ISS Takes Deep Dive on PSUs in Policy Survey

ISS just released its annual policy survey, with a number of questions on hot topics in executive compensation, including the future of performance-based pay.

Why it matters: Amid increasing investor pressure (think Norges Bank and CII) to reduce reliance on performance metrics, ISS is seriously reconsidering its long-standing requirement that half of LTI be “performance-based.”

PSUs – needed or not? ISS is now asking stakeholders to vote on whether time-based equity is an acceptable substitute for PSUs, and if so, what an appropriate vesting and/or post-vesting retention requirement would be.

• There are multiple questions on what a “reasonable mix” would be, reflecting ISS’s likely desire to keep at least some requirement for PSUs – but if enough investors respond that no amount of PSUs should be required, ISS may change its mind.

Other issues. The survey targets a number of critical areas for companies:

• Shareholder engagement. SEC changes are making it riskier for investors to engage with companies in detail. ISS asks whether companies should be penalized if a shareholder declines to engage, especially following a low say on pay vote. Our answer: no.
• Modifying DEI metrics in-flight. In the current environment, ISS asks whether companies should be penalized for removing DEI metrics mid-plan year. Our answer: again, no (though we wouldn’t recommend it unless absolutely necessary.)
• Director pay. ISS has been telegraphing its intention to scrutinize director pay more closely, even though outliers are rare. The survey asks whether elements of director pay such as perks or unusual numbers should warrant immediate no votes on directors or say on pay. Our answer: considering the rarity of this issue, waiting two years to give the company a chance to explain seems reasonable.

The Center will respond on behalf of members – if your company would like to weigh in, you can do so here by August 22.