The Advisors' Blog

Meredith noted last week that ISS made only one clarification to its benchmark voting policy guidelines for the 2024 proxy season. There were also a few updates to related guidance: the FAQs for equity compensation plans and compensation policies, the pay-for-performance mechanics, and the peer group methodology.

Here’s a paraphrased recap of the equity compensation plan updates:

– Adjusting the Equity Plan Scorecard Framework (Question 30): Among these adjustments, weighting of the SVT – A+B+C Shares factor decreased for both the S&P 500 and Russell 3000 models. Weighting of the Grant Practices pillar for the S&P 500, Russell 3000, and non-Russell 3000 models decreased, while the weighting of the Plan Features pillar for the same models increased.

– Updates to the pillars and pillar scores for the EPSC frameworks (Question 32): Increasing the “maximum pillar score” for the plan cost, plan features, and grant practices pillars for most categories of issuers. The threshold passing scores are unchanged.

ISS also made a few updates to the value-adjusted burn rate benchmarks – in the index to the equity plan FAQs. For the “compensation policies” FAQs, updates are:

– Pay-for-performance quantitative screens (Question 17): There are no changes to the three primary screens (RDA, MOM and PTA) for 2024. The secondary FPA screen’s “Eligible for FPA Adjustment” thresholds are calculated on an annual basis, and slight changes have been made for 2024. For detailed information on the quantitative screens, see ISS’ Pay-for-Performance Mechanics white paper.

– Consideration of company-responses to pay-related concerns (Question 34): If a company has taken recent actions following the publication of ISS’ research report to address pay-related concerns, any such actions must be disclosed in a public filing in order to be considered by ISS. Based on the additional public disclosure, ISS may issue a “proxy alert” to update the analysis and, if warranted, change a vote recommendation. ISS is generally unable to change vote recommendations if the additional public filing is made in close proximity to the meeting date (specifically, less than five business days before the meeting date). ISS may change its vote recommendation in the proxy alert if the company’s actions sufficiently remedy the concerns driving the adverse vote recommendation. The mitigating weight placed on such actions depends on the specificity of disclosure.

– Disclosure of adjustments to metric results, including non-GAAP adjustments (Question 41): Non-GAAP metrics are commonly utilized in incentive pay programs, and the performance results (and consequently the payouts) can be significantly changed by adjustments approved by the board. If such adjustments materially increase incentive payouts, companies should provide clear disclosure in the proxy explaining the nature of the adjustment, its impact (dollar or percentage) on payouts, and the board’s rationale. Disclosure in the proxy of line-item reconciliation to GAAP results, when possible, is considered a best practice. The absence of these disclosures would be viewed negatively, as would adjustments that appear to insulate executives from performance failures – particularly for companies that exhibit a quantitative pay-for-performance misalignment.

– Distinguishing between problematic CIC severance arrangements and incentive awards that are payable upon a CIC transaction (Question 51): a new or materially amended executive agreement that provides for CIC severance without requiring a qualifying termination (i.e., single or modified single trigger) is considered a problematic pay practice. However, this is distinguishable from a bona fide incentive award that becomes payable upon a CIC transaction. . . . In order to make the distinction between problematic CIC severance and a single trigger CIC incentive award, ISS will review the company’s disclosure of the incentive award structure and award rationale, and whether separate non-problematic severance entitlements are in place.

For the pay-for-performance mechanics, ISS adjusted the quantitative concern thresholds. For the peer group methodology, ISS didn’t indicate any significant updates.

– Liz Dunshee