DEFA14A: Matrix Service Defends Stock Plan Amid ISS Opposition

Matrix Service Company urges stockholders to approve an increase in its equity incentive plan, countering a negative recommendation from Institutional Shareholder Services (ISS).

Summary

• Matrix Service Company filed a supplement to its proxy statement, urging stockholders to vote FOR Proposal 5 at the Annual Meeting on November 4, 2025.
• Proposal 5 seeks approval for the Third Amendment to the 2020 Stock and Incentive Compensation Plan, increasing available shares by 1,025,000.
• Glass, Lewis & Co., LLC recommended a vote FOR Proposal 5, while Institutional Shareholder Services Inc. (ISS) recommended AGAINST it, citing excessive cost.
• The Company disagrees with ISS, stating that ISS overestimated the plan's cost by assuming a maximum 200% achievement for performance share unit (PSU) awards, which is not the expected outcome.
• Actual PSU performance in prior years was 109% in August 2025, 28.25% in August 2024, and 0% in August 2023, suggesting target level is a more realistic estimate.
• The Company's average value-adjusted burn rate over the last three years was 1.47% of shares outstanding per year, nearly 20% below the ISS industry burn rate cap.
• If approved, the additional shares are expected to support grant activity for approximately two years, reducing the need for frequent share requests.
• The Board of Directors unanimously recommends that stockholders vote FOR approval of the Third Amendment to the 2020 Stock and Incentive Compensation Plan.

Sentiment

Score: 7

Explanation: The company is proactively defending its compensation plan against a negative recommendation from a prominent advisory firm. While there's external opposition, the company's detailed rationale, emphasis on governance, and commitment to talent retention present a positive internal outlook on the necessity and benefits of the plan for long-term value creation.

Positives

• Glass, Lewis & Co., LLC recommended a vote FOR Proposal 5, indicating external support for the plan.
• The Company's average value-adjusted burn rate of 1.47% over the last three years is nearly 20% below the ISS industry burn rate cap, demonstrating disciplined share usage.
• The Amended 2020 Plan, if approved, is expected to provide a reasonable duration of grants for approximately two years, allowing for long-term planning.
• The equity-based compensation program includes strong corporate governance features, such as 60% performance-based CEO equity awards, minimum 1-year vesting, no dividends on unvested awards, 3-year performance periods, and no repricings without stockholder approval.
• The equity incentive plan is deemed critical for attracting, motivating, and retaining top talent, and aligning executive and employee interests with long-term stockholders.

Negatives

• Institutional Shareholder Services Inc. (ISS) recommended a vote against Proposal 5, primarily due to its view that the cost of the Amended 2020 Plan is excessive.
• ISS overestimated the cost by assuming maximum (200%) achievement for all outstanding performance share unit awards, which the Company states is not the expected or most likely outcome.
• If Proposal 5 is not approved, the Company's share reserve could be exhausted as soon as August 2026, potentially hindering its ability to grant equity awards.
• Without the ability to grant equity awards, the Company may need to rely on additional cash compensation, which would reduce cash resources and decrease alignment of interests between management and stockholders.

Risks

• Risk of not being able to attract, motivate, and retain top talent if the equity incentive plan is not adequately funded.
• Potential for reduced cash resources if the Company is forced to rely on additional cash compensation instead of equity awards.
• Decreased alignment of interests between executive officers, employees, and stockholders if equity-based compensation is limited.
• The possibility of stockholder disapproval of Proposal 5, which could lead to the aforementioned challenges.

Future Outlook

If Proposal 5 is approved, the shares available under the Amended 2020 Plan are expected to support grant activity for approximately two years. If not approved, the current share reserve could be exhausted as soon as August 2026, potentially leading to increased reliance on cash compensation.

Management Comments

• We respectfully disagree with ISS's view that the cost of the Amended 2020 Plan is excessive, as they overestimated the cost by assuming maximum PSU achievement.
• The target level represents a more realistic estimate of the level of performance likely to be achieved for outstanding PSUs and provides a more accurate assessment of the potential cost.
• Our equity burn rate reflects a measured and disciplined approach to share usage, being nearly 20% below the ISS industry burn rate cap.
• The Amended 2020 Plan is a critical component of our ability to attract, motivate, and retain top talent, and to align the interests of executive officers and employees with those of long-term stockholders.
• The additional 1,025,000 shares requested will allow us to continue to attract, motivate, and retain the talent required to achieve our business goals.

Industry Context

This announcement highlights the ongoing tension between corporate boards seeking flexibility in executive compensation and proxy advisory firms like ISS, which scrutinize such plans for potential dilution and excessive cost. Companies often defend their equity plans by emphasizing alignment with shareholder interests and competitive talent retention, while advisory firms focus on quantitative metrics like burn rates and potential dilution against industry benchmarks.

Comparison to Industry Standards

• The Company's average value-adjusted burn rate of 1.47% over the last three years is nearly 20% below the ISS industry burn rate cap, indicating a more conservative share usage compared to the benchmark set by ISS for the industry.

Corporate Governance

Stakeholder Impact

• **Shareholders:** Directly impacted by the vote on Proposal 5, which could affect potential dilution, executive alignment, and long-term company performance. The company argues the plan aligns interests and is crucial for value creation.
• **Employees and Executive Officers:** The equity incentive plan is a primary vehicle for long-term incentive compensation, critical for attraction, motivation, and retention of talent. Disapproval could impact compensation structure and morale.
• **Company Operations:** Approval ensures continued ability to use equity for incentives, preserving cash resources for other business initiatives. Disapproval could lead to increased cash compensation, reducing available capital.

Next Steps

• Stockholders will consider and vote upon Proposal 5 at the Annual Meeting on November 4, 2025.

Key Dates

Recommendation

The filing addresses a critical corporate governance matter concerning executive compensation and talent retention. While there's a disagreement with ISS, the company presents a strong case for its equity plan, highlighting its commitment to shareholder alignment, disciplined share usage, and robust governance features. Approval of the plan would likely be viewed positively, ensuring the company's ability to incentivize key personnel and execute its strategy. A 'hold' recommendation reflects the importance of this vote for the company's operational stability and long-term value creation, suggesting investors maintain their position pending the outcome and its implications for management's ability to execute its strategic vision.

Keywords

Equity Incentive Plan, Stock Compensation, Proxy Statement, Shareholder Vote, Corporate Governance, Executive Compensation, Performance Share Units, Burn Rate, ISS Recommendation, Matrix Service Company