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.
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