ISS Releases Executive Compensation and Equity Plan Policy Updates for the 2025 Proxy Season
ISS Releases Executive Compensation and Equity Plan Policy Updates for the 2025 Proxy Season
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December 27th, 2024
Thanks to Sinead Kelly
Institutional Shareholder Services (ISS) has released its executive compensation and equity plan policy updates for the 2025 proxy season, reflecting its approach to determining its proxy voting recommendations on say on pay and equity plan proposals for shareholder meetings held on or after February 1, 2025.
The updates to ISS’s existing policies are fairly light overall, but it is notable that there will be heightened scrutiny of the design and disclosure of performance-vesting equity awards, due to what is described as increasing investor concerns with the potential pitfalls surrounding performance equity programs.
Executive Compensation Policy Updates
The updates to the executive compensation policy FAQs include the following:
- Realizable Pay: In FAQ 24, ISS explains its methodology for calculating estimated “realizable pay” of CEOs of S&P 1500 companies, and updates its prior policy to reflect that a realizable pay chart will not be displayed for companies that have experienced multiple (two or more) CEO changes within the prior three fiscal year measurement period.
- Performance Vesting Equity Programs: In FAQ 34, the most significant update, ISS states that it will increase its focus on the design and disclosure of performance-vesting equity awards, especially for companies with a qualitative pay-for-performance misalignment. Issues that may contribute to an adverse voting recommendation, particularly if multiple apply, include:
- Non-disclosure of forward-looking goals (retrospective disclosure of goals at the end of the performance period will carry less mitigating weight than previously);
- Poor disclosure of performance cycle vesting results;
- Poor disclosure of the rationale 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; and/or
- Overly complex performance equity structures.
- Incentive Program Metrics and TSR: In FAQ 39, ISS confirms that it does not endorse or prefer the use of TSR or other specific metrics in incentive plans but emphasizes the importance of objective metrics linked to quantifiable goals and the need for transparency into pay decisions, including the rationale for using certain metrics and clarity around any adjustments made when using non-GAAP metrics.
- Changes to In-Flight Programs: In FAQ 42, ISS confirms its longstanding view that mid-cycle changes to metrics, performance targets and/or measurement periods of incentive programs are generally viewed negatively and need to be supported by a clear and compelling rationale.
- Clawback Policies: FAQ 46 includes ISS’s October 2024 off-cycle policy update, adopted to incorporate a focus on clawback policies previously only seen in its equity plan policy. Now, to receive credit for a “robust” clawback policy under ISS’s executive compensation analysis, a company’s clawback policy must extend beyond the minimum Dodd-Frank requirements (i.e., incentive awards based on a financial reporting metric) and cover all time-vesting equity awards. No additional details are provided, but the policy is in line with an increasing trend for companies to adopt supplemental clawback policies that give the company discretion to recover equity and other incentive compensation in circumstances involving misconduct.
Equity Compensation Plan Policy Updates
In what may be good news for those taking an equity plan for shareholder approval in 2025, ISS’s equity plan FAQs include no updates, confirming in FAQ 30 that “for 2025, there are no new factors, and no changes to factor weightings or passing scores for any of the Equity Plan Scorecard models.”
Takeaways
US public companies preparing for the 2025 proxy season, especially those largely held by institutional shareholders, should take note of ISS’s policies and the key updates to the executive compensation policies, particularly when drafting disclosures regarding performance-vesting equity awards and other incentive programs.
Those taking equity plans for shareholder approval can enjoy a respite from new ISS policy requirements this year, but will still need to carefully navigate the overall plan design, drafting and disclosure process to ensure a smooth run through proxy season and, ultimately, a successful outcome.
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