December 17, 2024
ISS: Updated Exec Comp FAQs Seek More Disclosure on Performance-Based Equity
On Friday, ISS posted updated FAQs on executive compensation policies (new and materially updated questions are highlighted in yellow). This follows an off-cycle update in October of this year, which noted that another update would follow in December. Question 46, addressing when a clawback policy is considered “robust,” is highlighted but unchanged from the October updates.
Here’s a paraphrased recap of the questions that were materially updated:
– Computation of Realizable Pay (Question 24): The realizable pay chart will not be displayed for companies that have experienced multiple CEO changes (2 or more) within the three-year measurement period. (This was previewed in October.)
– Evaluation of Program Metrics (Question 39): While still not endorsing TSR or any other specific metric, ISS will consider the following factors when evaluating metrics: Whether the program emphasizes objective metrics that are linked to quantifiable goals, as opposed to highly subjective or discretionary metrics; The rationale for selecting metrics, including the linkage to company strategy and shareholder value; The rationale for atypical metrics or significant metric changes from the prior year; and/or The clarity of disclosure around adjustments for non-GAAP metrics, including the impact on payouts.
– Changes to In-Flight Programs (Question 42): Consistent with a prior FAQ focused on COVID-era pay program changes, ISS still generally views changes to in-process pay programs (e.g., metrics, performance targets and/or measurement periods) negatively. Clear disclosure is expected addressing rationale and how the changes do not “circumvent pay-for-performance outcomes.”
Most importantly, ISS added the following new FAQ, which was also previewed by the proxy advisor when it announced the opening of the comment period on proposed changes to its benchmark voting policies:
ISS previously announced adaptations to the pay-for-performance qualitative review effective for the 2025 proxy season, relating to the evaluation of performance-vesting equity awards. What does this entail? (Question 34) Beginning with the 2025 proxy season, ISS will place a greater focus on performance-vesting equity disclosure and design aspects, particularly for companies that exhibit a quantitative pay-for-performance misalignment. While ISS has historically analyzed the disclosure and design of incentive programs as part of the qualitative review, investors have increasingly expressed concerns with the potential pitfalls surrounding performance equity programs. As such, existing qualitative considerations around performance equity programs going forward will be subject to greater scrutiny in the context of a quantitative pay-for-performance misalignment. Typical considerations include the following non-exhaustive list:
– Non-disclosure of forward-looking goals (note: retrospective disclosure of goals at the end of the performance period will carry less mitigating weight than it has in prior years);
– Poor disclosure of closing-cycle vesting results;
– Poor disclosure of the rationale for metric changes, metric adjustments or program design;
– Unusually large pay opportunities, including maximum vesting opportunities;
– Non-rigorous goals that do not appear to strongly incentivize for outperformance; and/or
– Overly complex performance equity structures.Multiple concerns identified with respect to performance equity programs will be more likely to result in an adverse vote recommendation in the context of a quantitative pay-for-performance misalignment.
Aon’s Laura Wanlass shared this helpful commentary on this new FAQ on LinkedIn:
ISS did signal proactively in previous weeks that there would be a requirement for more forward-looking goal disclosure at the onset of a performance period and it has been codified in FAQ 34. The middle ground practice has always been to commit to and actually disclose full performance plan design and outcome information at the conclusion of the performance period (i.e., some companies don’t give forward looking guidance and/or there are competitive harm considerations). I suspect this factor won’t be a deal breaker on a stand-alone basis but will likely require one or more additional issues from this new list of qualitative evaluation factors to drive a negative vote recommendation.
Yesterday, ISS also posted updated FAQ documents for equity compensation plans, the pay-for-performance mechanics, and the peer group methodology, with very minimal changes. With respect to equity compensation plans, I’m happy to report that the only highlighted FAQ reads: “For 2025, there are no new factors, and no changes to factor weightings or passing scores for any of the EPSC models.”
– Meredith Ervine