Archive November 2017

ISS Posts Preliminary U.S. Compensation FAQs – Buckle Up!

On November 21, 2017, ISS issued preliminary U.S. Compensation FAQs These can be found at the bottom of the ISS Latest Voting Policies page:

https://www.issgovernance.com/policy-gateway/latest-policies/

At first I thought it was a bit odd that ISS was issuing preliminary Compensation FAQs. Then, I read through the FAQs and understand why they did so.  The FAQs make a number of changes to ISS policies that likely will leave a few companies scrambling to figure out how these will impact them going forward.

First, with respect to the Quantitative P4P tests:

  • ISS is dropping the medium threshold for the Multiple of Median test from 2.33x to 2.00x for S&P 500 constituents covered by ISS’s U.S. Policies. All other thresholds remain the same for 2018.
  • Total Shareholder Return will now be calculated using a “smoothing” method by ISS for both the beginning-of-period and end-of-period stock prices by averaging the beginning and ending stock price for the month closest to the fiscal year-end of a company. Stock splits and dividends occurring during such averaging periods will be factored into the TSR calculations. If a company’s FYE is on/after the 15th of the month, then that monthly stock price average will be used; otherwise, the monthly average of the prior month will be used.
  • Financial Performance Assessment (FPA) will be applied as a secondary measure after the traditional three quantitative tests (MOM, RDA, and PTA) are calculated. FPA will then could be used to assess how well companies performed on relative financial metrics and may cause ISS to score the overall quantitative P4P concern level as low concern when the traditional quantitative tests indicate a medium concern, and, likewise, could cause ISS to score the overall quantitative P4P concern as medium concern when the traditional quantitative tests indicate a low concern.
  • Preliminary FAQs include a chart showing which metrics will be used for the various GICS groups – no word on the weightings of these metrics is provided.

Second, with respect to the Equity Plan Scorecard (EPSC), ISS appears to making a couple of significant changes :

  • The minimum points necessary to pass the EPSC model is being increased from 53 points to 55 points for all S&P 500 companies; for all other companies, the minimum points remains at 53 points.
  • Change in Control (CIC) Vesting Factor under the EPSC will now only give full or no points. Full points will be awarded when an equity plan contains both of the following provisions:
    • For performance-based awards, acceleration is limited to actual performance achieved, pro-rata of target based on the elapsed portion of the performance period, a combination of both actual & pro-rata, or the performance awards are forfeited or terminated upon a change in control. If no performance awards, points for this factor will be based solely on the treatment of time-based awards.
    • For time-based awards, acceleration upon a CIC cannot be automatic single-trigger or discretionary.

Any other provision for CIC treatment results in no points under this factor.

  • Holding Requirements Factor is being “simplified” for 2018 and ISS will either award full or no points. To receive full points, awards must be subject to a minimum 12-month holding period, or holding through the end of employment. A holding period of less than 12 months or only until stock ownership guidelines are met will result in no points under this factor.
  • CEO Vesting Requirement Factor is also being “simplified” for 2018 and there will either be full or no points under this factor. To receive full points, time-based options, time-based restricted stock, and performance-based equity compensation for the CEO must all have a vesting requirement of at least 3 years from the date of grant until all shares from the award vest.
  • Broad Discretion to Accelerate Vesting Factor is being revised so that full credit under this factor will only be awarded if the discretion to accelerate vesting is limited to cases of death and disability.  If discretion extends to CIC, retirement, or other terminations, the plan would not receive any points under this factor.

ISS Issues 2018 Policy Updates

On November 16, 2017, ISS released it policy updates for 2018.  These updated policies will apply to shareholder meeting on or after February 1, 2018.

For the U.S., there are several compensation-related policies that were updated:

  • Pay-for-Performance Policy — starting in 2018, ISS will add a new relative quantitative test that measures relative CEO against three to four relative financial performance metrics, which will vary by industry, all measured over a 3-year period similar to the RDA or Relative Degree of Alignment test which compares CEO pay and TSR over a 3-year period.

Note: ISS indicated that it will provide specific details around the mechanics of its updated quantitative P4P screening methodology in an updated P4P white paper. ISS did not give an estimated timeframe for the release of this updated white paper, but in the past, such P4P white papers have been released in late January or early February after policy updates. I will provide details on the P4P quantitative screening mechanics once the white paper becomes available.

  •  Advisory Votes on Executive Compensation: Compensation Committee Communications and Responsiveness–this policy looks at a company’s response to a say on pay (SOP) vote that received less than 70% support. ISS is now clarifying the information it wants companies to detail in their subsequent year proxy statements about their reaction to such a low SOP vote, including the timing and frequency of shareholder engagements, whether independent directors participated, the specific concerns raised by dissenting shareholders, and disclosure of specific and meaningful action to address shareholders’ concerns.
  • Board Accountability–ISS will generally vote against members of the board committee responsible for approving/setting non-employee director compensation if there is a pattern (i.e., two or more years) of awarding excessive non-employee director compensation without disclosing a compelling rationale or other mitigating factors.

The ISS policy updates can be found on ISS’ Latest Voting Policies page:

https://www.issgovernance.com/policy-gateway/latest-policies/

ISS Opens Its QualityScore Data Verification Window Through November 28

On November 13, 2017, ISS opened the data verification window for its QualityScore.  The data submission window will remain open until 8 pm Eastern on November 28. The data submission for both QualityScore and peer groups is doen through ISS’s Governance Analytics database, so a working user login is required for companies to make these submissions.

ISS at the same time released an updated technical document on QualityScore that details the factors that go into it, available at:

http://images.info.isscorporatesolutions.com/Web/ISSCorporate/%7Bec72720c-4c60-4f81-a5e6-ddf60de12b0c%7D_qualityscore-techdoc-13112017.pdf 

 

ISS Open Peer Group Submission Window Until November 20

On November 6, 2017, ISS announced that it had opened the window for companies to submit changes to their proxy-disclosed peer groups. Companies that submit updates will have ISS use their updated peer groups when ISS conducts its proxy analyses.  The submission window will remain open until 9 am Eastern on November 20.

For more information, see the ISS Press Release at:

https://www.issgovernance.com/iss-announces-peer-group-submission-review-window-open-november-20/