On January 22nd, Institutional Shareholder Services Inc. (“ISS”) updated its Frequently Asked Questions for US Executive Compensation Policies and US Equity Compensation Plans.1 The original FAQs were published on December 18, 2015, and apply to all shareholder meetings held after February 1, 2016. This publication summarizes the Updated FAQs.
The Updated FAQs
- Impact of Pay for Performance Misalignment on Equity Plan Proposals. If ISS recommends, as a result of a pay-for-performance misalignment, either a negative say-on-pay vote or a vote against compensation committee members, ISS may also recommend a vote against an equity plan proposal that is also on the ballot. In making its recommendation, ISS will weigh: (1) the severity of pay for performance misalignment, (2) whether equity plan practices are driving the misalignment and (3) whether equity plan awards are broad-based or heavily concentrated to the chief executive officer and/or other named executive officers (“NEOs”). ISS does not consider the plan broad-based if the three-year average concentration ratio for equity awards made to the CEO exceeds 30%, or, for all named executive officers (including the CEO), 60%.
- Compensation Disclosure for Externally Managed Issuers (“EMIs”).2 As our readers know, EMIs are issuers who retain an outside management company to provide services that would otherwise be provided by employees of the issuer. As we previously noted, ISS wants information about the pay practices of the EMI’s management fee that is allocated to the NEO compensation paid by the external manager (aggregated values are acceptable), (2) the breakdown of fixed vs. variable/incentive pay and (3) the metrics utilized to measure performance to determine the NEOs’ variable/incentive pay.
- Problematic Pay Practices In the Current Fiscal Year. ISS generally will issue an adverse recommendation on problematic pay practices disclosed by a company (typically in its Compensation Discussion and Analysis) that were adopted after the end of the previous fiscal year. If, however, ISS believes its analysis can be better informed by the additional information required to be disclosed in the following year’s proxy statement, it may postpone its recommendation until that year. For example, a problematic equity grant to a CEO hired after the fiscal year end may be better evaluated after the new CEO’s total pay is disclosed. Conclusion Compensation committees should be aware of these and other ISS policy recommendations, and weight them appropriately in exercising their business judgment on pay decisions affecting the CEO and other NEOs.