Institutional Shareholder Services (ISS) recently announced updates to its proxy voting guidelines for 2017. One update states that if a company pays dividends on unvested shares that are part of an equity award, it will adversely affect the company's ISS score.
The new guideline states, "From an incentive and retention perspective, dividends on unvested awards should be paid only after the underlying awards have been earned and not during the performance / service vesting period."
Under this new ISS guideline:
- Full points will be earned if the equity plan expressly prohibits, for all award types, the payment of dividends before the vesting of the underlying award. Accrual of dividends payable upon vesting is acceptable.
- No points will be earned if this prohibition is absent or incomplete (i.e. not applicable to all award types). A company's general practice (not enumerated in the plan document) of not paying dividends until vesting will not suffice.
Will this change affect company policies in this area?
Computershare conducted a small survey of its own clients who pay out cash dividends on unvested shares. Most currently pay out cash dividends immediately. And despite the change in the ISS guidelines, nearly half have no plans to change their policies, and the rest are unsure if they will change. Basically, despite the fact that the new ISS guidelines adversely affect companies who immediately pay out cash dividends on unvested shares, most companies have not been motivated to change their policies at this time.
That said, the National Association of Stock Plan Professionals (NASPP) has surveyed its members on this subject every three years going back to 2007. According to its results, the practice of paying out cash dividends on unvested shares has been on a steady decline. On restricted stock awards, in 2007, 67 percent of companies paid out cash dividends on unvested shares. By 2016, that dropped to 51 percent. The same is true for restricted stock units. 42 percent paid out in 2007, while only 23 percent paid out in 2016.
So while the trend shows companies moving away from paying out cash dividends on unvested shares, it is not clear if the change to ISS Guidelines will have an immediate impact on that trend.
We can help you manage a cash dividend accrual program
Accruing cash dividend payments to each vesting or to the final vesting of awards allows your company to continue paying out dividends on unvested awards while complying with ISS Guidelines. Our cash dividend accrual feature can help you manage such payments.
When dividends are calculated, our clients have a choice to reflect the dividend as distributed immediately or have it prorated by tranche and accrued to next vest date or until the last vest date.
Want to know more?
You can review the full ISS Guidelines here. You can also read an NASPP blog post on the subject here.
And for more information on Computershare's cash dividend accrual feature, our clients should talk to their relationship manager.