Background and Key Takeaways
On October 15, ISS released a preliminary set of frequently asked questions that are intended to serve as guidance, ahead of the annual FAQs typically published in December, for how ISS will approach company pay decisions made during the COVID-19 pandemic as part of its qualitative pay-for-performance evaluation.
ISS concedes that compensation changes that may have been problematic in normal times may be justified under pandemic conditions but stresses the need to provide clear and specific justifications for the changes that result from the pandemic related problems faced by the company. In addition, companies should consider whether any of the compensation changes made could impact how a company might normally disclose such amounts in the summary compensation table. Please contact us if you want assistance in working through how these FAQs may impact your compensation disclosure for the upcoming proxy season.
Guidance on Changes to Current Executive Compensation
- Salary Reductions. Salary reductions alone will be given limited weight because salaries tend to make up such a small portion of executive compensation. ISS would consider more meaningful incentive compensation reductions that are commensurate with salary reductions.
- Annual Incentive Program Changes. ISS may view as reasonable changes to metrics, performance targets and measurement periods of annual incentive programs made by companies who were mildly affected by the pandemic and even the disregard of an incentive program and the making of a one-time discretionary payout by companies severely affected by the pandemic if the justifications are clearly disclosed and the results appear reasonable. While each company’s annual incentive plan changes will be evaluated on a case-by-case basis, the following five items are key disclosure items that will help investors assess such changes:
- Specific Challenges. The specific pandemic-related challenges faced by the company and how those challenges rendered the original program unworkable or impossible to achieve. This should include a discussion regarding why the changes are not reflective of poor management.
- Reasons for New or Adjusted Awards. An explanation about why management chose mid-year changes over one-time discretionary awards, or vice versa.
- Performance Criteria for New Awards. A discussion of the new performance metrics applicable to one-time discretionary awards that is more specific than “strong leadership during challenging times” or other generic descriptions.
- Performance Measurement and Comparison to Original. How the resulting payouts reflect both company and executive performance, and a comparison as to how the awards would have paid under the original program. New awards that pay more than the original awards will be closely reviewed.
- 2021 Annual Incentive Program Design. Information about the company’s 2021 annual incentive program, if it has been designed, particularly to highlight positive changes.
Proxy Disclosure Point. A company that makes changes to its annual incentive program should consider whether such changes could impact how the annual bonus is normally disclosed. For example, most companies disclose their annual bonus awards in the non-equity incentive plan column of the summary compensation table; however, discretionary bonuses are required to be disclosed in the bonus column of the summary compensation table.
Guidance on Changes to Long-term Awards and New Awards
- Multiyear Incentive Awards. Changes to in-flight multi-year incentive awards will generally be viewed negatively.
- New Award Design. Slight changes to long-term awards granted in 2020 are acceptable, such as movement toward more qualitative factors. However, large changes, such as conversion to time-only vesting or shorter performance periods will be viewed negatively. Appropriate disclosure is crucial.
- Retention and One-time Awards. A one-time award requires clear and specific disclosure for the award’s rationale. It should be reasonable, isolated, performance-based, clearly linked to the underlying rationale, have longer time horizons and appropriate termination-related vesting to avoid potential windfalls.
- Forfeited Awards. One-time awards granted as replacements for forfeited awards will be scrutinized and should clearly explain the rationale for granting the awards and how such awards do not just “insulate executives from lower pay.”
Guidance for Other Compensation Related Issues
- ISS' Responsiveness Policy. If a company that received less than 70% support on the prior say-on-pay proposal is unable to make changes to its executive compensation program due to pandemic conditions, the company should clearly disclose how the pandemic impeded the progress of the changes and what the company is doing going forward.
- Policies and Option Repricings. The passing scores for the S&P 500 Equity Plan Scorecard (EPSC) and the Russell 3000 EPSC will increase slightly. There are no changes to ISS’s problematic pay practices. ISS’s current policies that generally oppose option repricing programs that occur within one year of a steep drop in the company’s stock price will remain unchanged.
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