The Advisors' Blog

Last week, Glass Lewis released this special report (available for download) on its approach to analyzing equity plan proposals. The report reviews the proxy advisor’s Equity Compensation Model — the tool used by its analysts to assess share request proposals put forth by U.S. companies — in detail and discusses equity plan proposal trends from the 2024 proxy season.

The model includes eleven quantitative and qualitative tests that gauge:

– The potential dilution and overall costs of the proposed plan,
– If the company already has enough shares for near-term granting,
– If the proposed share pool is excessively large, decreasing the frequency in which shareholders will have a say on the company’s equity compensation program, and
– If the company’s actual share usage aligns with shareholders’ values.

Glass Lewis’ four cost-based tests evaluate actual and projected costs to shareholders relative to industry peers. Potential dilution as measured by overhang is evaluated on both absolute and relative bases. The results of the remaining quantitative tests are compared to fixed benchmarks, adjusted to incorporate sector-specific considerations or changes to the size of the employee base at the company. Additional tests measure how well the qualitative features of the proposed plan follow best practices in pay governance.

For the 2024 proxy season, the “dilution exceeds peers” test was most commonly failed — though the report notes that a mere 6% of proposals that failed this test actually received an against recommendation after the full, holistic assessment. The next most failed test was the “pace of historical grants” test, which finds the ratio of the company’s net recent grants to its total shares outstanding and compares that to an industry benchmark. In terms of the test most correlated to against recommendations, the “expensed cost as a percentage of operating metrics” and “projected cost as a percentage of operating metrics” were most correlated. A majority of proposals that failed either test ultimately received an against recommendation.

Glass Lewis has recently been emphasizing how its approach to executive compensation is both “holistic” and “case-by-case,” and this is again reiterated in this report.

In some tests, the model uses historical practices to forecast future granting behavior. However, it may be the case that such historical data no longer apply to companies that have experienced significant transformations such as large mergers. As a result, each company that presents a proposal to Glass Lewis’ clients for vote is evaluated on a case-by-case basis to ensure that all tests used in the model are applicable. When a transformative event or a contravening factor is identified, Glass Lewis refrains from using the full model, though unimpacted tests remain part of our assessments.

– Meredith Ervine