Quick Summary of ISS’ 2011 Policy Updates Related to Compensation

Quick Summary of ISS’ 2011 Policy Updates Related to Compensation

From Ed Hauder's Blog

On November 19, 2010, ISS issued its 2011 Policy Updates. The
2011 Policy Updates will apply to companies with shareholder meetings
occurring on or after February 1, 2011 (2/1/2011). There are not really
any “new” policies related to compensation for 2011 (other than those as
a result of the new Dodd-Frank requirements, which the draft policy
updates released in late October addressed), but definitely some
refinements that might cause some companies a bit of angst (if not
trouble).  Here is a quick summary of the 2011 Policy Updates related to
compensation:

• Equity Compensation Plans: Burn Rate—ISS is making a change to the Burn Rate policy so that the burn rate caps cannot increase or
  decrease by more than two (2) percentage points from year-to-year. The
  2011 Burn Rate table will be released as part of ISS’ 2011 Summary
  Guidelines in December 2010.


• Say When on Pay Vote—ISS will support annual
  advisory votes on compensation, as its draft policies released at the
  end of October suggested.  However, it still remains unclear what ISS
  will do if a company chooses a different frequency or the shareholder
  vote supports a different frequency.


• Problematic Pay Practices—ISS is revising the list
  of “major” problematic pay practices which alone could trigger
  application of the policy. The “major” problematic pay practices are now
  identified as the following:
  
  • Repricing or replacing of underwater stock options/SARs without
    prior shareholder approval (including cash buyouts and voluntary
    surrender of underwater options);
  
  
  • Excessive perquisites or tax gross-ups, including any gross-up related to a secular trust or restricted stock vesting;
  
  
  • New or extended agreements that provide for:
    
    • Change-in-control (CIC) payments exceeding 3x base salary and average/target/most recent bonus;
    
    
    • CIC severance payments without involuntary job loss or substantial
      diminution of duties (“Single” or “modified single” triggers);
    
    
    • CIC payments with excise tax gross-ups (including “modified” gross-ups).
    
    
  
  


• As before in such cases, the presence of problematic pay practices will influence ISS’ vote recommendations as follows:
  
  • ISS will recommend against management say on pay (MSOP) proposals,
  
  
  • Then ISS will recommend against/withhold on compensation committee
    members (or in rare cases the full board) in (i) egregious situations,
    (ii) when no MSOP item is on the ballot, or (iii) when the board has
    failed to respond to concerns raised in prior MSOP evaluations, and/or
  
  
  • ISS will recommend against an equity incentive plan proposal if
    excessive non-performance-based equity awards are the major contributors
    to a pay-for-performance misalignment.
  
  


• Problematic Pay Practices-Commitments—ISS will no
  longer accept future commitments on problematic pay practices as a way
  of preventing or reversing a negative vote recommendation.


• Voting on Golden Parachutes—ISS sticks pretty close
  to the draft policy it issued in late October 2010. Such proposals will
  be evaluated on a case-by-case basis, but the presence of certain
  practices could lead ISS to recommend against the proposal.