ISS Releases Proposed Modifications to Executive Compensation Evaluation Policy
On October 16, 2012, ISS posted its 2013 Draft Policies for comment by institutional investors, companies and other members of the governance community. While the conceptual framework has been provided, complete details are not. However, these draft policies have traditionally served as a preview of the final policies expected next month.
The draft policies do not propose major modifications to the ISS methodology as they did last year, but rather appear to be focused on addressing widely acknowledged weaknesses of the current ISS methodology with respect to peer group selection and the impact of using target rather than realized pay when assessing pay-for-performance disconnects. In addition, the draft policies elevate the issue of executive and director pledging of shares to a problematic pay practice and propose modifications to the methodology used to determine recommendations on golden parachute proposals.
Key Changes Under Consideration
Management Say-On-Pay Proposals
- Peer Group
- ISS will begin to use the GICS codes of a company’s self-selected peers in addition to the company’s GICS code to determine the peer group used in pay-for-performance tests
- 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
- Qualitative Evaluation
- ISS is proposing to incorporate a comparison of realizable pay to grant date pay as part of the qualitative evaluation of pay-for-performance alignment
- Problematic Pay Practices
- Add pledging of shares as a factor that may lead to negative recommendations under the existing problematic pay practices evaluation
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
- Place increased scrutiny on problematic features in existing change-in-control agreements, with consideration given to number, magnitude and/or timing of the issues
We have provided further details of these policy changes under consideration on our website.
It is important to note that ISS did not provide complete details on how these modifications will be implemented in its final policies due out in November. We are generally encouraged by the proposed modifications to both peer group selection and the incorporation of realizable pay into the pay-for-performance assessment. However, we must wait for the final regulations to see how the inclusion of the additional GICS codes will be factored into the current peer group methodology. It appears that this change will makes ISS’ peer group methodology more complex, less transparent and more difficult to replicate. Likewise, it is unknown how much the realized/realizable pay assessment will influence ISS’ qualitative evaluation, including how this assessment will be considered compared to the other qualitative tests already included in ISS’ policy.
Additional information is necessary to understand the full scope of the proposed pledging of company stock policy. ISS has asked for comments on what constitutes a “significant” level of pledging. We believe that this detail is critical to assessing how much of an issue this will pose for companies and their executives.
Finally, with respect to the proposed modifications on golden parachute proposals, we note the scope of this analysis is limited, only occurring when a merger has been put to a shareholder vote. However, we do wonder whether these proposed modifications serve as a troubling harbinger of future modifications to the Management Say-on-Pay polices, which currently only focus on new or amended agreements with executives.
We encourage companies to provide feedback to ISS on the draft policies by the October 31st deadline. We are currently in the process of composing a comment letter. If you wish to discuss further, please don’t hesitate to contact us.
About Steven Hall & Partners
Steven Hall & Partners is an independent compensation consulting firm, specializing exclusively in the areas of executive compensation, board remuneration, non-profit compensation and related governance issues. By focusing solely on this critical and complex segment of the human resources arena, we are able to provide our clients with the highest quality expertise and best counsel available on a practical basis. For more information, please visit www.shallpartners.com and follow us on Twitter @SHallPartners.
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