The Advisors' Blog

– Liz Dunshee

New this year, ISS started taking a closer look at director pay. In the absence of a “compelling rationale” or other mitigating factors, it will recommend a vote against members of the board committee responsible for setting non-employee director pay if the pay has been “excessive” for two or more years. This means that we could start seeing negative vote recommendations in 2019. Here’s more detail from this Meridian memo:

ISS guidance indicates how it will determine whether director pay is “excessive”: To determine outlier cases, ISS will compare individual non-employee director (NED) pay totals to the median of all non-employee directors at companies in the same index [e.g., S&P 500] and industry [i.e., two-digit GICS group]. The purpose is to identify a pattern of extreme outliers, which historically has represented pay figures above the top 5% of all comparable directors [based on ISS back testing].

One area of concern raised by ISS’s evaluation of NED compensation is with respect to non-executive chair pay levels. We have received informal guidance from ISS that it has been comparing non-executive chair pay levels against the median pay of all NEDs at companies in the same index and industry, rather than against the median pay of other non-executive chairs. This methodology will cause non-executive chair pay at many companies to rank high against the comparator group, because non-executive chair pay is often significantly greater than other non-employee directors’ pay. As director pay levels tend to be closely clustered, moderate increases in total compensation can have a material impact on percentile calculations.

To reduce the risk of a negative recommendation, companies should consider disclosing the rationale for director pay (including non-executive chair pay). It’s also helpful to describe the director pay-setting process.

This earlier blog notes that the ISS policy is a good reason to evaluate director pay annually, and lists some practices to avoid. Also see this blog from Mike Melbinger: “Boards Should Review Non-Employee Director Compensation in Light of Adverse Court Decisions.”