On October 18, 2011, Institutional Shareholder Services (ISS) issued its draft 2012 Policies for comment.  These policies are available at:


Comments will be accepted through October 31, 2011.

Here’s a quick summary of the draft Say-on-Pay(SOP)-related policy changes for 2012:

  • Board: Board Response to Management Say-on-Pay Votes (US)—ISS will consider prior SOP proposals that received significant opposition (note: no bright line set) from votes cast when recommending on compensation committee members, taking into account:
    • The level of opposition
    • The company’s ownership structure
    • Disclosure of engagement efforts with major institutional investors regarding compensation issue(s)
    • The company’s response
    • Specific actions taken to address the issue(s) that appear to have caused the significant level of against votes
    • Other recent compensation actions taken by the company, and
    • ISS’s current analysis of the company’s executive compensation and whether any prior issues of concern are recurring or one-time
    • Additional notes:
      • Higher level of scrutiny for companies where SOP received less than 50% support
      • Recurrence of previously identified compensation issues or newly identified compensation concerns, depending on the severity, may result in an AGAINST vote on SOP and the compensation committee members
    • Request for comment:
      • Does a support level of less than 70 percent warrant an explicit response from a company to address concerns – i.e., including actions or an action plan?  If not, what opposition level warrants an explicit response?
      • Should boards be expected to provide an explicit response to a low supported SOP proposal by the year following that vote; or should accountability be based on the results of more than one low SOP vote?
  • Board: Board Response to Management Say-on-Pay Frequency Vote—ISS is proposing a new vote recommendation policy for SOP:
    • Vote WITHHOLD/AGAINST on all incumbent director nominees if board implements an advisory vote on a less frequent basis than the frequency which received a majority of the votes cast at most recent meeting.
    • Vote CASE-BY-CASE if board implements a frequency that is different than the frequency that received a plurality, but not majority, of votes cast at most recent meeting, taking into account:
      • The board’s rationale for doing so,
      • The company’s ownership structure,
      • ISS’s analysis of the company’s executive compensation and whether there are compensation concerns or a history of problematic pay practices,
      • The previous year’s support level on the company’s SOP proposal
      • The difference between the frequency adopted and the frequency supported by shareholders
    • Request for comment:
      • In cases where a company fails to adopt an SOP frequency that received majority support by shareholders, should there be additional considerations given to these companies?
      • In cases where a company implements an option that is less frequent than that which received a plurality, but not a majority, of votes cast (e.g., one year received 43 percent of votes cast, two year received 1 percent, and three year received 39 percent, excluding abstentions), would the proposed factors help your organization analyze such situations? Are there other factors that your organization would recommend?
  • Compensation: Evaluation of Executive Pay (Management Say-on-Pay)—ISS is proposing a new methodology for evaluating pay-for-performance alignment – strong, satisfactory or weak alignment. Methodology would combine a quantitative analysis followed by a qualitative analysis:
    • Quantitative Analysis – 3 factors in 2 categories:
      • Relative Alignment—2 factors are analyzed to determine the PFP alignment within a group of companies similar to the company in market cap, revenue (or assets) and industry:
        • The degree of alignment between the company’s TSR rank and the CEO’s total pay rank within the peer group as measured over 1- and 3-year periods (weighted 40/60), to put more emphasis on longer term);
        • The multiple of the CEO’s total pay relative to the peer group median, which may identify cases where a high performing company may nevertheless be overpaying.
      • Absolute Alignment—this factor measures long-term alignment between pay and company performance as:
        • Alignment between the trend in the CEO’s pay and the company’s TSR over the prior 5 fiscal years – difference between the slope of annual pay changes and the slope of annualized TSR changes during the 5-year period
      • Peer Alignment and Absolute Alignment may be weighted 50/50 in this portion of the analysis. Companies demonstrating a weak alignment will receive further qualitative review to determine a final vote recommendation.
      • Qualitative review will consider:
        • The ratio of performance- to time-based equity awards
        • The overall ratio of performance-based compensation
        • The robustness of disclosure an rigor of performance goals
        • The company’s peer group benchmarking practices
        • Actual results of financial/operational metrics, such as growth in revenue, profit, cash flow, etc., both absolute and relative to peers
        • Special circumstances related to, for example, new CEO in prior FY or equity grant practices (e.g., biannual awards)
        • Any other factors deemed relevant
      • Request for comment:
        • Do the factors utilized in ISS’ proposed pay-for-performance evaluation approach align with those that your organization believes should be considered?
        • Does the proposed new approach give adequate consideration to long-term alignment?
        • Will the proposed new approach be beneficial to your organization in identifying companies with strong pay-for-performance alignment?
        • What additional factors, if any, should ISS consider and display to improve investors’ ability to evaluate companies’ long-term pay-performance alignment?
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