Institutional Shareholder Providers (ISS) has issued new FAQs addressing U.S. Executive Compensation Insurance policies and U.S Equity Compensation Plans for the 2019 proxy season, for annual conferences held on or after February 1, 2019. Vital government compensation and fairness plan updates for U.S. listed corporations are summarized under. Corporations ought to be aware of the impression if any, that ISS’s updates might have on their present and proposed government compensation and fairness and incentive-related plans, insurance policies, agreements, and preparations, along with Glass Lewis & Co.’s up to date proxy steerage, which we’ve got summarized in a earlier shopper alert.
ISS Points 2019 U.S. Executive Compensation Insurance policies FAQs
On December 20, 2018, ISS launched its U.S. government compensation insurance policies FAQs for annual conferences held on or after February 1, 2019. Key updates embrace:
Refinement of ISS Evaluation of Board Actions in Response to a Low Say-on-Pay Vote. Usually, when a say-on-pay proposal receives lower than 70% help of votes forged (for and towards), ISS will conduct a qualitative evaluation of the compensation committee’s responsiveness to the low help on the subsequent annual assembly. ISS has refined its coverage so as to add that in instances of low help in reference to an uncommon state of affairs, reminiscent of a proxy contest or chapter, ISS will evaluate how the board thought-about investor dissent and whether or not the board took actions to meaningfully reply.
Quantitative Pay-for-Efficiency Screens Stay Unchanged. Whereas the quantitative screens stay unchanged for the 2019 proxy season, ISS will proceed to discover Financial Worth Added (EVA) metrics to spherical out the market efficiency (TSR) and accounting efficiency (GAAP) measures utilized in ISS’s monetary efficiency evaluation. EVA knowledge can be displayed in ISS analysis reviews on a phased-in foundation, however won’t impression ISS’s quantitative pay-for-performance evaluation presently.
Impartial View of TSR as an Incentive Program Metric. ISS doesn’t endorse or favor TSR or any particular metric in government incentive packages, though ISS acknowledges that buyers choose packages that emphasize goal and clear metrics. ISS believes that boards and compensation committees are usually in the most effective place to find out the motivation plan metrics that encourage government decision-making that promotes long-term shareholder worth creation.
Refinement of Qualitative Pay-for-Efficiency Evaluation. Along with the important thing elements that ISS will contemplate in performing its qualitative pay-for-performance evaluation, ISS will search for an emphasis on goal and clear efficiency metrics, and it is going to additionally take a look at the precise outcomes of monetary and operational metrics, together with any non-standard changes to such outcomes.
Scrutiny of Entrance-Loaded Awards. It’s unlikely that ISS will help front-loaded fairness awards which are meant to cowl greater than 4 years, because of ISS’s concern that such awards restrict a board’s capability to meaningfully modify future pay alternatives in response to modifications in efficiency or strategic focus, or unexpected occasions. ISS expects any front-loaded awards to incorporate a agency dedication to not grant further awards over the coated interval. ISS will extra intently scrutinize the pay-for-performance issues for front-loaded awards, together with, with out limitation, completeness of disclosure, emphasis on clear and rigorous efficiency standards, and stringent vesting circumstances that restrict windfall danger.
“Good Reason” Resignations that Fail to Qualify as Constructive Terminations as a Problematic Pay Apply. ISS will view a “Good Reason” definition which will set off CIC severance funds in conditions the place no hostile constructive termination exists as a problematic pay follow. Consequently, “Good Reason” definitions must be rigorously drafted to keep away from any potential windfall danger to an government, akin to a definition triggered by a efficiency failure, firm chapter or delisting. As well as, ISS will not view a “Good Reason” definition triggered by a successor’s failure to imagine a selected settlement as a problematic pay follow.
New Problematic Pay Practices. ISS will think about shifts away from performance-based compensation to discretionary or fastened pay parts, similar to modifications made in response to the elimination of the Inner Income Code Part 162(m) performance-based compensation deduction that take away all performance-based standards, as a problematic pay apply. As well as, inadequate government compensation disclosure by externally managed issuers that forestalls an inexpensive evaluation of the pay packages relevant to the executives of such issuers will probably end in a damaging say-on-pay suggestion.
Scaled Compensation Disclosure for Newly Certified Smaller Reporting Corporations. ISS could also be unlikely to help a say-on-pay vote if a newly certified smaller reporting firm (SRC) avails itself of the scaled disclosure necessities and the scaled disclosure doesn’t permit shareholders to meaningfully assess the board’s compensation philosophy and practices or allow buyers to make an knowledgeable say-on-pay vote. In consequence, SRCs might really feel elevated strain to offer disclosure that exceeds what’s required underneath the SEC’s scaled disclosure necessities as a way to tackle considerations from ISS and Glass Lewis.
Extreme Non-Worker Director Compensation. ISS has delayed the implementation of its coverage, initially scheduled to enter impact for the 2019 proxy season, to problem hostile voting suggestions for corporations with extreme non-employee director (NED) pay and not using a compelling rationale. As an alternative, starting in 2020, ISS will advocate withholding votes for board members liable for setting and approving director compensation when there’s a sample of extreme NED pay for 2 or extra consecutive years, absent a compelling rationale. Acceptable rationales, if affordable and adequately defined, embrace (i) onboarding grants for brand spanking new administrators which might be clearly recognized as one-time in nature; (ii) particular funds associated to company transactions or particular circumstances, e.g., particular committee service; and (iii) funds made for specialised scientific experience. ISS will assess funds in reference to separate consulting agreements on a case-by-case foundation, and won’t view funds to reward basic efficiency or service as a compelling rationale.
ISS’s revised methodology to determine NED outliers will concentrate on particular person NED pay above the highest 2-Three% of all comparable administrators inside the similar index and two-digit GICS group, recognizing that non-executive chairs and lead unbiased chairs, as board-level leaders, are sometimes acknowledged with further pay in comparison with different NEDs. ISS’s revised methodology additionally acknowledges that in a sure sector and index groupings, NED pay is narrowly distributed, and for such teams the place there’s a very small distinction in pay magnitude between the highest 2-Three% of administrators and the median director, the slender distribution of NED pay could also be a mitigating issue.
CEO Pay Ratio. ISS will proceed to show an organization’s disclosed median worker pay determine and the CEO pay ratio, in comparison with the prior yr (as obtainable), in ISS analysis reviews. Nevertheless, these knowledge factors won’t impression ISS vote suggestions presently.
ISS Points 2019 U.S. Equity Compensation Plans FAQs
On December 19, 2018, ISS launched its U.S. fairness compensation plans FAQs for annual conferences held on or after February 1, 2019. Key updates embrace:
Liberal Change in Management Definition Mixed with Single-Set off Vesting. ISS will now view a liberal change in management (CIC) definition that would outcome within the vesting of awards by any set off aside from a full double set off (i.e., a termination of employment in reference to a CIC) as a destructive overriding issue, which can end in ISS’s suggestion towards an fairness plan proposal, whatever the plan’s Equity Plan Scorecard (EPSC) rating. Subsequently, corporations ought to take steps to replace any liberal CIC definitions and single-trigger CIC vesting provisions contained in present fairness plans (if a shared pool wants replenishment) or proposed new plans in mild of ISS’s up to date steerage.
Updates to CIC Vesting Issue. ISS will assess the CIC vesting issue for its EPSC fashions to award factors based mostly on the standard of disclosure of CIC vesting provisions, relatively than based mostly on the precise vesting remedy of awards. Full factors shall be earned the place the fairness plan discloses with specificity the CIC vesting remedy for each performances – and time-based awards. If the plan is silent on the CIC vesting remedy or offers for discretionary vesting for both sort of award, then no factors shall be earned. Consequently, new fairness plans or amendments to plans that require shareholder approval might have to “hard-wire” the CIC vesting remedy for performance- and time-based awards in an effort to obtain full factors.
New EPSC “Negative Override” Issue. ISS introduced a brand new unfavorable override issue for extreme shareholder dilution underneath the S&P 500 and Russell 3000 EPSC fashions solely. The brand new override shall be triggered when an organization’s fairness plan is estimated to dilute shareholders by greater than 20% (for the S&P 500 solely) or 25% (for the Russell 3000 solely). The override issue measures share capital dilution slightly than voting energy dilution, and is calculated as (A + B + C) ÷ CSO, the place A = # new shares requested, B = # shares that stay out there for issuance, C = # shares underlying unexercised/unvested excellent awards, and CSO = widespread shares excellent.
No Modifications to EPSC Passing Scores. Passing scores for all U.S. EPSC fashions haven’t modified from the 2018 proxy season (which stay 55 factors for S&P 500 corporations, and 53 factors for all others), though corporations ought to anticipate that in step with previous follow, ISS will reallocate the factors and weightings amongst a number of the particular person elements inside every EPSC mannequin. ISS has indicated that weighting on the plan period issue has elevated to encourage plan approval resubmission to shareholders extra typically than itemizing exchanges require, to counter the elimination of shareholder approval for Code Part 162(m) functions.
The chart under summarizes the utmost scores by EPSC fashions and pillars efficient for shareholder conferences held on or after February 1, 2019.
Elimination of Code Part 162(m) Efficiency-Based mostly Compensation Deduction. The Tax Cuts and Jobs Act of 2017 eradicated the performance-based compensation deduction underneath Code Part 162(m), topic to a grandfather rule which permits a restricted class of performance-based compensation to proceed to be deductible. Consequently, ISS had up to date its steerage to permit for incentive plan amendments that take away common references to Code Part 162(m) qualification as administrative or impartial amendments. Nevertheless, ISS might negatively view the removing of incentive plan provisions that characterize good governance practices, which have been beforehand required to qualify performance-based compensation underneath Code Part 162(m), as unfavorable modifications when ISS evaluates plan amendments. Subsequently, plan amendments to take away particular person award limits and permit the plan administrator upward discretion in figuring out award quantities could also be seen negatively.
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