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ISS Burn Rate Caps: 2009–2014
Edward A. Hauder, Senior Advisor

EXEQUITY

December 27, 2013

Independent Board and
Managem...
ISS Burn Rate Caps
As part of its analysis of equity compensation plan proposals, Institutional Shareholder Services (ISS)...
FVA Multiplier
A company’s FVA Multiplier depends on its three-year historic volatility annualized as of the
company’s spe...
ISS Burn Rate Caps for 2014
Russell 3000
GICS

Desc4510riiption4520

Non-Russell 3000

Mean

Standard
Deviation

2014 Burn...
Russell 3000 ISS Burn Rate Caps: 2009–2014

ISS Burn Rate Maximums
12.00%

Maximum Burn Rate

10.00%

8.00%

6.00%

4.00%
...
Excessive ISS Burn Rates
■ If a company’s ISS burn rate exceeds its GICS group ISS burn rate cap, ISS will recommend
AGAIN...
About Edward Hauder
Ed Hauder, Senior Advisor, Exequity LLP

■ Ed has consulted with companies in multiple industries on a...
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ISS Burn Rate Caps 2009-2014

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This presentation describes the ISS (Institutional Shareholder Services) burn rate methodology, details the ISS Burn Rate Caps for 2014, and gives a historical perspective of the ISS Burn Rate caps from 2009 through 2014.

Published in: Business, Economy & Finance
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ISS Burn Rate Caps 2009-2014

  1. 1. ISS Burn Rate Caps: 2009–2014 Edward A. Hauder, Senior Advisor EXEQUITY December 27, 2013 Independent 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.
  2. 2. 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 Global Industry Classification Standard (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 three years, using the chart set forth on the next slide Note: Performance-based FVAs 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, etc.) are not included in the calculation, as long as the company clearly discloses such awards will be paid out in cash and not shares. 1 Stock appreciation rights Full value awards (generally any award other than a stock option or SAR that is settled by the issuance of shares) 3 Common shares outstanding 2 ISS Burn Rate Caps_20131227 1 Exequity
  3. 3. FVA Multiplier A company’s FVA Multiplier depends on its three-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 three-year observation period for stock price volatility for purposes of both its shareholder value transfer (SVT) and burn rate tests starting December 1, 2011 ISS Burn Rate Caps_20131227 2 Exequity
  4. 4. ISS Burn Rate Caps for 2014 Russell 3000 GICS Desc4510riiption4520 Non-Russell 3000 Mean Standard Deviation 2014 Burn Rate Cap* Mean Standard Deviation 2014 Burn Rate Cap* 1010 Energy 2.14% 2.16% 4.30% 2.66% 3.60% 7.46%* 1510 Materials 1.55% 1.30% 2.85% 3.20% 4.65% 7.85% 2010 Capital Goods 1.81% 1.39% 3.20% 3.28% 4.88% 8.16% 2020 Commercial & Professional Services 2.55% 1.82% 4.37% 3.68% 3.65% 7.33% 2030 Transportation 1.53% 1.80% 3.33% 1.71% 1.98% 3.69% 2510 Automobiles & Components 1.78% 2.03% 3.81% 2.74% 3.21% 5.95% 2520 Consumer Durables & Apparel 2.48% 1.80% 4.28% 3.37% 4.24% 7.61% 2530 Consumer Services 2.55% 1.61% 4.16% 2.16% 2.12% 4.28% 2540 Media 2.45% 1.98% 4.43% 3.23% 2.24% 5.47% 2550 Retailing 2.41% 1.75% 4.16% 3.39% 3.21% 6.60% 1.59% 1.18% 2.77% 2.13% 2.32% 4.45% 3010, 3020, 3030 Consumer Staples 3510 Health Care Equipment & Services 3.00% 1.82% 4.82% 4.81% 4.27% 9.08% 3520 Pharmaceuticals & Biotechnology 3.65% 2.26% 5.91% 4.87% 4.11% 8.98% 4010 Banks 1.48% 1.65% 3.13% 1.12% 1.67% 2.79% 4020 Diversified Financials 3.65% 5.09% 8.74% 2.74% 4.43% 7.56%* 4030 Insurance 1.75% 1.55% 3.30% 1.05% 1.53% 2.58% 4040 Real Estate 1.36% 1.50% 2.86% 1.12% 1.56% 2.68% 4510 Software & Services 4.56% 2.69% 7.25% 5.26% 3.88% 9.14% 4520 Technology Hardware & Equipment 3.50% 1.99% 5.49% 3.96% 4.95% 8.91% 4530 Semiconductor Equipment 4.34% 2.38% 6.72% 4.67% 5.08% 9.75% 5010 Telecommunication Services 2.59% 1.63% 4.22% 3.57% 3.97% 7.54% 5510 Utilities 0.82% 0.47% 2.00%* 1.76% 1.90% 3.66% * Generally, Mean + Standard Deviation, subject to minimum cap of 2% (de minimis allowance) and maximum +/- 2 percentage points relative to prior year burn rate cap for same industry/index group ISS Burn Rate Caps_20131227 3 Exequity
  5. 5. Russell 3000 ISS Burn Rate Caps: 2009–2014 ISS Burn Rate Maximums 12.00% Maximum Burn Rate 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 1010 1510 2010 2020 2030 2510 2520 2530 2540 2550 3010, 3510 3520 4010 4020 4030 4040 4510 4520 4530 5010 5510 3020, 3030 2009 ISS Burn Rate Caps_20131227 2010 GICS 2011 2012 4 2013 2014 Exequity
  6. 6. 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_20131227 5 Exequity
  7. 7. About Edward Hauder Ed Hauder, Senior Advisor, Exequity LLP ■ Ed has consulted with companies in multiple industries on all aspects of executive and director compensation. He focuses on helping companies design compensation programs that assist them in achieving 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: edward.hauder@exqty.com | 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/EdHauder ISS Burn Rate Caps_20131227 6 Exequity

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