ISS and Glass Lewis Publish 2021 Policy Updates
ISS and Glass Lewis recently published updates to their respective proxy voting policy guidelines for the 2021 proxy season. Additionally, ISS published FAQ documents related to compensation polices and equity compensation plans that included additional insight into ISS’s review policy. The updated guidelines will be effective for all companies with annual meetings on or after February 1, 2021.
2021 ISS Compensation-Related Policy Updates ISS did not amend their overall compensation polices for the 2021 proxy season, but they did update their Compensation Polices and Equity Plan FAQ documents. In those documents ISS announced minor changes to their pay-for-performance screen, equity plan score card and addressed COVID-related compensation changes.
Pay-for-Performance Screen ISS lowered the high concern threshold of the Multiple of Median (MOM) measure for S&P 500 companies from 3.33x to 3.00x the peer median.
Equity Plan Score Card ISS is increasing the threshold passing scores for the S&P 500 model and the Russell 3000 model. The S&P 500 model threshold is increasing two points from 55 points to 57 points. The Russell 3000 model threshold is increasing two points from 53 points to 55 points.
ISS also published their updated 2021 burn rate benchmarks. Click here for the updated benchmark tables.
ISS COVID-related Compensation Policies ISS referenced an October 2020 FAQ document regarding the impacts of COVID-19 that updated their initial guidance provided in April. The compensation-related issues addressed in that October 2020 FAQ include:
Adjustments to annual incentive programs ISS expects that many companies will make adjustments to annual incentive programs (metrics, targets, and measurement periods). ISS believes companies should fully disclose their justifications and rationale for any adjustments made.
Adjustments to long-term incentive programs Changes to in-progress performance cycles will generally be viewed negatively, particularly for companies that exhibit a quantitative pay-for-performance misalignment. Modest alterations to the incentive program design for upcoming awards, such as a change to relative or qualitative metrics, will generally be viewed as reasonable. ISS has indicated that more drastic changes, such as shifts to predominantly time-vesting equity or short-term measurement periods, would continue to be viewed negatively. Companies should fully disclose their justifications and rationale for any adjustments.
Retention or other one-time awards One-time awards made to address concerns resulting from the pandemic should include long-term vesting schedules and performance-based vesting conditions clearly linked to the underlying concerns the award aims to address. Investors do not expect one-time awards to serve as a replacement for forfeited performance-based awards. Companies that indicate that one-time awards were granted in consideration of forfeited incentives, for fairness considerations, lowered realizable pay, etc., will also need to explain how such awards do not merely insulate executives from lower pay.
U.S. Proxy Voting Guidelines Updates for 2021 U.S. Compensation Policies Preliminary FAQs for 2021 U.S. Equity Compensation Plans FAQ for 2021 U.S. Compensation Policies & the COVID-19 Pandemic FAQ 2021 Glass Lewis Compensation-Related Policy Updates Compensation-related policy modifications announced by Glass Lewis (GL) were minimal and mainly focused on clarifying existing policies. Their most impactful change relates to peer group methodology.
Short-Term Incentives GL expects companies to provide justifications for any significant changes to a company’s short-term incentive plan structure and for instances in which performance goals have been lowered from the previous year. GL will now consider instances of retroactively prorated performance periods as an application of upward discretion.
Long-Term Incentives GL has defined inappropriate performance-based award allocation as a criterion which may, in the presence of other major concerns, contribute to a negative recommendation. Additionally, significant reduction in performance-based award allocation will be reviewed as a regression of best practices and may lead to a negative recommendation. This excludes exceptional circumstances. Finally, GL notes it is looking for clearly disclosed explanations regarding long-term incentive equity granting practices, including any significant structural program changes or any use of upward discretion.
Excise Tax Gross-Ups and Votes on Golden Parachute Payments If a company adds new excise tax gross-ups to specific change-in-control transactions, GL may consider expanding a negative recommendation beyond the golden parachute proposal in which the gross-up entitlements first appear to also include a subsequent recommendation against the compensation committee members and the say-on-pay proposals of any involved corporate parties.
Option Exchanges and Repricing While GL generally opposes option exchanges or reprices, they may provide exceptions, but only if the proposed program includes language that excludes officers and board members from the program and that the program be value-neutral or value-creative.
Peer Group Methodology GL clarified the use of their proprietary peer group methodology announced in 2019 in determining the peer groups used to assign A-F pay-for-performance letter grades. This proprietary methodology considers both country-based and sector-based peers, along with each company’s network of self-disclosed peers. These components are considered on a weighted basis and subject to size-based ranking and screening.
Glass Lewis COVID-related Compensation Policies Glass Lewis published an online blog post in August that provided some insight into how they will consider executive bonuses in the COVID-19 context. Overall, they believe that any upward adjustments made need to be properly disclosed and justified to the company’s shareholders.
Glass Lewis considered four performance situations below:
Performance has been devastated and the company’s prospects are now on life support. Glass Lewis expects companies to make little or no bonus payments to executives based on performance, but special consideration can be made for forward-looking retention awards.
Performance has been moderately and negatively impacted. Glass Lewis expects very limited annual bonus payments, if any, for executives in this category.
Performance has been modestly and negatively impacted, and the company has outperformed the market on a relative basis. Glass Lewis expects well designed remuneration structures should lead to reasonable outcomes without significant use of discretion by the board.
Performance has been strong on an absolute and relative basis. Glass Lewis will support generous bonus outcomes for defensive companies that remain resilient throughout the COVID-19 crisis where the remuneration structure had been set up to pay counter-cyclically. Glass Lewis is also encouraging boards of companies that received unexpected tail winds as a result of COVID-19 to use discretion to reduce payouts from stretch or maximum levels if the results are not reflective of the executive’s efforts.
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