On October 26, ISS issued draft 2018 proposed policy changes for comment. Feedback received during the solicitation period, which runs through November 9, may be used by ISS in finalizing changes to its benchmark policies. While a host of issues were addressed in the ISS Policy Survey, there are only two proposals open to comment related to compensation issues. Notably absent from the draft policies are any references to ISS’ consideration of the CEO Pay Ratio and any change to ISS’ quantitative pay-for-performance test to include realized/realizable pay. (We outline survey results and our view on those potential issues here.) We are not out of the clear, however, as ISS reserves the right to make final policy changes—with no opportunity to comment—on its own.
The two proposals open to comment are:
- Non-Employee Director (NED) Pay: The proposed policy explicitly provides for adverse vote recommendations for board committee members who are responsible for approving/setting NED compensation when there is a pattern (i.e., two or more consecutive years) of excessive NED pay magnitude without a compelling rationale or other mitigating factors. ISS expects a minimal impact for boards as the policy is focused on “extreme director pay outliers.” ISS seeks comment on this policy, and specifically on three questions:
- What are the circumstances for which large NED pay magnitude would merit support on an exceptional basis (e.g., one-time onboarding grants to new directors)?
- If a company's proxy disclosure does not clearly indicate which board committee is responsible for setting and/or approving director pay, which board members should be held accountable?
- In calculating average/median pay, should ISS include outsized pay packages provided to NED board chairs, lead directors, or other board members who receive outsized boardroom pay?
- Gender Pay Gap: Over the past three years, shareholders have increasingly filed more resolutions requesting that companies report whether a gender pay gap exists, and if so, what measures will be taken to address the gap. To date, ISS had applied a case-by-case approach. The proposed new policy codifies the approach by requiring consideration of three key points:
- The company's current policies and disclosure related to diversity and inclusion policies/ practices and its compensation philosophy and fair and equitable compensation practices;
- Whether the company has been the subject of recent controversy or litigation related to gender pay gap issues; and
- Whether the company's reporting regarding gender pay gap policies or initiatives is lagging its peers.
ISS does not expect this proposed policy to have a significant impact on vote recommendations but welcomes feedback, particularly on whether there are other factors it should consider when assessing proposals requesting disclosure on a company's gender pay gap.
Those final policy changes will be announced second half of November and become part of the proxy voting guidelines applicable in developing vote recommendations for companies with annual meetings on or after February 1, 2018. Other changes pertaining to current policies (e.g., burn rate and pay-for-performance concern thresholds) are typically announced through updated ISS FAQs in mid-December.
