded if the minimum vesting period is less than 1 year, there is no minimum vesting period, or the plan administrator can override the minimum vesting period in individual award agreements.
- Dividends on Unvested Awards. To receive points on this factor, the plan must expressly prohibit the payment of dividends (and dividend equivalents) on any unvested award; no points are awarded if not expressly prohibited.
Historical Grant Practices:
- Burn Rate: ISS compares the company’s three-year average burn rate to ISS’s benchmark for companies in the same industry and index. (Burn rate benchmarks can be found in Exhibit A to the FAQs linked above.)
- Estimated Plan Duration. ISS estimates the number of years that the proposed share reserve will last based on the company’s burn rate. If five years or less, then full points are awarded; between 5 and 6 years, half points, and more than six years, no points.
- CEO Vesting Period. Considers the length of the vesting period on all equity awards granted to the CEO within the last three years. If the vesting period and performance period for all awards is more than three years, then full points are awarded. However, if the company does not grant performance awards, then that is an overriding factor, and no points will be awarded for this factor.
- CEO Award Types. Considers the proportion of the CEO’s equity awards that are performance-based during the last three years. If 50% or more, then full points; if 33%-50%, then half points; if less than 33%, then no points are awarded.
- Clawback Policy: The Company’s clawback policy must require recovery of both time and performance-based equity awards to receive points. A clawback policy that only meets the minimum SEC and stock exchange requirements will not receive points on this factor because the SEC and stock exchange requirements do not generally require clawback policies to cover time-based awards.
Glass Lewis 2025 Guidelines:
Glass Lewis evaluates equity plans holistically and does not have a predetermined scorecard, but is guided by the following principles when evaluating equity plan proposals:
- Companies should seek more shares only when needed;
- Requested share reserves should be conservative so that companies must seek shareholder approval at least every three to four years;
- Dilution of annual net share count or voting power, along with the “overhang” of incentive plans, should be limited;
- Annual cost of the plan should be reasonable as a percentage of financial results and should be in line with the peer group and proportional to the business’s value;
- Plans should not permit repricing of stock options without shareholder approval;
- Plans should not contain excessively liberal administrative or payment terms;
- Plans should not count shares in ways that understate the potential dilution, or cost, to common shareholders; and
- Equity programs should be adequately disclosed to shareholders.
Glass Lewis believes that the following characteristics are common to most well-structured long-term incentive (LTI) plans:
- No re-testing or lowering of pre-established performance conditions;
- Performance metrics should not be easily manipulated by management;
- Each award should have two or more performance metrics;
- At least one performance metric should be a relative metric that compares the company’s performance to a relevant peer group or index;
- Performance periods should be at least three years;
- There should be additional post-vesting holding periods to encourage long-term executive share ownership; and
- At least half of any annual grant should consist of performance-based awards.
Large Investor Voting Policies
Large institutional investors such as Black Rock and Vanguard also have their own voting policies, which may or may not align with ISS and Glass Lewis. So, it is advisable for companies to also check the voting policies of their largest investors when putting an equity plan up for shareholder approval.
Grant Timing
No rule specifically requires or forbids any particular grant timing for publicly-traded companies. However, there has been increased scrutiny of situations in which companies have allegedly sought to time the grant of equity awards to take advantage of material nonpublic information to deliver more value to employees at the expense of shareholders, or in a manner that results in improper accounting treatment. There is also a relatively new requirement under Item 402(x) of Regulation S-K that requires companies to disclose in their Form 10-K or annual meeting proxy statement (1) the company’s policies on timing awards of options in relation to the release of material nonpublic information, and (2) whether the company has timed the disclosure of material nonpublic information for purposes of affecting the value of executive compensation. Even if the company does not issue option awards, it is prudent to include a statement addressing item (2) as such disclosure does not appear to be limited only to option awards.
In addition to the narrative disclosure, if a company awards options to a named executive officer within the period starting four business days before, and ending one day after, the filing or furnishing of a Form 10-Q, Form 10-K, or Form 8-K that discloses material nonpublic information, then the company must also disclose detailed information about each such grant in the tabular format specified by Item 402(x)(2).
Some companies are anticipating increased scrutiny over the timing of grants as a result of these new requirements, and though not required by any rule, some companies are preemptively deciding to time both the grant and settlement of equity awards to occur only during open trading windows. Whether this becomes a standard practice still remains to be seen.
Section 16 and Insider Trading Compliance
While these rules are complicated and subject to nuance, officers who are subject to Section 16 should generally report equity award grants on a Form 4 as follows:
- Restricted Stock:Must be reported in Table I within two trading days of the date of grant.
- RSUs: Grants of restricted stock units that are not subject to performance conditions must also be reported within two trading days of the date of grant. They can either be reported in Table II as derivative securities or, if they can be settled only in stock (not cash), in Table I. If reported in Table II, then a separate filing must be done within two trading days of settlement to report the settlement of the RSUs reported in Table II.
- Options and SARs: Must be reported in Table II within two trading days of the date of grant. Upon exercise of the award, report the conversion from options or SARs (as reported in Table II) to shares reported in Table I.
- Performance Share Units or Performance Shares (PSUs): The reporting requirements for PSUs are trickier. Typically, PSUs are required to be reported within two trading days of the date the performance goals are satisfied (even if the award remains subject to time-based vesting as of such date) using the same reporting principles as RSUs. However, if the performance goals are solely related to the market price of the issuer’s securities, then the awards are reportable in Table II at the time of grant (and separately in Table I when the award is earned and shares are issued).
Securities Registration
Offers of shares made to employees through equity awards generally must be registered with the SEC on a Form S-8. When a publicly-traded company establishes a new equity compensation plan, therefore, it will typically be required to file a Form S-8 registration statement registering a definite number of shares. The company will want to establish a process for tracking how many shares have been used and are remaining at all times to determine when additional shares need to be registered for the equity compensation plan. As part of the standard planning process for making ongoing equity grants, companies should regularly confirm that they have enough shares remaining on their Form S-8 registration statements to cover the grant or take steps to register additional shares.
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This article is intended only as an overview and addresses only certain key aspects of publicly-traded companies’ equity awards and is not intended to be comprehensive. If you have questions about the topics covered in this article or other issues that are not addressed in this article, then please contact your Foley attorney for more information.
