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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