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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SEC’s Corp Fin Issues New Compliance & Disclosure Interpretations

On March 4, 2011, the SEC’s Division of Corporation Finance issued several new Compliance & Disclosure Interpretations (C&DIs) relating to the proxy disclosure rules.  Here is a link to the full C&DIs: http://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm

Below are the newly-added C&DIs for Regulation S-K:

Question 116.08

Question: If Item 401(a) and Item 401(e) director information is omitted from a proxy statement pursuant to Instruction 3 of Item 401(a), is this information nevertheless required to be included in a Form 10-K that otherwise provides its Part III information by incorporation by reference from the proxy statement?

Answer: Yes. Instruction 3 of Item 401(a) applies only to proxy statements and information statements. [Mar. 4, 2011]

Question 116.09

Question: Is a company required to include Item 401(e) information about a director’s business experience if the director is appointed by holders of a class of preferred stock?

Answer: Yes. In this situation, the company may either provide the same information about this director as it would directors nominated by the board or disclose that the preferred shareholder has advised the company that the shareholder has appointed this director because of [the Item 401(e) information provided to the company by the shareholder that the company would then include in its filing]. [Mar. 4, 2011]

Question 118.07

Question: In Compensation Discussion and Analysis (CD&A), is a company required to discuss executive compensation, including performance target levels, to be paid in the current year or in future years?

Answer: No. The CD&A covers only compensation “awarded to, earned by, or paid to the named executive officers.” Although Instruction 2 to Item 402(b) provides that the CD&A should also cover actions regarding executive compensation that were taken after the registrant’s last fiscal year’s end, such disclosure requirement is limited to those actions or steps that could “affect a fair understanding of the named executive officer’s compensation for the last fiscal year.” [Mar. 4, 2011]

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Say It Isn’t So! No Support for Share Authorizations That Last More Than 3 Years?

I recently received the following question and thought it worth sharing so folks can gain a little perspective on what is happening with equity plan proposals.

Q.

A public company will need to submit its stock plan for shareholder approval in the next few years.  This company has a substantial amount of stock allocated to its equity plans and has heard that RiskMetrics or a similar organization is now recommending a “no” vote on plans that have more than 2-3 years of stock allocated to them (based on current burn rates).

A.

Technically, neither RiskMetrics nor any of the other proxy advisory firms that I’m aware of have a proxy voting guideline that says they will not support a proposed plan if the shares will last beyond 2-3 years.  What the company probably heard was a statement by someone who’s been working with companies on equity plans with the RiskMetrics model that the share authorizations that are passing the model now typically would only last 2-3 years.  A subtle difference.

So a quick explanation may be in order.  RiskMetrics applies a number of policies (at least 7 at last count) when evaluating an equity plan proposal.  One of the more significant ones is its Shareholder Value Transfer (SVT) Policy which compares the total percent of company market value being transferred to employees by equity plans (in new shares requested, outstanding equity awards, and shares available under existing and continuing plans) against a company-specific allowable cap (which is generated using the RiskMetrics’ black-box formulas that look to the top quartile performers in the same GICS code group to develop a regression formula that then gets applied to every company in that GICS group).  If the percent of the market value (the cost) is equal to or below the company-specific allowable cap, the proposed plan will pass the SVT Policy.

It just so happens that given the large amount of overhang at many companies (outstanding equity awards that have not been exercised, in the case of stock options or SARs) coupled with the general decline in stock prices, the allowable caps being generated typically only permit companies to request 2-3 years’ worth of additional shares in a new plan proposal.  However, I’ve worked with a number of companies during the past 6 months where the RiskMetrics model would not even allow the companies to have 1 years’ worth of shares.

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