With proxy season heating up, ISS has published a
formal policy primer on evaluating pay changes in response to COVID-19. A
recent article from Compensation Advisory Partners found that while S&P 500 companies generally had some mention of changes, if the quantitative screen did not indicate an elevated level of concern, the analysis and vote recommendation were typically positive. If there was an elevated quantitative screen or another pay practice raised concerns, the changes were evaluated more harshly.
Highlights of the study include a detailed analysis of six companies making COVID changes, with four receiving negative ISS recommendations (and thus low Say on Pay votes including two failures).
- ISS Increasingly Critical. For companies with an elevated level of concern in late 2020, ISS primarily focused on problematic pay practices (see Nike) rather than COVID-19 modifications. For the companies reviewed in the article, an elevated level of quantitative concern compared with COVID-19 modifications appears enough to drive adverse vote recommendations.
- Discretionary Changes. The four companies with negative recommendations were criticized for making discretionary incentive plan changes (such as altering performance periods to exclude the months most heavily affected by the pandemic and trigger payouts despite COVID impacts) or special grants to replace underperforming performance-based awards.
- Two of the four filed supplemental proxy statements criticizing ISS’s inflexibility or lack of understanding of the business.
- Pay for Performance Alignment. The two companies that received positive recommendations made adjustments to the threshold and target performance goals for in-flight long-term incentives, bifurcated performance periods but with payouts well below target for annual incentive awards, and issued modest special one-time grants.
A negative vote recommendation from ISS correlates with a reduction in shareholder support from anywhere between 18% and 36% (including two that received less than 50% support). Based on reports of the 2021 proxy season, ISS may be gearing up to lean more heavily on companies making COVID related changes, especially if this does not align with shareholder return.
