ISS announced that it would not apply its excessive non-employee director (NED) pay policy until meetings on and after February 1, 2020. But in the U.S. Compensation Policies Frequently Asked Questions, Updated December 14, 2018, ISS indicated that adverse vote recommendations could be issued under this policy for meetings occurring on or after February 1, 2020 where ISS has identified excessive NED pay without compelling rationale in both 2019 and 2020.
This means that companies that might have excessive NED pay and wanted to addresses it so it would not be an issue in 2020, will need to address NED pay now. That’s because most companies are setting their director compensation for 2019, that will be disclosed in their 2020 proxy statements.
Therefore, if a company will have an issue under ISS’ NED pay policy in 2020, it will be extremely difficult to avoid that result. So, the way ISS is implementing this policy creates a real possibility that companies will be trapped into being amongst the top 3% NED pay in both their 2019 and 2020 proxy statements and have no real opportunity to address NED pay levels (since 2019 pay being set shortly) before ISS applies the policy in 2020.
Companies should therefore carefully review ISS’s new FAQ on NED pay and determine whether their director pay for any director would place him/her at the 90th percentile or higher for companies in their 2-digit GICS code in their index (S&P 500; combined S&P 400 and S&P 600; remainder of the Russell 3000 index; and, the Russell 3000-Extended). If so, then they should consider adding an explanation in their proxy explaining why their pay is higher for those directors and also consider better laying out the process used to set director pay, especially timing, so that shareholders and ISS can more easily see that the Company had very little opportunity to address NED pay levels for the 2020 proxy.