Center On Executive Compensation Criticizes Proposed ISS Equity Scorecard Over Unintended Consequences, Increased Uncertainty

October 31, 2014

The Association's Center On Executive Compensation filed comments with ISS this week providing its views on the proxy advisor's 2015 draft policy updates, focusing on its plans to adopt a new "scorecard" process for evaluating company stock plans up for shareholder approval.  The impact of the changes is potentially significant, as the new scorecard (which will form the basis of ISS's recommendations for binding shareholder votes on stock plans) incorporates several criteria that up until now only had been part of ISS's recommendations for nonbinding say on pay votes.  Under the new process, ISS will shift from a series of pass/fail stand-alone tests focused on the cost of the equity plan and so-called egregious practices to a more "holistic" approach that takes into account cost, plan features and grant practices using a qualitative review.  The Center's comments express its concerns that the new "holistic" approach may effectively give companies less flexibility in designing equity plans, and may limit the ability to structure certain awards to meet business needs. The Center's comments urge ISS not to use binding equity plan vote recommendations to influence substantive incentive plan design features such as vesting periods for equity awards and clawback policies.  In addition, the Center registers its concern that given the lack of detail ISS has provided regarding the exact nature of the new methodology, the new approach could become a "black box" exercise, and unless ISS provides clearer guidance as to how it will be applied, might effectively cause companies to seek paid consulting services from ISS's consulting arm when they would not ordinarily do so.  Final policy updates are expected around November 7, and some commentators have indicated they include more changes than were included in the draft proposals.  Once finalized, the policies will apply to companies whose annual meetings occur on or after February 1, 2015.