Both ISS and Glass Lewis have issued their policy updates for the 2023 proxy season. Neither ISS nor Glass Lewis announced any completely new policies that directly impact executive compensation. Both ISS and Glass Lewis clarified existing policies or codified existing practices concerning the current policies.
We will have to see what other routine updates ISS issues later this year, if any, concerning how it will apply its existing executive compensation policies. In the past, ISS has used these late-year updates to tweak the thresholds and quantitative scores needed for certain compensation tests, including its pay-for-performance quantitative assessment and its equity plan scorecard policy.
ISS
ISS did confirm what it announced in last year’s policy updates—that for 2023 the definition of Burn Rate will change. Starting for 2023 shareholder meetings on or after February 1, 2023, ISS will define Burn Rate in terms of the value of equity awards instead of the number, which was the old methodology. The Value-Adjusted Burn Rate will equal the number of stock options granted multiplied by the options’ dollar value determined using a Black-Scholes model, plus the number of full-value awards granted multiplied by the stock price, divided by the weighted average common shares outstanding multiplied by the stock price. ISS indicated that Burn Rate would continue to be assessed against industry-specific benchmarks and/or de minimis benchmarks established for each industry.
Regarding ISS’ problematic pay practices policy, ISS added “severance payments made when the termination is not clearly disclosed as involuntary (for example, a termination without cause or resignation for good reason)” to the list of significant problematic pay practices that may result in adverse vote recommendations. ISS had been treating these types of severance payments as a problematic pay practice, which caused negative vote recommendations for a bit, so adding this to the list of significant problematic pay practices codifies an existing policy interpretation that ISS had already taken.
Glass Lewis
Glass Lewis included several small updates and many clarifications to its existing compensation-related policies. These updates and clarifications apply to shareholder meetings on or after January 1, 2023.
For low say on pay votes, Glass Lewis added “making commitments” to its list of appropriate responses, and clarified that a robust response is expected when opposition to a say on pay vote is greater than 20%.
For long-term incentives, Glass Lewis updates its policies to state that it expects at least half (50%) of long-term incentives to be in the form of performance-based awards (up from 33% previously).
For shareholder proposals regarding requiring approval of executive severance in excess of 2.99 times base salary plus bonus, Glass Lewis updated its policies to indicate that it may recommend against such proposals where companies have already indicated that they will seek shareholder approval for any cash severance payments exceeding such amount.
Timing
The ISS policy updates apply to shareholder meetings on or after February 1, 2023, and the Glass Lewis policy updates apply to shareholder meetings on or after January 1, 2023.
ISS 2023 Policy Updates can be found at: https://www.issgovernance.com/file/policy/latest/updates/Americas-Policy-Updates.pdf
Glass Lewis Policy Updates can be found at: https://www.glasslewis.com/wp-content/uploads/2022/11/US-Voting-Guidelines-2023-GL.pdf?hsCtaTracking=45ff0e63-7af7-4e28-ba3c-7985d01e390a%7C74c0265a-20b3-478c-846b-69784730ccbd