Institutional Shareholder Services (ISS) maintains a comprehensive list of U.S. Equity Compensation FAQs. On December 19, 2018, ISS issues updates to its FAQs based, in part, on recent changes to the Internal Revenue Code of 1984, as amended (the “Code”) and the Tax Cuts and Jobs Act of 2017 (“TCJA”).
Effect of Section 162(m) Deduction Removal on Compensation Programs
Removal of Section 162(m) of the Code may indicate a shift from performance-based compensation to discretionary or fixed pay elements. ISS views this type of shift in a negative light as a type of problematic pay practice.
Use of Total Shareholder Return
ISS addressed the use of the total shareholder return (TSR) as a metric pertaining to executive incentive programs. At this time, ISS does not prefer the TSR to other metrics.
Changes to “Good Reason” Termination Definitions
When a company terminates an executive, they may need to show “good reason” to avoid or minimize severance. At this time, “good reason” definitions initiated by failure to meet certain agreements will no longer trigger an ISS problematic pay practices policy.
Smaller Reporting Companies and Reduction in Compensation Disclosures
The SEC recently revised its “smaller reporting company” definition. However, ISS advises small reporting companies (SRCs) use caution before eliminating compensation discussion & analysis (CD&A) sections of corporate proxy statements. Shareholders still need to make informed decisions about compensation policies.
Problematic Pay Practices
Compensation committee members should be aware that certain additional problematic pay practices may result in adverse vote recommendations. These include excessive termination payments and “good reason” terminations that may present windfall risks.
Additional Updates to U.S. Equity Compensation FAQs
ISS issued other FAQ updates related to:
- Levels of Non-Employee Director Pay
- Non-Employee Director Pay Outliers
- Quantitative Pay-for-Performance Screens
- Front-Loaded Awards for Future Years