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