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Equity-Based Compensation (France)

 

Background and Overview

ISS' European policy on equity-based compensation contains stipulations on the allowable volume of shares that a company may reserve for equity plans (the respective limits are 5 percent of fully diluted share capital for mature companies, and 10 percent of fully diluted share capital for growth companies). In France, equity plan volumes typically exceed 5 percent of a company's share capital: the average equity plan volume at SBF 120 companies was 6 percent in 2011, with 47.3 percent of the companies with an outstanding volume of greater than 5 percent. This is primarily attributable to a combination of market-specific legal requirements and tax incentives that result in equity plans with broad employee participation levels and award blocking periods of four to six years.

The resulting overhang level has been a major factor leading ISS to recommend against a high number of management-proposed plans over the past years. However, according to ISS' 2010 policy survey, performance criteria were cited by 68 percent of investor respondents as the largest concerns when evaluating long-term incentive plans.   Moreover, the AFEP-MEDEF and Middlenext corporate governance codes currently recommend that all or a portion of equity awards to executives be subject to performance vesting criteria or premium pricing, and ISS has observed a broader use of performance criteria following the AFEP-MEDEF recommendations on remuneration published in 2008. However, this positive trend had little impact on ISS' vote recommendations due to the current policy's stipulations on volume.

Key Changes Under Consideration

In line with the current situation in the French market, ISS is considering the following changes to its policy on equity-based compensation for France:

  • Increasing focus on performance criteria in line with local best practice. This would mean that for companies that refer to the AFEP-MEDEF Code, ISS would expect that all awards granted to executives would be subject to challenging performance criteria or premium pricing. For companies that refer to the Middlenext Code or no code at all, ISS would expect at least a portion of awards to executives to be subject to challenging performance criteria or premium pricing. In all cases, free shares shall remain subject to performance criteria for all beneficiaries. 
  • Raising the allowable volume ceiling to 10 percent of share capital for all companies. This new level is better aligned with the generally accepted standard in France and consistent with the AFG recommendations.
  • Introducing a burn rate criterion to measure use of capital.The proposed policy would state that the company's unadjusted three-year burn rate (or, if lower, the maximum volume per year implied by the proposal made at the general meeting) must not exceed the mean plus one standard deviation of the average unadjusted three-year burn rate of its sector group, but not more than one percentage point above the prior year sector cap.

Intent and Impact

The introduction of higher expectations on performance criteria in France would align ISS policy with local best practice recommendations, and the increased focus on performance criteria reflects investor views.  We further note that the introduction of the burn rate criterion would provide for focus on the actual transfer of equity to employees. ISS already applies similar burn rate policies for other markets (such as the US, Canada, and in the ABI guidelines for the UK), and a majority of institutional respondents to the 2011 policy survey supported the inclusion of burn rate criteria in the equity compensation policy. Other provisions of the ISS European Compensation Guidelines (including vesting periods, administration body, and so forth) would continue to apply to French companies and remain sufficient reasons to recommend against any proposal.

At the same time, introducing new volume and sector-based burn rate stipulations for the French market is expected to reduce the number of companies not in line with ISS guidelines on this particular issue. Nevertheless, the requirement for challenging performance criteria or premium pricing will mean that a large majority of plans, including those with performance criteria, may not satisfy the proposed ISS policy provisions (based on current practices and levels of disclosure).

Request for Comment

Please feel free to add any additional information or comments on the proposed policy change.  In addition, ISS is specifically seeking feedback on the following:

  • Under AFEP-MEDEF and Middlenext corporate governance codes, it is recommended best practice to require performance criteria for either all (AFEP-MEDEF) or a portion (Middlenext) of equity-based compensation to executives.  Under the proposed policy on equity-based compensation for France, ISS intends to define the "executives" as all members of the company's management board or executive committee, plus any other director classified as an executive under ISS' director election policy. Would your organization support this definition?
     
  • The Middlenext Code recommends that a portion of equity-based compensation to executives be performance-based.  At companies that refer to the Middlenext Code or no code at all, what percentage of equity-based compensation would your organization consider to be significantly performance-based?   
     
  • A key stipulation of the proposed policy requires that executive equity awards contain sufficiently challenging performance criteria. In order to evaluate this, ISS prefers that companies disclose specific performance targets for future awards. In cases where a company may refuse to disclose this information, would your organization still be willing to support an equity plan if the company has an established track record of issuing equity awards with appropriately challenging performance targets in the past?

To submit a comment, please send via e-mail to policy@issgovernance.com.Please indicate your name and organization for attribution. While ISS will consider all feedback that it receives, comments will not be published without attribution.

All comments received will be published as received, unless otherwise requested in the body of the e-mail submission.