Institutional Shareholder Services (ISS) recently released updates to both its proxy voting guidelines for and FAQs on US Equity Compensation. Some of the more notable updates are summarized as follows.

Equity Plan Scorecard Updates. The 2018 policy updates include a few key changes to its “Equity Plan Scorecard,” the methodology it uses to review equity compensation plan proposals, for shareholder meetings on or after February 1, 2018. Specifically: 

  • Change in control vesting factor - Partial points for this factor (which were previously allowed) can no longer be earned.  Full points may be earned only if a plan contains both of the following:
    • For performance-based awards, acceleration is limited to actual performance achieved, pro-rata of target based on the elapsed proportion of the performance period, a combination of both actual & pro-rata, or the performance awards are forfeited or terminated upon a change in control.
    • For time-based awards, acceleration upon a change in control cannot be automatic (single-trigger) or discretionary. 
      • If no performance-based awards are awarded under the plan, points for this factor will be based solely on the treatment of time-based awards.  If the plan is silent as to treatment of awards upon a change in control, treatment will be considered discretionary and no points will be awarded.
  • Broad discretion to accelerate vesting – Full points will be awarded only if the discretion to accelerate vesting for unvested awards is limited to cases of a participant’s death or disability.  Previously, full points could be earned if plans authorized vesting acceleration in the event of a change in control, in addition to death or disability.
  • ISS also made changes to points awarded for meeting holding period requirements and CEO vesting requirements, as well as increasing the passing score for S&P 500 companies from 53 to 55 points.   

Director Compensation. The ISS policy updates also address a change regarding non-employee director compensation:

  • ISS added a new policy addressing director compensation after identifying certain companies that were paying their non-employee directors substantially more than their peer companies without any justification. This new policy provides for adverse vote recommendations for board or committee members who set non-executive director compensation when there is a recurring pattern (two or more consecutive years) of excessive non-employee director pay magnitude without compelling rationale or other mitigating factors.  The new policy will not impact vote recommendations in 2018.