February 14, 2019
How ISS is Encouraging Continued 162(m) Practices
– Liz Dunshee
In December, Broc reported that ISS had released its “Equity Compensation Plan” FAQs – and its final “Executive Compensation Policies” FAQs. As part of those updates, the proxy advisor confirmed that it wants companies to continue some practices that initially became common because of the now-repealed Section 162(m) performance-based compensation exemption.
Specifically, it’s encouraging companies to continue frequently submitting equity plans for approval (by increasing the weighting of the plan duration factor in its Equity Plan Scorecard) and discouraging any shifts away from performance-based pay to discretionary or fixed-pay elements (by defining that behavior as a “problematic pay practice”). Here’s what Ron Mueller had to say about this in our recent webcast, “The Latest: Your Upcoming Proxy Disclosures“:
Not surprisingly, the repeal of the exemption is not having dramatic effects, at least among my clients. Everyone is still aligned with pay for performance. Some of those compensation plans that have had two sets of performance goals – one for 162(m) and one that were the determinative goals – now might only have the determinative goals.
There is still alignment with pay for performance, and ISS has reiterated that it very much expects some of the practices from 162(m) to continue. I think that will be the case as well, and that there will be a continued focus on setting pre-established performance criteria.
There will be continued frowning upon discretionary increases above what a performance goal allows, other than just perhaps some percentage of the target being based on personal performance, generally positive discretion. I don’t think we’re going to see that being widespread.
Companies should consider whether they need to amend their proxy discussion of the implications of tax rules on their compensation programs. One company, Unum Group, in their 2018 proxy had a good statement that reaffirmed the comp committee’s commitment to a pay for performance alignment. I think we will see more of this in 2019.