The Advisors' Blog

Sullivan & Cromwell is out with Part 2 of its 2024 Proxy Season Review covering compensation-related matters, and it contains a helpful deep dive into ISS’s qualitative say-on-pay analyses in 2024. The report lists the following issues regularly cited by ISS in its qualitative assessments this year:

Insufficient disclosure of performance goals. Similar to prior years, the inclusion of limited, opaque, or undisclosed performance goals was a significant qualitative factor in say-on-pay recommendations for S&P 500 companies in 2024. ISS specifically cited this concern for 19 of the 34 companies that received negative recommendations (vs. 24 of 42 in H1 2023). The continued significance of this qualitative factor is consistent with ISS’s focus on pay-for-performance alignment in the quantitative assessments.

Discretion in bonus plans. In addition, ISS was more focused on the use of subjective criteria for determining bonuses, or the use of discretion to increase an executive’s compensation, than it had been in prior years. ISS identified this as a qualitative factor for 17 of the 34 S&P 500 companies that received a negative recommendation in H1 2024 (vs. 16 of 42 in H1 2023). In some cases, companies used discretion to limit the impact of poor performance on outstanding equity awards, which ISS considers to be problematic.

Sizeable compensation. ISS cited the broad provision of outsized compensation, including through large base salaries and one-time, special cash or equity awards, for 17 of the 34 S&P 500 companies (vs. 18 of 42 in H1 2023). Certain companies were also criticized for granting multiple incentive awards that utilized identical performance metrics, resulting in high compensation for the same performance.

Large perquisites. Thirteen of the 34 S&P 500 companies were criticized by ISS for providing excessive perquisites (vs. 19 of 42 in H1 2023). ISS specifically mentioned security services and aircraft use in seven and six of these cases, respectively. Other frequently mentioned perquisites include car services and tax gross-ups.

The use of time-based incentive awards rather than performance-based incentive awards. ISS identified this concern at 12 of the 34 S&P 500 companies (vs. 13 of 42 companies in H1 2023). The failure by ISS to consider time-based vesting awards to be a robust measure of performance has been the subject of criticism because time-based equity awards can give holders a stake in the performance of the company and align the interests of executives with those of shareholders. However, awards granted subject to performance-based conditions are considered to be a matter of good governance by many stakeholders.

The use of above-median peer group benchmarking practices. ISS criticized eight of the 34 S&P 500 companies for using above-median peer group benchmarking practices (vs. 19 of 42 in H1 2023). Specifically, ISS criticized the provision of compensation above the median level of the company’s identified peer group and the selection of a peer group with a greater average revenue than the company. In 2024, ISS also criticized three companies for granting long-term incentive awards to their CEO with a value exceeding the total pay for CEOs at the median company in ISS’s and/or the company’s selected peer group.

Interestingly, ISS’s reports referenced “above target payouts” more than any other “pay practice” in its qualitative assessments for companies receiving negative say-on-pay recommendations, but the reports weren’t always critical of payout levels. They only went one step further to say performance conditions were not sufficiently rigorous in about half of those reports. S&C suggests that other factors, including the above, may have a larger impact on the decision to recommend against say-on-pay.

The qualitative evaluation in ISS’s pay-for-performance screen often gets less attention than the quantitative piece but shouldn’t be overlooked! The following is from ISS’s December 2023 updated Pay-for-Performance Mechanics document that provides technical info & guidance on its say-on-pay methodology:

ISS conducts an in-depth qualitative evaluation for all companies that exhibit a quantitative pay-for-performance misalignment, and for some companies that do not, depending on the circumstances. … It is the outcome of the qualitative evaluation that determines the vote recommendation for the say-on-pay proposal (or, in some cases, for the election of directors when there is no say-on-pay proposal on the ballot). The qualitative evaluation … identifies whether the pay-and-performance misalignment is mitigated or otherwise reinforced.

Don’t miss out on our “2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences,” which will feature a panel titled “Navigating ISS and Glass Lewis” with Ning Chiu from Davis Polk, Galen Spielman from ISS and Krishna Shah from Glass Lewis. Be sure to check out all of our great speakers and action-packed agenda! You can register now by visiting our online store or by calling us at 800-737-1271.

– Meredith Ervine