On November 16, 2017, Institutional Shareholder Services (ISS) published its updated proxy voting guidelines for the US, Canada, and Brazil effective for shareholder meetings that occur on or after February 1, 2018. In addition to many other changes, ISS addressed two issues that relate to compensation programs that should be considered by public company clients.

First, ISS added a problematic compensation practice related to non-employee director compensation. ISS notes that it will generally vote against the members of the board committee responsible for non-employee director compensation if there is a pattern of awarding excessive compensation to non-employee directors.  Although excessive is not defined, ISS notes that it has identified cases of “extreme outliers” of non-employee director compensation relative to peers and the broader market so it appears that peer data will be used as a justification for identifying excessive compensation.  Additionally, because a pattern of excessive compensation is the trigger for a negative vote (as opposed to a single instance), ISS will not consider non-employee director compensation for vote recommendations in 2018, but may take current compensation into account in the future if a pattern of excessive compensation is identified in consecutive years.

Second, ISS updated guidance regarding the responsiveness of the company’s board of directors to an advisory vote of less than 70% in favor of executive compensation. ISS will consider a failure to adequately respond to investors following a previous say-on-pay vote that received less than 70% support on a case-by-case basis when evaluating ballot items related to executive compensation.  Factors considered when evaluating the company’s response include:

  • Disclosure of engagement efforts with institutional investors (including the timing and frequency of engagements and whether independent directors participated);
  • Disclosure of specific concerns voiced by such investors that led to voting against the say-on-pay proposal;
  • Disclosure of specific actions taken by the company in response to such concerns; and
  • Disclosure of any other recent changes in the compensation program made by the company.

ISS notes that independent director participation in any engagement with shareholders is preferred as being more conducive to receiving candid shareholder feedback. ISS also notes that it wants a summary of the concerns raised to more effectively evaluate whether changes are responsive to the feedback and to evaluate not just whether changes were made but whether quality changes were made.

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