Shutterfly: A Glass Lewis Equity Compensation Use Case
What exactly is a tech company? Shutterfly asked a similar question in proposing an amendment to their equity compensation program at the 2019 annual shareholder meeting. The plan included a number of best practice features and avoided many of the design pitfalls that often provoke shareholder ire, but the S&P 1000 firm still had quite a fight on their hands in securing shareholder support.
The main contentions related not to the terms of the plan, but rather to Shutterfly’s recent granting practices – and the appropriate context for analyzing them. The firm’s equity plan disclosure included relatively candid discussion of the impact of executive transitions, recent acquisitions and repurchase activity, as well as the general difficulty of existing in Silicon Valley. Indeed, that location is central to the company’s point; the disclosure takes specific umbrage with the firm’s inclusion in the retail sector for equity plan assessments. While the company acknowledges that the comparison also includes a narrower internet-specific sub-category, it argues that retailers generally “tend to place more emphasis on cash compensation and grant to a smaller portion of their employees than technology companies like Shutterfly[.]”
The equity compensation model that Glass Lewis uses to develop analysis and voting recommendations looks at multiple factors around cost and dilution, and many of Shutterfly’s concerns were accounted for. Changes in employee ranks and share counts are formally incorporated into the model, which assesses company practices based on a mixture of broad and specific GICS-derived groupings. Using a combination of CGLytics data and the ECM’s back-end information, we reviewed the model result in the context of some of the other claims.
First, we looked at some of the characteristics of the internet retail industry group to identify how closely the more narrow group within the retail sector compared with Shutterfly. We began by comparing R&D/technology expenditures relative to revenue, which one might expect to be higher for ‘cutting edge’ firms. Shutterfly’s last fiscal year R&D spend was comparable the ECM industry group midpoints, each in the high single-digit percentages. However, to the company’s credit, spend was over 14% of revenue on a trailing basis and for the most recent fiscal year if the revenue from newly-acquired Lifetouch is excluded. Shutterfly also had only slightly lower operating margin than the group median and average, suggesting some comparability. We also found that, like Shutterfly, almost 40% of the industry group was headquartered in areas with a high cost of living. Still, the mix of tangible and intangible products sold by the group complicates this comparison. Ultimately, the industry used by the Glass Lewis ECM appeared to be a fair, if not perfect, peer group for comparing equity usage.
Of course, no peer group is truly perfect. Instead, they serve as a starting point for deeper investigation. In this case, based on the concerns raised above we took a closer look at a group of software & services companies within a range of Shutterfly’s revenue and market capitalization. Most of those firms did not provide the same level of R&D disclosure as Shutterfly, but had a higher average operating margin than the reluctant retailer. Shutterfly’s equity burn rate exceeded both the software & services group and the retail sector, even prior to the significant Lifetouch acquisition, and a close look at the company’s cost and dilution figures showed recent cost proportions well above the average for that sector.
Ultimately, just enough shareholders were convinced of the adequacy of the plan. The final vote tally showed roughly 56% support, a close margin for a type of proposal that usually receives near 90% approval. Any argument citing the poor fit of an established comparator group invites close review and a look at the comparison that ostensibly don’t work. Those reviews require good data – and the right tools.
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