Last week ISS released its 2018 benchmark proxy voting policies, with detailed FAQs to follow in mid-December. Highlights of changes related to U.S. executive compensation are as follows:
Pay-for-Performance Methodology
ISS will modify its quantitative pay-for-performance screening for 2018 to add an examination of a company’s alignment of pay and financial performance over three years relative to its ISS comparator group. In 2017 ISS had begun to incorporate financial analysis into its reports, but it was only included as part of the qualitative review. Beginning next year, the financial analysis will now be part of the quantitative review for Russell 3000 companies, incorporated in the Relative Degree of Alignment test.
Non-Employee Director (NED) Pay
A new policy will provide for adverse vote recommendations for board and committee members who are responsible for approving/setting NED compensation when there is a recurring pattern (i.e., two or more consecutive years) of excessive NED pay magnitude without a compelling rationale or other mitigating factors. This policy will not impact vote recommendations in 2018, but a negative recommendation may be triggered in future years following a pattern of excessive NED pay. While ISS admits that pay magnitude varies by company size and industry, it also states that it “has identified some extreme outliers that pay directors substantially more than their peer companies without providing a clear explanation for these discrepancies.” Unfortunately, no further guidance is provided to define “extreme outliers.”
Gender Pay Gap Shareholder Proposals
As the number of gender pay gap proposals has continued to grow, ISS has provided new clarity on its policy in this area. Under the policy, ISS will evaluate requests for reports on a company’s pay data by gender, or a report on a company’s policies and goals to reduce any existing gender pay gaps, on a case-by-case basis. It will take into account a variety of factors, including: (i) the company’s current policies and disclosures related to both its diversity and inclusion policies and practices; (ii) the company’s compensation philosophy and use of fair and equitable compensation practices; (iii) whether the company has been the subject of recent controversies, litigation, or regulatory actions related to gender pay gap issues; and (iv) whether the company’s reporting on gender pay gap lags its peers.
Compensation Committee Communication and Responsiveness Policy
For 2018, ISS is clarifying and amending the factors it will consider (on a case-by-case basis) if a company receives less than 70% support for say-on-pay (SOP) proposals. Specific items that will now warrant robust disclosure for ISS consideration will include: (i) the timing and frequency of institutional investor engagement and whether an independent director participated in the discussions; (ii) the disclosure of specific concerns raised by shareholders that led them to oppose SOP; and (iii) detailed disclosure of “meaningful” actions taken by the company to address shareholder concerns.
Problematic Pay Practice Policy
In the absence of a SOP vote on the ballot, the list of problematic pay practices that may trigger votes against the committee or full board has been clarified to include a company’s failure to provide a SOP vote if required by regulation or the company’s approved voting frequency, in addition to failure to provide a say-on-frequency when required by regulation. Burn rate commitment failure and unapproved stock option transfers have been removed from the triggering list.
Board Diversity and Poor Attendance
ISS has indicated that while it will highlight boards with no gender diversity, it will not make voting recommendations on that basis at this time. In addition, poor attendance by new directors who serve on the board for only part of the year will no longer result in negative recommendations.
Pledging of Company Shares
The update provides for an “against” vote recommendation for members of the committee that oversees risks related to pledging if a significant level of pledged company stock by executives or directors raises concerns. ISS will consider the following factors when making its recommendation relating to problematic pledging: (i) the presence of an anti-pledging policy disclosed in the proxy statement that prohibits future pledging activity; (ii) the magnitude of the aggregate pledged shares; (iii) the disclosure of progress in reducing the magnitude of aggregate pledged shares over time; (iv) proxy disclosure that states shares subject to stock ownership and holding requirements do not include pledged company stock; and (iv) any other relevant factors. ISS has been recommending on this basis since 2013 under its Governance Failures policy, but has now codified that pledging of company shares is evaluated on a case-by-case basis, examining its magnitude and rationale, and efforts to wind it down.
What’s Missing?
While anything could change pending ISS’ FAQs and final documents to be issued in December, issues noticeably missing from the updates include:
- Policies regarding use of CEO Pay Ratio information;
- Changes to the equity plan scorecard; and
- Incorporation of realizable pay into the quantitative pay-for-performance review (although it will continue to be included in research reports for S&P 1500 companies and can be considered on qualitative review).
