ISS has published its Preliminary Frequently Asked Questions as to Compensation Policies for 2020, as it does every year. Generally, ISS publishes its “final” version of these policies in mid-December.

Quantitative Pay-for-Performance Screens
 For annual meetings on and after February 1, 2020, ISS’s Financial Performance Assessment (FPA) will be based on four Economic Value Added (EVA) metrics instead of the GAAP metrics, which it used in 2019 and prior years. ISS will not use the GAAP metrics in the pay-for-performance evaluation in the quantitative pay-for-performance screen for 2020, but it will continue to display those metrics for informational purposes and may take them into account in its overall evaluation of long-term pay-and-performance alignment.

ISS will calculate EVA metrics based on audited financial data reported in annual and quarterly public filings. Other than the change to EVA metrics, the basic operation of the FPA screen as a secondary modifier screen affecting a relatively small number of companies will be the same.

ISS also is changing certain of the quantitative pay-for-performance thresholds for 2020. The thresholds that trigger concern on the Relative Degree of Alignment (RDA) and Pay-TSR Alignment (PTA) tests will change as shown in the table below.

2019 vs. 2020 Quantitative Thresholds: All U.S. Companies
Measure Policy Year Eligible for FPA Adjustment Medium Concern High Concern
Relative Degree of Alignment 2019 -28 -40 -50
Relative Degree of Alignment 2020 -38 -50 -60
Pay-TSR Alignment 2019 -13% -20% -35%
Pay-TSR Alignment 400 -22% -30% -45%

ISS is not making any other changes to the quantitative pay-for-performance screens for 2020.

Finally, in 2020, ISS will not apply its secondary FPA screen to certain companies that are subject to the primary pay-for-performance screen, including REITs and companies that have insufficient data for the EVA metric calculations

Equity Plan Scorecard

ISS confirmed that it has made only one change to its Equity Plan Scorecard (EPSC). ISS is introducing a new negative overriding factor for equity plan proposals that contain an “evergreen” funding provision. Evergreen funding refers to a plan provision for automatic share funding additions, typically on an annual basis, over the life of the equity plan. Evergreen features bypass shareholder approval of authorized share increases and may perpetuate plans with shareholder-unfriendly features. Evergreen features are viewed negatively and, in most cases, result in a very high plan cost estimate.

There are no substantive changes to other EPSC factors. The passing scores for all U.S. EPSC models will remain the same as in effect for the 2019 proxy season. However, ISS notes that it will make weighting/point reallocations among some of the individual factors within each EPSC model, as it has in prior years.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.