On October 19, proxy advisory firm Institutional Shareholder Services (ISS) announced the results of its Policy Application Survey (PAS). The PAS, which ran from August 3 through October 6, reflects 328 responses: 77 from institutional investors and organizations representing them, and 251 from members of the corporate community, including companies, consultants/advisors to companies, corporate directors and other trade organizations. These surveys often provide a good indication of potential changes to ISS’s voting policies. It is expected that ISS will publish its draft 2018 policy updates and open its comment period in late October, and release its final policy updates in November.
Key takeaways from the PAS applicable to the United States include the following:
Outcomes-Based Compensation Measures
Noting the increased prevalence in performance-based compensation among pay programs, and the increasing use of “realized” or “realizable pay” in Compensation Discussion and Analysis disclosure to demonstrate a compensation program’s emphasis on “pay-for-performance,” PAS respondents were asked whether their organization supports the use of an outcomes-based measure, such as realizable pay, as part of the ISS quantitative pay-for-performance evaluation. Current ISS policy calculates and presents a standardized measure of “realizable pay” for CEOs of S&P 1500 companies as part of its qualitative analysis. Of the investor respondents, 87% supported the use of an outcome-based measure as part of ISS’s quantitative screening, and of that 87%, two-thirds indicated realizable pay could be used to mitigate other pay concerns. For corporate respondents, 54% expressed support for the use of realizable pay in the quantitative pay-for performance screening, and of that 54%, 83% supported the use of realizable pay as a mitigating factor.
Non-Employee Director Pay
PAS respondents were asked which factors should be considered when determining whether a director pay program presents a governance concern with respect to high pay magnitude or problematic pay structures. The results of the PAS reflect that the majority of investor and corporate respondents believe that comparing a company’s director pay practices against companies in the same index and Global Industry Classification Standard (GICS) (consistent with ISS’s current approach) are the most effective factors to consider when evaluating director pay programs for governance concerns. In addition, respondents identified excessive perquisites, the use of performance awards and the use of stock option grants as the most significant factors in considering whether or not a problematic pay structure exists for directors.
Gender Pay Gap Reporting
ISS noted the increase in shareholder proposals asking for a report on gender pay equity and that, while a number of companies have disclosed or committed to disclose their gender pay gap, such disclosure has not been widely adopted across all sectors. PAS respondents were asked whether companies should disclose gender pay gap information. Of investor respondents, 60% supported such disclosure, while 67% of corporate respondents disagreed; however, a minority of each group noted that pay gap disclosure may not be necessary if the company provides detailed disclosure of diversity and inclusion policies or of equitable compensation practices.
Poison Pill Policy
PAS respondents were asked whether, consistent with ISS’s current guidelines, their organizations would apply a case-by-case approach to initial adoptions of short-term (one-year or less) poison pills which have not been subject to a shareholder vote, when voting on director elections, using ISS’s current criteria. In terms of investor respondents, 83% supported the current ISS policy, while 56% of corporate respondents indicated that one-year poison pills are generally acceptable and votes against directors are not warranted.
A complete summary of the PAS results is available here.