Equity Compensation Plans

ISS Posts Final FAQs and Other Policy Document for 2018

On December 14, 2017, ISS issued several important updated documents concerning its policies and methodologies for the upcoming 2018 proxy season:

These are all available on ISS’s Latest Voting Policies: 2018 webpage on its website: https://www.issgovernance.com/policy-gateway/latest-policies/

This page also includes information ISS released on its European Pay-for-Performance Alignment and Methodology.

U.S. Compensation Policies: FAQs

This supersedes the preliminary FAQs on this topic issued in November 2017.  These FAQs make changes to or introduce ISS policies:

  • How ISS Assesses Board’s Actions Taken in Response to Low Support (<70%) on a Say-on-Pay (SOP) Vote
    • Same as last year’s policy except now ISS will expect companies to address in their proxy statements: (1) the breadth of the engagement with shareholders, including the frequency and timing of engagements, number of institutional investors and the company participants including whether independent directors participated as well; (2) disclosure of specific feedback received from investors; and, (3) specific and meaningful actions taken to address shareholder concerns.
  • Lay out the four measures now used in ISS’ quantitative Pay-for-Performance (P4P) screen
    • Relative Degree of Alignment (RDA) – relative measure
    • Multiple of Median (MOM) – relative measure
    • Pay-TSR Alignment (PTA) – absolute measure
    • Financial Performance Assessment (FPA) – relative measure – assesses CEO pay rank and financial performance rank over a two- or three-year period using up to four financial metrics which vary by industry
  • Explain how the new Financial Performance Assessment (FPA) measure operates
    • Compares a company’s financial and operational performance over the long-term versus ISS peer group. Note: ISS has historical taken the position that you need a performance period of at least 3 years for it to consider the program long-term performance and yet, somehow it characterizes a two-year period of financial performance as long-term. FPA uses three or four financial metrics that are selected and weighted based on industry. The financial metrics that could be used include: return on invested capital (ROIC); return on assets (ROA); return on equity (ROE); EBITDA growth; and, cash flow (from operations) growth.
  • Explain how the FPA result will impact the final quantitative P4P concern level
    • FPA may affect the overall quantitative P4P concern level only if:
      • a Medium concern under any of the three initial tests (RDA, MOM, PTA), or
      • a Low concern but bordering the Medium concern threshold under any of the three initial tests
    • FPA can modify the overall concern up to Medium or down to low in the above cases. If the concern level under any of three initial tests is a High concern or the three initial tests result in a Low concern not bordering on Medium concern, then FPA modification is not be available.
  • Explain the time period used for TSR calculations for RDA
    • ISS uses a three-year period for measuring TSR ending closest to the fiscal year-end of the subject company. The TSR of the ISS peers will be measured over that same period. However, ISS will begin to average the closing prices across all trading days contained in the beginning and months of the TSR measurement period.
  • Explain which problematic practices are most likely to result in an adverse ISS vote recommendation
    • Repricing or replacing underwater stock options/SARs without prior shareholder approval (including cash outs)
    • Extraordinary perquisites or tax gross-ups
    • New or extended executive agreements that provide for:
      • Excessive CIC payments (exceeding 3 times base salary and average/target/most recent bonus)
      • CIC severance payments without involuntary job loss or substantial diminution of duties
      • CIC payments with excise tax gross-ups
      • Multi-year guaranteed awards that are no at-risk due to rigorous performance conditions, or
      • Liberal CIC definition combined with any single-trigger CIC benefits
    • Any other provision or practice deemed to be egregious and present a significant risk to investors
  • Explain how ISS will identify “excessive” levels of non-employee director pay and the impact it will have on its analysis
    • ISS is looking for extreme “outliers” in NED pay, which historically has represented pay figures above the top 5% of all comparable directors
    • If ISS finds excessive NED pay levels to exist, it may issue adverse vote recommendation for those board members responsible for approving/setting NED pay if no compelling rationale is provided
  • Explain how ISS will consider the new CEO Pay Ratio disclosure
    • ISS will display in its research reports: (1) the median employee pay figure; and, (2) the CEO pay ratio.
    • ISS will continue to assess the CEO pay ratio data as it becomes available and seek feedback from investors on the usefulness of this information and what should be done with it


U.S. Equity Compensation Plans: FAQs

This supersedes the preliminary FAQs issued in November 2017 about ISS’ Equity Plan Scorecard (EPSC) policy. These updated FAQs

  • Explain how ISS will treat the grant of time-vested restricted shares as consideration for an acquisition for purposes of its burn rate calculation
    • Generally, ISS factors all equity grants into its burn rate calculation. However, if companies grant time-vested restricted shares as part of an acquisition, they may request that such shares be excluded from the ISS burn rate calculation, but must provide tabular disclosure to enable ISS to determine the shares used in each of the three most recent years. Only time-vested restricted stock can be excluded under this policy; performance-based awards issued in an acquisition context will continue to be included. See the FAQs for a sample of the table that must be provided. Once companies make this initial disclosure, they should continue to provide it, even if they did not issue any time-vested restricted shares for acquisitions during the most recent year covered.
  • Clarified that all previous ISS burn rate commitments are now dead and of no force and that ISS no longer gives any special treatment to such commitments
  • Lay out the definition of “liberal change in control” and its impact on a plan with contains such a term
    • Means vesting triggers linked to: shareholder approval of the transaction, rather than its consummation; and/or an unapproved change in less than a majority of the board; and/or acquisition of a low percentage of outstanding common stock (15% or less); and/or announcement or commencement of a tender or exchange offer; or any other trigger that could result in windfall compensation without the occurrence of an actual change in control of the company.
  • Explain how ISS evaluates an equity plan proposal seeking approval of one or more amendments
    • Evaluated on a case-by-case basis
    • ISS will generally base its vote recommendation on the EPSC evaluation/score if any of the following apply:
      • the proposal includes a material request for additional shares;
      • the proposal represents the first time shareholders have had an opportunity to vote on the plan;
      • the amendments include an extension of the plan’s term; or
      • the amendments include the addition of full value awards as an award type when the current plan authorizes only stock option/SAR grants
    • If none of the four scenarios above apply, then ISS’ vote recommendation will depend on the overall impact of the proposed amendments, i.e. whether deemed beneficial or contrary to shareholders’ interests
  • Explain the factors ISS considers in its qualitative review of director pay for the purpose of a proposal seeking approval of a director equity plan
    • The relative magnitude of director compensation compared to companies of a similar profile
    • The presence of problematic pay practices relating to director compensation
    • Director stock ownership guidelines and holding requirements
    • Equity award vesting schedules
    • The mix of cash and equity-based compensation
    • Meaningful limits on director compensation
    • The availability of retirement benefits or perquisites
    • The quality of disclosure surrounding director compensation
  • Lay out the changes to the EPSC policy for 2018
    • Passing score for S&P 500 companies was raised from 53 to 55 points
    • The CIC vesting factor was made binary – either full or no points are no earned depending on whether plan complies with the ISS CIC vesting requirements:
      • 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 CIC, and
      • For time-based awards: acceleration cannot be automatic single-trigger or discretionary
    • The holding requirement factor was made binary – either full or no points are earned depending on whether all awards require a holding period of at least 12-months. No points are given if the holding period is less or the holding requirement applies until stock ownership guidelines are met.
    • The CEO vesting requirement factors were made binary – either full points or no points depending on whether the vesting period is at least 3 years from the date of grant
    • The broad discretion to accelerate vesting factor was updated so that full points are earned only if discretion is limited to cases of death and disability. Discretion to accelerate vesting upon a CIC will cause no points to be awarded under this factor unlike current policy which would give full  points. The ability to use discretion to accelerate vesting in any other situation would cause the plan to lose all points under this factor.
    • ISS adjusted certain factor scores, per ISS’ proprietary scoring model.
  • Explain how the EPSC models differ now
    • Generally the same as current policy, except that the maximum points for S&P 500 and Russell 3000 companies under the Plan Features and Grant Practices pillars have been revised to be: 19 and 36 points, respectively.
  • Explain the EPSC points required to receive a positive ISS vote recommendation
    • S&P 500 companies now must score 55 or more points under the EPSC model to receive a positive ISS vote recommendation for their equity plan proposals
    • All other companies must still score 53 or more points under the EPSC model to receive a positive ISS vote recommendation for their equity plan proposals
  • Explain the ESPC factors, whether they are binary and if weighted equally
    • See chart in the FAQs on this. But note that ISS does not give out the actual points attributed to each factor
  • Lay out when repricing provisions will constitute and overriding factor that would cause ISS to recommend against a plan proposal regardless of EPSC model score and other analysis
    • If the plan would permit repricing of stock options/SARs without shareholder approval it would constitute an overriding factor.
  • Explain how ISS evaluates whether a plan meets the minimum vesting requirement
    • The plan must mandate a vesting period of at least one year for all equity award types grantable under the plan, which applies to no less than 95% of the shares authorized for grant. Exceptions to the minimum vesting beyond 5% will prevent a company from getting points under this factor. Also if the plan permits individual award agreements or other mechanisms to reduce or eliminate the minimum vesting requirement, the plan receives no points under this factor.
  • Explain how ISS determines the treatment of performance-based awards that may vest upon a change in control
    • ISS will consider whether the amount of the performance award that would be payable/vested upon a CIC is (a) at target level, (b) above target level, (c) prorated based on actual performance as of the CIC date and/or the time elapsed in the performance period as of the CIC date, or (d) based on board discretion. Of the plan is silent, it will be treated as discretionary.
  • Explain how ISS determines the vesting period for a CEO’s most recent equity grants
    • For time-vested awards, full vesting should not occur until three years from the date of grant
    • For performance-based awards, ISS will give credit for a vesting period of slightly less than three years from the grant date so long as the performance measurement period is three years, if the reason is due to the grant date being within the performance measurement period. For performance-based awards that are subject to subsequent time-based vesting, only the performance-contingent portion of the vesting period is counted.
  • Explain how ISS will evaluate an equity plan amendment proposal when the company does not disclose the updated plan document
    • ISS may recommend against the plan amendment proposal because the company has not provided sufficient information to enable shareholders to fully evaluate the revised plan
  • Lay out the new 2018 Burn Rate Benchmarks
    • See the Appendix to this FAQ


Pay-for-Performance Mechanics (U.S.)

Those that were hoping that ISS would go into more sufficient detail so that they might be able to determine how they will fare under ISS’ quantitative P4P assessment are likely to be a bit disappointed.  While ISS does give some direction on how it will the P4P quantitative test will work, it stops short of giving sufficient details for a company to calculate these on its own. So much for transparency. But, I guess too much transparency is bad for the bottom line and if companies could calculate how they would fare under the ISS quantitative P4P tests they might need to purchase P4P simulation modeling from ISS Corporate Solutions (ISS corporate services arm).

However, this document does lay out a change in the concern thresholds under the Multiple of Median (MOM) test for S&P 500 companies. For S&P companies, the level that triggers a medium concern level has decreased from 2.33x to 2.00x. For non-S&P 500 companies, the medium concern threshold under the MOM test remain at 2.33x.

While this document does lay out the metrics that will be used for FPA for each GICS group, it does not specify the weighting of those metrics.



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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:


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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Is it Better to Propose a New Omnibus Plan or to Amend an Existing Omnibus Plan?

I am often asked whether it is better to ask shareholders to approve an amendment of an existing omnibus plan or a completely new omnibus plan. Generally, there is not too much difference since you can make the amendments ensure that the existing omnibus plan complies with current corporate governance best practices.  But, in point of fact, there is a slight difference when I look at the voting for proposals to amend an existing plan versus to approve a new plan.

Mind you, the difference is not all that much.  But for companies that are looking to do everything possible to ensure a favorable vote outcome, then serious thought should be given to adopting a new omnibus plan since such proposals receive higher levels of voting support.  That said, the median level of vote support for proposals to amend an existing omnibus plan are slightly higher than the median support for proposals to approve a new omnibus plan.  But this is offset by the fact that proposals to approve new omnibus plans have more votes coming in at or above the 90% level.

The charts below look at the vote support at median and average and by support level for both of these proposals using data from the ISS Voting Analytics database for S&P 500 companies with such proposals in 2015, 2016 and in 2017 so far.

Source: ISS Voting Analytics database

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That’s a FAQ, Jack! – New Interpretations from ISS

On December 19, 2016, ISS issued updates to several of its key FAQs, including those on Equity Compensation Plans, Executive Compensation Policies, and also the explanation of ISS’ Pay-for-Performance Mechanics. Below I look at the specific updates under each FAQ and the P4P Mechanics.

U.S. Equity Compensation Plans

FAQ #19 If a company grants performance-based awards, how will the shares be counted for the purposes of calculating burn rate?

ISS makes clear that unless a company provides disclosure of the performance-based awards that vest and are earned in each year during the past three years, ISS will use the number of performance-based awards that are granted in each year when calculating its burn rate for a company.

FAQ #28 How does ISS evaluate an equity plan proposal seeking approval of one or more plan amendments?

If there is not a request for additional shares (or other modification that is deemed to potentially increase the plan’s cost), ISS will review the overall impact of the amendments to shareholders. If beneficial, ISS will support the proposal; if detrimental, then ISS will oppose the proposal.

If there is a request for additional shares (or other modification that is deemed to potentially increase the plan’s cost) or this is the first time public shareholders will have an opportunity to opine on the plan, then ISS will consider both the Equity Plan Scorecard (EPSC) score as well as an analysis of the overall impact of the amendments to shareholders (as above). But the EPSC score is more heavily weighted. If the EPSC score is such to warrant a positive vote recommendation, ISS will only recommend against the proposal if the amendments represent a substantial diminishment to shareholders’ interests.

See FAQs #29 and 30 for proposals seeking approval only for Section 162(m) purposes.

FAQ #30 How are proposals that include 162(m) reapproval along with plan amendments evaluated?

The general ISS positive override for Section 162(m) proposals does not apply to bundled amendments. For bundled amendments, even those that include Section 162(m) reapprovals, ISS will evaluate the plan proposal in terms of the impact to shareholders and/or the EPSC score as detailed above under FAQ #28.

FAQ #32 How does ISS view a plan amendment to increase the tax withholding rate applicable upon an award settlement?

Generally, ISS views such a change as neutral to shareholders’ interests. However, if the plan also has a liberal share recycling feature, ISS will view the amendment negatively. But, if this is the only amendment being made to the plan, by itself it would not be sufficient for ISS to recommend against the plan (see my blog post on this). If this is bundled with other amendments, then ISS will review it using its EPSC policy framework discussed in FAQ #28.

FAQ #36 What changes were made to the EPSC policy for 2017?

Effective for shareholder meetings on or after February 1, 2017, the EPSC policy generally remains the same, though ISS did make the following adjustments:

  • A new factor was added to the Plan Features pillar that looks at whether the plan permits the payment of dividends or dividend equivalents on unvested awards. Full points are awarded if the plan expressly prohibits, for all awards, the payment of dividends and dividend equivalents before the vesting of the underlying awards; however, accrual of dividends and dividend equivalents payable upon vesting is acceptable. No points will be awarded if the plan does not include an express prohibition on the current payment of dividends and dividend equivalents.
  • The minimum vesting factor is updated so that full points are only awarded if the plan specifies a minimum vesting period of one year for all equity awards. Further, no points will be awarded if the plan permits the administrator, through individual award agreements or other mechanisms, to reduce or eliminate the one-year vesting requirement beyond the allowable 5% carve-out.
  • Companies that have 33 or more months of trading history as of the applicable lock-in date (QDD or quarterly data download date per ISS) will have burn rate incorporated into their EPSC evaluation if they disclose three years of burn rate data. For companies with 32 or fewer months of trading history, ISS will continue to evaluate them under its Special Cases models, see FAQs #37, 38 and 41.
  • Finally, ISS adjusted certain factor scores under its proprietary EPSC score model.
  • The EPSC threshold number of points remains at 53.

FAQ #41 How will equity plan proposals at newly public companies be evaluated?

Companies that are newly public will continue to be evaluated under an EPSC model that includes fewer factors. As previously was the case, the burn rate and plan duration factors will not apply if the company has less than 3 years of disclosed grant data. ISS will use its Special Cases models in two cases: (1) company has less than or equal to 32 months of trading history as of the QDD date, or (2) company has between 33 and 36 months of trading history and there is less than 3 years of burn rate data.

FAQ #42 What factors are considered in the EPSC, and why?

The EPSC has three categories/pillars under which ISS conducts its analysis: Plan Cost, Plan Features, and Grant Practices. This FAQ has been updated to reflect the updates to the EPSC model mentioned in FAQ #36.

FAQ #43 Are the factors binary? Are they weighted equally?

The EPSC factors are not weighted equally. Each factor is assigned a maximum number of points and the total maximum number of points is 100. A passing score remains at 53 points. This FAQ then includes a table with the factors, a definition of the factor, and information on how it is scored for purposes of the EPSC model (but not the actual maximum number of points for the factors).

FAQ #47 How does ISS assess a plan’s minimum vesting requirements for EPSC purposes?

In order for a plan to receive full points for the minimum vesting factor, it must require a vesting of at least 1 year for all equity award types and cannot permit individual award agreements to reduce or eliminate this minimum vesting requirement. This minimum vesting requirement must apply to at least 95% of the shares authorized for grant under the plan, i.e., the plan can permit up to 5% of the authorized shares to be granted without complying with the minimum vesting requirement.


U.S. Executive Compensation Policies

FAQ #3 How is Total Compensation calculated?

Total Compensation = Base Salary + Bonus + Non-equity Incentive Plan Compensation + Stock Awards* + Option Awards** + Change in Pension Value and Nonqualified Deferred Compensation Earnings + All Other Compensation.

  • * The value of all stock-based awards – both time- and performance-vesting) are calculated by multiplying the number of underlying shares (target number for performance awards) by the closing stock price on the date of grant.
  • ** The value of option and SAR awards is calculated using ISS’ Black-Scholes option pricing model.

FAQ #20 What are the factors that ISS considers in conducting the qualitative review of the pay for performance analysis?

Some of the key factors ISS considers in conducting its qualitative review of the P4P analysis include:

  • Ratio of performance- to time-based equity awards
  • Overall ratio of performance-based compensation
  • Completeness of disclosure
  • Rigor of performance goals
  • Application of compensation committee discretion
  • Magnitude of pay opportunities
  • Company’s peer group benchmarking practices
  • Results of financial/operational metrics both absolute and relative to peers
  • Special circumstances related to CEO and executive turnovers or anomalous equity grant practices
  • Realizable and realized pay compared to granted pay
  • Any other factors deemed relevant

FAQ #22 What is the Relative Pay and Financial Performance Assessment included in research reports?

ISS introduced a Relative Pay and Financial Performance Assessment for Russell 3000 companies for meetings on or after February 1, 2017. ISS will compare the long-term CEO pay and financial/operational performance rankings relative to a company’s ISS peer group. Financial/operational performance will be assessed across up to 6 financial metrics and TSR, depending on the company’s GICS industry group. The potential metrics include:

  • Cash flow (from operations) growth
  • EBITDA growth
  • Return on assets
  • Return on equity
  • Return on invested capital
  • Revenue growth
  • Total shareholder return

FAQ #23 How will ISS use the Relative Pay & Financial Performance Assessment (RPFPA) in its analysis?

For 2017, the RPFPA is part of the qualitative P4P assessment and not included in the quantitative P4P assessment.

Note: ISS seems to be using 2017 as an information-gathering year and will be evaluating the RPFPA information collected. I expect after this analysis, ISS may move the RPFPA into the quantitative P4P assessment in a subsequent year.

FAQ #34 If a company has not been publicly traded for at least three or five years, does the relevant quantitative pay for performance evaluation still apply? Does this affect whether a company would be used as a peer?

If a company has not been publicly traded for 5 fiscal years, the relative measures, specifically the 3-year Relative Degree of Alignment (RDA) and the multiple of pay against the ISS peer median will still apply. But if the company has been publicly traded for less than 3 years, the RDA measure will be based on 2 years of data. If less than 2 years of data is available, RDA will not be run.

ISS will generally only include a company as a peer company if it has 3 full years worth of data.

FAQ #48 What is ISS’ Problematic Pay Practices evaluation?

ISS has identified certain practices that are contrary to a performance-based pay philosophy, and evaluates these practices on a case-by-case basis:

  • Egregious employment contracts
  • New CEO with overly generous new-hire package
  • Abnormally large bonus payouts without justifiable performance linkage or proper disclosure
  • Egregious pension/SERP payouts
  • Excessive perquisites
  • Excessive severance and/or change in control (CIC) provisions:
    • CIC cash payments exceeding 3x base salary + target/average/most recent bonus
    • New or materially amended arrangements that provide for CIC payments without job loss or substantial diminution of job duties
    • New or materially amended arrangements that provide for an excise tax gross-up (regardless of whether full or modified)
    • Excessive payments upon an executive’s termination in connection with performance failure
    • Liberal CIC definition in individual contracts or equity plan which could result in payments to executives without an actual CIC occurring
  • Tax reimbursements: excessive reimbursement of income taxes on executive perquisites or other payments
  • Dividends or dividend equivalents paid on unvested performance shares or units
  • Repricing or replacing of underwater stock options/stock appreciation rights without prior shareholder approval
  • Other pay practices that may be deemed problematic in a given circumstance but are not covered in the above categories

FAQ #61 What is ISS’ policy on say-on-pay frequency?

ISS will generally recommend in favor of annual say-on-pay votes.

FAQ #63 In the event that a company does not present shareholders with a say-on-pay (SOP) vote where one would otherwise be expected, what are the vote recommendation implications?

If there is no SOP or SOP frequency vote on the ballot where one otherwise would be expected, and the company does not provide an explanation for the omission, ISS will generally recommend against the compensation committee chair (or full committee, as appropriate) until the company presents shareholders with an advisory vote on executive compensation.

FAQ #64 How does ISS evaluate the treatment of equity awards upon a change-in-control (CIC)?

Single trigger vesting of equity awards upon a CIC is viewed as a poor practice. ISS believes vesting acceleration should require both a CIC and a qualifying involuntary termination event (double trigger CIC vesting). ISS considers the potential windfall payments when evaluating equity award treatment upon a CIC. The factors ISS considers include:

  • Maintaining of vesting criteria
  • Pro rata vesting
  • The elapsed vesting period
  • Magnitude of accelerated awards

FAQ #67 How does ISS evaluate management advisory proposals seeking shareholder approval of non-employee director pay?

ISS looks for reasonable practices that adequately align the interests of directors with those of shareholders. ISS considers director pay composition, magnitude, and other qualitative features. ISS believes a director pay program should incorporate meaningful director stock ownership and/or holding requirements (i.e., at least 4x the annual cash retainer). When equity is a much larger component of director pay, the ownership and holding requirements should be more robust. ISS consider directors receiving performance-vesting equity awards, retirement benefits, or other perquisites to be a problematic practice. ISS also considers the magnitude of director pay, and the presence of a meaningful limit on annual director pay is a positive.

FAQ #68 How does ISS approach U.S.-listed companies with multiple executive compensation proposals on the ballot as a result of the company’s incorporation in a foreign country?

For U.S.-listed proxy (DEF 14A) filers that have multiple executive pay proposals on the ballot as a result of the company’s foreign incorporation, ISS will generally align the vote recommendation of the foreign compensation proposal to the U.S. management say-on-pay (SOP) recommendation so long as the foreign proposal is reasonably analogous to the SOP. Foreign Private Issuers are exempt from the U.S. SOP requirements.


Pay-for-Performance Mechanics

This document reviews ISS’s quantitative and qualitative approach to pay-for-performance (P4P) assessments.

On the quantitative P4P assessments, ISS has left the current concern thresholds that became effective February 1, 2015 unchanged:

  • Relative Degree of Alignment:
    • Medium Concern Threshold: -40
    • High Concern Threshold: -50
  • Multiple of Median:
    • Medium Concern Threshold: 2.33x
    • High Concern Threshold: 3.33x
  • Pay-TSR Alignment:
    • Medium Concern Threshold: -20%
    • High Concern Threshold: -35%

The major update for shareholders meetings on and after February 1, 2017 involves the addition of the relative pay and financial performance assessment (RPFPA). The document gives a sample of what the RPFPA disclosure will look like in the ISS proxy report.  Additionally, the Appendix gives the weightings of the various financial/operational metrics and TSR for each GICS industry group based on rank of the metric, not its exact weight.

The Appendix also details the Data Download Date for the TSR and financial/operational metrics used when ISS will conduct this analysis.

  • Shareholder Meeting Date Range -> Data Download Date
    • March 1 through May 31 -> December 1
    • June 1 through August 31 -> March 1
    • September 1 through November 30 -> June 1
    • December 1 through February 29 -> September 1

Note: Given the timing of things, ISS will use a common date for the subject company and the ISS peers, but it is unlikely to track to the company’s fiscal year end in most cases. Additionally, ISS will pull the information from the Compustat database and may not track to what a company used, especially if a company uses adjusted figures.

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