On December 20, Institutional Shareholder Services (ISS) published updated FAQs regarding its proxy voting policies and procedures. The updated FAQs address, among other things, ISS’ policies for evaluating executive compensation, including ISS’ methodology for assessing pay for performance, its view that hedging and pledging of stock by executives and directors constitute problematic pay practices and its policies related to advisory votes on so-called “golden parachute” payments.
Pay for Performance Analysis
The updated FAQs identify several factors that ISS considers as part of its qualitative analysis of pay for performance. The factors include the ratio of performance to time-based equity awards; overall ratio of performance-based compensation; the completeness of disclosure and rigor of performance goals; the company’s peer group benchmarking process (e.g., whether it includes the presence of outsized peers or above-median benchmarking); actual results of financial/operational metrics, such as growth in revenue, profit, cash flow, etc., both absolute and relative to peers; special circumstances related to, for example, a new CEO in the prior fiscal year or anomalous equity grant practices; realizable pay compared to grant pay; and any other factors ISS deems relevant. The new FAQs also clarify that, in formulating vote recommendations, ISS’ quantitative pay for performance analysis serves as an initial screen that determines the relative depth of ISS’ qualitative analysis of pay for performance alignment. The new FAQs also address ISS’ use and calculation of realizable pay (including suggested disclosure with respect to realizable pay) in connection with its pay for performance analysis.
For 2013, ISS modified its policies for determining “peer” groups of companies used in its pay for performance analysis. The updated FAQs, among other things, identify some of the characteristics of the projected 2013 peer groups relative to prior peer groups in terms of Global Industry Classification Standard (GICS) classification precision, similarity with the subject company’s selected peers and the sizes of the peer companies relative to the subject company.
Hedging and Pledging of Stock
The new FAQs clarify ISS’ view that hedging and significant pledging of company stock by an executive or director constitute problematic pay practices. Specifically, ISS noted that, in its view, strategies designed to offset or reduce the risk of price fluctuations for stock held by executives or directors sever the alignment of the executive or director’s interests with shareholders’ interests intended by equity-based compensation. ISS further noted that “any amount of hedging will be considered a problematic practice warranting a negative vote recommendation against appropriate board members.”
Say on Golden Parachute Compensation
The new FAQs provide insight into ISS’ views on severance payable to executives following a change in control (i.e. “golden parachute” compensation), including an explanation of how ISS determines whether specified golden parachute payouts are “excessive.” The new FAQs indicate that, in evaluating disclosed payouts related to a change in control in connection with advisory votes on golden parachute compensation, ISS may consider a variety of factors, including the value of the payout on an absolute basis (e.g., relative to an executive’s annual compensation) or one or total payouts relative to the transaction’s equity value. ISS noted that there are no bright line thresholds for these considerations, since they are made in conjunction with other factors in ISS’ review.
The FAQs also include guidance with respect to ISS’ consideration of problematic change-in-control severance features in its evaluation of say on golden parachute proposals. Beginning in 2013, ISS will consider existing problematic features (as opposed to new problematic features, as was ISS’ policy for 2012) such as excise tax gross-up provisions and single and modified single payout triggers in determining a vote recommendation on such proposals. In general, legacy excise tax gross-up provisions will be considered in the context of the amount of actual tax gross-ups reported as part of the company’s disclosure with respect to the say on golden parachute proposal. Legacy single/modified single triggers also may be considered in the context of the total change-in-control payout and whether they result in unjustifiable payouts in the absence of an executive’s termination without cause in connection with the change in control.
To view all of ISS’ new FAQs regarding executive compensation, click here.
To view all of ISS’ U.S. Proxy Voting Policies and Procedures Frequently Asked Questions on Compensation, click here.
On December 20, ISS also published updated FAQs regarding its 2013 U.S. Proxy Voting Policies and Procedures for matters other than compensation-related questions, which can be viewed by clicking here.