Appendix: ISS Proposed Modifications to Executive Compensation Evaluation Policy

Appendix: ISS Proposed Modifications to Executive Compensation Evaluation Policy

October 19 2012

Management Say-On-Pay Proposals

Peer Group

  • Incorporate company’s own selected peers as an input to ISS’s peer group methodology
  • Under the proposed methodology, in addition to using market cap, revenues (or assets for financial firms), and the target company’s GICS code when selecting 14-24 companies for the pay-for-performance evaluation group, ISS will now also incorporate those GICS industries designated by companies’ own selected peers, with similar size constraints
  • Will attempt to maintain the approximate proportion of GICS industries from the company’s peer group in the final ISS peer group where possible
  • Use the target company’s eight-digit GICS code, instead of the six-digit code currently used, as the starting point for identifying industry peers
  • Slight relaxation of size constraints in peer selection criteria, particularly for very small and large companies
  • Usage of revenues (instead of assets) for certain financial companies
  • ISS has requested comments on
    • Additional or alternative ways that ISS should use company’s self-selected peers to inform peer group construction
    • Reasonable size ranges with respect to revenues/assets for peer group construction
    • Whether or not there are additional factors which should be considered in peer group construction

 

Qualitative Evaluation

  • Incorporation of a comparison of realizable pay to grant date pay as part of ISS’s qualitative evaluation of pay-for-performance alignment for large cap companies only
  • ISS has proposed that realizable pay consist of the sum of relevant cash and equity-based grants and awards made during a specific performance period being measured.  Equity awards would be valued using the stock price at the end of the performance measurement period, using either awards actually earned, or target values for ongoing awards.
  • ISS has requested comments on
    • How realized pay should be calculated, particularly with respect to options
    • The length of an appropriate measurement period for realizable pay

 

Problematic Pay Practices

  • Addition of the pledging of shares by executives or directors as a factor that may lead to negative recommendations under the existing problematic pay practices evaluation
    • ISS has requested comments on
      • What should constitute a “significant” level of pledging of company stock that causes concern for investors
      • If pledging raises concerns significant enough to warrant voting action, and whether this action should be directed at the say-on-pay proposal (if available), the board, or members of a specific committee (and if so, which one)
      • Whether or not remedial actions, such as a commitment not to pledge in the future, or to unwind positions within a reasonable period, would be sufficient to address concerns.

 

Say on Golden Parachute Proposals

  • Include existing change-in-control arrangements maintained with named executive officers rather than focusing only on new or extended arrangements
  • Increase scrutiny on problematic features in existing change-in-control agreements which may result in an AGAINST recommendation depending on number, magnitude and/or timing of issue, such as
    • Single- or modified-single-trigger cash severance
    • Single-trigger acceleration of unvested equity awards
    • Excessive cash severance (>3x base salary and bonus
    • Excise tax gross-ups triggered and payable (as opposed to a provision to provide excise tax gross-ups
    • Excessive golden parachute payments (on an absolute basis or as a percentage of transaction equity value
    • Recent amendments that incorporate any problematic features (such as those above) or recent actions which may make pay packages so attractive as to influence merger agreements that may not be in the best interests of shareholders
    • The company’s assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote
  • Recent amendments that incorporate problematic features will tend to carry more weight in the analysis, but the presence of multiple legacy problematic features will also be closely scrutinized
  • ISS has requested comments on
    • Whether or not the differentiation between new and existing problematic arrangements is appropriate when determining whether to support a proposal
    • Whether or not the number of problematic features should be a consideration when evaluating golden parachute proposals
    • Whether or not there are other factors which should be considered when evaluating golden parachute proposals