The Advisors' Blog

This blog from Meridian Compensation Partners walks through two main approaches that companies can leverage — either together or independently — to start the process of determining the right size for a new share pool request. One looks internally — what the company needs — and the other looks externally — what proxy advisors and investors will expect. Ultimately, most companies will need to closely assess both, but the blog notes situations where companies may focus more on one than the other.

– Ground-Up Approach: This method involves calculating the projected annual equity value needed for grants, typically guided by burn rate, historical share usage and/or peer and market benchmarks. The projection is then scaled to cover the desired number of years the share pool should last (external stakeholders generally prefer a share request sufficient for 2-3 years).

This approach may be suited for companies with controlled ownership, moderate share pool needs, strong shareholder relations, or no major strategic changes anticipated.

– Directive Approach (based on Shareholder and Regulatory Expectations): Institutional shareholders and proxy advisory firms, such as ISS and Glass Lewis, have guidelines on acceptable burn rates, dilution levels and share pool sizes. Aligning with these guidelines can help companies gain shareholder support for additional shares, especially when share pool requests are sizable.

Situations where this may be appropriate include: companies with meaningful institutional shareholder ownership; and companies that require a significant increase in the share pool, or that have major plan provisions not aligned with shareholder interests.

The blog also discusses factors that will influence the company’s assessment under the Directive Approach — including the impact that plan design may have on the ability to get the increase approved — reiterating a note I shared in January that certain provisions that provide flexibility to the compensation committee continue to be popular with companies despite being disfavored by the proxy advisors.

– Meredith Ervine