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E-MailJessica Pollock is a Senior Research Associate at FCLTGlobal. This post is based on her FCLTGlobal memorandum.
Using equity as part of employee compensation reinforces an ownership culture across the employee base. And ownership by employees, executives, and board members has been shown to create value over the long term. Having “skin in the game” is largely considered a good idea. Yet, companies often receive pushback from proxy advisors such as ISS that issuing shares to provide equity to their team causes dilution, even if the companies repurchase an equal number of shares in the marketplace.
How can there be dilution when the number of shares issued and the number repurchased line up?
ISS’s dilution formula produces a figure closer to gross share issuance than net dilution. For companies with active buyback programs and broad-based equity plans, the gap between the two can be significant enough to drive an Against recommendation that doesn’t reflect economic reality.
When a company puts an equity plan to a shareholder vote, ISS runs the math. The formula is straightforward: take all shares requested, available, and outstanding under equity awards, divide by shares outstanding, and compare against a threshold. Exceed 20 percent for an S&P 500 company (25 percent for the Russell 3000), and ISS will recommend Against, regardless of anything else.
The problem is that this number measures gross share issuance rather than net dilution. And for many companies, the difference is material.
Why the framing of “dilution” matters
Calling this number dilution implies it reflects what shareholders actually experience in terms of ownership erosion. For companies that don’t repurchase shares, gross issuance and net dilution are close enough that the distinction is minimal. But for companies with substantial buyback programs (and many large public companies return billions to shareholders through repurchases annually), the two numbers can diverge significantly.
When ISS uses a gross issuance figure to trigger a negative recommendation, institutional investors voting on that recommendation may believe they’re acting on a net dilution number. They’re not. They’re acting on a figure that counts every share going out and none coming back in.
What the formula actually measures
ISS’s dilution calculation is defined in Question 40 of their U.S. Equity Compensation Plans FAQ: (A+B+C) ÷ CSO[1], where A is new shares requested, B is shares remaining available, and C is unvested and unexercised outstanding awards. It captures every share that could be issued under equity programs. But it does not subtract shares the company has already bought back, or is buying back, on the open market.
ISS is explicit about this in Question 6 of the same document. Equity compensation and share repurchases are treated as “separate and distinct decisions,” and ISS does not offset grants with repurchased shares. The policy is deliberate, not an oversight.
But the consequence is a formula that can flag a company as excessively dilutive even when its share count is flat or declining. A company may issue shares to employees, repurchase shares on the open market, and still face the same dilution penalty when it later grants equity again.
ISS’s formula assumes the buybacks never happened, and each new issuance cycle starts from zero again.
For companies with large, active buyback programs, common among S&P 500 companies, this gap between gross issuance and net dilution can be the difference between a passing score and a negative recommendation.
The three scenarios and what ISS’s math does with each
The overstatement problem plays out differently depending on what’s on the ballot.
Scenario 1: A standalone employee equity plan
ISS runs the formula and compares it to its benchmark. The formula treats every share the same regardless of whether grants are going to the CEO or a frontline employee. A company extending ownership to tens of thousands of employees faces identical dilution math to one concentrating grants at the executive level.
ISS does have a “broad-based” concept, but as Question 39 makes clear, it only appears in the pay-for-performance analysis, not the dilution calculation. A plan may be flagged as not broad-based if the CEO receives more than 30 percent of grants or all named executive officers receive more than 60 percent. This distinction is meaningful for identifying executive pay concentration, but it plays no role in whether the company clears the dilution threshold. The numerator doesn’t care who the shares are going to.
Scenario 2: A standalone board equity plan
Here the math works differently and more favorably. As outlined in Question 26, stand-alone non-employee director equity plans are not evaluated under the EPSC scorecard. ISS assesses them separately, primarily against a plan cost benchmark, and if that benchmark is exceeded, supplements the analysis with a qualitative review of overall board compensation. That’s a more judgment-based process than the binary dilution override applied to employee plans.
A company bringing only a board equity plan to a vote has more room to make a qualitative case.
Scenario 3: Both plans on the ballot at the same meeting
This is where the math compounds, and it’s the scenario most companies actually face. As Question 33 specifies, when an employee equity plan and a non-employee director plan are both on the ballot simultaneously, ISS folds the NED plan’s shares directly into the Plan Cost pillar of the EPSC evaluation. Both sets of shares land in the same numerator.
The formula then treats a board member’s grant and a frontline employee’s RSU as equivalent dilution. There is no mechanism to distinguish recipient, program design, or purpose. A company running a broad-based employee ownership program while also compensating its board competitively with shares sees a combined gross issuance figure, with no adjustment for buybacks, and no way to explain within the model that the two pools of shares serve fundamentally different functions.
The question is what dilution means
ISS’s 2026 policy update added a new disclosure requirement around cash-denominated award limits for non-employee directors, a transparency improvement, but one that changes nothing about how shares are counted in the dilution formula.
The more fundamental question is: should a gross share issuance figure, one that ignores buybacks entirely and treats executive grants, board compensation, and broad-based employee ownership as equivalent, be the basis for negative recommendations on equity plans?
For investors trying to make informed voting decisions, and for companies trying to build long-term employee ownership cultures, the answer to that question is no – and has real consequences.
1CSO: Common Shares Outstanding(go back)
