ISS Guidance on COVID-19 Compensation Issues

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ISS first provided guidance regarding compensation issues related to COVID-19 back in April 2020 (Annual General Meetings & COVID-19: A Review of the Regulatory Landscape, April 1, 2020; and Impacts of the COVID-19 Pandemic, April 8, 2020). Since then ISS representatives have spoken on webinars about COVID-19 and compensation, and likely fielded many questions about how ISS will apply its policies and view actions taken with respect to compensation. Just last week ISS released an early set of FAQs to address the issues it sees regarding compensation actions taken regarding COVID-19 (U.S. Compensation and the COVID-19 Pandemic, Frequently Asked Questions, October 15, 2020).

Key issues and ISS positions from the FAQS:

  • Base salary reductions—temporary salary reductions will be given mitigating weight if they decrease total pay. Given more weight if targeted incentive payout opportunities are decreased to reflect the reduced salary.
  • Change to bonus/annual incentive awards—suspending program and making one-time discretionary payments may be viewed as reasonable so long as the justifications and rationale are clearly disclosed, and the resulting outcomes appear reasonable.
  • Disclosure needed if make COVID-related changes to bonus/annual incentive awards—the key disclosure items that would help investors evaluate the actions taken are:
    • specific challenges and how they rendered the original program design obsolete or the original performance targets impossible to achieve; should address how the changes are not reflective of poor management performance.
    • For mid-year changes—explain why that approach was taken and how the changes further investors’ interests.
    • One-time discretionary awards should carry performance-based considerations, with underlying criteria being disclosed.
    • How resulting payouts appropriately reflect both executive and company annual performance. Should clarify or estimate how the payouts would compare with what would have been paid under the original program design.
    • If have designed the subsequent year’s (ex. 2021) annual incentive program, encouraged to disclose information about positive changes made to the prior year design.
  • Lowered financial or operational targets below prior year’s actual levels achieved—If reflect external factors, maybe a reasonable explanation. Should be accompanied by disclosure as to how the board considered corresponding payout opportunities, especially if such payout opportunities are not commensurately reduced.
  • Changes to outstanding performance-based equity/long-term incentive awards—Such awards should be designed to smooth performance over a long-term period. Changes to in-process performance cycle awards will be viewed negatively, especially for companies that exhibit a quantitative pay-for-performance (P4P) misalignment under the ISS quantitative P4P tests.
  • Changes to outstanding equity/long-term incentive awards granted in 2020—Investors do not want to see drastic changes to awards unless the underlying business strategy has fundamentally changed. However, more modest changes to the incentive program could be viewed as reasonable. Should clearly explain any changes.
  • COVID-related retention or other one-time awards—If grant these types of awards, should clearly disclose the rationale for the award, including the magnitude and structure, and describe how the awards further investors’ interests. Vesting term should be long-term and vesting conditions should be strongly performance-based and clearly linked to the underlying concerns the awards aim to address. Such awards should also contain shareholder-friendly guardrails to avoid windfalls.
  • COVID-related retention or other one-time awards with forfeited awards—Investors do not expect such awards to be granted merely as a replacement for forfeited performance-based awards. If a one-time award is granted in the year or following year in which incentive awards are forfeited, companies must explain the specific issues driving the decision to grant the awards and how awards further investors’ interests. If a company indicates that the one-time awards were granted in consideration of forfeited performance awards, it must explain how such awards do not merely insulate executives from lower pay.
  • ISS’s board/committee responsiveness policy (when say-on-pay vote receives less than 70% support) in light of COVID-19—The ISS responsiveness policy generally requires companies in their next proxy to: (1) disclose the board’s engagement efforts, (2) disclose specific feedback from shareholders, and (3) disclose any actions or changes made to pay programs and practices to address shareholders’ concerns. In light of COVID-19, if a company is unable to implement changes, the proxy should disclose specifically how the pandemic has impeded the company’s ability to address shareholders’ concerns. If changes are delayed or do not fully address shareholders’ concerns, should disclose a longer-term plan on how the company intends to address shareholders’ concerns.
  • ISS policies unchanged by COVID-19—No changes to ISS’s equity plan scorecard (EPSC), problematic pay practices, or option repricing policies in light of the pandemic.
    However, ISS increased the passing scores (thresholds) under the EPSC model to 57 points for S&P 500 companies (was 55 points) and 55 points for Russell 3000 companies (was 53 points) and kept the score at 53 points for all other companies.

    Note: If your company is going out to shareholders to request approval of a new or amended plan in 2021, the above changes to the EPSC model likely mean that only a reduced number of shares will pass compared to 2020, everything else remaining the same. Increasing the thresholds for the S&P 500 and Russell 3000 will make it more likely that companies can request fewer shares and, thus, most likely will need to go back to shareholders sooner than they otherwise would after 2021 to request more shares.

So, if your company is even considering making changes to outstanding awards or making special one-time grants, you should also develop the proxy disclosure explaining the change(s) or one-time awards concurrently so that it is ready for your next proxy. Preparing draft proxy disclosure may also enable you to refine any changes or one-time awards to help anticipate how ISS may react.

SEC Amends Whistleblower Rules

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On September 23, 2020, the SEC also amended the whistleblower rules (SEC Press Release 2020-219). These rule amendments are detailed in SEC Release No. 34-89963 (available at: https://www.sec.gov/rules/final/2020/34-89963.pdf).

The whistleblower rules (Section 21F of the Securities Exchange Act of 1934, as added by Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act) authorize the SEC to make monetary awards to eligible individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions greater than $1 million.

The SEC based these amendments on its experience with the whistleblower rules. Under the amendments, for awards of $5 million or less, a presumption will exist that the statutory maximum amount will be awarded. For awards over $5 million, the SEC will continue to analyze the award factors specified in Rule 21F-6 when determining the size of a whistleblower award.

The amendments expand the definition of “action” to include deferred prosecution agreements and non-prosecution agreements. This ensures whistleblowers are not disadvantaged because of the particular form of an action that the SEC or Department of Justice may elect to pursue.

The amendments also adopt a uniform definition of “whistleblower” that will apply to all aspects of the whistleblower rules.

Finally, the amendments create an automatic waiver of compliance with the portion of the rules that specifies how the whistleblower must notify the SEC if the whistleblower provides the SEC with the correct form (Form TCR) within 30 days of first providing the information or within 30 days of first obtaining actual or constructive notice about the rule’s notification requirements.

The amendments offer a number of other clarifications for the whistleblower rules, which should help folks that wish to pursue a whistleblower claim.

The amendments will become effective 30 days after publication in the Federal Register.

SEC Amends Shareholder Proposal Rules

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On September 23, 2020, the SEC voted to adopt amendments to the shareholder proposal rules (Rule 14a-8) (SEC Press Release 2020-220). The SEC published a draft rule for comment in November 2019 (see my blog post, SEC Proposed Additional Rules for Proxy Voting Advice and Shareholder Proposals, for details).

On the share ownership requirements that entitle a shareholder to submit a proposal and the proposal resubmission requirements, the SEC adopted the most of the changes proposed in the draft rules released last November:

Share ownership requirements met in any of three ways:

  • $2,000 of company securities entitled to vote on the proposal held for at least 3 years;
  • $15,000 of company securities entitled to vote on the proposal held for at least 2 years; or
  • $25,000 of company securities entitled to vote on the proposal held for at least 1 year.

Shareholders will no longer be able to aggregate their shares in order to meet the minimum ownership requirements. Additionally, there will be a transition period that allows shareholders who meet the current requirement ($2,000 of company securities held for at least 1 year) to submit proposals before January 1, 2023.

As for the shareholder resubmission rules, the SEC amended them to provide that the shareholder support threshold will be increased as proposed in the draft rule amendment. A proposal that deals with substantially the same subject matter as a previous proposal or proposals included in the company’s proxy materials within the preceding 5 years may be excluded if the most recent vote was within the preceding 3 years and was:

  • Less than 5% of the votes cast if previously voted on once;
  • Less than 15% of the votes cast if voted on twice; and
  • Less than 25% of the votes cast if voted on three or more times.

The final resubmission rules differ form the proposed rules in that they do not include a provision that would permit excluding resubmitted proposals that experienced declining shareholder support.

Generally, the final rules will be effective 60 days after publication in the Federal Register.

The final SEC shareholder proposals rules are detailed in SEC Release No. 34-89964, available at: https://www.sec.gov/rules/final/2020/34-89964.pdf

ISS Releases Global Policy Survey Results

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On September 25, 2020, ISS released the results of its 2020 Global Benchmark Policy Survey. In the global section, ISS had several compensation-related questions, mainly related to the impact of COVID-19.


ISS’s 202 COVID-Guidance—62% of Investors and 87% of Non-Investors responded that ISS should keep its 2020 COVID-19 guidance or similar guidance in place into 2021 and continue to apply flexible approaches where warranted through at least 2021 main proxy seasons. While 27% of Investors indicated that ISS should keep the guidance in place for 2021 for specific markets, companies or industry sectors (e.g., travel, restaurants, retail, and leisure) that continue to be severely impacted by the pandemic, but not continue it more generally for 2021.

Shareholder Meeting Formats—Asked about their preferred shareholder meeting format, 77% of Investors and 31% of Non-Investors indicated a preference for “hybrid” meetings, with the possibility for shareholders to attend and participate in the meeting either in-person or via effective remote communications. However, the majority of Non-Investors (42%) preferred in-person meetings, with virtual meetings used only when there is a compelling reason (such as pandemic restrictions).

Compensation Adjustments—Asked about what view best reflects their view of executive compensation in the pandemic’s wake, 70% of Investors indicated that the pandemic’s impact on the economy, employees, customers and communities and the role of government-sponsored loans and other benefits must be considered by boards, incorporated thoughtfully into compensation decisions to adjust pay and performance expectations, and should be clearly disclosed by shareholders. Only 33% of Non-Investors shared that view. The most prevalent view of Non-Investors (53%) was that the pandemic differs from previous market downturns and many boards and compensation committees will need flexibility to make decisions regarding reasonable adjustments to performance expectations and related changes to executives. Only 10% of Investors shared that view. In my opinion, this points to potential tension between Investors and Non-Investors regarding what they deem appropriate for adjustments regarding incentive compensation in light of the pandemic. Given Investors’ preference expressed in this question, companies should fully explain adjustments in their proxy statements, to provide the information that many shareholders will desire to put any adjustments in the proper context.

Adjustments to Short-Term/Annual Incentive Programs—The last COVID-19 question asked for the participants’ views with respect to adjustments to short-term/annual incentive programs in light of the pandemic. The majority of Investors (51%) and Non-Investors (54%) though that it would be reasonable for companies to make mid-year changes to annual incentive metrics, performance targets and/or measurement periods to reflect the changed economic realities, as well as to suspend the annual incentive program and instead make one-time awards based on committee discretion. Again, if any action like this is undertaken, companies should fully explain the rationale for such action in their proxy statement.

Independent Chair

The two U.S./North America questions in the policy survey focused on independent chairs.

View of Independent Chairs—The first asked participants for their view regarding independent board chairs. A majority of Investors (47%) believe an independent chair is generally the preferred model, but think there are company-specific circumstances that can justify other models. The second most prevalent view of Investors (38%) is that absent an emergency or temporary transition period, an independent chair position is the defualt preferred model for board leadership. Non-Investors viewed things a bit differently. A majority (48%) believe there is no single preferred model for board leadership and that any assessment should take company-specific factors into account. The next most prevalent view of Non-Investors (34%), echoed the majority of Investors view that an independent chair is generally the preferred model, but thinks there are company-specific circumstances that can justify other models.

Significant Governance or Risk Oversight Failures—The second question asked participants to rank the governance or risk oversight failures to be significant when evaluating an independent chair proposal. Investors ranked the following as their top five issues:

  • Significant misconduct or mismanagement by the company, board or senior executives resulting in legal and reputational risks.
  • Unilateral board actions that have materially diminished shareholder rights without shareholder agreement or ratification.
  • Significant failures of audit or internal controls oversight.
  • Insufficient board responsiveness to a majority shareholder vote (for example, against a say on pay vote or a director election or for a shareholder proposal).
  • Significant concerns about failure to address risks to the business model or the company’s long-term viability such as those related to climate change.

Meanwhile, Non-Investors had a different top five list of failures:

  • Significant misconduct or mismanagement by the company, board or senior executives resulting in legal and reputational risks.
  • Significant failures of audit or internal controls oversight.
  • Insufficient board responsiveness to a majority shareholder vote (for example, against a say on pay vote or a director election or for a shareholder proposal).
  • Unilateral board actions that have materially diminished shareholder rights without shareholder agreement or ratification.
  • Significant concerns about failure to address risks to the business model or the company’s long-term viability such as those related to climate change.

Investors appear to rank higher any failure that implicates shareholders rights than do the Non-Investors. This likley will create some tensions between the two groups. Companies would do well to consider the Investors preferences if they ever consider an action which could impact shareholder rights.

Full results of the ISS Policy Survey can be found at: