Conflicting Opinions: Views on Executive Compensation from Investors and Companies Results of ISS’ 2014-2015 Policy Survey
ISS recently released the results of their annual survey of institutional investors and corporate issuers on emerging corporate governance issues. ISS considers the survey a critical component of its annual policy review and formulation process.
The survey was structured around several high-level corporate governance themes. The primary compensation areas focused on CEO pay magnitude, goal setting, equity plan evaluation and the impact of forward-looking compensation disclosures on pay-for-performance reviews. A significant theme that continued from prior years’ survey results: the dramatic divergence in opinions held by those in the investment community versus companies.
While not an official statement of policy, this annual survey provides a foreshadowing of likely policy changes to apply for the upcoming 2015 proxy season. Based on the survey results, we expect ISS to increasingly focus on absolute magnitude of pay when evaluating executive compensation programs, not just the relative level of pay. We also expect the equity plan evaluations to be more complex, with equity usage/grant practices and plan features to play a more significant role in ISS’ vote recommendations going forward. We anticipate that ISS’s governance risk model (“QuickScore”) will also be impacted by these potential policy changes.
On a positive note, commitments to future pay reforms appear to be a useful mitigating factor for past pay for performance concerns. We continue to advise clients to tailor proxy disclosures to acknowledge investors’ views, and in cases where company policy differs from known or anticipated investor positions, we suggest providing a clear and convincing rationale for why the company’s position is in the best interests of shareholders.
We will likely see these themes reflected again in the draft 2015 policy update, which is expected to be released later this month. We will provide an update once the proposed policy changes are announced.