Category Pay for Performance

ISS Posts 2012 Compensation FAQs

On January 25, 2012, ISS posted its first set of compensation frequently asked questions (FAQs) about its 2012 policies.  The policies covered include: Pay-for-Performance, Management Say on Pay Responsiveness and Equity Plans.  Below is a summary of the FAQs that were presented for each policy.

Pay-for-Performance (P4P)

  • CEOs who have not been in their positions for 3 years will be subject to the Quantitative Analysis under the P4P policy.
  • For years in which a company has more than 1 CEO, ISS will use only once CEO’s pay, generally the CEO who was in the position at FYE.
  • ISS will annualize the salary of a CEO serving for less than 1 year.
  • If a company has co-CEOs, ISS will use the CEO with higher total compensation.
  • TSR generally will be calculated from the last day of the month closest to the subject company’s FYE.
  • For companies with early meetings in 2012, ISS will use the latest available compensation data, which may be from the prior year (2010).
  • ISS does not include the subject company in determining the peer group median CEO pay or count it in achieving the minimum 14 peer companies.
  • An adverse P4P recommendation that is attributed to non-performance-based equity awards when there is an equity plan on the proxy may lead ISS to recommend against the equity plan proposal .
  • If a company has not been traded for a full 5 years, ISS will still apply the Quantitative Analysis; if traded less than 3 years, ISS will still apply the 1-year RDA and the MOM.
  • ISS will continue to define pay as Summary Compensation Table pay, with its own valuation of stock options.
  • Swings in pension amounts will not automatically be exempted from ISS’s Quantitative Analysis, but ISS may consider the underlying cause as part of its Qualitative Analysis.
  • ISS will look at companies that are in the Russell 3000 Index as well as company-selected peers outside the Russell 3000 Index if they meet ISS’s peer company requirements and could then be used in other P4P analyses after the next update of peer groups.
  • A company will not always be at the median of its peer group.
  • A company will have more than 14 peers if within the same 6-digit GICS group (up to 24 companies can be selected).
  • The minimum number of peer companies isn’t really 14, it is 12.  In a limited number of cases, when size and industry parameters are difficult to satisfy, ISS may use a minimum 12-member peer group.
  • Companies’ commitments to strengthen their pay for performance alignment are not as relevant given the annual management say on pay votes.

Management Say on Pay (MSOP) Responsiveness

  • All companies, regardless of the results on their last MSOP vote, should highlight how they are improving their compensation programs.
  • ISS will take into consideration shareholder engagement and actions taken in response to shareholder desires. But, ISS will also consider the nature of the issue(s) perceived to have caused a high opposition to the MSOP vote and their impact going forward.
  • A low or negative vote on MSOP will roll over and affect ISS’s voting recommendation on the election of directors(assuming an MSOP is on the proxy)  under two conditions:
  • If an issue is deemed sufficiently egregious to warrant that, even if MSOP is on the ballot; and
  • If ISS determines that the board has failed to respond adequately to issues that led to high opposition to the prior MSOP proposal.

Equity Plans

  • ISS will apply a full analysis, including SVT analysis, for all equity plans put up for shareholder approval, for any reason, for the first time following a company’s IPO.
  • ISS has changed the volatility and dividend yield assumptions for purposes of the ISSue Compass model.  Volatility will now be measured on a 3-year historic basis as of the applicable quarterly data download date. Dividend yield will now be determined using the historic 5-year dividend yield average.

The FAQs can be found at: http://www.issgovernance.com/policy/2012/USCompensationFAQ

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Companies Fighting ISS Negative Vote Recommendations

Several companies have gone on the offensive this year when ISS issued negative vote recommendations against their proxy proposals, especially in the context of failing the ISS pay-for-performance policy.  These companies include Hewlett Packard, Headwaters, Disney and Tyco International. These companies waited for ISS to issue its negative vote recommendation and then filed additional supplemental proxy materials which were then used in contacting their top shareholders and lobbying for their support of the proposals. In one instance I’m aware of, the one-on-one lobbying had a dramatic impact on the voting and the company prevailed on its say on pay proposal as a result.

Here are links to the supplemental materials that each of these companies filed:

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How Will Your Company Fare Under RiskMetrics’ Pay For Performance Policy?

Well, as I’m sure you know, RiskMetrics consolidated its Pay for Performance (P4P) Policies into a more unified approach for 2010.  Additionally, RiskMetrics tweaked the P4P Policy a bit.  However, the initial screen applied to determine whether a more in-depth analysis is warranted remains comparing a company’s 1- and 3-year Total Shareholder Returns (TSR) to that of its GICS industry group medians.  If a company’s 1- and 3-year TSRs are both below its GICS industry group medians, then RiskMetrics will take a closer look at things. More specifically, RiskMetrics would look more closely at the relationship between company performance and the CEO’s pay during the past five years, paying more attention to the prior 3 years.

RiskMetrics figures out the GICS industry group 1- and 3-year TSR medians on a quarterly basis.  So for companies that have fiscal years that end between November 15, 2009 and February 14, 2010, RiskMetrics will apply the 1- and 3-year TSRs it calculated for the GICS industry groups as of December 30, 2009.  Those figures were recently published and are available on RiskMetrics website at: http://www.riskmetrics.com/policy/2010/PerformanceLists

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