On October 18, 2011, Institutional Shareholder Services (ISS) issued its draft 2012 Policies for comment. These policies are available at:
http://www.issgovernance.com/policy/2012comment
Comments will be accepted through October 31, 2011.
Here’s a quick summary of the draft compensation-related policy changes for 2012:
- Board: Board Response to Management Say-on-Pay Votes (US)—ISS will consider prior SOP proposals that received significant opposition (note: no bright line set) from votes cast when recommending on Compensation Committee Members, taking into account:
- The level of opposition
- The company’s ownership structure
- Disclosure of engagement efforts with major institutional investors regarding compensation issue(s)
- The company’s response
- Specific actions taken to address the issue(s) that appear to have caused the significant level of against votes
- Other recent compensation actions taken by the company, and
- ISS’s current analysis of the company’s executive compensation and whether any prior issues of concern are recurring or one-time
- Additional notes:
- Higher level of scrutiny for companies where MSOP received less than 50% support
- Recurrence of previously identified compensation issues or newly identified compensation concerns, depending on the severity, may result in an AGAINST vote on MSOP and the Compensation Committee members
- Request for comment:
- Does a support level of less than 70 percent warrant an explicit response from a company to address concerns – i.e., including actions or an action plan? If not, what opposition level warrants an explicit response?
- Should boards be expected to provide an explicit response to a low supported MSOP proposal by the year following that vote; or should accountability be based on the results of more than one low MSOP vote?
- Board: Board Response to Management Say-on-Pay Frequency Vote—ISS is proposing a new vote recommendation policy for MSOP:
- Vote WITHHOLD/AGAINST on all incumbent director nominees if board implements an advisory vote on a less frequent basis than the frequency which received a majority of the votes cast at most recent meeting.
- Vote CASE-BY-CASE if board implements a frequency that is different than the frequency that received a plurality, but not majority, of votes cast at most recent meeting, taking into account:
- The board’s rationale for doing so,
- The company’s ownership structure,
- ISS’s analysis of the company’s executive compensation and whether there are compensation concerns or a history of problematic pay practices,
- The previous year’s support level on the company’s SOP proposal
- The difference between the frequency adopted and the frequency supported by shareholders
- Request for comment:
- In cases where a company fails to adopt an MSOP frequency that received majority support by shareholders, should there be additional considerations given to these companies?
- In cases where a company implements an option that is less frequent than that which received a plurality, but not a majority, of votes cast (e.g., one year received 43 percent of votes cast, two year received 1 percent, and three year received 39 percent, excluding abstentions), would the proposed factors help your organization analyze such situations? Are there other factors that your organization would recommend?
- Compensation: Evaluation of Executive Pay (Management Say-on-Pay)—ISS is proposing a new methodology for evaluating pay-for-performance alignment – strong, satisfactory or weak alignment. Methodology would combine a quantitative analysis followed by a qualitative analysis:
- Quantitative Analysis – 3 factors in 2 categories:
- Relative Alignment—2 factors are analyzed to determine the PFP alignment within a group of companies similar to the company in market cap, revenue (or assets) and industry:
- The degree of alignment between the company’s TSR rank and the CEO’s total pay rank within the peer group as measured over 1- and 3-year periods (weighted 40/60), to put more emphasis on longer term);
- The multiple of the CEO’s total pay relative to the peer group median, which may identify cases where a high performing company may nevertheless be overpaying.
- Absolute Alignment—this factor measures long-term alignment between pay and company performance as:
- Alignment between the trend in the CEO’s pay and the company’s TSR over the prior 5 fiscal years – difference between the slope of annual pay changes and the slope of annualized TSR changes during the 5-year period
- Peer Alignment and Absolute Alignment may be weighted 50/50 in this portion of the analysis. Companies demonstrating a weak alignment will receive further qualitative review to determine a final vote recommendation.
- Qualitative review will consider:
- The ratio of performance- to time-based equity awards
- The overall ratio of performance-based compensation
- The robustness of disclosure an rigor of performance goals
- The company’s peer group benchmarking practices
- Actual results of financial/operational metrics, such as growth in revenue, profit, cash flow, etc., both absolute and relative to peers
- Special circumstances related to, for example, new CEO in prior FY or equity grant practices (e.g., biannual awards)
- Any other factors deemed relevant
- Request for comment:
- Do the factors utilized in ISS’ proposed pay-for-performance evaluation approach align with those that your organization believes should be considered?
- Does the proposed new approach give adequate consideration to long-term alignment?
- Will the proposed new approach be beneficial to your organization in identifying companies with strong pay-for-performance alignment?
- What additional factors, if any, should ISS consider and display to improve investors’ ability to evaluate companies’ long-term pay-performance alignment?
- Compensation: Equity Plans Related to Section 162(m)—Looks like ISS would conduct a full analysis of an IPO equity plan put to shareholders for 162(m) purposes, regardless of whether the plan was approved prior to the company going public.
- Request for comment:
- Should the potential tax deduction on performance-based compensation for named executive officers outweigh the adverse impact of problematic features in equity plans for 162(m) proposals from new IPO companies?
- If shareholders do not support the 162(m) proposal at the newly public company, the company would not be able to obtain tax deduction for performance-based compensation. Should the Compensation Committee be held accountable for the problematic design in the equity plan instead?
- Are there additional factors that investors should consider for the case-by-case analysis, besides those mentioned above?