The dilutive impact of employee stock option plans drew less investor opposition in 2006 than in 2005, according to findings from ISS' recently released Stock Plan Dilution study. Average voting opposition for 2006 stood at 22.1 percent, compared with 25.5 percent in 2005 and 24.6 percent in 2004.

The decline matches a marked drop in total dilution levels at study companies--S&P 1,500 firms--from 2005 to 2006. Average total dilution stood at 14.5 in 2006, compared with 17.2 in 2005 and 17.3 in 2004.

As in previous periods, voting results from the 2006 proxy season confirmed that potential dilution of 10 percent or more is a red flag for many shareholders voting on stock incentive plan proposals. Stock plan proposals that create less than 10 percent dilution elicited average voting opposition no higher than 24 percent; however, opposition rises to more than 29 percent when proposals that reserve new shares add potential dilution of 10 percent or more. Dilution analysis over the past three years confirms equity overhang of 10 percent as an approval threshold for many shareholders.

The data on actual voting results for stock-based plan proposals in the 2006 season also indicates that shareholders are sensitive to companies’ overall dilution levels, or "overhang," when voting on stock plans. Since 2000, voting trends indicate that shareholders view an overall company dilution level of more than 20 percent as a cut-off point in terms of voting practices for stock-based plan proposals.

Companies with a total overhang under 10 percent, for example, saw average voting opposition of 14 percent when they proposed new stock incentive plans or additional funding for existing plans. That opposition increases to almost 22 percent for companies with overall dilution levels between 15 and 20 percent. Company overhang in excess of 20 percent appears to be highly significant in stimulating votes against a stock plan proposal. Average voting opposition rose to 30 percent for companies with dilution levels between 20 percent and 30 percent. Companies with dilution levels over 30 percent also experienced a jump in opposition of 4.1 percentage points over last year, when average opposition was 18 percent.

Among the 1,438 S&P 1,500 companies covered, the study tracked a total of 357 proposals seeking to reserve shares under a new or existing stock-based incentive plan--down from 383 such proposals last year, albeit among a slightly larger universe of 1,454 companies studied during the previous period.