Just in time for the holidays, ISS released updated FAQs concerning equity plans and compensation policies on December 16, 2022.
Equity Compensation Plan FAQs
ISS announced several changes, including how it will determine the common shares outstanding (CSO) when there are economic proposals such as mergers or acquisitions that are on the agenda, how burn rate will be considered (including the new Value Adjusted Burn Rate methodology), implications of a change in index membership or GICS classification within the last three years, and changes with respect to the Equity Plan Scorecard (EPSC) model.
With respect to the EPSC model, ISS announced that for meetings on and after February 1, 2023, the threshold scores will increase for most groups as follows:
- S&P 500 Companies’ thresholds will increase from 57 points to 59 points
- Russell 3000 companies’ (excluding the S&P 500 companies) thresholds will increase from 55 points to 57 points
- Non-Russell 3000 companies’ thresholds will increase from 53 points to 55 points
- ISS indicated that the thresholds for other models (groups) remain unchanged at 53 points.
The last bullet likely applies to Special Cases, i.e., companies that recently IPO’d, spunoff, and emerged from bankruptcy.
Increasing the thresholds by 2 points may not seem like much, but it is likely to translate into far fewer shares passing the ISS model than was previously possible.
ISS’s FAQs also suggest that the individual weighting of various factors under the EPSC model might change, but ISS does not specify the weighting of each factor the model uses, so it is difficult to pinpoint what has changed.
Finally, for purposes of assessing clawback policies for purposes of the EPSC model, ISS states that in order to receive full points, a company’s clawback policy “should authorize recovery upon a financial restatement and cover all or most equity-based compensation for all NEOs (including both time- and performance-vesting awards).” Thus, the required clawback policy would need to be broader than the new SEC requirements for clawback policies which only apply to incentive compensation.
The Appendix to the FAQs has been updated to show 2023 Value-Adjusted Burn Rate Benchmarks for each group that ISS will assess a company under. However, ISS now only shows the benchmark number itself and not the mean, standard deviation and the burn rate benchmark as it had done in the past under the prior formulation of burn rate.
Compensation Policies FAQs
ISS indicates that there will be no changes to any of the quantitative pay-for-performance (P4P) screens for 2023 used to inform its Say-on-Pay (SOP) vote recommendations. However, ISS did change how it will use its Financial Performance Assessment (FPA) measure in 2023 by expanding the number of situations that it can be used to change the ultimate P4P concern level.
Starting February 1, 2023, ISS can use FPA result to not only move a low bordering medium concern company to a medium concern or a medium concern company to a low concern, ISS will be able to move concern down to medium for certain high concern companies and up to high concern for certain medium concern companies.
Since FPA is based on ISS-developed proprietary EVA-style metrics and ISS has not fully disclosed how it calculates these amounts, companies will be hard-pressed to determine their FPA and how it might impact the overall P4P concern, and thus, the ISS vote recommendation on their SOP proposal.
ISS added a FAQ detailing how it will evaluate CEO transition pay, including inducement and/or make-whole awards. In a nutshell, making these awards performance-based appears to be preferred by ISS.
ISS also added FAQs on how it evaluates modifier metrics in incentive-based compensation, how it evaluates overly complex pay programs, and how it will evaluate the new pay versus performance disclosures (ISS will detail certain elements from the PVP table in its proxy reports and may consider this information as part of its qualitative evaluation that helps inform its SOP vote recommendations).
ISS also basically updated its COVID FAQ, indicating that companies should be back to pre-pandemic incentive program structures, If anything different is being done, ISS admonishes that clear disclosure of why such actions were taken would help investors evaluate the changes.
Finally, if a company grants awards or increases pay intending to offset forgone compensation due to the Coronavirus Aid, Relief and Economic Security Act (CARES Act) restrictions/caps, ISS will generally view such actions negatively, especially if a companies’ quantitative P4P tests show a misalignment.
United States: Equity Compensation Plans Frequently Asked Questions, updated December 16, 2022
United States: Compensation Policies Frequently Asked Questions, updated December 16, 2022