On October 27, 2017, Institutional Shareholder Services (ISS) commenced a two-week consultation period on potential updates to its benchmark voting policy for 2018. There are a total of 13 U.S. and international draft policy updates for consideration, of which two relate to U.S. compensation matters: non-employee director (NED) pay and gender pay gap proposals.
Non-employee Director Compensation
Currently, ISS broadly addresses NED compensation under its “Compensation Global Principles,” which provides that companies should avoid inappropriate pay for NEDs.
The proposed new policy would explicitly provide for adverse vote recommendations for board committee members who are responsible for approving/setting NED compensation when there is a pattern (i.e., two or more consecutive years) of excessive NED pay magnitude without a compelling rationale or other mitigating factors.
ISS is specifically seeking feedback on the following:
- What are the circumstances for which large NED pay magnitude would merit support on an exceptional basis (e.g., one-time onboarding grants to new directors)?
- If a company's proxy disclosure does not clearly indicate which board committee is responsible for setting and/or approving director pay, which board members should be held accountable?
- In calculating average/median pay, should ISS include outsized pay packages provided to NED board chairs, lead directors or other board members who receive outsized pay?
As proposed, there would be no impact on vote recommendations in 2018 for directors as a result of the policy. Negative recommendations would be triggered only after a pattern of excessive NED pay is identified in consecutive future years.
Gender Pay Gap Proposals
Currently, ISS applies its global approach on social/environmental issues when analyzing gender pay gap proposals, which is a case-by-case approach. The proposed new policy is an effort to provide more clarity regarding ISS' approach in light of the anticipated growing attention on gender pay issues.
The proposed new ISS policy is stated as follows:
Generally, vote case-by-case on requests for reports on a company's pay data by gender, or a report on a company’s policies and goals to reduce any gender pay gap, taking into account:
- The company's current policies and disclosure related to both its diversity and inclusion policies and practices and its compensation philosophy and fair and equitable compensation practices;
- Whether the company has been the subject of recent controversy or litigation related to gender pay gap issues; and
- Whether the company's reporting regarding gender pay gap policies or initiatives is lagging its peers.
ISS is seeking feedback on whether there are other factors that it should consider when assessing proposals requesting disclosure on a company's gender pay gap.
Comment Period; Final Policy Updates
The comment period is open until 5:00 PM (Eastern) on November 9, 2017. If adopted, the policies would take effect for meetings on or after February 1, 2018. Click here to access the policy drafts from the ISS website.
The final ISS policy updates, which are expected to extend beyond the policies open for comment, are expected to be announced during the second-half of November. Note that certain other voting policy details for 2018 (e.g., burn rate thresholds and pay for performance quantitative concern thresholds) are expected to be announced through updated ISS FAQs in mid-December.
Bindu M. Culas
Bindu Culas has over 15 years of experience advising clients on the US and international legal, tax and regulatory aspects of designing and structuring equity incentive programs, employment agreement, and severance and change-of control plans. Bindu has worked with both domestic and foreign publicly traded and privately held companies as well as pre-IPO companies.
Wendy J. Hilburn
Wendy Hilburn advises both public and privately held companies in industries that include: banking, diversified financial services, insurance, asset management, publishing, equipment manufacturing, computer services, technology and government contracting. Her consulting engagements focus on providing independent consulting services to compensation committees and working cooperatively with management to develop compensation philosophies and strategies, total compensation structures, annual and long-term incentive programs, and committee governance processes.
On behalf of the firm, Wendy has oversight responsibility for shareholder voting guidelines, including the firm’s relationship with Institutional Shareholder Services (ISS).
Samantha Nussbaum has consulted on behalf of public and private companies, compensation committees, and senior management on all aspects of executive compensation. Samantha’s consulting and legal background includes advising on executive compensation in the context of mergers and acquisitions, spin-offs, and initial public offerings; executive employment, severance, and change in control agreements; equity incentive plans; deferred compensation; and securities laws, including reporting and disclosure implications.
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.