Institutional Shareholder Services (ISS) Launches 2015 Policy Survey

On July 17, 2014, Institutional Shareholder Services ("ISS") published its annual policy survey covering the 2015 proxy season. Their survey seeks to solicit input on a range of corporate governance and compensation issues, and is open to both investors and issuers until August 29, 2014.

Survey results are scheduled to be published at the end of September 2014, and will likely have a direct impact on changes to ISS proxy voting guidelines for 2015, which are typically published in the November to December timeframe.

In our experience, this survey is very much worthy of investigation, as it often provides directional guidance on policy changes ISS is actively considering. With an eye toward clients in the technology and life sciences communities, Radford has prepared the following summary of key ISS policy survey questions, including potential takeaways and action items.

Top Compensation Issues

Assessing the Absolute Magnitude of Compensation:

  • ISS Survey Questions: Regardless of a company's performance, is there an absolute magnitude of compensation that causes concern, and if so, how would that absolute magnitude be determined? Are proportional and/or absolute limits on CEO compensation supported and what tools may be appropriate for determining excessive pay magnitude (e.g., peer comparisons, comparisons to other named executive officers, proportion of corporate earnings or revenue)?
  • Radford Comment: The survey questions listed above suggest ISS may soon adopt absolute pay thresholds, which could go so far as to trigger an automatic finding that CEO pay is excessive, regardless of the strength of a company's performance. These thresholds could be expressed in an absolute dollar value (tied in some manner to the mean or median level of CEO compensation in a particular industry), as a relative level of pay (for instance, CEO compared to the next highest paid executive), or both.
  • Action Item: Technology and life sciences companies may be particularly vulnerable to an absolute pay threshold, given industry reliance on compensation delivered via stock awards and consequent volatility and variability in compensation values. Radford recommends that clients continue to monitor CEO and NEO pay levels against market benchmarks, including both self-selected peers disclosed in the proxy and ISS-selected comparator companies.

Assessing the Relationship between Performance-Based Goals and Award Values:

  • ISS Survey Questions: What should the relationship be between goals governing performance-based compensation awards, and the sizes of the awards themselves?
  • Radford Comment: This question appears to contemplate formalizing an ad hoc analysis we've observed in several ISS reports over the past two years, where ISS evaluates year-over-year changes in incentive targets and flags companies that decrease financial targets without adopting a corresponding decrease in associated target payouts. ISS has also criticized performance share programs that deliver shares based on "threshold" levels of performance that ISS regards as insufficiently rigorous.
  • Action Item: Radford recommends that all clients carefully review short- and long-term incentive program metrics and payout levels in the context of prior year programs. Where target levels of performance are fixed at a lower threshold than in a prior year, enhanced discussion of the rationale for the reduced targets should be provided in the CD&A whenever possible. With respect to relative TSR programs, delivery of shares for performance below the 50th percentile should be reviewed— the adoption of absolute price floors or other mitigating provisions may be warranted to pre-empt ISS criticism.

Assessing the Value of Forward-Looking Disclosure:

  • ISS Survey Questions: How should ISS use forward-looking disclosures of changes to a company's executive compensation program in its pay-for-performance evaluation?
  • Radford Comment: In 2013, ISS stopped giving companies "credit" for prospective disclosure of changes to or improvements in pay programs that would take place after the end of the year covered by a current Say-on-Pay vote. This survey item revisits the question of how and to what degree ISS should consider prospective disclosures in its Say-on-Pay recommendations, and might indicate that ISS is prepared to give companies credit for at least some such changes.
  • Action Item: A policy change of this nature would give companies an opportunity to act upon 2014 Say-on-Pay votes over the next several months to receive credit in next year's ISS analysis, even if the changes take effect in fiscal 2015. Relevant compensation program changes might include the adoption of new or amended performance-based equity programs, adjustments to short-term incentive plan metrics and payout curves, and adoption of compensation "risk-mitigating" policies, such as executive compensation clawbacks, policies on hedging and pledging, and stock ownership guidelines.

Significant Adjustments to Equity Plan Policies:

  • ISS Survey Questions: ISS plans to implement a "balanced scorecard" for equity plan evaluation. How should ISS weigh each of the three factors: Plan Cost, Plan Features, and Company Practices?
  • Radford Comment: ISS is changing its equity plan evaluation process to replace its formulaic and rigid shareholder value transfer methodology with a more flexible balancing test taking into account a range of quantitative and qualitative factors (note: we expect that shareholder value transfer will continue to figure prominently). Specific details of the new methodology remain to be determined at this time.
  • Action Item: Radford recommends that clients contemplating refreshes to equity incentive plan pools continue to model the SVT cost of the plans while also engaging in a more holistic review of equity compensation practices and qualitative plan provisions. Radford already regularly provides such reviews to clients in connection with share requests, but the relative importance of the qualitative factors may increase beginning in 2015.

ISS Publishes Due Diligence Materials

In response to guidance published in the Securities and Exchange Commission's ("SEC") Legal Bulletin No. 20, ISS recently posted due diligence materials for its investor subscribers on its corporate website. It's unclear at this point whether the due diligence information provided by ISS fully complies with the SEC's published guidance.

Key Takeaways for Corporate Issuers

While ISS's 2015 policy survey questions likely provide directional guidance on future policy changes, it's important to understand that it is uncommon for every issue in the survey to make its way into final proxy voting guidelines.

We encourage corporate issuers to consider communicating their views on proxy voting issues by participating in the 2015 Benchmark Policy Survey before it closes on the August 29, 2014 deadline. In our experience, ISS typically applies more weight to responses from investor subscribers; however, it is always helpful for the ISS Research team to be aware of potential pitfalls public companies see in proposed proxy voting guidelines.


To learn more about participating in a Radford survey, please contact our team. To speak with a member of our compensation consulting group, please write to consulting@radford.com.

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