Problematic Pay Practices - as identified by ISS
(based on its U.S. compensation policies, as updated 12/14/2017)
On at least an annual basis, those who make executive compensation decisions for public companies should check their practices against the guidelines published by ISS and other proxy advisory firms. The table below reformats, but generally tracks, the U.S. Compensation Policy FAQs that ISS most recently updated on December 14, 2017. All references are to FAQ #48 unless another is noted.
When reviewing the table below, directors should first aim to determine whether their company has executive compensation structures that involve problematic practices. The best companies avoid or eliminate such irritants to shareholders, unless there are solid business justifications for them. For instance, the payment of tax gross-ups for golden parachute taxes is generally verboten. Nevertheless, tax gross-ups may be justifiable under some circumstances, such as when executive compensation is being restructured, to be more performance-based, in anticipation of a corporate sale. Overall, boards should be careful to identify (and to justify) any problematic pay practices, because ISS and others will likely scrutinize them if incumbent directors do not.
HAVING "SIGNIFICANT WEIGHT" THAT "WILL LIKELY RESULT IN
ADVERSE VOTE RECOMMENDATIONS."
|Employment Contracts||Egregious contracts containing multi-year guarantees for –|
|New CEO's Pay||Overly generous new-hire package [evidenced by] --|
|Pension/SERP||Egregious payout [potential from]:|
|Severance and Other Change in Control (CIC) Benefits||Excessive due to –|
|Tax Reimbursements||Excessive reimbursement of income taxes on executive perquisites or other payments (e.g., related to personal use of corporate aircraft, executive life insurance, bonus, restricted stock vesting, secular trusts, etc; see also excise tax gross-ups above)|
|Stock Awards||Dividends or dividend equivalents paid on unvested performance shares or units.|
Repricing or replacing of underwater stock options/stock appreciation rights without prior shareholder approval (including cash buyouts, option exchanges, and certain voluntary surrender of underwater options where shares surrendered may subsequently be re-granted).
Stock plans with a liberal CIC definition (e.g. low % or occurrence before CIC closing) coupled with single trigger vesting upon the CIC "are likely to receive a negative recommendation" (FAQ #63).
|Internal Pay Disparity||Excessive differential between CEO total pay and that of next highest-paid named executive officer (NEO).|
Director Compensation (Excessive)
[New FAQ 67 in 2017]
|Hedging and Pledging||[See FAQ #50 for links to relevant ISS policies]|
Note in particular:
FAQ 49. ADVERSE VOTE TRIGGERS. Which problematic practices are most likely to result in an adverse recommendation?
The list below highlights the problematic practices that carry significant weight and will likely result in adverse vote recommendations:
FAQ 69 [New in 2017] PAY RATIO
See generally:annual proxy statement planning for a comprehensive discussion of issues to address when preparing executive compensation disclosures.
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