Executive Compensation: 2017 Proxy Voting Guidelines, What’s Really Important?


boardroom

Executive compensation experts shared with Bloomberg BNA their insight regarding the 2017 proxy voting guidelines issued by Institutional Shareholder Services (ISS) and Glass Lewis.  The experts generally characterized the updates as modest, but advised companies to review the guidelines for the 2017 proxy season.

Proxy voting guidelines provide shareholders with voting recommendations on executive compensation and corporate governance issues.  The updated guidelines apply to annual shareholder meetings held on or after Feb. 1, 2017.   

Key Takeaways 

1) ISS introduced new financial metrics to analyze CEO pay for performance to supplement total shareholder return (TSR) analysis.  

  • James Kroll, director at Willis Towers Watson’s Executive Compensation practice in Los Angeles, Ca., told Bloomberg BNA Jan. 12, “ISS has broadened the financial metrics for CEO pay for performance review by looking beyond TSR.  ISS added six financial metrics, which provides a quantitative component to this review.  This is a good thing because some companies were unhappy with TSR."

  • Carol Silverman, partner at Mercer's Washington Resource Group based in New York, NY, told Bloomberg BNA Jan. 13, “The change responds to criticisms of the proxy adviser’s over reliance on TSR when making its say-on-pay vote recommendations. For 2017, the new metrics won't affect ISS's quantitative analysis — which will continue to use only TSR — but they could raise or lower a company’s concern rating as part of the qualitative analysis. The change could relieve some of the pressure companies feel to use TSR or relative TSR as an incentive plan metric. Glass Lewis already uses multiple metrics.”

 2) The 2017 proxy voting guidelines were silent regarding frequency of say-on-pay votes.  

  • Michael Melbinger, partner at Winston & Strawn LLP’s Employee Benefits and Executive Compensation practice in Chicago, Il., told Bloomberg BNA Jan. 13, companies should “stick with an annual say-on-pay vote.”

  • Kroll said, "ISS advocated for annual votes.  It is anticipated that some companies may seek shareholder approval for different vote frequencies.  We have been reminding our clients that they may have to conduct a say-on-pay vote this year if the vote was last held in 2011 given the requirement that the vote must take place at least every six years.”

3) The 2017 proxy guidelines emphasized policies regarding director compensation and associated corporate governance issues.  

  • Melbinger said, “We are advising clients to consider following better procedures for determining and making better disclosure of director compensation.”

  • Kroll said, "It is interesting that ISS finalized policies regarding director compensation.  These policies were influenced by the influx of litigation in this area in the past year.  These issues only come up when standalone director plans are on the ballot and are not as common as they once were.  It will be interesting to see how often we are going to see these policies applied."

4) The 2017 proxy guidelines contained changes regarding the review of equity plans requiring minor action by companies. 

  • Melbinger said, companies should “make certain relatively minor changes to your equity plans, including (i) stating unequivocally that dividends on unvested awards will only be held and paid if/when the underlying award shares vest, (ii) adding provisions to require a minimum one-year vesting on all awards (with the 5% carve-out), (iii) removing language that allows Committee to accelerate vesting of awards, (iv) tailor the company’s ability to withhold shares for income tax at greater than the minimum level, and (v) providing for double trigger vesting of equity awards upon a change in control.”

  • Silverman said, “ISS’s changes for evaluating equity plan proposals are pretty modest and only affect companies seeking plan approval, but there’s a catch that could take companies by surprise -- proposals to amend an existing plan may fare worse than proposals to approve a new plan if the amendment eliminates a shareholder-friendly plan feature (even if the plan receives a passing score under ISS’s scorecard)."

Stay on top of the latest industry trends and news coverage with a free trial to the Benefits Practice Resource Center.