ISS Posts 2011-2012 Policy Survey

ISS Posts 2011-2012 Policy Survey

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Institutional Shareholder Services (ISS) has posted its 2011-2012 Policy Survey at:

The survey will remain opne through August 3, 2011. ISS will use the results it receives in formulating its policy updates for 2012.

Unlike was suggested by certain media reports, it does not appear that ISS is asking about policies and procedures related to its Say on Pay policy, i.e., its methodology for the valuation of stock options and the development of peer groups.

The survey questions related to ISS’ U.S. Compensation policies are as follows:

11. When determining whether executive pay is aligned with company performance, how relevant are the following factors?

– Pay that is significantly higher than peer pay levels

– Pay levels that have increased disproportionately to the company’s performance trend

Rank factors — Not relevant, Somewhat relevant, Very relevant

Comment: ISS doesn’t address the definition of pay, or whether it is appropriate to utilize a different valuation of stock options than the FASB ASC Topic 718 expense disclosed in the proxy. Frankly, I think that is a fundamental issue that ISS subscribers should be asked for input on since most public companies view the use of non-U.S. GAAP values for stock options as being undesirable and inconsistent with accounting and securities disclosure requirements.

12. Does your organization consider discretionary annual bonus awards (i.e., not based primarily on attainment of pre-set goals) to be problematic in the following circumstances:

– Always – annual incentives should always be tied mainly to attainment of specific goals related to the company’s business and/or strategic plan.

– Sometimes – if the awards are not aligned with company performance.

– Never – companies should have flexibility to design incentive plans according to culture and the board’s determination.

– Other (please specify).

Comment: ISS could be angling to try and “outlaw” any non-performance based annual incentive. That may end up tying the hands of management and the board to motivate employees when the performance goals that are set have to be abandoned part way through the year because of external changes, as happened during the recent financial crisis to many companies.

13. At what level of opposition on a say-on-pay proposal should there be an explicit response from the board regarding improvements to pay practices?

– More than 10%

– More than 20%

– More than 30%

– More than 40%

– More than 50%

– Not applicable

Comment: ISS is likely looking for its subscribers’ input into what level of opposition should warrant an affirmative statement from the company. Knowing how ISS policies have been constructed in the past, I expect that whatever that level gets set at, if a company hits it and fails to make an affirmative statement, there will be consequences under one or more of the ISS policies, most likely related to the Say on Pay vote and the election of directors.

14. How does your organization view the new Advisory Vote on Golden Parachutes that are on ballot at meetings where shareholders are voting on a change-in-control transaction?

– Always vote for the Golden Parachute proposal if you vote for the transaction

– Vote against the Golden Parachute proposal, to express concerns about the nature and/or amount of executives’ parachute arrangements, even if you support the transaction

– Not applicable

– Other (please specify)

Next set of questions are to be applied to equity compensation plan proposals from U.S. incorporated companies

15. In cases where the Shareholder Value Transfer cost of an equity plan proposal is excessive relative to peers, to what extent should the following positive factors mitigate the cost to shareholders?

– Above median long-term shareholder return

– Low average burn rate relative to peers

– Double-trigger CIC equity vesting

– Reasonable plan duration based on historical share usage

– Robust vesting requirements (>5 years)

Rank each of the above: Not at all, Somewhat, Very much, No opinion

Comment: ISS is likely trying to determine where its subscribers would differ in their possible vote on equity plans and could end up modifying its equity compensation plan proposal policies depending on the outcome of the survey. In all likelihood, I would expect that it would require multiple positive factors coupled with some stipulations from a company in order for ISS to be comfortable overriding a negative vote recommendation as the result of excessive Shareholder Value Transfer.

16. In cases where the Shareholder Value Transfer cost of an equity plan proposal is not excessive relative to peers, to what extent should the following negative factors weigh against the plan?

– Liberal CIC definition with automatic award vesting

– Excessive potential share dilution relative to peers

– High CEO or NEO “concentration ratio”

– Automatic replenishment (“Evergreen funding”)

– Prolonged poor financial performance

– Prolonged poor shareholder returns

Rank each of the above: Not at all, Somewhat, Very much, No opinion

Comment: ISS is most likely facing the reality of the situation — many proposals that had acceptable levels of dilution but failed another of ISS’ policies, e.g., burn rate policy, were accepted by shareholders even in light of the negative ISS vote recommendation. So I expect ISS is trying to get some context around what these shareholders would find acceptable and write it into its policies so that its vote recommendations fit better with what its subscribers intend to do.

17. Under single-trigger equity vesting, a change of control (CIC) by itself triggers accelerated vesting of all outstanding awards. Under what circumstances is “single-trigger” vesting appropriate?

– Automatic accelerated vesting of outstanding grants upon a CIC

– Accelerated vesting at the board’s discretion after a CIC

– Accelerated vesting in certain circumstances after a CIC (e.g., if awards are not converted or replaced by a surviving entity)

Rank each of the above: Appropriate, Not appropriate, No opinion

Comment: This question suggests that ISS will once again be looking at single-trigger CIC protections as it formulates the 2012 policy updates. For the past several years, ISS has looked at single-trigger CIC protections with additional scrutiny and has warned companies that it may change its policy with respect to them, i.e., it could start viewing the inclusion of a single-trigger CIC protection in equity plans as reason alone to recommend against such plans. Certainly if the survey responses from ISS subscribers seem to support such a position, I think ISS could adopt such a policy update for 2012.

18. Should equity plans coming to a shareholder vote for the first time after an IPO (in order to qualify for Section 162(m) tax deductibility) be evaluated under the same guidelines as a “standard” equity plan, even if no shares are requested?

Comment: ISS is asking this question to solicit feedback from its subscribers which is similar to several issues which popped up during the 2011 proxy season related to post-IPO plan proposals.


If you or your company has opinion on these or other possible survey questions posed by ISS, you can complete the survey as well.  ISS has indicated that it will permit corporate  issuers (public companies) as well as its investor clients complete the survey.

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