ISS Burn Rate Caps: 2009–2012 Edward A. Hauder, Senior AdvisorEXEQUITY January 3, 2012Independent Board and Management Advisors To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the approval of Exequity LLP.
ISS Burn Rate Caps As part of its analysis of equity compensation plan proposals, Institutional Shareholder Services (ISS) analyzes a company’s “burn rate” compared to maximum amounts established by ISS for Russell 3000 and non-Russell 3000 GICS groups. ■ ISS Burn Rate = (X + Y + Z) / 3, where: X = Burn Rate in Last FY = [(options + SARs1 granted during Last FY) + (FVAs2 granted during Last FY x FVA Multiplier)] / Weighted Average CSO3 during Last FY Y = Burn Rate in Last FY-1 = [(options + SARs granted during Last FY-1) + (FVAs granted during Last FY-1 x FVA Multiplier)] / Weighted Average CSO during Last FY-1 Z = Burn Rate in Last FY-2 = [(options + SARs granted during Last FY-2) + (FVAs granted during Last FY-2 x FVA Multiplier)] / Weighted Average CSO during Last FY-2 ► FVA Multiplier is determined by ISS as of a company’s lock-in date (four per year, based on when a company’s shareholder meeting will be held) based on the company’s volatility during the past 3 years, using the chart set forth on the next slide 1 Stock Appreciation Right 2 Full Value Award (generally any award other than a stock option or SAR that is settled by the issuance of shares) 3 Common Shares Outstanding Note: Performance-based full value awards are included in the year in which the underlying shares are delivered, i.e., in the year earned and paid out, not the year in which the performance period begins. Cash-Settled Awards (Cash-Settled RSUs, Cash-Settled SARs) are not included in the calculation, so long as the company clearly discloses such awards will be paid out in cash and not shares.ISS Burn Rate Caps 09-12_20120103 1 Exequity
FVA Multiplier A company’s FVA Multiplier depends on its 3-year historic volatility annualized as of the company’s specific ISS Lock-In Date. Annual Stock Price Volatility FVA Multiplier 54.6% and higher 1 FVA = 1.5 option shares 36.1% or higher and less than 54.6% 1 FVA = 2.0 option shares 24.9% or higher and less than 36.1% 1 FVA = 2.5 option shares 16.5% or higher and less than 24.9% 1 FVA = 3.0 option shares 7.9% or higher and less than 16.5% 1 FVA = 3.5 option shares Less than 7.9% 1 FVA = 4.0 option shares Note: ISS Research moved to using a 3-year observation period for stock price volatility for purposes of both its Shareholder Value Transfer (SVT) and Burn Rate tests as of 12/1/2011.ISS Burn Rate Caps 09-12_20120103 2 Exequity
ISS Burn Rate Caps for 2012Note: Highlighted GICS Groups are those Russell 3000 groups that had their 2012 Burn Rate Caps limited by the two percentage point governor forincreases and decreases. ISS Burn Rate Caps 09-12_20120103 3 Exequity
Excessive ISS Burn Rates ■ If a company’s ISS Burn Rate exceeds its GICS group ISS Burn Rate Cap, ISS will recommend AGAINST the company’s equity compensation plan proposal. ■ Companies that exceed their allowable burn rate cap can avoid a negative vote recommendation from ISS by publicly committing (in a public filing) to maintain its burn rate over the next three fiscal years of equal to or less than its GICS group ISS Burn Rate Cap, i.e., the industry mean plus one standard deviation as calculated by ISS for the year of the equity compensation plan proposal.ISS Burn Rate Caps 09-12_20120103 5 Exequity
About Edward Hauder Ed Hauder, Senior Advisor, Exequity LLP ■ Ed has consulted with hundreds of companies in multiple industries on all aspects of executive and director compensation. He focuses on helping companies design compensation programs that assist them achieve their strategic goals and objectives, while at the same time keeping them out of the penalty box with shareholders and the media. Ed also helps companies understand and find practical solutions for technical matters impacting compensation, e.g., financial accounting, securities, tax, and corporate governance issues. His expertise includes ISS compensation modeling and policies, which enabled him to create the Flexible Share Authorization to maximize equity plan flexibility. ■ Ed is a frequent author and speaker and his recent articles have appeared in The Corporate Board, workspan Weekly, BNA’s Executive Compensation Library, and Tax Management Compensation Planning Journal. ■ Ed received a B.A. in International Relations from Juniata College, a J.D., cum laude, from Seattle University School of Law, and an LL.M. (Tax), with honors, from IIT-Chicago-Kent College of Law. Ed’s Contact Information Email: firstname.lastname@example.org | Office: 847-996-3990 / Cell: 847-406-8150 Exequity’s web site: www.exqty.com Ed’s Equity Compensation Plan Blog: www.EdwardHauder.com Track the latest Say on Pay Developments at: www.Say-on-Pay.com Follow Ed on Twitter: www.Twitter.com/EdHauderISS Burn Rate Caps 09-12_20120103 6 Exequity