On January 25, 2012, ISS posted its first set of compensation frequently asked questions (FAQs) about its 2012 policies. The policies covered include: Pay-for-Performance, Management Say on Pay Responsiveness and Equity Plans. Below is a summary of the FAQs that were presented for each policy.
Pay-for-Performance (P4P)
- CEOs who have not been in their positions for 3 years will be subject to the Quantitative Analysis under the P4P policy.
- For years in which a company has more than 1 CEO, ISS will use only once CEO’s pay, generally the CEO who was in the position at FYE.
- ISS will annualize the salary of a CEO serving for less than 1 year.
- If a company has co-CEOs, ISS will use the CEO with higher total compensation.
- TSR generally will be calculated from the last day of the month closest to the subject company’s FYE.
- For companies with early meetings in 2012, ISS will use the latest available compensation data, which may be from the prior year (2010).
- ISS does not include the subject company in determining the peer group median CEO pay or count it in achieving the minimum 14 peer companies.
- An adverse P4P recommendation that is attributed to non-performance-based equity awards when there is an equity plan on the proxy may lead ISS to recommend against the equity plan proposal .
- If a company has not been traded for a full 5 years, ISS will still apply the Quantitative Analysis; if traded less than 3 years, ISS will still apply the 1-year RDA and the MOM.
- ISS will continue to define pay as Summary Compensation Table pay, with its own valuation of stock options.
- Swings in pension amounts will not automatically be exempted from ISS’s Quantitative Analysis, but ISS may consider the underlying cause as part of its Qualitative Analysis.
- ISS will look at companies that are in the Russell 3000 Index as well as company-selected peers outside the Russell 3000 Index if they meet ISS’s peer company requirements and could then be used in other P4P analyses after the next update of peer groups.
- A company will not always be at the median of its peer group.
- A company will have more than 14 peers if within the same 6-digit GICS group (up to 24 companies can be selected).
- The minimum number of peer companies isn’t really 14, it is 12. In a limited number of cases, when size and industry parameters are difficult to satisfy, ISS may use a minimum 12-member peer group.
- Companies’ commitments to strengthen their pay for performance alignment are not as relevant given the annual management say on pay votes.
Management Say on Pay (MSOP) Responsiveness
- All companies, regardless of the results on their last MSOP vote, should highlight how they are improving their compensation programs.
- ISS will take into consideration shareholder engagement and actions taken in response to shareholder desires. But, ISS will also consider the nature of the issue(s) perceived to have caused a high opposition to the MSOP vote and their impact going forward.
- A low or negative vote on MSOP will roll over and affect ISS’s voting recommendation on the election of directors(assuming an MSOP is on the proxy) under two conditions:
- If an issue is deemed sufficiently egregious to warrant that, even if MSOP is on the ballot; and
- If ISS determines that the board has failed to respond adequately to issues that led to high opposition to the prior MSOP proposal.
Equity Plans
- ISS will apply a full analysis, including SVT analysis, for all equity plans put up for shareholder approval, for any reason, for the first time following a company’s IPO.
- ISS has changed the volatility and dividend yield assumptions for purposes of the ISSue Compass model. Volatility will now be measured on a 3-year historic basis as of the applicable quarterly data download date. Dividend yield will now be determined using the historic 5-year dividend yield average.
The FAQs can be found at: http://www.issgovernance.com/policy/2012/USCompensationFAQ
ISS recently released its 2012 Burn Rate Caps as part of its 2012 U.S. Proxy Voting Summary Guidelines (December 19, 2011), p. 44, available at http://www.issgovernance.com/files/2012USSummaryGuidelines.pdf
The presentation below includes these burn rate caps as well as a chart looking at how the caps have changed from 2009 through 2012.
Update: After posting this, I discovered that with its December 1, 2011 quarterly download, ISS Research is now using a 3-year observation period for stock price volatility in both the Shareholder Value Transfer (SVT) and burn rate tests. The 200-day annualized volatility is no longer being used.
On December 19, 2011, ISS posted the Technical Document, Evaluating Pay for Performance Alignment, ISS’ Quantitative and Qualitative Approach to its 2012 Policy page. The complete document can be downloaded from:
http://www.issgovernance.com/sites/default/files/EvaluatingPayForPerformance_20111219.pdf
The Pay-for-Performance (P4P) methodology laid out differs in certain aspects from what ISS had previously communicated about its 2012 P4P Policy, e.g., peer group methodology. I’m in the process of reviewing and will post more details once I’m done with my analysis, but wanted folks to know that the document is available.
On November 17, 2011 (right on time), ISS issued its final policies for 2012. The policies will be effective for shareholder meetings occurring on or after February 1, 2012. Generally, the final policies kept to the draft policies issued a few weeks back and there were very few new surprises (a very welcome occurrence). That said, there are a few interesting things to note about the final policies:
- Say on Pay Votes that receive less than 70% votes cast in favor will trigger additional scrutiny under the ISS Management Say on Pay (MSOP) Policy which can cause ISS to recommend against compensation committee members (or, in rare cases, the full board) and the next MSOP proposal. ISS has identified things it will take into account and has indicated that support levels of less than 50% will warrant the highest level of company responsiveness.
- Pay-For-Performance (P4P) Alignment – virtually identical to the draft policy put forward several weeks ago. ISS still offers scant details on how peer companies will be selected, although the final policy update includes a footnote identifying factors that ISS will consider (see Footnote 1, page 9).
- Say When on Pay / Say on Pay Frequency - ISS includes a new policy that indicates ISS might recommend against or withhold from the entire board (except new director nominees) if the Board implements a SOP frequency that is less frequent than the frequency that received a plurality, but not a majority, of the votes cast. In making its recommendation, ISS will consider the Board’s rationale for such action, the company’s ownership structure and vote results, its own analysis of whether there are compensation concerns or a history of problematic compensation practices, and the previous year’s support level on the company’s SOP proposal.
The ISS materials about the final 2012 Policies can be found by following these links:
- ISS Press Release announcing the final policies: http://www.issgovernance.com/press/2012PolicyUpdateRelease
- ISS’ U.S. Corporate Governance Policy, 2012 Updates (November 17, 2011): http://www.issgovernance.com/files/ISS_2012US_Updates20111117.pdf
- ISS’s U.S. Corporate Governance Policy Updates and Process, Executive Summary (November 17, 2011): http://www.issgovernance.com/files/ISS_2012ExecutiveSummary20111117.pdf
- ISS’s Policy Gateway with links to the final policies, press release, executive summary, etc.: http://www.issgovernance.com/policy
On October 28, 2011, Institutional Shareholder Services Inc. (ISS) announced that it was extending the comment period on its Draft 2012 Policies until Monday, November 7, 2011. Furthermore, ISS announced that the final 2012 Policies are expected to be issued the week of November 14, 2011.
For more details, see this entry on the ISS Governance Blog by Ted Allen:
http://blog.issgovernance.com/gov/2011/10/iss-policy-comment-period-extended-to-nov-7.html
