ISS and Glass Lewis Compensation Policy Updates for 2020 Proxy Season

By Kelsey O’Gorman and Joshua Agen

Institutional Shareholder Services (“ISS”) and Glass Lewis & Co. (“Glass Lewis”) both recently came out with proxy voting updates for the 2020 proxy season.  The ISS updates will apply for shareholder meetings held on or after February 1, 2020, and the Glass Lewis updates will apply for shareholder meetings held on or after January 1, 2020.  Below is a summary of the key changes relating to executive compensation.

I. ISS UPDATES

Use of EVA.  ISS will now use Economic Value Added (EVA) metrics (specifically, EVA Margin, EVA Spread, EVA Momentum vs. Sales, and Momentum vs. Capital) in its Financial Performance Assessment (FPA) portion of its pay-for-performance quantitative screen for its say-on-pay voting recommendations instead of the GAAP metrics that it used last year. Relative Total Shareholder Return (TSR) will continue to be included as a key metric in the quantitative screen.  

Evergreen Equity Plans.  ISS evaluates whether it will recommend voting for or against an equity plan proposal based on its “Equity Plan Scorecard.”  However, if a plan includes any “egregious factors,” then ISS will generally vote against the plan proposal, regardless of its score.  New this year, ISS will consider the existence of an “evergreen” provision (meaning a provision that automatically replenishes a plan’s share reserve without action by the company) in an equity plan to be an “egregious factor” that will generally lead to a vote against an equity plan.  

II. GLASS LEWIS UPDATES

Compensation Committee Responsiveness Regarding Say-On-Pay Frequency.  Glass Lewis will now recommend voting against all members of the compensation committee if the board adopts a frequency for future say-on-pay votes other than the frequency approved by a plurality of shareholders in the Company’s most recent say-when-on-pay vote.

Executive Contracts and Change-in-Control Arrangements.  Glass Lewis clarified that it disfavors contractual agreements that are excessively favorable to executives, including excessive severance payments, new or renewed single-trigger change-in-control arrangements, excise tax gross ups, large one-time awards and multi-year guaranteed awards.  Glass Lewis believes that double-trigger change-in-control arrangements (which require a change-in-control and a termination of employment for payment to be made) are a best practice.  Under the updated guidelines, Glass Lewis may consider any change-in-control arrangement that is not explicitly double-trigger to be a problematic single-trigger arrangement.  Glass Lewis also clarified that it considers excessively broad definitions of change-in-control to be problematic because they can lead to executives receiving extra compensation without a meaningful change in the executive’s status or duties.

Responsiveness Following Low Say-On-Pay Vote.  Glass Lewis expects that companies that get 80% or less shareholder support for their say-on-pay votes will actively engage with their large shareholders and make changes that directly respond to those concerns.  In the updated guidelines, Glass Lewis clarified that if companies do not disclose such activities in the proxy statement, then Glass Lewis may recommend voting against the members of the Compensation Committee.

Post-Year End Compensation Decisions.  Glass Lewis clarified that it does consider compensation decisions made after the end of the fiscal year when making its say-on-pay voting recommendations.

Upward Discretion and Non-GAAP Metrics for Annual Bonuses.  The updated guidelines clarify that if a company either lowers annual performance goals mid-year or exercises discretion to pay annual bonuses above the level earned based on actual performance, then Glass Lewis will expect a “robust discussion of why the decision was necessary.”  Glass Lewis also clarified that it expects a reconciliation between non-GAAP measures used as performance goals and the GAAP figures shown in the audited financial statements.