ISS policy results were full of surprises this year. Approximately one-third of the respondents from its Global Principles and Policy Application Surveys are from the institutional investment community and the remainder are from the corporate community and other professionals. Survey outcomes are taken into account by ISS in drafting upcoming policies, but are not dispositive. The big ticket items for U.S. issuers on the compensation front this year include:
CEO Pay Ratio: The survey asked if and how the ratio would be used. As a surprise to most of us, investors indicated an intention to analyze—not ignore—pay ratio disclosures, with 63% stating they would compare companies’ pay ratios to each other and look at a company’s year-over-year changes. Only 16% of investors said they did not plan to use pay ratio information. Not surprisingly, corporate responders generally expressed doubt about any usefulness of the data.
We understand that despite these results, ISS does not intend to use the CEO Pay Ratio to drive any voting recommendations, at least not this year. Nonetheless, it will likely appear on ISS reports and could become part of ISS’ scrutiny in year two when there are more comparable results both year-over-year and within industries. We also understand that notwithstanding these survey results, none of the large institutional investors have an intention to focus on this number in any material manner.
Board Diversity: ISS asked whether the absence of women on the board is problematic. A majority of investors and companies responded that the lack of board gender diversity is problematic, but that disclosure of actions considered by the board or nominating committee to increase board gender diversity could mitigate the concern.
Both sets of respondents preferred shareholder engagement with the board or management as the most appropriate response, with some institutional investors also in favor of supporting a shareholder proposal aimed at increasing diversity. It is not entirely clear what, if anything, ISS will do with this information.
Quantitative Consideration of Realizable Pay: For several years, ISS has calculated and presented a standardized measure of “realizable pay” for CEOs of S&P 1500 companies, but it has only been used in its qualitative analysis. This survey asked whether realizable pay should be part of the quantitative pay-for-performance evaluation.
A large majority of investors and majority of companies supported the use of realizable pay for such purpose. Two-thirds of institutional investors indicated that the measure could be used to mitigate problems such as excessive pay or TSR misalignment, while one-third thought that it could exacerbate concerns regarding “excessive leverage to performance.” Most companies generally thought it should be used to mitigate concerns.
Quantification of “realized pay” or “realizable pay” in the ISS pay-for-performance test has been percolating for quite some time, and we would not be surprised to see it incorporated in this year’s quantitative test.
Non-Employee Director Pay: To identify NED pay problems, ISS currently reviews director pay levels relative to other companies within the same index and four-digit GICS code and also reviews NED pay structure. The survey asked which factors should be considered to determine whether NED pay programs raised governance risks, what types of structures present risk, and appropriate actions where NED pay is perceived to be a problem.
Both investors and companies generally expressed a preference to be benchmarked against stock market index peers or four-digit GICS rather than all companies. Investors cited excessive perquisites, the use of performance awards, and the use of stock options as the top structural concerns. Investors and companies agreed that concerns with NED pay should not warrant an immediate adverse vote recommendations from ISS, but that such recommendations may be warranted if the concerns persist.
With director pay in the spotlight for the last few years, we would not be surprised to see a new ISS policy that could result in negative vote recommendations for persistent excessive NED pay.
Gender Pay Gap: Recently, there have been quite a few shareholder proposals seeking reports on gender pay equity. The survey solicited opinions on whether companies should be required to disclose such information.
Not surprisingly, the majority of investors favor disclosure of information on a company’s gender pay gap, while companies largely oppose it. Both groups suggested the absence of such data is mitigated by robust disclosure of diversity policies and fair compensation practices. It is not entirely clear what, if anything, ISS will do with the information gleaned from this result.
Stay tuned for further updates when ISS issues draft policies in late October and final policies in mid-November.
