A Review of Russell 3000 Equity Plan Proposals

Since 2024 has wrapped up, we observed a similar number of equity proposals and shareholder support levels as in calendar year 2023. Approximately 24% of the Russell 3000 (over 700 companies) submitted an equity plan proposal for shareholder approval between January 1, 2024, and December 31, 2024. Companies have received significant support from shareholders on their 2024 equity plan proposals, about 88% support on average, and only 1% of equity plan proposals failed in 2024.

Figure 1. Summary of Equity Plan Shareholder Proposal Outcomes in 2023 and 2024¹

While 2024 shareholder support levels are similar to 2023 results, and the majority of companies received shareholder support in the 90% to 100% range, we observed a year over year decrease in the number of companies receiving support in the 80% to 89% range and the 70% to 79% range. Overall, the 2024 shareholder vote results continue to demonstrate companies receiving overwhelming support when an equity plan proposal is submitted to shareholders for approval. See Figure 2 for year-over-year details (please note two companies in 2024 and one company in 2023 did not report their vote outcomes and have been excluded from the chart).

Figure 2. Equity Plan Shareholder Proposal Vote Results in 2023 and 2024¹

‍Impact of Proxy Advisors’ Recommendations on Equity Plan Proposal Outcomes

The majority of Russell 3000 companies received favorable recommendations from proxy advisors on their equity plan proposals (71% received support from Institutional Shareholder Services (ISS) and 85% received support from Glass Lewis (GL)). Companies that received ISS or GL opposition, on average, received lower shareholder support by about 17 percentage points and 12 percentage points, respectively. However, the equity plan proposal failure rate increases very modestly (to 1.9% when ISS is in opposition and to 3.7% when GL is in opposition).

Figure 3. 2024 Proxy Advisor Vote Recommendations^1,2

When taking a closer look at companies’ average shareholder support results based on market capitalization (market cap) and industry sector (based on the 2-digit global industry classification standard (GICS)), we observed the following:

Figure 4. 2024 Proxy Advisor Against Vote Recommendations by Market Capitalization ^1,2

• Companies with market caps of less than $500M received the lowest shareholder support on their equity plan proposals (84% average shareholder support) and received the highest percentage of opposition from ISS and GL (44% and 20%, respectively) in comparison to larger market cap companies.

• Companies with market caps of $20B and greater received the highest support, on average, from both shareholders (91% average shareholder support) and proxy advisors (82% and 96% favorable vote recommendations from ISS and GL, respectively).

• Industry sectors with relatively high ISS opposition (30% and greater) included communication services (e.g., media and entertainment), health care (e.g., pharma/biotech), consumer discretionary (e.g., retail), and real estate. None of the industry sectors had GL opposition above 30%.

• The industry sectors with the lowest opposition from ISS or GL were utilities (13% from ISS) and consumer staples (5% from GL).

Figure 5. 2024 Proxy Advisor Against Vote Recommendations by Industry Sector ^1,2

Both ISS and GL utilize proprietary models that consider quantitative aspects of shareholder dilution and equity plan share usage as well as qualitative aspects such as shareholder friendly plan provisions. Despite the complex nature of the proxy advisors’ models, shareholder vote recommendations appear to generally come down to how costly the equity plan is in terms of the potential dilutive effect to shareholders and how companies have been managing equity spend.

Potential Dilution

‍Figure 6. Median Potential Dilution Percentages, as of June 30, 2024³

Potential dilution measures the impact on shareholder ownership of a company from the issuance of equity awards to employees. The dilution calculation assumes that the company grants equity awards using all available shares under the equity plan pool and that all awards are exercised/vested and settled by issuing additional shares. Median potential dilution for Russell 3000 companies is about 10%, with significant variability across industry sectors due to differences in capital structures (higher total common shares outstanding generally results in lower dilution levels), equity grant practices (e.g., award type, award size, eligibility, etc.), pay mix, and other factors. The highest median potential dilution is observed in the health care sector (18%), which includes pharma and biotech companies, while the lowest median potential dilution is found in the utilities sector (3%).

ISS will automatically recommend that shareholders vote “against” an equity plan proposal that results in dilution of greater than 20% for S&P 500 companies or greater than 25% for Russell 3000 companies. A company’s potential dilution resulting from a requested share pool increase is an important factor considered by shareholders when voting on an equity plan proposal. Some institutional investors have specific dilution thresholds that are used as a guideline when determining how to vote as well as other factors. For example, The Vanguard Group’s Proxy Voting Policy for U.S. Portfolio Companies (effective February 2024) states it is likely to vote against a proposal when “total potential dilution (including all stock-based plans) exceeds 20% of shares outstanding”⁴; and Amundi Asset Management U.S.’s proxy voting guidelines state it will “reject plans with 15% or more potential dilution”.⁵ Other institutional investors state in their proxy voting guidelines that they consider dilution when determining how to vote on an equity plan proposal but do not disclose a threshold and/or state their evaluation of dilution depends on the company’s size, industry, lifecycle, etc.

A company’s potential dilution in comparison to its peers and industry is a helpful data point when trying to predict whether a company’s new equity plan proposal will be approved. To test the impact of potential dilution levels, we analyzed potential dilution levels at Russell 3000 companies that received low shareholder support (which we defined as less than 70%) for their equity plan proposals in 2023 and 2024. For this subset of companies, median potential dilution was 20%, or double the median of the Russell 3000 potential dilution of 10%. The size of the new share pool requests was 6% of common shares outstanding, at median, and ranged from less than 1% to 26% in our total sample across all industry sectors. Potential dilution levels in the year of the equity plan proposal were about 8 percentage points higher than the median of the respective industry sector, on average.

Figure 7. Median Potential Dilution Percentages based on Industry Sector and Low Shareholder Equity Plan Support as of June 30, 2024³

Frequency of Equity Plan Proposals

In addition to evaluating potential dilution levels, we analyzed the frequency of equity plan proposals over the last 10 years among the Russell 3000, which resulted in the following conclusions:

• It is most common to return to shareholders every 2 to 3 years to seek equity plan approvals.
• Consumer staples and utility companies’ equity share pools typically last the longest, and these companies usually request more shares every 3.5 years, on average.
• Health care companies (e.g., pharma/biotech) generally go back for more shares more frequently: 2.1 years on average.
• Companies with annual equity plan proposals were mostly from the healthcare (e.g., pharma/biotech) and information technology industry sectors, and half of the companies with annual equity plan proposals had a market capitalization of less than $2B.

We also reviewed the correlation between frequency of equity plan proposals and average shareholder support and observed the following (refer to Figure 8 for more details):

Figure 8. Distribution of Average Shareholder Support by Equity Plan Proposal Frequency¹

Why Companies Fail

While the majority of companies with equity plan proposals over the past two years have received majority shareholder support, we thought it would be helpful for readers to understand the characteristics of equity plan proposals that failed obtaining shareholder support. Based on reviewing the 13 proposals that failed to obtain shareholder support of the new share request in 2023 and 2024 (with one company failing two years in a row), we note the following:

• Companies in the healthcare sector represented about half of the proposals that received shareholder support below 50%, with vote outcomes ranging from 19% to 47%.
• All but one of the companies had potential dilution levels above their respective industry sector median with potential dilution 13 percentage points, on average, higher than the companies’ industry sector median.
• Problematic executive compensation practices and failed Say on Pay (SOP) votes were not necessarily drivers in a failed equity plan proposal (54% of companies not receiving equity plan support received SOP support of 60% or higher); 69% and 46% of companies received SOP support from ISS and GL, respectively.
• Negative 1-year total shareholder return (TSR) was not likely the driver on why companies failed their equity plan proposal, as 38% had positive TSR.
• At least half of the companies used inducement awards (e.g., granted new hire employee awards from a non-shareholder approved equity incentive plan).

Key Equity Plan Proposal Considerations

As companies are preparing for equity plan proposals, there are several things that can be done to increase the likelihood of a successful shareholder vote outcome. We highlight some of these considerations below:

1. Analyze the share reserve pool under various stock price scenarios to help determine how many shares are needed over the next 1 to 3 years.

2. Calculate current and potential dilution levels and share usage levels on an absolute basis and relative to your peer group and overall industry sector.

3. Understand the voting guidelines on new share requests of your largest institutional shareholders, including any brightline policies such as excessive dilution thresholds. Also, understand how likely your institutional shareholders might follow a vote recommendation from ISS and GL.

4. Understand what the proxy advisor “dealbreakers” are (e.g., allowing for option repricings or cash buyouts without shareholder approval, “evergreen” provisions that automatically replenish the share reserve pool). Estimate the likelihood of proxy advisors’ vote recommendations on the proposal. If opposition is anticipated, consideration should be given to engaging with the largest shareholders well before the annual shareholder meeting.

5. Ensure the proxy disclosure of the equity plan proposal is clear and complete. Within the equity plan proposal disclosure, highlight shareholder friendly design features and practices (e.g., reasonable dilution and share usage levels, requiring shareholder approval of option repricings or cash buyouts) and the role equity plays in attracting, motivating, and retaining employees as well as why it is important to the success of the company.

General questions about this Viewpoint can be directed to Tara Tays (tara.tays@paygovernance.com) or Linda Pappas (linda.pappas@paygovernance.com).

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¹ Source: ISS Corporate, Voting Analytics database

² Source: Diligent Market Intelligence

³ Potential dilution percentages based on information in ESGAUGE’s database and industry sector is based on 2-digit GICS codes‍

⁴ The Vanguard Group. Proxy voting policy for U.S. portfolio companies. February 2024. https://corporate.vanguard.com/content/dam/corp/advocate/investment-stewardship/pdf/policies-and-reports/us_proxy_voting_policy_2024.pdf.

⁵ Amundi Asset Management US, Inc. Proxy Policy. January 2021. https://nationwidefinancial.com/media/pdf/proxy-amundi.pdf.

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