Category Pay for Performance

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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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/

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ISS Issues 2014-2015 Policy Survey Results

On September 29, 2014, ISS released the results of its 2014-2015 Policy Survey. ISS highlighted several survey results related to compensation matters, including:

  • Responses regarding pay for performance; and
  • Equity plans.

Pay for Performance (P4P)

ISS highlighted the responses to several survey questions that dealt with P4P. ISS indicates that investors liked the idea of having CEO pay limits relative to company performance (27% of investors supported, while only  12% of issuers agreed). The magnitude of CEO pay was considered when evaluating pay practices by 24% of investors and 50% of issuers. Based on these responses, and the additional follow-up questions, ISS may propose a refinement to its P4P policy that does more to evaluate the CEO pay versus both absolute and relative measures.  Currently, the ISS P4P policy compares a CEO’s pay to that of the median CEO pay of the ISS peer group for the company.  So, we’ll have to see if this means ISS will add two components to the CEO pay evaluation–both a relative and absolute analysis–and how these will factor into the overall quantitative concern level.

Equity Plans

ISS indicates in the survey results that it will be revising its equity plan policy for the 2015 proxy season (i.e., for shareholder meeting held on or after February 1, 2015). According to the narrative, ISS will implement a “balanced scorecard” approach for evaluating equity compensation plans that will evaluate the proposal under three categories:

  • Cost;
  • Plan Features; and
  • Company Grant Practices.

ISS indicates that issuers supported a weighting of these categories as follows:

  • 70% of investors supported weighting of 30% to 50% for Cost, with 40% being cited most often;
  • 62% of investors supported weighting of 25% to 35% for Plan Features; and
  • 64% of investors supported weighting of 20% to 35% for Grant Practices.

ISS has given no indication of what the final weighting will be, but they could be 40/30/30.  Additionally, ISS did not necessarily explain what was included in each fo these broad categories.  While I assume “Cost” refers to the ISS Cost calculated for an equity plan proposal using ISS’s ISSue Compass model, it is not absolutely certain that ISS won’t introduce some additional factors into the Cost category. The same holds true for the other categories, Plan Features and Grant Practices, which, conceivably, ISS already addresses in its proxy reports on equity plan proposals.  However, there is no indication if there will be additional features (such as liberal share counting) that might cause a proposal to lose all the points under the Plan Features category. Likewise, while Grant Practices probably includes the ISS Burn Rate evaluation, it is by no means absolutely certain that is all it will include.  It also isn’t clear to me what will happen if a company exceeds the ISS Burn Rate Cap but makes a public commitment, will that still be viewed as an override and cause a company to not lose points under the Grant Practices category?

The possibilities are numerous and, unfortunately, not touched upon in these survey results.  However, they do indicate a significant reorganization to the ISS equity plan proposal policy and all companies should keep an eye out to see what the actual draft policy looks like and try to understand what differences exist from the current policy and how that might impact share requests.

 

A copy of the ISS Press Release announcing the survey results can be found here:

http://www.issgovernance.com/iss-releases-results-annual-global-voting-policy-survey/

 

The actual 2014-2015 Policy Survey results can be found here:

http://www.issgovernance.com/file/publications/ISS2014-2015PolicySurveyResultsReport.pdf

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ISS Accepting Peer Group Updates Starting November 20, 2013

ISS Corporate Services sent out an email on November 18, 2013 that indicated that ISS will be accepting updates to Russell 3000 companies’ self-selected peer groups from November 20, 2013 at 9 am Eastern through 5 pm Eastern on December 9th. (Copy of email text appears below)

If your company revised its peer group since last year’s proxy and used this revised peer group for compensation decisions that were made for the year that will be required to be disclosed in your next proxy (2014 proxy covering 2013 for calendar year companies) for shareholder meetings between February 1, 2014 and September 15, 2014, you should consider participating so that ISS has your correct self-selected peer group when it develops its own peer groups for assessing your company (ISS peer group is used for its pay for performance analysis done as part of its say on pay vote recommendation).

Link to submit changes: http://www.issgovernance.com/PeerFeedbackUS
(Active during the dates and times detailed above)

ISS Corporate Service November 18, 2013 email

We wanted to make you aware that ISS will be accepting updates to companies’ self-selected compensation benchmarking peers starting this Wednesday, November 20, at 9:00 AM EST.

The peer submission window will remain open until 5:00 PM EST on December 9.  All companies in the Russell 3000 index with annual meetings set to occur between February 1, 2014, and September 15, 2014, are invited to participate.

ISS uses a company’s self-selected executive compensation benchmarking peers as a key input into the ISS peer group selection process.  To maximize the potential overlap between a company’s proxy-defined peers and the ISS-selected peers, your clients should use this process to ensure that ISS has an up-to-date list of what their proxy-defined peer companies will be.  For more details about the ISS peer group selection process, please refer to ISS’ U.S. 2013 Peer Group Methodology Frequently Asked Questions.

ISS requires the issuer itself to submit the peer group updates; outside advisors may not submit on a client’s behalf. [Companies] should consider submitting any peer group changes by visiting http://www.issgovernance.com/PeerFeedbackUS no later than December 9.  These peer group submissions should be for the most recent fiscal year ended prior to the 2014 annual meeting.  If an issuer did not make any changes to its compensation benchmarking peer set, or disclosed the relevant peers in a previous proxy statement, that peer set will automatically be factored into the ISS peer selection process; no further action is needed.

If [companies] do submit an updated peer list, it must be accompanied by letter submission on the company’s letterhead, in a PDF version, containing the full list of peers that were submitted online.  The issuers will receive specific instructions on how to complete this email verification at the end of their web-based peer submission.  Without this verification, the updated peer list will not be incorporated into the ISS peer selection process. 

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