The Advisors' Blog

– Liz Dunshee

Broc & I have blogged several times about the director pay analysis that ISS will start applying next year. So far, it hasn’t been super clear how ISS will treat “outliers” – directors whose pay was in the top 3% of their peer category. But this Pearl Meyer blog takes a look at what recent proxy filings – and corresponding ISS comments – can tell us. Here’s an excerpt:

It’s becoming clear that outliers will be categorized into two buckets, those that may be able to provide a compelling rationale for outlier compensation and those that may not. ISS’ position on what may qualify as compelling rationale is based on feedback from investors. We reviewed detail from Main Data Group on 2018 proxy filings for Industrials companies in the Russell 3000 to see how many board members, board chairs, and lead directors received outlier compensation, and what types of director fees or other compensation positioned these directors in the top 3%.

– The companies with outlier compensation were larger from a revenue size perspective. Because the ISS evaluation is based on indices, which include companies across a wide range in revenue size, a larger company within a given index is more likely to have directors be identified as outliers (given that director pay tends to be correlated with company size).

– It matters which index the company is a member of, and will be evaluated against, particularly for companies in the S&P 500. The 97th percentile director compensation for the S&P 500 is significantly higher than the other indices.

– More than half of the 14 companies with outlier director compensation (one or more board members) could likely provide a compelling rationale for the positioning above the 97th percentile. Reasons for the outlier positioning included (from most to least prevalent): receiving a chair retainer for a portion of the year, newly-elected directors receiving an initial equity grant; special fees for work on a transaction; consulting fees; and payment of dividend equivalents.