New proxy voting guidelines from Institutional Shareholder Services (ISS), issued November 16, include a new voting guideline on director pay. Among other recommendations, ISS urges investors to vote against reelection of compensation committee members “if there is a pattern (i.e., two or more years) of awarding excessive non-employee director compensation without disclosing a compelling rationale or other mitigating factors.”

The new ISS policy, effective in 2019, penalizes patterns, not windfalls: “We agree that anomalous single-year totals, which may be driven by one-time onboard grants or dramatic volatility in stock price, should be considered in relation to compensation practices in other years,” says the policy. Still, boards should be wary of pay spikes in the current bull market, now fueled by the likelihood of a lower corporate tax rate.

Virtually all companies now pay directors in equity to some degree; most director compensation plans (68 percent in 2016) deliver 50 percent or more of their value in equity rather than cash, says a recent Pearl Meyer survey. To mitigate the effect of stock market volatility on director compensation levels, companies may consider shifting away from fixed-shares equity award guidelines (e.g., 100,000 shares per year) in favor of fixed-value equity award guidelines (e.g., shares having a value of $100,000 per year). According to the Pearl Meyer survey, 93 percent of all public companies made equity awards to their directors in 2016, of which 74 percent did so on a fixed-value basis.