I’m sure many of our readers have more refined holiday traditions than I do, but I like to think that some of you enjoy watching random portions of “A Christmas Story” during its annual 24-hour marathon. If so, you’ll recall how Ralphie’s excitement reaches its pinnacle when his “Old Man” tells him there’s one more present hidden behind the tree. That is kind of how I felt yesterday, when Meredith and I realized that during the December hustle & bustle, ISS posted updated FAQs and related documents for the upcoming 2026 changes that were announced in late November.
1. Non-Compensation Policies & Procedures FAQs: Consistent with the new benchmark policy changes, ISS beefed up the FAQ on non-employee director pay by saying that it may issue adverse recommendations if there’s been problematic pay in two or more years (even if non-consecutive) – and that ISS could also issue an adverse recommendation in Year 1 in egregious cases. The FAQ also clarifies that ISS is inclined to issue an adverse vote recommendation for the entire board committee responsible for director pay, rather than just the chair. In ISS’s view, problematic director pay can exist based on excessive magnitude, or problematic perquisites, performance awards, stock options, or retirement benefits.
2. Equity Compensation Plan FAQs: Updates include:
– When calculating burn rate, ISS doesn’t offset incentive compensation grants with repurchased shares.
– Beginning February 1, 2026, equity plan proposals are generally analyzed on a post-economic transaction basis when matters such as a merger, financing, etc. are also on the ballot. Common shares issuable pursuant to the economic proposal will be included in ISS’s calculations, unless the proposed equity plan would only become effective if the proposed transaction isn’t completed.
– Elaborating on the two changes to the Equity Plan Scorecard framework about (1) limits on cash-denominated awards to non-employee directors (which applies to S&P 500 and Russell 3000 models) – and (2) the “overriding factor” for a plan that lacks a sufficient “Plan Features” pillar score (which applies to S&P 500, Russell 3000, and non-Russell 3000 models).
–> For the non-employee director awards, the FAQ says that if a plan discloses a cash-denominated award limit for directors – or if directors aren’t eligible participants under the plan – a company gets full points. If directors are participants and no cash-denominated limit is disclosed, then companies get no points for that factor. Companies don’t get points if their plan only has non-cash (i.e., share-denominated) award limits.
–> For the “Plan Features” overriding factor, the FAQ says ISS may recommend a vote against the equity plan proposal when the pillar score is less than 7 points.
– For non-Russell 3000 models, a clawback factor is now also part of the “grant practices” pillar.
– Updating factor weightings within all models (but no changes to any of the passing scores).
3. Pay-for-Performance Mechanics: ISS details how it’s adjusted its model to reflect longer time horizons – from 3 to 5 years for the measures of Relative Degree of Alignment and Financial Performance Assessment and from 1 year to the average of a 1- and 3-year assessment for the relative Multiple of Median measure. Those time horizons might be shortened – or measures might be excluded – for companies with fewer years of data. The FAQ explains how this is all calculated and assessed. This FAQ also says that extended time-based awards will now be viewed as a positive factor in the qualitative evaluation – while awards with vesting or retention requirements of less than 5 years will continue to be viewed negatively.
4. Executive Compensation Policies: Lots of updates here:
– Says that ISS is unlikely to raise significant concerns for relatively high executive security-related perks, as long as the company discloses a reasonable rationale. For example, disclosure of an internal or third-party assessment, and a broad description of the security program and its connection to shareholder interests, would generally mitigate concerns regarding relatively large security costs. However, extreme outliers in security costs may still drive significant concerns, particularly if not adequately addressed in the proxy disclosure.
– States that ISS will review management proposals seeking shareholder approval to reprice or exchange stock options on a case-by-case basis. ISS will consider factors like the quality of disclosure and rationale, whether the proposal is value-neutral, the program’s participants, historic trading patterns, timing, stock volatility, cost of equity plans, etc. ISS will generally recommend opposing repricing/exchange programs if the program includes NEO and/or director participants, the replacement awards are not subject to a minimum one-year vesting period, or any other factors that ISS considers problematic.
– Adds to the factors that ISS considers when evaluating “responsiveness” to a low say-on-pay vote to include significant corporate activity (e.g., mergers) and “any other recent compensation action or factor considered relevant to assessing board responsiveness.”
– Lays out lengthened time periods for the pay-for-performance model, similar to what’s explained above for the Pay-for-Performance Mechanics.
– Points out that the 3-year Multiple of Median measure is now incorporated into the quantitative screen, instead of just being provided for informational purposes.
– Updates and clarifies the list of factors ISS considers in its qualitative evaluation – e.g., to include time horizons, rationale for pay structures and decisions, and relevant industry or other external factors.
– Adds an explanation of how ISS considers a company’s financial performance in the qualitative evaluation and says that ISS sources GAAP performance measures sourced from Compustat as well as adjusted results and financial highlights disclosed by the company in its proxy statement. ISS also might consider performance as measured by its own financial performance assessment measure. For example, strong financial or operational results may explain above-target incentive payouts despite poor TSR performance.
– Details how ISS will review extended time-based awards as part of the pay mix evaluation. A program that consists primarily or entirely of time-based awards won’t in itself raise significant concerns as long as the design uses a time horizon of at least 5 years, which can be achieved through vesting or retention requirements. The FAQ goes into detail on how to demonstrate a 5-year time horizon through different types of vesting arrangements. The FAQ says that as before, if the program consists of more than 50% time-based equity that doesn’t utilize an extended time horizon, it will generally be a negative consideration.
– ISS (and investors) still want one-time/special awards to be performance based. The factors for those awards are unchanged.
– Clarifies that ISS considers profit-sharing awards to be incentive compensation, so payments are included in the quantitative screen and considered in the qualitative evaluation. ISS considers similar factors as for other incentive compensation when assessing these awards.
– Adds detail on how ISS evaluates annual incentives based on discretionary assessments. Bonus programs that are heavily based on discretionary determinations are viewed negatively, particularly for companies that exhibit a pay-for-performance misalignment. The FAQ says disclosures about discrete category and metric weightings, minimum performance requirements for payouts, and pre-set target/maximum pay opportunities, are all considered positive features and they may provide mitigating weight to such bonus programs that are informed by performance but ultimately discretionary.
5. Peer Group Selection Methodology and Issuer Submission Process: Beginning with peer groups constructed for meetings on and after February 1, 2026, ISS’s methodology will give priority to potential peers that were previously chosen by ISS as a peer for the company (among other unchanged factors).