On January 25, 2012, Institutional Shareholder Services (ISS) released 20 frequently asked questions on its 2012 compensation guidelines. Fifteen questions discuss pay for performance, three address management say-on-pay responsiveness and two discuss equity plans.
Pay for Performance
The following issues are addressed in the pay-for-performance FAQs:
- ISS will annualize CEO pay for performance where the CEO served for less than one year or if multiple individuals served as CEO during the previous three years.
- If the company has more than one CEO during a fiscal year, the CEO at fiscal year end will be used.
- Calculation of one- and three-year total shareholder return will smooth "peaks and valleys" in the five-year analysis.
- ISS will use prior-year peer-group compensation for companies with early 2012 annual meetings.
- ISS will exclude the subject company from the 14-company peer group.
ISS will consider the following factors in voting against equity plan proposals after an adverse pay-for-performance recommendation:
- Magnitude of pay misalignment;
- Contribution of non-performance-based equity grants to overall pay; and
- The proportion of equity awards granted in the last three fiscal years concentrated at the named executive officer level.
A concentration ratio for the five highest-paid executives that exceeds 25% would warrant additional scrutiny.
- ISS will conduct quantitative one- and three-year peer-group total shareholder return pay and performance ranking and multiple of pay against median rankings analysis for companies that have not been publicly traded for five fiscal years.
- For companies that have not been publicly traded for three fiscal years, ISS will apply a one-year total shareholder return pay and performance ranking and multiple of pay against median rankings analysis.
- ISS will continue to define pay as summary compensation table pay, excluding current value of long-term incentive plans (potential realizable pay).
- The discount rate will not be a separate factor in CEO pay assessment because this factor is already incorporated in ISS's long-term orientation.
- ISS may use company-selected peer-group companies (specified in the proxy) in the ISS peer group if those companies fit ISS's peer-group criteria.
- The company will not necessarily be at the median in terms of size within its peer group, so long as the company is within the peer-group size range.
- Peer groups may have as few as 12 members or as many as 24.
- Peer-group companies will generally range in size from 0.2- to 5-times the subject company's market cap and revenue (or assets in the case of financial companies).
- After GRId 2.0 is launched in late February, there will be a greater linkage between GRId and pay for performance in formulating say-on-pay recommendations.
- While considered, prospective pay-for-performance commitments in proxy statements will have a minimal impact on ISS’s vote recommendation.
Management Say on Pay Responsiveness
The following issues are addressed in the management say on pay responsiveness FAQs:
- Each company should highlight key actions taken with respect to improving its compensation program, regardless of the vote result on the say-on-pay proposal.
- ISS will take into consideration shareholder engagement and actions taken in response to shareholder desires.
ISS discussed its "Yellow Card/Red Card" approach to director vote recommendations following a low or negative say-on-pay vote. In general, the compensation committee or board will receive a negative vote under either of two conditions:
- The issue is sufficiently egregious to warrant a negative vote despite an upcoming say-on-pay vote; or
- ISS determines that the board failed to adequately respond to factors that led to the high opposition to the prior say-on-pay vote.
The following issues are addressed in the equity plans FAQs:
- ISS will apply a full analysis, including SVT analysis, for all equity plans put up for shareholder approval, for any reason, for the first time following a company’s IPO.
- Beginning with the December 1, 2011, quarterly data download (companies with March-May 2012 annual meetings), ISS is changing the volatility and dividend yield assumptions for the stock plan model approach. Volatility will be measured on a three-year historic basis as of the applicable quarterly data download date. Dividend yield will be determined using the historic fiveyear dividend yield average.