This Cooley Alert penned by Michael Bergmann, Brad Goldberg, Ali Murata, Beth Sasfai, and Megan Schilling digs deeper into the recent changes to ISS’ voting policy guidelines and executive pay FAQs than I recently did in this blog. Here is an excerpt related to the changes to the executive compensation FAQs:
“On December 13, 2024, ISS published updates to its Executive Compensation Policies FAQ, which includes a new question addressing these changes to the evaluation of performance-vesting awards. In particular, the FAQ notes that relevant considerations for the evaluation of performance equity programs may include:
- Nondisclosure of forward-looking goals (with retrospective disclosure of goals at the end of a performance period carrying less mitigating weight).
- Poor disclosure of closing-cycle vesting results.
- Poor disclosure of the rational for metric changes, metric adjustments or program design.
- Unusually large pay opportunities, including maximum vesting opportunities.
- Non-rigorous goals that do not appear to strongly incentivize for outperformance.
- Overly complex performance equity structures.
The updated FAQ also includes a new question providing further insight into how ISS evaluates incentive plan metrics. The question explains that while ISS continues to believe that a company’s board and compensation committee are generally best qualified to determine metrics, it recognizes that shareholders prefer emphasis on objective metrics that increase transparency into pay decisions.
The FAQ includes the following examples of factors that ISS may consider in evaluating incentive plan metrics: whether the program emphasizes objective metrics linked to quantifiable goals; the rationale for selecting metrics (including the linkage to company strategy and shareholder value); the rationale for atypical metrics or significant changes from the prior year; and/or the clarity of disclosure around adjustments for non-GAAP (generally accepted accounting principles) metrics, including the impact on payouts.
Some investors have advocated for companies replacing performance-conditioned equity awards with time-based equity awards that have extended vesting periods. A potential ISS benchmark policy update remains under consideration for 2026 (or later) regarding the evaluation of the equity pay mix for regular-cycle equity awards whereby a preponderance of time-vesting equity awards generally would not in itself raise significant concerns in the qualitative review of pay programs. ISS will continue to gather feedback on this topic through 2025.”
Authored by
Broc Romanek