Overview of ISS’ Equity Plan Scorecard Model

Is your company thinking about asking shareholders to approve more shares for your equity compensation plan? Are your shareholders influenced by ISS? Then be sure to read the latest Exequity Client Briefing I wrote. The Client Briefing provides an overview of the ISS Equity Plan Scorecard model and some of the insights I have gained running it for nearly two decades.

Exequity’s Client Briefing: An Overview of ISS’ Equity Plan Scorecard Model, can be found at:

https://www.exqty.com/newsroom/an-overview-of-iss-equity-plan-scorecard-epsc-model

 

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ISS Opening Peer Group Submission Window for Companies with Late Year Meetings

ISS announced that it will open its peer group change submission window starting 9 am Eastern on July 10, 2017.  Any companies that will have an annual meeting between September 16, 2017 and January 31, 2018 may submit changes made to their peer groups for that will be disclosed in their next proxy statement. The ISS peer group change submission window will close at 8 pm Eastern on July 21, 2017.

For companies with meetings during the time period that do not submit peer group changes, ISS will use the proxy-disclosed peer group from the company’s last filed proxy statement (i.e., generally those from last year).

For information about the peer group submission to ISS process and methodology for ISS selected peer groups for U.S. and Canadian companies, companies can visit ISS’s website, https://www.issgovernance.com/company-peer-group-feedback

ISS’ peer submission form can be accessed at https://login.isscorporatesolutions.com. As in prior years, ISS only permits companies to submit these peer group changes and not any third parties, such as compensation consultants, attorneys, or proxy solicitors.

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Glass Lewis Releases 2017 Policy Updates

On November 18, 2016, Glass Lewis announced that it had released updated 2017 proxy voting guidelines for several countries and that updated guidelines for other countries would be released over the next few weeks. The announcement can be found at: http://www.glasslewis.com/2017-proxy-season-asian-guidelines-available/

The countries that Glass Lewis released updated proxy voting guidelines for initially were:

Glass Lewis identified the following key areas for changes in the US 2017 proxy voting guidelines (none related to compensation):

  • Evaluating director commitments
  • Governance following an IPO or spin-off
  • Board evaluation and refreshment

And these were the key areas for Canada:

  • Evaluating director commitments
  • Board responsiveness to a failed advisory vote
  • Equity compensation plans
  • Shareholder rights plans
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ISS Policy Updates for 2017

ISS has announced several updates for its policies for 2017 (generally apply starting February 1, 2017 unless otherwise noted). Initially, ISS departed from past practice of announcing all annual policy updates at the same time when it issued an update with respect to its pay for performance policy on November 8, 2016 and then followed this up with its “normal” annual policy updates on November 21, 2016.

Pay for Performance Updates

ISS announced that in its 2017 pay for performance analyses (typically undertaken as part of ISS’ evaluation of a company’s say-on-pay proposal), it will add six relative quantitative performance metrics to its qualitative analysis. The six metrics are: relative ROIC, ROA, ROE, revenue growth, EBITDA growth, and growth in cash flow from operations — all evaluated over a three year period relative to the ISS peers for a company and presented in a table included in the qualitative portion of its pay for performance analysis. ISS may later include these six performance metrics in the quantitative analysis section of its pay for performance analysis — perhaps for the 2018 proxy season. I think we can expect that 2017 will be a year for ISS to learn how investors and companies think of the six performance metrics being disclosed in addition to TSR which ISS has included in its reports for many years.

ISS has indicated that the weight afforded each of these six metrics will vary by industry, though it did not release what those weights will be. I expect ISS will release a set of FAQs with the industry weights if it follows what it has done with other policies.

I expect these six performance metrics will play a factor in ISS’s analysis of situations where the current quantitative screens show a medium or high concern level. So if a company expects it will garner such concern levels under the current ISS quantitative tests, it should see how it fares against its expected ISS peers on these six performance metrics.  I expect companies could be in for a tougher time from ISS if they score below median in several of these six performance metrics, with greater importance of a below median score attached to those metrics carrying the greatest weight.

Finally, ISS announced that the Relative Degree of Alignment (RDA) test (one of the quantitative tests under the ISS pay for performance analysis).

Peer Group Submission

ISS also announced that its peer group submission window will run from November 28 to December 9. Companies that made changes to their peer group for 2016 should consider providing their updated peer group to ISS in order to ensure that ISS uses the company’s 2016 peer group in its analysis.  If a company does not submit a new peer group during the peer group submission window, ISS will use the existing peer group it has on file (which should be the 2015 peer group for most companies).

For more information about the ISS Pay for Performance Update and the Peer Group Submission, see this ISS press release (November 8, 2016): https://www.issgovernance.com/iss-announces-pay-performance-methodology-updates-2017/

 

Compensation-Related 2017 Policy Updates

ISS announced updates to its Equity Plan Scorecard Policy and a new policy with respect to proposal seeking to ratify director compensation.

Equity Plan Scorecard (EPSC) Policy Updates

When the proposal includes amendments to an equity plan:

  • If this includes a transfer of shareholder value to employees, ISS will supplement its EPSC with an overall impact of the proposed amendments.
  • ISS will now add a new factor under Plan Features that will weigh on the total points the proposal will receive under the EPSC policy — whether the plan prohibits the payment of dividends on unvested equity awards (though this factor will permit plans to receive full points if they accrue the dividends until the underlying award is vested/earned).
  • For the minimum vesting factor under Plan Features, ISS will only give credit if the plan contains a minimum 1 year vesting period that applies to all awards, which cannot be varied in an award agreement, except for up to 5% of the plan’s share authorization.
  • For proposals to amend non-employee director equity plans, ISS is expanding the qualitative factors that it can evaluate when the proposal exceeds the applicable shareholder value transfer or burn rate benchmarks, in keeping with its new policy on director pay ratification proposals.

As in years past, ISS likely will issue FAQs on the EPSC policy to take into account these updates prior to the next proxy season — perhaps in December or January.

Equity Proposals Submitted Only for 162(m) Approval

ISS clarified that proposals seeking shareholder approval of performance metrics in a cash incentive plan or equity plan for Section 162(m) purposes only will be evaluated on the basis of the compensation committee members’ independence.

Management Proposals Seeking Ratification of Director Compensation

ISS also announced a new policy with respect to proposals seeking ratification of director compensation. ISS will evaluate eight qualitative factors with respect to the magnitude, structure, and disclosure of director compensation. ISS will review the magnitude of director compensation relative to similar companies.

Other 2017 ISS Policy Updates

ISS released a number of additional policy updates for 2017 covering director elections, capital authorizations, and cross-market company policies.

For U.S. domestic issuers organized abroad, ISS will base its recommendations on say-on-pay proposals required by a foreign jurisdiction on ISS’ U.S. say-on-pay policy.

The updates to ISS policies for 2017 can be found in this press release (November 21, 2016):

https://www.issgovernance.com/iss-announces-2017-benchmark-policy-updates/

as well as on the ISS policy gateway that has links to all the 2017 policy updates:

https://www.issgovernance.com/policy-gateway/2017-policy-information/

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