Institutional Shareholder Services, a leading proxy advisor, has updated guidance, in the form of “frequently asked questions,” regarding its approach to executive compensation policies.
The document is intended as a general discussion about the way ISS will analyze certain issues in the context of preparing proxy analyses and determining vote recommendations for U.S. companies. The responses should not be construed as a guarantee as to how ISS' Global Research Department will apply its benchmark policy in any particular situation.
The new information was added to a document originally released on Dec. 18, 2015.
What impact might an identified pay for performance misalignment have on equity plan proposals?
If ISS identifies a significant pay-for-performance misalignment that results in an adverse recommendation on the say-on-pay proposal or compensation committee members, it may also recommend a vote against an equity plan proposal on the same ballot. Considerations in recommending against the equity plan include, but are not limited to: severity of pay-for-performance misalignment; whether problematic equity grant practices are driving the misalignment; and whether equity plan awards have been heavily concentrated to the CEO and/or the other Near Executive Officers (NEOs,) as opposed to the plan being considered broad-based.
In determining whether the equity plan is broad-based, ISS examines the three-year average concentration ratio for equity awards made to the CEO and other NEOs. If the average concentration ratio exceeds 30 percent for the CEO (or 60 percent for all NEOs, including the CEO), this would indicate that the plan is not broad-based.
What level of compensation disclosure by externally managed issuers (EMIs) would be sufficient to enable a reasonable assessment of pay programs to make an informed say-on-pay vote and avoid an adverse say-on-pay recommendation?
Although EMIs are required to present a say-on-pay vote, most EMIs provide little, if any, disclosure regarding the compensation arrangements between their executive officers and the external manager.
Based on ISS’ review of EMI compensation disclosure, most EMIs provide only the aggregate management and incentive fees paid to the manager. Without more information, shareholders are unable to make a reasonable assessment of pay programs and practices applicable to the EMI's executives, and therefore are unable to cast an informed say-on-pay vote. In assessing whether an EMI has provided sufficient compensation disclosure to allow for an informed say-on-pay vote, ISS will look for all of the following disclosures including: the portion of the EMI’s management fee that is allocated to NEO compensation paid by the external manager (aggregated values for all NEOs is acceptable); of this compensation, the breakdown of fixed vs. variable/incentive pay; and the metrics utilized to measure performance to determine NEOs’ variable/incentive pay.
While the above does not represent a complete picture of executive compensation, it represents the minimum disclosure necessary to enable shareholders to reasonably evaluate pay arrangements between the EMI's executives and the external manager. Absent this disclosure, ISS will generally recommend against the EMI's say-on-pay proposal.
How will ISS evaluate problematic pay practices relating to agreements or decisions in the current fiscal year as opposed to those from the most recently completed fiscal year?
For problematic provisions (excise tax gross-ups, single-trigger severance, etc.) contained in a new/materially amended executive agreement, ISS will generally issue an adverse recommendation when such provisions are disclosed by the company, even if the problematic agreement was entered into or amended after the most recent fiscal year end. For example, if a company with a calendar fiscal year discloses a new problematic agreement entered into in February following the fiscal year’s end, ISS will generally recommend against the current say-on-pay proposal.
However, in certain cases ISS may wait to further evaluate the problematic issue in the following year, when our analysis could be informed by additional information that would be disclosed in the following year's proxy statement. For example, ISS may wait until the following year in the case of a potentially problematic equity grant to a new CEO hired in February after the fiscal year’s end, in order to evaluate the grant in the context of the new CEO's total pay as disclosed in the following year's proxy statement.