The Advisors' Blog

– Broc Romanek, CompensationStandards.com

A few days ago, I blogged on TheCorporateCounsel.net about ISS’ new policy survey results (here’s the press release – and the full summary). As noted in this Towers Watson memo, this year’s survey was light in questions related to executive compensation, with only three main questions overall. Here’s an excerpt from that memo:

Incentive Plan Design (U.S.)

The use of adjusted (non-GAAP) metrics within incentive plans has been common among U.S. companies. Investor survey participants generally agree that adjusted metrics are acceptable, depending on the rationale for their use and the degree of adjustment made by companies. Investors believe that performance goals and results should be clearly disclosed in the proxy. In addition to disclosing the rationale, companies should also disclose how the adjusted metrics reconcile with similar GAAP metrics.

Regarding the types of adjustments, investors generally feel it’s appropriate to adjust results for such items as discontinued operations, extraordinary charges and foreign exchange volatility, but not for compensation or litigation expenses. Some investors commented that adjustments should be considered on a case-by-case basis as industry and/or business model considerations may have a bearing on appropriateness. Some respondents also commented that the type of adjustments made should be consistent year over year. (For more on the extent to which companies adjust performance metrics for currency movements, see “Survey Reveals How U.S. Companies Address the Impact of Currency Fluctuations on Incentive Plans,” Executive Pay Matters, July 22, 2015.)

Say-on-Pay at Externally Managed Issuers (U.S. & Canada)

For externally managed issuers — generally real estate investment trusts that use external management — ISS sought guidance on the appropriate course of action with respect to say-on-pay resolutions where the issuer provides minimal (or no) disclosure about executive compensation because that is paid by the external manager. Almost three-quarters of investor respondents suggested that ISS should recommend a vote against the proposal for lack of disclosure.

When a say-on-pay resolution is not on the ballot, such as when the issuer doesn’t hold an annual say-on-pay vote, some investors noted that they might consider voting against compensation committee members if the disclosure did not meet minimum informational needs. Factors like stock price performance, the independence of directors and any history of pay or shareholder activism would be considered in these cases.

In the case of either of these topics, proxy disclosure that includes additional information and a clear explanation of the company’s rationale are key to helping investors make informed voting decisions.

Outside Directors & Equity (Global)

ISS sought feedback in the survey on which types of equity compensation, if any, are appropriate for non-executive directors. The investor respondents generally favored grants of shares in lieu of cash retainers or meeting fees, while a slight majority suggested that stock options/stock appreciation rights are inappropriate and over 60% said that performance-based restricted stock is inappropriate for outside directors. The general theme was that tying director compensation to management performance can create a conflict of interest, perceived or actual, because the directors are in charge of setting the underlying performance goals.