ISS Publishes FAQs on the Impact of COVID-19

By David Yang, Joe Sorrentino


On October 15, ISS released preliminary Frequently Asked Questions (FAQs) to provide general guidance on how they intend to qualitatively evaluate pay actions in response to COVID-19.  Consistent with historical practice, an elevated concern from the quantitative screen will result in a more in-depth qualitative review of the company's pay programs and practices.  However, the qualitative evaluation will take into consideration the pandemic’s impact on company operations.

The key takeaways from the FAQs are as follows:

  • The meaningfulness of temporary reductions in base salary will depend on the percent of total compensation that the reduction represented.  In other words, a 25% salary reduction that represented 10% of total pay will be viewed more favorably than a 25% salary reduction that represented only 5% of total pay.  In addition, salary reductions will be viewed as more meaningful if the incentive payout opportunity for the year is based on the reduced salary.
  • ISS anticipates many companies will make adjustments to annual incentive plans in response to the pandemic including revisions to existing formulaic plans and discretionary payments.  ISS indicates that these actions will be evaluated on a case-by-case basis and may be deemed acceptable if the supporting rationale is clearly disclosed and the outcomes of the actions are reasonable.  Key disclosure items expected to be covered include:
    • The specific challenges resulting from the pandemic that rendered the original program design obsolete or the original performance targets impossible to achieve. The disclosure should address how changes are not in response to poor management performance.
    • The rationale as to why one approach was taken over another (i.e., mid-year adjustments vs. discretionary awards) and why the action was in the best interest of shareholders.
    • The performance considerations and underlying criteria for any discretionary awards, even if not tied to the original metrics or targets. Generic descriptions (i.e. "strong leadership during challenging times") will be deemed insufficient.
    • How the resulting payouts appropriately reflect both executive and company annual performance and how they compare to what would have been paid under the original plan. Above-target payouts under changed programs will be closely scrutinized.
    • Any positive changes to the following year’s annual incentive plan design, if known, which could mitigate other concerns.
  • ISS indicates that lower year-over-year performance goals due to operational challenges following the pandemic may be acceptable and may not be criticized as having insufficient performance rigor.  However, there should be accompanying disclosure explaining how the board considered corresponding payout opportunities, particularly if such payout opportunities are not commensurately reduced.
  • Modifications to in-cycle long-term incentives will generally be viewed negatively, especially for companies with poor quantitative pay-for-performance alignment.
  • Material changes to the long-term incentive program design for the current year may be viewed negatively in the absence of a shift in the underlying business strategy.  The FAQs specifically call out shifts to predominantly time-vesting equity or short-term measurement periods as negative changes. However, more modest modifications to the incentive program, such as shifting to relative or qualitative metrics, could be viewed as reasonable.  The rationale for changes to the program should be fully disclosed to allow investors to evaluate the compensation committee's actions.
  • Retention or other one-time awards may be viewed as appropriate in limited circumstances. Companies that grant one-time awards should clearly disclose the rationale for the award (including magnitude and structure), as well as describe how the award furthers investors' interests. Boilerplate language regarding "retention concerns" will not be viewed as sufficient rationale. The vesting conditions are expected to be long-term, strongly performance-based, and clearly linked to the underlying concerns the award aims to address. The award is expected to include shareholder-friendly guardrails to avoid windfall scenarios, including limitations on termination-related vesting. Companies that indicate that one-time awards were granted in consideration of (a) forfeited incentives, (b) for fairness considerations, (c) lowered realizable pay, etc., will also need to explain how such awards do not merely insulate executives from lower pay.
  • If a company receives less than 70 percent support on its say-on-pay proposal, ISS will evaluate the board’s responsiveness by reviewing (1) the disclosure of the board’s shareholder engagement efforts and (2) the disclosure of the specific feedback received from dissenting investors, which is consistent with previous years.  However, if a company is unable to implement changes due to the pandemic, the proxy statement should disclose how the pandemic has impeded the company's ability to address shareholders' concerns and the company’s plans to address investors' concerns over time.
  • No changes have been made to the application of ISS policies related to problematic pay practices, stock option repricings, and the Equity Plan Scorecard (EPSC) due to COVID-19.  However, for the 2021 policy year, the passing score for the S&P 500 EPSC model will increase from 53 to 57 points. The passing score for the Russell 3000 EPSC model will increase to 55 points. For all other EPSC models, the passing score will remain 53 points.


The full preliminary ISS FAQ document can be found here.  ISS is expected to release final US Compensation Policies FAQs in December.  In the meantime, FW Cook will continue to track and provide updates on ISS and other proxy advisory firm guidance in this blog.

David Yang
Managing Director

David Yang has advised numerous public and privately-held companies on all aspects of executive and board compensation. His experience covers a wide range of industries, including healthcare, financial services, retail, consumer products, transportation, and technology among others. He is a frequent speaker on executive compensation topics and a regular author of the firm’s alert letters.

Portrait of Joe Sorrentino, PrincipalJoe Sorrentino
Managing Director

Joe Sorrentino has over 20 years of executive compensation consulting experience. His client assignments have been with both public and privately-held companies in industries including: chemicals, consumer products, financial services, health care, manufacturing, pharmaceuticals, real estate/REITS and utilities. His consulting engagements often focus on the development of executive compensation strategy, design of annual and long-term incentive programs, and ISS equity plan modeling, compensation and governance policies.