Last Friday, ISS released its Policy Updates for 2013. That morning, I blogged on ISS’ announced new approach to share pledging arrangements. Today, I will cover two other significant policy changes: Voting on Golden Parachutes and ISS potential consideration of Realizable Pay.
Realizable Pay. The Policy Updates announce that ISS may incorporate into its research report a comparison of realizable pay to grant date pay as part of the qualitative evaluation of pay-for-performance alignment when relevant to the analysis in large cap companies. ISS’ consideration of realizable pay may mitigate or exacerbate CEO pay-for-performance concerns. Importantly, under ISS definition, “Realizable Pay” will consist of the sum of relevant cash and equity-based grants and awards made during a specified performance period being measured, based on equity award values for actual earned awards, or target values for ongoing awards, calculated using the stock price at the end of the performance measurement period. Stock options or stock appreciation rights (SARs) will be re-valued using the remaining term and updated assumptions, as of the performance period, using a Black-Scholes option pricing model.
As I have discussed in previous Blogs*, the SEC had expressed concern about companies’ "realized pay" disclosures because there was not common a definition for that term, which made comparisons difficult for investors and (fears the SEC) potentially misleading. An ISS-created standard might solve that problem.
Golden Parachutes. In the past, ISS has focused only on new or extended change-in-control arrangements, effectively giving a pass to existing arrangements with named executive officers. Beginning in 2013, ISS will include existing change-in-control arrangements maintained with named executive officers in two circumstances:
- When voting on golden parachutes in an acquisition, merger, consolidation, or proposed sale, and
- In cases where the golden parachute vote is incorporated into a company's separate advisory vote on compensation (management say-on-pay), ISS will evaluate the say-on-pay proposal in accordance with these guidelines, which may give higher weight to that component of the overall evaluation. [I will leave you to draw your own conclusion here.]
ISS includes a list of features that may result in it recommending a vote AGAINST, including any one or more of the following, depending on the number, magnitude, and/or timing of issue(s):
- Single- or modified-single-trigger cash severance;
- Single-trigger acceleration of unvested equity awards;
- Excessive cash severance (>3x base salary and bonus);
- Excise tax gross-ups triggered and payable (as opposed to a provision to provide excise tax gross-ups);
- Excessive golden parachute payments (on an absolute basis or as a percentage of transaction equity value); or
- Recent amendments that incorporate any problematic features (such as those above) or recent actions (such as extraordinary equity grants) that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders; or
- The company's assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote.
Recent amendment(s) that incorporate problematic features will tend to carry more weight in ISS’ overall analysis. However, ISS also now will closely scrutinize the presence of multiple legacy problematic features.