Have you ever played a card game with 5-year olds? Before you start, they explain the game in vague details and provide a list of rules that are customized to their needs. Then you begin playing, doing your best to remember the rules and keep the game moving and fun for everyone. STOP! The game is no longer fun. The 5-year has just realized that one of their rules is not beneficial to them. Because they are a kid and generally pretty darned cute, you allow the change of how the rules apply to them without comment (yet you must continue following their original rules). It doesn't take long for more rules to be changed and for a ball or car to be added to the mix (you must still follow the original rules). Then comes the part where you must do a short dance to get your next card. And, yes, you are still losing.
In October of 2014, I wrote about the new Equity Plan Scorecard (EPSC) from ISS. As a reminder, ISS, or Institutional Shareholder Services, provides guidance to investors regarding how they should vote during public company proxy season. ISS is not a 5-year old child. They are not really that cute (no offense intended). But, they seem to have a similar policy regarding the rules of the game.
I mentioned that the EPSC was both better and worse than the prior formulaic and didactic method of providing voting guidance on executive compensation. I stated that there was more wiggle room to do what was right for your company. I also said that the EPSC would leave many saying, “I think this will work, but it will depend on how some people I don't know (and who don't really know us) interpret and evaluate the information we put in our filings. What is the best way to balance cost, plan features and grant practices for your company and investors? I have no idea right now."
Unfortunately, I was right and the results were even less predictable than my cynical assumption. Frank Glassner, of the executive compensation consulting firm Veritas, just wrote an article about a company who followed ALL of the rules and still received a negative recommendation from ISS. Like a kid playing a game, ISS has decided that their “rules” are actually a flexible set of guidelines. Like playing a game with a 5-year old, this can leave even the best-intentioned professionals frustrated about what to do next.
In my 2014 post, I mentioned that we really couldn't complain in the future if we weren’t willing to comment as the new rule was being crafted. As expected, very few commented. Now we are stuck once again playing a game with rules that are only known to the originator. Let this be a lesson to all of us.
What we do is not a game. The rules that determine how we do our jobs cannot be subject to the whims of those who have decided that the rules do not work in their favor. Most of us do our best to perform to the standards set for us, but when the finish line moves during the race, we have every right to be annoyed (unless we were unwilling to participate before the rules were complete).
Have you found that compensation rules have recently changed for your company? Provide details in the comments section.
Dan Walter, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and has been deeply involved in equity compensation for a long, long time. Dan has written several inustry respurces including the recent Performance-Based Equity Compensation. He has co-authored “The Decision Makers Guide to Equity Compensation”and “Equity Alternatives” and a few other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.